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, 2017September 30, 2022
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)
| 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.
xYes¨No
☒ 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).
xYes¨No
☒ 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):
¨YesxNo
☐ Yes ☒ 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, 2018November 4, 2022 was 2,355,098.
TABLE OF CONTENTS
| - 2 - |
PART I
FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| September 30, 2022 | ||||||||
| As of | (unaudited) | June 30, 2022 | ||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | 38,248,000 | $ | 37,267,000 | ||||
| Investment in real estate, net | 48,147,000 | 48,025,000 | ||||||
| Investment in marketable securities | 10,687,000 | 11,049,000 | ||||||
| Cash and cash equivalents | 12,219,000 | 14,367,000 | ||||||
| Restricted cash | 8,662,000 | 8,982,000 | ||||||
| Other assets, net | 3,439,000 | 2,744,000 | ||||||
| Deferred tax assets, net | 3,670,000 | 3,612,000 | ||||||
| Total assets | $ | 125,072,000 | $ | 126,046,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities - Hotel | $ | 9,291,000 | $ | 7,691,000 | ||||
| Accounts payable and other liabilities | 3,033,000 | 2,715,000 | ||||||
| Due to securities broker | - | 490,000 | ||||||
| Obligations for securities sold | - | 449,000 | ||||||
| Related party notes payable | 3,379,000 | 3,521,000 | ||||||
| Mortgage notes payable - Hotel, net | 108,249,000 | 108,747,000 | ||||||
| Mortgage notes payable - real estate, net | 85,202,000 | 85,437,000 | ||||||
| Total liabilities | 209,154,000 | 209,050,000 | ||||||
| Shareholders’ deficit: | ||||||||
| Preferred stock, $ par value, shares authorized; issued | - | - | ||||||
| Common stock, $ par value, shares authorized; and issued; and outstanding, respectively | 33,000 | 33,000 | ||||||
| Additional paid-in capital | 3,258,000 | 3,277,000 | ||||||
| Accumulated deficit | (46,315,000 | ) | (46,116,000 | ) | ||||
| Treasury stock, at cost, and shares, respectively | (20,196,000 | ) | (19,324,000 | ) | ||||
| Total InterGroup shareholders’ deficit | (63,220,000 | ) | (62,130,000 | ) | ||||
| Noncontrolling interest | (20,862,000 | ) | (20,874,000 | ) | ||||
| Total shareholders’ deficit | (84,082,000 | ) | (83,004,000 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 125,072,000 | $ | 126,046,000 | ||||
| As of | December 31, 2017 | June 30, 2017 | ||||||
| ASSETS | ||||||||
| Investment in hotel, net | $ | 40,820,000 | $ | 42,092,000 | ||||
| Investment in real estate, net | 54,402,000 | 54,984,000 | ||||||
| Investment in marketable securities | 13,209,000 | 17,177,000 | ||||||
| Other investments, net | 963,000 | 1,211,000 | ||||||
| Cash and cash equivalents | 2,309,000 | 2,871,000 | ||||||
| Restricted cash | 7,686,000 | 7,402,000 | ||||||
| Other assets, net | 3,075,000 | 3,365,000 | ||||||
| Deferred income taxes | 3,688,000 | 4,107,000 | ||||||
| Total assets | $ | 126,152,000 | $ | 133,209,000 | ||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities | $ | 2,971,000 | $ | 2,947,000 | ||||
| Accounts payable and other liabilities - hotel | 11,870,000 | 12,833,000 | ||||||
| Due to securities broker | 2,792,000 | 3,012,000 | ||||||
| Obligations for securities sold | 2,071,000 | 3,710,000 | ||||||
| Related party and other notes payable | 5,920,000 | 6,112,000 | ||||||
| Mortgage notes payable - hotel | 115,038,000 | 115,615,000 | ||||||
| Mortgage notes payable - real estate | 63,597,000 | 64,298,000 | ||||||
| Total liabilities | 204,259,000 | 208,527,000 | ||||||
| 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 | ||||||
| Additional paid-in capital | 10,468,000 | 10,346,000 | ||||||
| Accumulated deficit | (46,915,000 | ) | (45,298,000 | ) | ||||
| 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 | ) | ||||
| Noncontrolling interest | (28,958,000 | ) | (27,773,000 | ) | ||||
| Total shareholders' deficit | (78,107,000 | ) | (75,318,000 | ) | ||||
| Total liabilities and shareholders' equity | $ | 126,152,000 | $ | 133,209,000 | ||||
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 September 30, | 2022 | 2021 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 12,310,000 | $ | 6,805,000 | ||||
| Real estate | 4,078,000 | 4,116,000 | ||||||
| Total revenues | 16,388,000 | 10,921,000 | ||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | (9,306,000 | ) | (6,333,000 | ) | ||||
| Real estate operating expenses | (2,191,000 | ) | (2,074,000 | ) | ||||
| Depreciation and amortization expenses | (1,329,000 | ) | (1,148,000 | ) | ||||
| General and administrative expenses | (699,000 | ) | (810,000 | ) | ||||
| Total costs and operating expenses | (13,525,000 | ) | (10,365,000 | ) | ||||
| Income from operations | 2,863,000 | 556,000 | ||||||
| Other (expense) income: | ||||||||
| Interest expense - mortgages | (2,222,000 | ) | (2,242,000 | ) | ||||
| Net loss on marketable securities | (810,000 | ) | (1,818,000 | ) | ||||
| Net loss on marketable securities - Comstock | - | (350,000 | ) | |||||
| Dividend and interest income | 175,000 | 187,000 | ||||||
| Trading and margin interest expense | (265,000 | ) | (354,000 | ) | ||||
| Total other expense, net | (3,122,000 | ) | (4,577,000 | ) | ||||
| Loss before income taxes | (259,000 | ) | (4,021,000 | ) | ||||
| Income tax benefit | 58,000 | 1,115,000 | ||||||
| Net loss | (201,000 | ) | (2,906,000 | ) | ||||
| Less: Net loss attributable to the noncontrolling interest | 2,000 | 745,000 | ||||||
| Net loss attributable to The InterGroup Corporation | $ | (199,000 | ) | $ | (2,161,000 | ) | ||
| Net loss per share | ||||||||
| Basic | $ | (0.09 | ) | $ | (1.31 | ) | ||
| Diluted | $ | (0.09 | ) | $ | (1.31 | ) | ||
| Net loss per share attributable to The InterGroup Corporation | ||||||||
| Basic | $ | (0.09 | ) | $ | (0.97 | ) | ||
| Diluted | $ | (0.09 | ) | $ | (0.97 | ) | ||
| Weighted average number of basic common shares outstanding | 2,231,228 | 2,222,904 | ||||||
| Weighted average number of diluted common shares outstanding | 2,482,423 | 2,560,499 | ||||||
| For the three months ended December 31, | 2017 | 2016 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 13,187,000 | $ | 12,837,000 | ||||
| Real estate | 3,625,000 | 3,605,000 | ||||||
| Total revenues | 16,812,000 | 16,442,000 | ||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | (10,743,000 | ) | (9,611,000 | ) | ||||
| Real estate operating expenses | (2,102,000 | ) | (1,754,000 | ) | ||||
| Depreciation and amortization expenses | (1,267,000 | ) | (1,370,000 | ) | ||||
| General and administrative expenses | (730,000 | ) | (602,000 | ) | ||||
| Total costs and operating expenses | (14,842,000 | ) | (13,337,000 | ) | ||||
| Income from operations | 1,970,000 | 3,105,000 | ||||||
| Other income (expense): | ||||||||
| Interest expense - mortgages | (2,490,000 | ) | (2,402,000 | ) | ||||
| Net loss on marketable securities | (1,178,000 | ) | (3,290,000 | ) | ||||
| Impairment loss on other investments | (200,000 | ) | (24,000 | ) | ||||
| Dividend and interest income | 48,000 | 68,000 | ||||||
| Trading and margin interest expense | (313,000 | ) | (291,000 | ) | ||||
| Total other expense, net | (4,133,000 | ) | (5,939,000 | ) | ||||
| 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 | ) | ||
| Net loss per share | ||||||||
| Basic and diluted | $ | (1.06 | ) | $ | (0.85 | ) | ||
| Net loss per share attributable to InterGroup | ||||||||
| Basic and diluted | $ | (0.51 | ) | $ | (0.72 | ) | ||
| Weighted average number of basic and diluted common shares outstanding | 2,371,125 | 2,375,654 | ||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| - 4 - |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSSHAREHOLDERS’ DEFICIT
(UNAUDITED)(unaudited)
| Common Stock | Additional Paid-in | Accumulated | Treasury | InterGroup Shareholders’ | Noncontrolling | Total Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2022 | 3,459,888 | $ | 33,000 | $ | 3,277,000 | $ | (46,116,000 | ) | $ | (19,324,000 | ) | $ | (62,130,000 | ) | $ | (20,874,000 | ) | $ | (83,004,000 | ) | ||||||||||||
| Net loss | - | - | - | (199,000 | ) | - | (199,000 | ) | (2,000 | ) | (201,000 | ) | ||||||||||||||||||||
| Investment in Portsmouth | - | - | (19,000 | ) | - | - | (19,000 | ) | 14,000 | (5,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (872,000 | ) | (872,000 | ) | - | (872,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2022 | 3,459,888 | $ | 33,000 | $ | 3,258,000 | $ | (46,315,000 | ) | $ | (20,196,000 | ) | $ | (63,220,000 | ) | $ | (20,862,000 | ) | $ | (84,082,000 | ) | ||||||||||||
| 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 | ||||||
| Common Stock | Additional Paid-in | Accumulated | Treasury | InterGroup Shareholders’ | Noncontrolling | Total Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2021 | 3,404,982 | $ | 33,000 | $ | 2,172,000 | $ | (36,394,000 | ) | $ | (17,370,000 | ) | $ | (51,559,000 | ) | $ | (19,677,000 | ) | $ | (71,236,000 | ) | ||||||||||||
| Beginning balance, value | 3,404,982 | $ | 33,000 | $ | 2,172,000 | $ | (36,394,000 | ) | $ | (17,370,000 | ) | $ | (51,559,000 | ) | $ | (19,677,000 | ) | $ | (71,236,000 | ) | ||||||||||||
| Net Loss | - | - | - | (2,161,000 | ) | - | (2,161,000 | ) | (745,000 | ) | (2,906,000 | ) | ||||||||||||||||||||
| Stock options expense | - | - | 2,000 | - | - | 2,000 | - | 2,000 | ||||||||||||||||||||||||
| Investment in Portsmouth | - | - | (25,000 | ) | - | - | (25,000 | ) | 17,000 | (8,000 | ) | |||||||||||||||||||||
| Purchase of remaining interest in Justice | - | - | - | (999,000 | ) | - | (999,000 | ) | 999,000 | - | ||||||||||||||||||||||
| Investment in Justice | - | - | - | - | - | - | (344,000 | ) | (344,000 | ) | ||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (74,000 | ) | (74,000 | ) | - | (74,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2021 | 3,404,982 | $ | 33,000 | $ | 2,149,000 | $ | (39,554,000 | ) | $ | (17,444,000 | ) | $ | (54,816,000 | ) | $ | (19,750,000 | ) | $ | (74,566,000 | ) | ||||||||||||
| Ending balance, value | 3,404,982 | $ | 33,000 | $ | 2,149,000 | $ | (39,554,000 | ) | $ | (17,444,000 | ) | $ | (54,816,000 | ) | $ | (19,750,000 | ) | $ | (74,566,000 | ) | ||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| - 5 - |
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)(unaudited)
| For the six months ended December 31, | 2017 | 2016 | ||||||||||||||
| For the three months ended September 30, | 2022 | 2021 | ||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net loss | $ | (2,802,000 | ) | $ | (414,000 | ) | $ | (201,000 | ) | $ | (2,906,000 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 2,597,000 | 2,638,000 | 1,275,000 | 1,112,000 | ||||||||||||
| Deferred taxes | (58,000 | ) | (1,115,000 | ) | ||||||||||||
| Net unrealized loss on marketable securities | 2,081,000 | 2,448,000 | 10,000 | 4,421,000 | ||||||||||||
| Impairment loss on other investments | 200,000 | 44,000 | ||||||||||||||
| Stock compensation expense | 122,000 | 140,000 | - | 2,000 | ||||||||||||
| Deferred taxes | 419,000 | 227,000 | ||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Investment in marketable securities | 1,887,000 | (5,210,000 | ) | 352,000 | 7,937,000 | |||||||||||
| Other assets | 290,000 | 2,648,000 | (695,000 | ) | (1,513,000 | ) | ||||||||||
| Accounts payable and other liabilities - Hotel | 1,653,000 | 1,144,000 | ||||||||||||||
| Accounts payable and other liabilities | (939,000 | ) | (3,406,000 | ) | 318,000 | 511,000 | ||||||||||
| Due to securities broker | (220,000 | ) | 2,530,000 | (490,000 | ) | (6,747,000 | ) | |||||||||
| Obligations for securities sold | (1,639,000 | ) | 867,000 | (449,000 | ) | (349,000 | ) | |||||||||
| Net cash provided by operating activities | 1,996,000 | 2,512,000 | 1,715,000 | 2,497,000 | ||||||||||||
| 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 | - | ||||||||||||||
| Payments for hotel investments | (1,632,000 | ) | (240,000 | ) | ||||||||||||
| Payments for real estate investments | (800,000 | ) | (223,000 | ) | ||||||||||||
| Payments for investment in Portsmouth | (5,000 | ) | (8,000 | ) | ||||||||||||
| Payments for investment in Justice | - | (344,000 | ) | |||||||||||||
| Net cash used in investing activities | (639,000 | ) | (962,000 | ) | (2,437,000 | ) | (815,000 | ) | ||||||||
| 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 | ) | ||||||||||||
| Net payments of mortgage notes payable | (874,000 | ) | (823,000 | ) | ||||||||||||
| Proceeds from refinance of mortgage notes payable | - | 3,161,000 | ||||||||||||||
| Issuance costs of refinancing mortgage and other notes payable | - | (39,000 | ) | |||||||||||||
| Purchase of treasury stock | (109,000 | ) | (352,000 | ) | (872,000 | ) | (74,000 | ) | ||||||||
| Net cash used in financing activities | (1,919,000 | ) | (3,183,000 | ) | ||||||||||||
| Net cash (used in) provided by financing activities | (1,746,000 | ) | 2,225,000 | |||||||||||||
| 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 | ||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (2,468,000 | ) | 3,907,000 | |||||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | 23,349,000 | 15,392,000 | ||||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 20,881,000 | $ | 19,299,000 | ||||||||||||
| Supplemental information: | ||||||||||||||||
| Interest paid | $ | 5,336,000 | $ | 5,167,000 | $ | 1,797,000 | $ | 2,092,000 | ||||||||
| Taxes paid | $ | - | $ | 73,000 | ||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| - 6 - |
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, 2017.2022. The June 30, 20172022 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, 2017.2022.
The condensed consolidated financial statements include the accounts of our wholly owned and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended December 31, 2017September 30, 2022 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2018.2023.
Basic and diluted loss per share is computed by dividing net loss available to common stockholders byEffective February 19, 2021, 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's only potentially dilutive common shares are stock options.
As of December 31, 2017, the Company had the power to vote 85.8% of the voting shares ofCompany’s 83.7% owned subsidiary, Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF). This percentage includes the power to vote an approximately 4%, was liquidated and all of its assets including its 68.8% interest in the common stock in Santa Fe owned by the Company’s Chairman and President pursuant to a voting trust agreement entered into on June 30, 1998.
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). was distributed to its shareholders in exchange for their Santa Fe common stock. As of September 30, 2022, InterGroup owns approximately 75% of the outstanding common shares of Portsmouth and the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield, owns approximately 2.5% of the outstanding common shares of Portsmouth. Mr. Winfield also serves as the Chairman of the Board and Chief Executive Officer of Portsmouth.
Portsmouth’s primary business iswas conducted through its general and limited partnership interest in Justice Investors Limited Partnership;Partnership, a California limited partnership (“Justice” or the “Partnership”). InterGroup also directly owns approximately 13.4%Effective July 15, 2021, Portsmouth completed the purchase of 100% of the common stocklimited partnership interest of Portsmouth.
Justice through the acquisition of the remaining 0.7% non-controlling interest. Effective December 23, 2021, the Partnership was dissolved. The financial statements of Justice were consolidated with those of Portsmouth.
Prior to its subsidiariesdissolution effective December 23, 2021, Justice Holdings Company, LLC (“Holdings”), a Delaware Limited Liability Company, Justice Operating Company, LLC (“Operating”)owned and Justice Mezzanine Company, LLC (“Mezzanine”), ownsoperated a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Holdingsgarage through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine are both wholly-owned subsidiariesCompany, LLC (“Mezzanine”). Mezzanine was a wholly owned subsidiary of the Partnership; Operating is a wholly-ownedwholly owned subsidiary of Mezzanine. Effective December 23, 2021, Portsmouth replaced Justice as the single member of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton).(“Hilton”) through January 31, 2030.
Justice had a management agreementAimbridge Hospitality (“Aimbridge”) manages the Hotel, along with Prism Hospitality L.P. (“Prism”) to performits five-level parking garage, under 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 with an effective takeover date of February 3, 2017.Operating. The term of the management agreement is for an initial period of 10ten years commencing on the takeoverFebruary 3, 2017 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 for Interstatebase management fee payable to advance a key money incentive fee to theAimbridge shall be one and seven-tenths percent (1.70%) of total 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 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.revenue.
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.houses as strategic investments. The properties are located throughout the United States but are concentrated in Dallas, Texas and Southern California. The Company also has an investmentinvestments in unimproved real property. As of December 31, 2017, allAll of the Company’s residential rental properties and its commercial rental propertiesproperty are managed in-house.
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Due
There have been no material changes to Securities Brokerthe Company’s significant accounting policies during the three months ended September 30, 2022. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 2022 for a summary of the significant accounting policies. Certain prior year amounts have been reclassified for consistency with the current period presentation on the condensed consolidated balance sheet. Finance leases of $130,000 and $183,000 as of September 30, 2022 and June 30, 2022, respectively, were reclassified to Accounts Payable and Other Liabilities - Hotel. These reclassifications had no effect on the reported results of operations and financial position.
VariousRecently Issued and Adopted Accounting Pronouncements
As of September 30, 2022, there was no material impact from the recent adoption of new accounting pronouncements, nor expected material impact from recently issued accounting pronouncements yet to be adopted, on the Company’s condensed consolidated financial statements.
NOTE 2 - LIQUIDITY
Historically, our cash flows have been primarily generated from our Hotel and real estate operations. However, the responses by federal, state, and local civil authorities to the COVID-19 pandemic continues to have a material detrimental impact on our liquidity. For the three months ended September 30, 2022, our net cash flow provided by operations was $1,715,000. We have taken several steps to preserve capital and increase liquidity at our Hotel, including implementing strict cost management measures to eliminate non-essential expenses, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets. As the hospitality and travel environment continues to recover, Portsmouth will continue to evaluate what services we bring back. During the three months ended September 30, 2022, Portsmouth continued to make capital improvements to the hotel in the amount of $1,632,000 and anticipates continuing its guest room upgrade program during the remaining of fiscal year 2023. During the three months ended September 30, 2022 the Company made capital improvements in the amount of $800,000 to its multi-family and commercial real estate.
The Company had cash and cash equivalents of $12,219,000 and $14,367,000 as of September 30, 2022 and June 30, 2022, respectively. The Company had restricted cash of $8,662,000 and $8,982,000 as of September 30, 2022 and June 30, 2022, respectively. The Company had marketable securities, net of margin due to securities brokers, haveof $10,687,000 and $10,110,000 as of September 30, 2022 and June 30, 2022, respectively. These marketable securities are short-term investments and liquid in nature.
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. 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 and extended the maturity date of the loan to July 31, 2021. As of the date of this report, the maturity date was extended to July 31, 2023. In December 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. Upon the dissolution of Justice in December 2021, Portsmouth assumed Justice’s note payable to InterGroup in the amount of $11,350,000. During the fiscal year ending June 30, 2022, InterGroup advanced funds$7,550,000 to the Hotel, bringing the total amount due to InterGroup to $14,200,000 as of June 30, 2022 and September 30, 2022. All funds advanced to Portsmouth by 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 includedhave been eliminated in the condensed consolidated financial statements at September 30, 2022 and June 30, 2022, respectively. During the three months ended September 30, 2022, Portsmouth did not need any additional funding and does not anticipate any need for funding from InterGroup in the near future. As of operations.September 30, 2022, Portsmouth has not made any paid-downs to its note payable to InterGroup. Portsmouth could amend its by-laws and increase the number of authorized shares to issue additional shares to raise capital in the public markets if needed.
Income Tax
During the fiscal year ended June 30, 2022, the Company refinanced five of our properties’ existing mortgages and obtained a mortgage note payable on one of our California properties, generating net proceeds totaling $16,683,000. The Company consolidates Justice (“Hotel”) for financial reporting purposeswill continue to evaluate other refinancing opportunities and is not taxed on its non-controlling interest incould refinance additional multifamily properties should the Hotel. The income tax expense duringneed arise, or should management consider the three and six months ended December 31, 2017 and 2016 represents the income tax effect on the Company’s pretax income which includes its share in the net income of the Hotel.
Financial Condition and Liquidity
The Company’s cash flows are primarily generated from its Hotel operations. The Company also receives cash generated from the investment of its cash and marketable securities and other investments.
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due thru January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period thru its maturity date of January 2024. As additional security for the mortgage loan, there is a limited guaranty executed byenvironment favorable. In July 2022, the Company in favorrenewed its uncollateralized revolving line of mortgage lender.credit from CIBC Bank USA (“CIBC”) at a reduced amount of $2,000,000 from $5,000,000 and the entire $2,000,000 is available to be drawn down should additional liquidity be necessary. The mezzanine loanentire $2,000,000 is secured by the Operating membership interest held by Mezzanine and is subordinatedavailable 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.
Effectivedraw down 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.September 30, 2022.
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Despite an uncertain economy, the Hotel has continued
The Company’s known short-term liquidity requirements primarily consist of funds necessary to generate positivepay for operating income. While theand 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 at all of our properties.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt service requirements related the loans may create some additional risk for the Companymaturities 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 the Company’s currentanticipated requirements for operating and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.
Recently Issued Accounting Pronouncementsother expenditures, including corporate expenses, payroll and U.S. Tax Reform
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,Revenuerelated benefits, taxes and compliance costs and other commitments, for at least twelve months from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)(ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The 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 adopting the new standard effective July 1, 2019. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company currently anticipates adopting the standard using the modified retrospective method. While the Company is still in the processissuance of completing the analysis on the impact this guidance will have on the consolidatedthese financial statements, even if the economic recovery takes longer than anticipated. The objectives of our cash management policy are to maintain existing leverage levels and related disclosures, the Company does notavailability of liquidity, while minimizing operational costs. However, there can be no guarantee that management will be successful with its plan.
The following table provides a summary as of September 30, 2022, the Company’s material financial obligations which also includes interest payments.
SCHEDULE OF MATERIAL FINANCIAL OBLIGATION
| 9 Months | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | ||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 194,578,000 | $ | 7,087,000 | $ | 108,421,000 | $ | 3,970,000 | $ | 1,174,000 | $ | 3,304,000 | $ | 70,622,000 | ||||||||||||||
| Related party notes payable | 3,379,000 | 425,000 | 567,000 | 567,000 | 567,000 | 463,000 | 790,000 | |||||||||||||||||||||
| Interest | 33,388,000 | 6,643,000 | 5,630,000 | 2,491,000 | 2,371,000 | 2,264,000 | 13,989,000 | |||||||||||||||||||||
| Total | $ | 231,345,000 | $ | 14,155,000 | $ | 114,618,000 | $ | 7,028,000 | $ | 4,112,000 | $ | 6,031,000 | $ | 85,401,000 | ||||||||||||||
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 revenue recognition rules under ASC 606 specifically eliminates rental revenue from the accounting standard.
The following table present our Hotel revenue disaggregated by revenue streams.
SCHEDULE OF DISAGGREGATION OF REVENUE
| For the three months ended September 30, | 2022 | 2021 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 10,802,000 | $ | 5,562,000 | ||||
| Food and beverage | 535,000 | 266,000 | ||||||
| Garage | 822,000 | 907,000 | ||||||
| Other operating departments | 151,000 | 70,000 | ||||||
| Total hotel revenue | $ | 12,310,000 | $ | 6,805,000 | ||||
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 the impact to be material.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. | |
| ● | Non-cancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation. |
In August 2014, the FASB issued ASU No. 2014-15,Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern that requires management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern 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’s adoption of this ASU did not have a material impact on its consolidated financial statements.
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 timely recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2020. The Company is currently reviewing the effect of ASU No. 2016-13.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing corporate income tax by, among other things, lowering corporate income tax rates. As the Company has a June 30 fiscal year-end, 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.
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| ● | 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. |
The reductionHotel 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 corporate tax rate will cause us to reduce our deferred tax assetgoods and services are provided. For package reservations, the transaction price is allocated to the lower federal base rateperformance obligations within the package based on the estimated standalone selling prices of 21%.each component.
We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.
Contract assets and liabilities
We do not have any material contract assets as of September 30, 2022 and June 30, 2022, other than trade and other receivables, net on our consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.
We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities – Hotel on our consolidated balance sheets and had a balance of $493,000 at July 1, 2022. During the three months ended September 30, 2022, the entire $493,000 was recognized as revenue and $148,000 was recognized during the three months ended September 30, 2021. Contract liabilities increased to $1,061,000 as of September 30, 2022 from $493,000 as of June 30, 2022. The increase for the three months ended September 30, 2022 was primarily driven by advance deposits received from customers for services to be performed after September 30, 2022.
Contract costs
We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a result, a provisional net charge of $879,000 was included in the income taxpractical expedient, we expense for the quarter ended December 31, 2017.
The changes included in the Tax Actthese costs as incurred as our contracts with customers are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impact. The Securities Exchange Commission has issued rules that would allow for a measurement period of up toless than one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending June 30, 2018.year.
NOTE 24 – INVESTMENT IN HOTEL, NET
Investment in hotelHotel consisted of the following as of:
SCHEDULE OF INVESTMENT IN HOTEL, NET
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| December 31, 2017 | Cost | Depreciation | Value | |||||||||||||||||||||
| September 30, 2022 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||||||||
| Finance lease ROU assets | 1,805,000 | (1,002,000 | ) | 803,000 | ||||||||||||||||||||
| Furniture and equipment | 27,896,000 | (25,297,000 | ) | 2,599,000 | 34,492,000 | (28,792,000 | ) | 5,700,000 | ||||||||||||||||
| Building and improvements | 64,324,000 | (28,841,000 | ) | 35,483,000 | 64,665,000 | (35,658,000 | ) | 29,007,000 | ||||||||||||||||
| $ | 94,958,000 | $ | (54,138,000 | ) | $ | 40,820,000 | ||||||||||||||||||
| Investment in Hotel, net | $ | 103,700,000 | $ | (65,452,000 | ) | $ | 38,248,000 | |||||||||||||||||
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| June 30, 2017 | Cost | Depreciation | Value | |||||||||||||||||||||
| June 30, 2022 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||||||||
| Finance lease ROU assets | 1,805,000 | (922,000 | ) | 883,000 | ||||||||||||||||||||
| Furniture and equipment | 27,681,000 | (24,569,000 | ) | 3,112,000 | 32,860,000 | (28,567,000 | ) | 4,293,000 | ||||||||||||||||
| Building and improvements | 64,308,000 | (28,066,000 | ) | 36,242,000 | 64,665,000 | (35,312,000 | ) | 29,353,000 | ||||||||||||||||
| $ | 94,727,000 | $ | (52,635,000 | ) | $ | 42,092,000 | ||||||||||||||||||
| Investment in Hotel, net | $ | 102,068,000 | $ | (64,801,000 | ) | $ | 37,267,000 | |||||||||||||||||
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Finance lease ROU assets, furniture and equipment are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 3 to 7 years and amortized over the life of the lease. Building and improvements are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 15 to 39 years. Depreciation expense related to our investment in hotel for the three months ended September 30, 2022 and 2021 are $627,000 and $552,000, respectively.
NOTE 35 – INVESTMENT IN REAL ESTATE, NET
At September 30, 2022, the Company’s investment in real estate consisted of twenty properties located throughout the United States. These properties include sixteen apartment complexes, three single-family houses as strategic investments, and one commercial real estate property. The Company also owns unimproved land located in Maui, Hawaii.
Investment in real estate consisted of the following:
SCHEDULE OF INVESTMENT IN REAL ESTATE
| As of | December 31, 2017 | June 30, 2017 | September 30, 2022 | June 30, 2022 | ||||||||||||
| Land | $ | 25,033,000 | $ | 25,033,000 | $ | 22,998,000 | $ | 22,998,000 | ||||||||
| Buildings, improvements and equipment | 67,382,000 | 66,804,000 | 71,731,000 | 70,933,000 | ||||||||||||
| Accumulated depreciation | (38,013,000 | ) | (36,853,000 | ) | (48,050,000 | ) | (47,374,000 | ) | ||||||||
| Investment in real estate, gross | 46,679,000 | 46,557,000 | ||||||||||||||
| Land held for development | 1,468,000 | 1,468,000 | ||||||||||||||
| Investment in real estate, net | $ | 54,402,000 | $ | 54,984,000 | $ | 48,147,000 | $ | 48,025,000 | ||||||||
In July 2015,
Building, improvements, and equipment are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 5 to 40 years. During the three months ended September 30, 2022 the Company purchased residential houseinvested $800,000 in Los Angeles, California as a strategic asset for $1,975,000capitalized improvements. Depreciation expense related to our investment in cash. In August 2016, the Company obtained a mortgage note payable on the house in the amount of $1,000,000. The note has an adjustable interest rate of 5.25% as of December 31, 2017 and requires interest only paymentsreal estate for the first twenty-threethree months with a balloon payment at maturity in August 2018.ended September 30, 2022 and 2021 are $678,000 and $594,000, respectively.
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 transferinure to its shareholders through income and/or capital gain.
At December 31, 2017September 30, 2022 and June 30, 2017,2022, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:
SCHEDULE OF TRADING SECURITIES
| Gross | Gross | Net | Fair | Gross | Gross | Net | |||||||||||||||||||||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Value | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Fair Value | |||||||||||||||||||||||||||||||
| As of December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Corporate Equities | $ | 27,296,000 | $ | 2,251,000 | $ | (16,338,000 | ) | $ | (14,087,000 | ) | $ | 13,209,000 | $ | 10,829,000 | $ | 1,519,000 | $ | (1,661,000 | ) | $ | (142,000 | ) | $ | 10,687,000 | |||||||||||||||||
| As of June 30, 2017 | |||||||||||||||||||||||||||||||||||||||||
| As of June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Corporate Equities | $ | 29,170,000 | $ | 1,768,000 | $ | (13,761,000 | ) | $ | (11,993,000 | ) | $ | 17,177,000 | $ | 11,150,000 | $ | 1,474,000 | $ | (1,575,000 | ) | $ | (101,000 | ) | $ | 11,049,000 | |||||||||||||||||
As of December 31, 2017 and June 30, 2017, approximately 16% and 28%, respectively, of the investment marketable securities balance above is comprised of the common stock of Comstock Mining, Inc.
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As of December 31, 2017 and June 30, 2017, the Company had unrealized losses of $16,105,000 and $13,294,000, respectively, related to securities held for over one year.
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 losses on marketable securities for the respective periods:three months ended September 30, 2022 and 2021, respectively:
SCHEDULE OF NET GAINS (LOSSES) ON MARKETABLE SECURITIES COMPRISING OF REALIZED AND UNREALIZED GAINS (LOSSES)
| For the three months ended December 31, | 2017 | 2016 | ||||||
| Realized gain (loss) on marketable securities | $ | 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 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 | ) | ||
NOTE 5 – OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the securities investment committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary impairment losses. Other investments also include non-marketable warrants carried at fair value.
Other investments, net consist of the following:
| Type | December 31, 2017 | June 30, 2017 | ||||||
| Private equity hedge fund, at cost | $ | 582,000 | $ | 782,000 | ||||
| Other preferred stock, at cost | 381,000 | 429,000 | ||||||
| $ | 963,000 | $ | 1,211,000 | |||||
| For the three months ended September 30, | 2022 | 2021 | ||||||
| Realized (loss) gain on marketable securities, net | $ | (800,000 | ) | $ | 2,393,000 | |||
| Realized loss on marketable securities related to Comstock | - | (140,000 | ) | |||||
| Unrealized loss on marketable securities, net | (10,000 | ) | (4,211,000 | ) | ||||
| Unrealized loss on marketable securities related to Comstock | - | (210,000 | ) | |||||
| Net loss on marketable securities | $ | (810,000 | ) | $ | (2,168,000 | ) | ||
NOTE 6 – 7 - FAIR VALUE MEASUREMENTS
The carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities, due to securities broker and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).
The assets and liabilities measured at fair value on a recurring basis are as follows:
SCHEDULE OF FAIR VALUE MEASUREMENT ON RECURRING BASIS
| September 30, 2022 | June 30, 2022 | |||||||||||||||
| As of | 12/31/2017 | 6/30/2017 | Total - Level 1 | Total - Level 1 | ||||||||||||
| Total - Level 1 | Total - Level 1 | |||||||||||||||
| Assets: | ||||||||||||||||
| Investment in marketable securities: | ||||||||||||||||
| Basic materials | $ | 2,640,000 | $ | 6,222,000 | ||||||||||||
| REITs and real estate companies | $ | 4,315,000 | $ | 3,289,000 | ||||||||||||
| Basic material | 1,301,000 | 769,000 | ||||||||||||||
| Technology | 3,039,000 | 4,134,000 | 1,081,000 | 815,000 | ||||||||||||
| REITs and real estate companies | 1,494,000 | 1,820,000 | ||||||||||||||
| Financial services | 1,045,000 | 1,755,000 | ||||||||||||||
| Communication services | 948,000 | 2,787,000 | ||||||||||||||
| Consumer cyclical | 592,000 | 693,000 | ||||||||||||||
| Energy | 472,000 | 1,345,000 | 483,000 | 279,000 | ||||||||||||
| Corporate Bonds | 1,774,000 | 1,683,000 | ||||||||||||||
| Industrials | 22,000 | 385,000 | ||||||||||||||
| Other | 3,790,000 | 1,973,000 | 900,000 | 277,000 | ||||||||||||
| $ | 13,209,000 | $ | 17,177,000 | |||||||||||||
| Total | $ | 10,687,000 | $ | 11,049,000 | ||||||||||||
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). NOTE 8 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table showsprovides a reconciliation of cash, cash equivalents, and restricted cash reported within the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:
| Net loss for the six months | ||||||||||||
| Assets | Level 3 | December 31, 2017 | ended December 31, 2017 | |||||||||
| Other non-marketable investments | $ | 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 | ) | |||||
Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control overcondensed consolidated balance sheets that sum to the entities that issue these investments and holds less than 20% ownership in eachtotal of the investments. These investments are reviewed on a periodic basissame such amounts shown in the condensed consolidated statement of cash flows:
SCHEDULE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
| As of | September 30, 2022 | June 30, 2022 | ||||||
| Cash and cash equivalents | $ | 12,219,000 | $ | 14,367,000 | ||||
| Restricted cash | 8,662,000 | 8,982,000 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 20,881,000 | $ | 23,349,000 | ||||
Restricted cash is comprised of amounts held by lenders for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i)payment of real estate taxes, insurance, replacement and capital addition reserves for the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial conditionHotel 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.real estate properties.
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.
| - 12 - |
Please refer to Note 1615 – Stock Based Compensation Plans in the Company'sCompany’s Form 10-K for the year ended June 30, 20172022 for more detaildetailed information on the Company’s stock-based compensation plans.
During the three months ended December 31, 2017 and 2016,September 30, 2022 the Company did t record any stock option compensation cost and recorded stock option compensation cost of $60,000 and $66,000, respectively, related to stock options that were previously issued. For$ during the sixthree months ended December 31, 2017 and 2016, the Company recorded stock option compensation cost of $122,000 and $140,000, respectively,September 30, 2021 related to stock options that were previously issued. As of December 31, 2017, there was a total of $181,000 of unamortizedSeptember 30, 2022 all compensation related to stock options which is expected to be recognized over the weighted-average period of 2.90 years.has been fully amortized.
Option-pricing models require the input of various subjective assumptions, including the option’s expected life, estimated forfeiture rates 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.
SCHEDULE OF STOCK OPTION ACTIVITY
| 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, 2021 | 341,195 | $ | 16.95 | years | $ | 8,890,000 | ||||||||||||||||||||||||
| Granted | 18,000 | 27.30 | - | - | - | - | ||||||||||||||||||||||||||||||||
| Exercised | - | - | (90,000 | ) | 19.77 | - | - | |||||||||||||||||||||||||||||||
| Forfeited | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Exchanged | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Oustanding at | June 30, 2017 | 368,000 | $ | 17.21 | 5.17 years | $ | 3,046,000 | |||||||||||||||||||||||||||||||
| Outstanding at | June 30, 2022 | 251,195 | $ | 15.95 | years | $ | 6,628,000 | |||||||||||||||||||||||||||||||
| Exercisable at | June 30, 2017 | 286,000 | $ | 16.19 | 5.20 years | $ | 2,635,000 | June 30, 2022 | 251,195 | $ | 15.95 | years | $ | 6,628,000 | ||||||||||||||||||||||||
| Vested and Expected to vest at | June 30, 2017 | 368,000 | $ | 17.21 | 5.17 years | $ | 3,046,000 | |||||||||||||||||||||||||||||||
| Vested at | June 30, 2022 | 251,195 | $ | 15.95 | years | $ | 6,628,000 | |||||||||||||||||||||||||||||||
| Oustanding at | July 1, 2017 | 368,000 | $ | 17.21 | 5.17 years | $ | 3,046,000 | July 1, 2022 | 251,195 | $ | 15.95 | years | $ | 6,628,000 | ||||||||||||||||||||||||
| Granted | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Exercised | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Forfeited | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Exchanged | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Oustanding at | December 31, 2017 | 368,000 | $ | 17.21 | 4.67 years | $ | 2,500,575 | |||||||||||||||||||||||||||||||
| Outstanding at | September 30, 2022 | 251,195 | $ | 15.95 | years | $ | 8,866,000 | |||||||||||||||||||||||||||||||
| Exercisable at | December 31, 2017 | 318,000 | $ | 16.47 | 4.80 years | $ | 2,345,000 | September 30, 2022 | 251,195 | $ | 15.95 | years | $ | 8,866,000 | ||||||||||||||||||||||||
| Vested and Expected to vest at | December 31, 2017 | 368,000 | $ | 17.21 | 4.67 years | $ | 2,500,575 | |||||||||||||||||||||||||||||||
| Vested at | September 30, 2022 | 251,195 | $ | 15.95 | years | $ | 8,866,000 | |||||||||||||||||||||||||||||||
NOTE 810 – SEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the hotelHotel (“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.
Information below represents reported segments for the three and six months ended December 31, 2017September 30, 2022 and 2016. Operating2021. Segment income from hotelHotel operations consistconsists of the operation of the hotelHotel and operation of the garage. OperatingSegment income forfrom real estate operations consists of the operation of the rental properties consist of rental income. Operating income (loss) for investment transactions consistproperties. Loss from investments consists of net investment gain (loss), impairment loss, on other investments, net unrealized gain (loss) on other investments, dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative expenses and the income tax expense for the entire Company.investment related expenses.
| - 13 - |
| As of and for the three months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2017 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 13,187,000 | $ | 3,625,000 | $ | - | $ | - | $ | 16,812,000 | ||||||||||
| Segment operating expenses | (10,743,000 | ) | (2,102,000 | ) | - | (730,000 | ) | (13,575,000 | ) | |||||||||||
| Segment income (loss) from operations | 2,444,000 | 1,523,000 | - | (730,000 | ) | 3,237,000 | ||||||||||||||
| Interest expense - mortgage | (1,850,000 | ) | (640,000 | ) | - | - | (2,490,000 | ) | ||||||||||||
| Depreciation and amortization expense | (682,000 | ) | (585,000 | ) | - | - | (1,267,000 | ) | ||||||||||||
| Loss from investments | - | - | (1,643,000 | ) | - | (1,643,000 | ) | |||||||||||||
| Income tax expense | - | - | - | (344,000 | ) | (344,000 | ) | |||||||||||||
| Net income (loss) | $ | (88,000 | ) | $ | 298,000 | $ | (1,643,000 | ) | $ | (1,074,000 | ) | $ | (2,507,000 | ) | ||||||
| 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 | |||||||||||||||
| Revenues | $ | 12,837,000 | $ | 3,605,000 | $ | - | $ | - | $ | 16,442,000 | ||||||||||
| Segment operating expenses | (9,611,000 | ) | (1,754,000 | ) | - | (602,000 | ) | (11,967,000 | ) | |||||||||||
| Segment income (loss) from operations | 3,226,000 | 1,851,000 | - | (602,000 | ) | 4,475,000 | ||||||||||||||
| Interest expense - mortgage | (1,750,000 | ) | (652,000 | ) | - | - | (2,402,000 | ) | ||||||||||||
| Depreciation and amortization expense | (810,000 | ) | (560,000 | ) | - | - | (1,370,000 | ) | ||||||||||||
| Loss from investments | - | - | (3,537,000 | ) | - | (3,537,000 | ) | |||||||||||||
| Income tax benefit | - | - | - | 825,000 | 825,000 | |||||||||||||||
| Net income (loss) | $ | 666,000 | $ | 639,000 | $ | (3,537,000 | ) | $ | 223,000 | $ | (2,009,000 | ) | ||||||||
| Total assets | $ | 50,206,000 | $ | 55,856,000 | $ | 18,029,000 | $ | 8,701,000 | $ | 132,792,000 | ||||||||||
| 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 | |||||||||||||||
| Revenues | $ | 27,442,000 | $ | 7,254,000 | $ | - | $ | - | $ | 34,696,000 | ||||||||||
| Segment operating expenses | (19,867,000 | ) | (3,561,000 | ) | - | (1,330,000 | ) | (24,758,000 | ) | |||||||||||
| Segment income (loss) from operations | 7,575,000 | 3,693,000 | - | (1,330,000 | ) | 9,938,000 | ||||||||||||||
| Interest expense - mortgage | (3,579,000 | ) | (1,285,000 | ) | - | - | (4,864,000 | ) | ||||||||||||
| Depreciation and amortization expense | (1,523,000 | ) | (1,115,000 | ) | - | - | (2,638,000 | ) | ||||||||||||
| Loss from investments | - | - | (2,623,000 | ) | - | (2,623,000 | ) | |||||||||||||
| Income tax expense | - | - | - | (227,000 | ) | (227,000 | ) | |||||||||||||
| Net income (loss) | $ | 2,473,000 | $ | 1,293,000 | $ | (2,623,000 | ) | $ | (1,557,000 | ) | $ | (414,000 | ) | |||||||
| Total assets | $ | 50,206,000 | $ | 55,856,000 | $ | 18,029,000 | $ | 8,701,000 | $ | 132,792,000 | ||||||||||
SCHEDULE OF SEGMENT REPORTING INFORMATION
| For the three months ended September | Hotel | Real Estate | Investment | |||||||||||||||||
| 30, 2022 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 12,310,000 | $ | 4,078,000 | $ | - | $ | - | $ | 16,388,000 | ||||||||||
| Segment operating expenses | (9,306,000 | ) | (2,191,000 | ) | - | (699,000 | ) | (12,196,000 | ) | |||||||||||
| Segment income (loss) | 3,004,000 | 1,887,000 | - | (699,000 | ) | 4,192,000 | ||||||||||||||
| Interest expense - mortgage | (1,632,000 | ) | (590,000 | ) | - | - | (2,222,000 | ) | ||||||||||||
| Depreciation and amortization expense | (651,000 | ) | (678,000 | ) | - | - | (1,329,000 | ) | ||||||||||||
| Loss from investments | - | - | (900,000 | ) | - | (900,000 | ) | |||||||||||||
| Income tax benefit | - | - | - | 58,000 | 58,000 | |||||||||||||||
| Net income (loss) | $ | 721,000 | $ | 619,000 | $ | (900,000 | ) | $ | (641,000 | ) | $ | (201,000 | ) | |||||||
| Total assets | $ | 47,526,000 | $ | 48,147,000 | $ | 10,687,000 | $ | 18,712,000 | $ | 125,072,000 | ||||||||||
| As of and for the three months ended | Hotel | Real Estate | Investment | |||||||||||||||||
| September 30, 2021 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 6,805,000 | $ | 4,116,000 | $ | - | $ | - | $ | 10,921,000 | ||||||||||
| Segment operating expenses | (6,333,000 | ) | (2,074,000 | ) | - | (810,000 | ) | (9,217,000 | ) | |||||||||||
| Segment income (loss) | 472,000 | 2,042,000 | - | (810,000 | ) | 1,704,000 | ||||||||||||||
| Interest expense - mortgage | (1,661,000 | ) | (581,000 | ) | - | - | (2,242,000 | ) | ||||||||||||
| Depreciation and amortization expense | (554,000 | ) | (594,000 | ) | - | - | (1,148,000 | ) | ||||||||||||
| Loss from investments | - | - | (2,335,000 | ) | - | (2,335,000 | ) | |||||||||||||
| Income tax benefit | - | - | - | 1,115,000 | 1,115,000 | |||||||||||||||
| Net income (loss) | $ | (1,743,000 | ) | $ | 867,000 | $ | (2,335,000 | ) | $ | 305,000 | $ | (2,906,000 | ) | |||||||
| Total assets | $ | 46,818,000 | $ | 47,338,000 | $ | 23,475,000 | $ | 16,209,000 | $ | 133,840,000 | ||||||||||
NOTE 911 – 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 at December 31, 2017 is the obligationas of September 30, 2022 and June 30, 2022, respectively.
SUMMARY OF RELATED PARTY AND OTHER NOTES PAYABLE
| As of | September 30, 2022 | June 30, 2022 | ||||||
| Note payable - Hilton | $ | 2,296,000 | $ | 2,375,000 | ||||
| Note payable - Aimbridge | 1,083,000 | 1,146,000 | ||||||
| Total related party notes payable | $ | 3,379,000 | $ | 3,521,000 | ||||
Note payable to Hilton (Franchisor) in the form ofis a self-exhausting, interest free development incentive note which is reduced by approximately $316,000$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, JusticeOperating entered into a Hotel management agreement (“HMA”)HMA with Interstate Management Company, LLC (“Interstate”)Ambridge to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for InterstateAmbridge to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000$2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8)(8) year period commencing on the second (2nd) anniversary of the takeover date. During the first quarter of fiscal year 2021, the Hotel obtained approval from Ambridge to use the key money for hotel operations and the funds were exhausted by December 31, 2020. The $2,000,000unamortized portion of $1,083,000 and $1,146,000 of the key money is included in restricted cash andthe related party and other notes payable balances in the condensed consolidated balance sheets as of December 31, 2017September 30, 2022 and June 30, 2017.2022, respectively.
| - 14 - |
In April
Future minimum principal amortizations for all related party financing transactions are as follows:
SCHEDULE OF FUTURE MINIMUM PRINCIPAL PAYMENTS
| For the year ending June 30, | ||||
| 2023 | $ | 425,000 | ||
| 2024 | 567,000 | |||
| 2025 | 567,000 | |||
| 2026 | 567,000 | |||
| 2027 | 463,000 | |||
| Thereafter | 790,000 | |||
| Long term debt | $ | 3,379,000 | ||
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 Company’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due through January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 2024. Outstanding principal balance on the loan was $88,554,000 and $89,114,000 as of September 30, 2022 and June 30, 2022, 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$97,000,000 mortgage loan and the $20,000,000$20,000,000 mezzanine loan, in orderloan. Pursuant to the agreement, InterGroup is required to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth was unableliquidity. As of September 30, 2022, InterGroup is in compliance with both requirements. However, due to satisfy independently.
In connection with the redemptionHotel’s ongoing recovery from the negative impact of Covid19 in the limited partnership interest of Justice,Hotel’s cash flow, Justice Operating Company, LLC agreedhave not been meeting certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lockbox by the Lender for all cash collected by the Hotel. However, such lockbox has been created and 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 DSCR.
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 31, 2023. 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. Upon the dissolution of Justice in December 2021, Portsmouth assumed Justice’s note payable to InterGroup in the amount of $11,350,000. In December 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. As of September 30, 2022 and June 30, 2022, the balance of the loan was $14,200,000 and is eliminated in the condensed consolidated balance sheets. As of September 30, 2022, Portsmouth has not made any paid-downs to its note payable to InterGroup.
In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. In July 2019, the Company obtained a modification from CIBC which extended the maturity date of the RLOC from July 24, 2019 to July 23, 2020. In July 2020, InterGroup entered into a second modification agreement with CIBC which extended the maturity date of its RLOC to July 21, 2021. In July 2022, the Company renewed its RLOC for services rendereda year at a reduced amount of $2,000,000 from the $5,000,000 and the entire $2,000,000 is available to be drawn down should additional liquidity be necessary.
| - 15 - |
As disclosed in connectionits Definitive Information Statement on Schedule 14C, filed with the redemptionSEC on January 25, 2021, Santa Fe received shareholder approval to distribute its assets, as described and subsequently dissolve, all as set forth in the Information Statement. As InterGroup formerly owned 83.7% of the partnership interests, refinancingoutstanding common stock of Santa Fe, the Company received cash of $5,013,000 and shares of Portsmouth common stock in March 2021 as a result of the Justices properties and reorganizationliquidation of Justice. This agreement was superseded bySanta Fe. As a letter dated December 11, 2013 from Justice, in which Justice assumedformer 3.7% shareholder of Santa Fe, the payment obligations of Justice Operating Company, LLC. As of December 31, 2017, $400,000 of these fees remain payable.
As of June 30, 2017, Justice had an outstanding accounts payable balance to InterGroup for $316,000 for managementCompany’s President, Chairman of the HotelBoard and Chief Executive Officer, John Winfield, received cash of $221,000 and shares of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of Dissolution from the State of Nevada, and Santa Fe is effectively fully dissolved and no longer in legal existence. In June to December2022, InterGroup received a distribution of 2016. As$1,159,000 of December 31,2017, that balance was paid off.from Santa Fe as the entity received federal and state tax refunds from previously filed final tax returns.
FourThree of the Portsmouth directors serve as directors of InterGroup. ThreeDirector Jerold R. Babin passed away in October 2022. The Company’s Vice President Real Estate was elected President of those directors also servePortsmouth in May 2021. The Company’s director and Chairman of the Audit Committee, William J. Nance, serves as directorsComstock’s director and Chairman of Santa Fe. The three Santa Fe directors also serve as directorsthe Audit and Finance, Compensation and Nominating and Governance Committees of InterGroup.Comstock. Steve Grunwald is a Director of Portsmouth and replaced Director Babin.
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 Board of Portsmouth and Santa Fe and oversees the investment activity of those companies.Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice and served in that position until the dissolution of Justice in December 2021. Depending on certain market conditions and various risk factors, the Chief Executive Officer Portsmouth and Santa FePortsmouth 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.
NOTE 12 – ACCOUNTS PAYABLE AND OTHER LIABILITIES – HOTEL
The following summarizes the balances of accounts payable and other liabilities – Hotel as of September 30, 2022 and June 30, 2022.
SCHEDULE OF ACCOUNTS PAYABLE AND OTHER LIABILITIES - HOTEL
| As of | September 30, 2022 | June 30, 2022 | ||||||
| Trade payable | $ | 2,120,000 | $ | 2,841,000 | ||||
| Advance deposits | 1,061,000 | 493,000 | ||||||
| Property tax payable | 504,000 | - | ||||||
| Payroll and related accruals | 2,433,000 | 2,223,000 | ||||||
| Mortgage interest payable | - | 513,000 | ||||||
| Withholding and other taxes payable | 1,025,000 | 920,000 | ||||||
| Security deposit | 52,000 | 52,000 | ||||||
| Lease payable | 130,000 | 183,000 | ||||||
| Other | 2,007,000 | 1,265,000 | ||||||
| Total accounts payable and other liabilities - Hotel | $ | 9,332,000 | $ | 8,490,000 | ||||
NOTE 13 – SUBSEQUENT EVENT
On October 20, 2022, Director Jerold R. Babin passed away. Mr. Babin, 90, was not a member of any Board of Directors committees. Mr. Babin was replaced by Steve Grunwald and was elected unanimously by the InterGroup’s Board of Directors until the next annual meeting.
The Company evaluated subsequent events through the date that the accompanying financial statements were issued, and has determined that no material subsequent events exist through the date of this filing, other than as described above.
| - 16 - |
We are involved from time to time in legal proceedings of types regarded as common in our business, including administrative or judicial proceedings, such as employment or labor disputes, breach of contract liability and premises liability litigation. Where appropriate, we may establish financial reserves for such proceedings. We also maintain insurance to mitigate certain of such risks.
On April 21, 2014, the Partnership commenced arbitration against Glaser Weil Fink Howard Avchen & Shapiro, LLP, Brett J. Cohen, Gary N. Jacobs, Janet S. McCloud, Paul B. Salvaty, and Joseph K. Fletcher III (“Respondents”) in connection with the redemption transaction. The arbitration alleges legal malpractice and also seeks declaratory relief regarding provisions of the redemption option agreement. The arbitration proceedings are active; discovery is proceeding. The hearing is set for April 2018 before JAMS in Los Angeles, California. The parties began a series of mediation sessions prior to the scheduled hearing. No prediction can be given as to the outcome of this matter.
On May 5, 2016, Justice and Portsmouth entered into a settlement agreement relating to previously reported litigation with Evon Corporation and certain other parties. Under the settlement agreement, Justice, a subsidiary of Portsmouth agreed to payEvon Corporation $5,575,000. The final installment due was made in January 2017 and all conditions of the settlement agreement have been satisfied by Justice and Portsmouth.
| Item 2 - | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 3 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time makeThis quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and projections concerningSection 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the impact to our business and financial condition, and measures being taken in response to the novel strain of coronavirus and the disease it causes (“COVID-19”), the effects of competition and the effects of future expectations. When usedlegislation or regulations and other non-historical statements. Forward-looking statements include all statements that are not historical facts, and in this discussion,some cases, can be identified by the use of forward-looking terminology such as the words “anticipate,“outlook,” “estimate,“believes,” “expect,“expects,” “project,“potential,” “intend,” “plan,” “believe,“continues,” “may,” “will,” “should,” “could,” “will”, “would”“seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. You should not rely on forward-looking statements since they involve known and similar expressions,unknown risks, uncertainties and other factors which are, intended to identify forward-looking statements. Thesein some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events.
Such statements are subject to certain risks and uncertainties. These risks and uncertainties such asinclude, but are not limited to, the following: national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry,industry; the impact of terrorism and war on the national and international economies, including tourism, and securities markets, energy and fuel costs,costs; natural disasters,disasters; general economic conditions and competition in the hotel industry in the San Francisco area,area; seasonality, labor relations and labor disruptions,disruptions; actual and threatened pandemics such as swine flu partnership distributions,or the outbreak of COVID-19 or similar outbreaks; the ability to obtain financing at favorable interest rates and terms,terms; securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017, that2022. 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.
COVID19 UPDATE
The novel strain of coronavirus and the disease it causes (“COVID-19”) have continued to affect the hospitality industry and our business. Beginning in March 2020, travel restrictions and mandated closings of non-essential businesses were imposed, which resulted in temporary suspensions of operations in many hotels in San Francisco, however, the Company did not suspend operations and did not close the hotel. As vaccination rates across the country increased and COVID-19 related restrictions were eased or removed, we saw an increase in travel and hospitality spending beginning in the second calendar quarter of 2021. During the second quarter of calendar year 2022, we continued to witness robust leisure demand and an acceleration in group and business transient demand. However, the potential for an economic slowdown or a recession during the second half of 2022 may disrupt the positive momentum at the Company’s hotel and our industry.
We believe the distribution of the COVID-19 vaccine during 2021 drove the improvement in traveler sentiment we experienced and resulted in an improvement in occupancy, Average Daily Rate (“ADR”) and Revenue per Available Room (“RevPAR”) during 2021. If additional virus variants emerge causing re-imposed widespread travel restrictions, the hospitality industry will be negatively affected. While there can be no assurances that the Company will not experience further fluctuations in hotel revenues or earnings due to the uncertainty of COVID-19 and other macroeconomic factors, such as inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts, we expect to continue to recover through the remainder of fiscal year 2023 based on current demand trends.
| - 17 - |
RESULTS OF OPERATIONS
As of December 31, 2017,September 30, 2022, the Company owned approximately 81.9% of the common shares of its subsidiary, Santa Fe and Santa Fe owned approximately 68.8%75.0% of the common shares of Portsmouth Square, Inc. InterGroup also directly owns approximately 13.4% of the common shares of Portsmouth. The Company'sCompany’s principal sources of revenue continue to be derivedare revenues from the general and limited partnership interests of its subsidiary,hotel owned by Portsmouth, in the Justice Investors limited partnership (“Justice” or the “Partnership”), rental income from its investments in multi-family and commercial real estate properties, and income received from investment of its cash and securities assets. Justice owns
Portsmouth’s primary asset is a 544- room544-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”) and related facilities, including a five-level underground parking garage. The financial statements of JusticePortsmouth have been consolidated with those of the Company.
The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement (the “License Agreement”) with HLT Franchise Holding LLC (“Hilton”). The Partnership entered into the License Agreement on December 10, 2004. The term of the License Agreement was for an initial period of 15 years commencing on the opening date, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030. The key money cash incentives were received on July 1, 2015.
Justice had a management agreement with Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. The management agreement with Prism had an original term of ten years and 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, on February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in 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 and management of its real estate. Properties include sixteen 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.property in Hawaii.
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, 2017September 30, 2022 Compared to the Three Months Ended December 31, 2016September 30, 2021
The Company had a net loss of $2,507,000$201,000 and $2,906,000 for the three months ended December 31, 2017September 30, 2022 September 30, 2021, respectively. The decrease was primarily attributable to increased revenues at the Hotel and offset by higher operating costs.
Hotel Operations
The Company had net income from Hotel operations of $721,000 for the three months ended September 30, 2022 compared to net loss of $2,009,000$1,743,000 for the three months ended December 31, 2016.September 30, 2021. The increase in the net losschange is primarily attributable to higher operating expenses from the Hotel operations and the increase in income tax expense.Hotel revenue and occupancy.
Hotel Operations
The Company had net loss from Hotel operations of $88,000 for the three months ended December 31, 2017 compared to net income of $666,000 for the three months ended December 31, 2016. The change is primarily due to increased operating expenses. The increase 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.
The following table sets forth a more detailed presentation of Hotel operations for the three months ended December 31, 2017September 30, 2022 and 2016.2021:
| For the three months ended December 31, | 2017 | 2016 | ||||||||||||||
| For the three months ended September 30, | 2022 | 2021 | ||||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 10,710,000 | $ | 10,497,000 | $ | 10,803,000 | $ | 5,562,000 | ||||||||
| Food and beverage | 1,614,000 | 1,506,000 | 535,000 | 266,000 | ||||||||||||
| Garage | 735,000 | 643,000 | 822,000 | 907,000 | ||||||||||||
| Other operating departments | 128,000 | 191,000 | 150,000 | 70,000 | ||||||||||||
| Total hotel revenues | 13,187,000 | 12,837,000 | 12,310,000 | 6,805,000 | ||||||||||||
| Operating expenses excluding depreciation and amortization | (10,743,000 | ) | (9,611,000 | ) | (9,306,000 | ) | (6,333,000 | ) | ||||||||
| Operating income before interest, depreciation and amortization | 2,444,000 | 3,226,000 | 3,004,000 | 472,000 | ||||||||||||
| Interest expense - mortgage | (1,850,000 | ) | (1,750,000 | ) | (1,632,000 | ) | (1,661,000 | ) | ||||||||
| Depreciation and amortization expense | (682,000 | ) | (810,000 | ) | (651,000 | ) | (554,000 | ) | ||||||||
| Net income (loss) from Hotel operations | $ | (88,000 | ) | $ | 666,000 | $ | 721,000 | $ | (1,743,000 | ) | ||||||
For the three months ended December 31, 2017,September 30, 2022, the Hotel had operating income of $2,444,000$3,004,000 before interest expense, depreciation, and amortization on total operating revenues of $13,187,000$12,310,000 compared to operating income of $3,226,000$472,000 before interest expense, depreciation, and amortization on total operating revenues of $12,837,000$6,805,000 for the three months ended December 31, 2016. Room revenues increased by $213,000 forSeptember 30, 2021.
| - 18 - |
For the three months ended December 31, 2017September 30, 2022, room revenues increased by $5,241,000, food and beverage revenue increased by $269,000 and garage decreased by $85,000 due to less people driving into the City and taking public transportation as the COVID-19 pandemic subsided and restrictions were lifted, compared to the three months ended December 31, 2016 primarily due to Salesforce citywide conference moving from third quarterSeptember 30, 2021. The year over year increase in 2016 to fourth quarterall the revenue sources except in 2017. Food and beverage revenue increased by $108,000garage revenues, are as a result of increased cateringthe recovery from the 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 increased by $1,132,000 this quarter as compared to the previous comparable quarter primarily$2,973,000 due to increased operating expenses related to foodincrease in salaries and beverage, rooms, franchisewages, commission, 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, 2017September 30, 2022 and 2016.2021.
Three Months Ended December 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||||
| 2017 | $ | 240 | 89 | % | $ | 212 | ||||||||
| 2016 | $ | 236 | 89 | % | $ | 210 | ||||||||
Three Months Ended September 30, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||
| 2022 | $ | 230 | 94 | % | $ | 216 | ||||||
| 2021 | $ | 141 | 79 | % | $ | 111 | ||||||
The Hotel’s revenues increased by 2.7%81% this quarter as compared to the previous comparable quarter. Average daily rate increased by $4$89, average occupancy increased by 15%, and RevPAR increased by $2$105 for the three months ended December 31, 2017September 30, 2022 compared to the three months ended December 31, 2016. Average occupancy was 89% for both quarters.September 30, 2021.
Real Estate Operations
RealRevenue from real estate revenuesoperations decreased to $4,078,000 for the three months ended December 31, 2017September 30, 2022 from $4,116,000 for the three months ended September 30, 2021 primarily due to increased vacancy at its Missouri property which is undergoing renovation and 2016 remained relatively consistent at $3,625,000 and $3,605,000, respectively.a rebranding campaign. Real estate operating expenses increased for the three months ended December 31, 2017 comparing to the three months ended December 31, 2016$2,191,000 from $2,074,000 year over year primarily due to increase in real estate taxes. All of Company’s properties are managed in-house.increased insurance expense, and painting – contract labor and maintenance and repair expenses. 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 loss on marketable securities of $1,178,000$810,000 for the three months ended December 31, 2017September 30, 2022 compared to a net loss on marketable securities of $3,290,000$2,168,000 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.September 30, 2021. For the three months ended December 31, 2017,September 30, 2022, the Company had a net realized loss of $800,000 and a net unrealized loss of $10,000. For the three months ended September 30, 2021, the Company had a net realized gain of $181,000$2,253,000 and a net unrealized loss of $1,359,000. For the three months ended December 31, 2016, the Company had a net realized loss of $107,000 and a net unrealized loss of $3,183,000. $4,421,000.
Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
The Company and its subsidiaries,subsidiary Portsmouth, and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expensebenefit during the three months ended December 31, 2017September 30, 2022 and 20162021 represents primarily the combined income tax effect of the pre-tax income at InterGroup and thePortsmouth’s pretax income of Portsmouthloss which includes its share in net income of the Hotel.
Six Months Ended December 31, 2017 Compared to the Six Months Ended December 31, 2016
The Company had a net loss of $2,802,000 for the six months ended December 31, 2017 compared to net loss of $414,000 for the six months ended December 31, 2016. The increase in the net loss is primarily attributable to higher operating expenses from the Hotel and real estate.the pre-tax loss from InterGroup (standalone). InterGroup and Portsmouth file their respective income tax returns on a calendar year basis.
Hotel Operations
Net income from Hotel operations was $1,208,000 for the six months ended December 31, 2017 compared to net income of $2,473,000 for the six months ended December 31, 2016. 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.
The following table sets forth a more detailed presentation of Hotel operations for the six months ended December 31, 2017 and 2016.
| For the six months ended December 31, | 2017 | 2016 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 22,552,000 | $ | 22,795,000 | ||||
| Food and beverage | 3,373,000 | 2,955,000 | ||||||
| Garage | 1,516,000 | 1,324,000 | ||||||
| Other operating departments | 183,000 | 368,000 | ||||||
| Total hotel revenues | 27,624,000 | 27,442,000 | ||||||
| Operating expenses excluding depreciation and amortization | (21,332,000 | ) | (19,867,000 | ) | ||||
| Operating income before loss on disposal of assets, interest, depreciation and amortization | 6,292,000 | 7,575,000 | ||||||
| Interest expense - mortgage | (3,703,000 | ) | (3,579,000 | ) | ||||
| Depreciation and amortization expense | (1,381,000 | ) | (1,523,000 | ) | ||||
| Net income from Hotel operations | $ | 1,208,000 | $ | 2,473,000 | ||||
For the six months ended December 31, 2017, the Hotel had operating income of $6,292,000 before interest, depreciation and amortization on total operating revenues of $27,624,000 compared to operating income of $7,575,000 before interest, depreciation and amortization on total operating revenues of $27,442,000 for the six months ended December 31, 2016. Room revenues decreased by $243,000 for the six months ended December 31, 2017 compared to the six months ended December 31, 2016 primarily as the result of the decrease in group business and the decrease in the average daily rate. Food and beverage revenue increased by $418,000 as the result of an increase in the catering and banquet services from the decrease in the group business. Garage revenues increased by $192,000 as a result of freeing parking spaces that were utilized as storage by previous management as well as additional valet parking income.
Total operating expenses increased by $1,465,000 for the six months ended December 31, 2017 as compared to the six months ended December 31, 2016 primarily due to the increase in legal fees associated with the Glaser matter, 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.
| - 19 - |
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”) of the Hotel for the six months ended December 31, 2017 and 2016.
Six months Ended December 31, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||||
| 2017 | $ | 247 | 91 | % | $ | 225 | ||||||||
| 2016 | $ | 245 | 93 | % | $ | 228 | ||||||||
The Hotel’s total revenues increased by 0.7% for the six months ended December 31, 2017 as compared to the six months ended December 31, 2016. Average daily rate increased by $2 and RevPAR decreased by $3 for the six months ended December 31, 2017 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.
Real Estate Operations
Real estate revenues 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 expenses increased for the six months ended December 31, 2017 comparing to the six months ended December 31, 2016 primarily due to increase in real estate taxes. All of 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 loss on marketable securities of $2,200,000 for the six months ended December 31, 2017 compared to a net loss on marketable securities of $2,136,000 for the six months ended December 31, 2016. 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, the Company had a net realized loss of $119,000 and a net unrealized loss of $2,081,000. For the six months ended December 31, 2016, the Company had a net realized gain of $312,000 and a net unrealized loss of $2,448,000. 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) benefit during the six months ended December 31, 2017 and 2016 represents primarily the income tax effect of the pre-tax loss at InterGroup and Portsmouth’s pretax income (loss) which includes its share in net income of the Hotel.
MARKETABLE SECURITIES
The following table shows the composition of the Company’s marketable securities portfolio as of December 31, 2017September 30, 2022 and June 30, 20172022 by selected industry groups.
| % of Total | ||||||||
| As of September 30, 2022 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | $ | 4,315,000 | 40 | % | ||||
| Basic material | 1,301,000 | 12 | % | |||||
| Technology | 1,081,000 | 10 | % | |||||
| Financial services | 1,045,000 | 10 | % | |||||
| Communication services | 948,000 | 9 | % | |||||
| Consumer cyclical | 592,000 | 6 | % | |||||
| Energy | 483,000 | 5 | % | |||||
| Industrials | 22,000 | 0 | % | |||||
| Other | 900,000 | 8 | % | |||||
| Total | $ | 10,687,000 | 100 | % | ||||
| % of Total | ||||||||
| As of June 30, 2022 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | $ | 3,289,000 | 30 | % | ||||
| Communication services | 2,787,000 | 25 | % | |||||
| Financial services | 1,755,000 | 16 | % | |||||
| Technology | 815,000 | 7 | % | |||||
| Basic material | 769,000 | 7 | % | |||||
| Consumer cyclical | 693,000 | 6 | % | |||||
| Industrials | 385,000 | 4 | % | |||||
| Energy | 279,000 | 3 | % | |||||
| Other | 277,000 | 2 | % | |||||
| $ | 11,049,000 | 100 | % | |||||
| % 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% ofSeptember 30, 2022, the Company’s investment in marketableportfolio is diversified with 35 different equity positions. The Company held two equity securities that are more than 10% of the equity value of the portfolio each. The largest security position represents 25% of the portfolio and consists of the common stock of Comstock Mining,American Realty Investors, Inc. (“Comstock” - NYSE MKT: LODE)(NYSE: ARL) which is included in the basic materialsREITs and real estate companies services industry group. The second largest position represents 13% of the portfolio and consists of the common stock of Essex Property Trust, Inc. (NYSE: ESS) which is included in REITs and real estate companies.
As of June 30, 2022, the Company’s investment portfolio is diversified with 38 different equity positions. The Company holds three equity securities that comprised more than 10% of the equity value of the portfolio. The three largest security positions represent 23%, 20%, and 13% of the portfolio and consists of the common stock of Paramount Global - Preferred Stock (NASDAQ: PARAP), American Realty Investors, Inc. (NYSE: ARL), and BlackRock Muni holdings California Quality Fund Inc. (NYSE: MUC), which are included the Communications, REITs and real estate companies, and Financial Services industry groups, respectively.
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The following table shows the net gain or 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 | ||||||||||||||
| For the three months ended September 30, | 2022 | 2021 | ||||||||||||||
| Net loss on marketable securities | $ | (1,178,000 | ) | $ | (3,290,000 | ) | $ | (810,000 | ) | $ | (1,818,000 | ) | ||||
| Impairment loss on other investments | (200,000 | ) | (24,000 | ) | ||||||||||||
| Net loss on marketable securities-Comstock | - | (350,000 | ) | |||||||||||||
| Dividend and interest income | 48,000 | 68,000 | 175,000 | 187,000 | ||||||||||||
| Margin interest expense | (162,000 | ) | (159,000 | ) | (153,000 | ) | (222,000 | ) | ||||||||
| Trading and management expenses | (151,000 | ) | (132,000 | ) | (112,000 | ) | (132,000 | ) | ||||||||
| $ | (1,643,000 | ) | $ | (3,537,000 | ) | |||||||||||
| Net loss from investment transactions | $ | (900,000 | ) | $ | (2,335,000 | ) | ||||||||||
| 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, LIQUIDITY AND LIQUIDITYCAPITAL SOURCES
The Company’sCompany had cash flows are primarily generated from its Hotel operations, and general partner management feescash equivalents of $12,219,000 and limited partnership distributions from 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 now controls approximately 93% of the voting interest in Justice and is now its sole General Partner.
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum 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 Mezzanine 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 balance of the senior loan and the mezzanine loans$14,367,000 as of September 30, 2017 were $96,028,3992022 and $20,000,000June 30, 2022, respectively. Effective May 12, 2017,The Company had restricted cash of $8,662,000 and $8,982,000 as of September 30, 2022 and June 30, 2022, respectively. The Company had marketable securities, net of margin due to securities brokers, of $10,687,000 and $10,110,000 as of September 30, 2022 and June 30, 2022, respectively. These marketable securities are short-term investments and liquid in nature.
On December 16, 2020, Justice and 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 mortgageentered into a loan and the $20,000,000 mezzanine loan.
On July 2, 2014, the Partnership obtainedmodification agreement which increased Justice’s borrowing from InterGroup (a related party) an unsecuredas needed up to $10,000,000 and extended the maturity date of the 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.to July 31, 2021. The loan may be prepaid at any time without penalty. The loanmaturity date was extended to July 31, 2023. Upon the dissolution of Justice in December 31, 2018.
In April 2017,2021, Portsmouth obtained fromassumed Justice’s note payable to InterGroup an unsecured short-term loan in the amount of $1,000,000 at 5% per$11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. During the fiscal year fixed interest, with a term of five months and maturing September 6, 2017. The short-term loan was extendedending June 30, 2022, InterGroup advanced $7,550,000 to September 15, 2017 and paid off on September 13, 2017.
Despite an uncertain economy, the Hotel, bringing the total amount due to InterGroup to $14,200,000 as of June 30, 2022 and September 30, 2022. During the three months ended September 30, 2022, Portsmouth did not need any additional funding and does not anticipate any need for funding from InterGroup in the near future. As of September 30, 2022, Portsmouth has continuednot made any paid-downs to generate strong revenue growth. Whileits note payable to InterGroup. Portsmouth could amend its by-laws and increase the debt service requirements relatednumber of authorized shares to issue additional shares to raise capital in the loanspublic markets if needed.
During the fiscal year ending June 30, 2022, the Company refinanced six of its properties’ existing mortgages and obtained a mortgage note payable on one of our California properties, generating net proceeds totaling $16,683,000. The Company is currently evaluating other refinancing opportunities and we could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable.
The Company had an uncollateralized $5,000,000 revolving line of credit (“LOC”) from CIBC Bank USA (“CIBC”) and the legal settlement may create some additional risks forentire $5,000,000 was available to be drawn down as of June 30, 2022. In July 2022, the Company renewed it’s LOC for a reduced amount of $2,000,000 and is available in its abilityentirety as of September 30, 2022.
Our known short-term liquidity requirements primarily consist of funds necessary to generate cash flows inpay 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 future, management believes that cash flows from the operationsHotel.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital 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 were to persist. The objectives of our cash management policy are to maintain existing leverage levels and future obligations. Additionally,the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential sources of liquidity that management believesmay 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.
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OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off balanceoff-balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of December 31, 2017,September 30, 2022, the Company’s material financial obligations which also includingincludes interest payments.
| 6 Months | Year | Year | Year | Year | 9 Months | Year | Year | Year | Year | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | 2023 | 2024 | 2025 | 2026 | 2027 | 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 | $ | 194,578,000 | $ | 7,087,000 | $ | 108,421,000 | $ | 3,970,000 | $ | 1,174,000 | $ | 3,304,000 | $ | 70,622,000 | ||||||||||||||||||||||||||||
| Other notes payable | 5,919,000 | 184,000 | 474,000 | 607,000 | 567,000 | 567,000 | 3,520,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Related party notes payable | 3,379,000 | 425,000 | 567,000 | 567,000 | 567,000 | 463,000 | 790,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest | 54,872,000 | 5,139,000 | 9,919,000 | 9,529,000 | 9,120,000 | 8,591,000 | 12,574,000 | 33,388,000 | 6,643,000 | 5,630,000 | 2,491,000 | 2,371,000 | 2,264,000 | 13,989,000 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 240,495,000 | $ | 6,786,000 | $ | 14,373,000 | $ | 13,239,000 | $ | 24,858,000 | $ | 12,236,000 | $ | 169,003,000 | $ | 231,345,000 | $ | 14,155,000 | $ | 114,618,000 | $ | 7,028,000 | $ | 4,112,000 | $ | 6,031,000 | $ | 85,401,000 | ||||||||||||||||||||||||||||
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 PrismAimbridge 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 partnershipHotel’s revenues due to inflation. PartnershipThe Company’s 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. The Company refinanced most of its mortgages with favorable long-term fixed interest rate mortgages during the past three fiscal years.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policies are those that are most significant to the presentationportrayal 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company and therefore, we are not required to the Company’s critical accounting policies during the six months ended December 31, 2017. Please refer to the Company’s Annual Report onprovide information required by this Item of Form 10-K for the year ended June 30, 2017 for a summary of the critical accounting policies.10-Q.
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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.
OTHER INFORMATION
Portsmouth Square Inc., through its operating company Justice Investors Operating Co., a Delaware limited liability company (“Portsmouth”), is the owner of the real property located at 750 Kearny Street in San Francisco, currently improved with a 27 – story building which houses a Hilton Hotel (the “Property”). The Property was improved pursuant to approvals granted by the City and County of San Francisco (the “City”) in 1970. Those approvals included a Major Encroachment Permit (“Permit”) by which Portsmouth was authorized to construct an ornamental overhead pedestrian bridge across Kearny Street, connecting the Property to the City park and underground parking garage known as Portsmouth Square (the “Bridge”). The construction of the Bridge was a condition of the City’s approval of the construction of the hotel structure on the Property. Effective on May 24, 2022, the City has revoked the Permit and directed Portsmouth to remove the Bridge at Portsmouth’s expense, including construction management costs and traffic control. Pursuant to a letter dated June 13, 2022, the City’s Department of Public Works has specifically directed the “removal of the unpermitted pedestrian bridge and all related physical encroachments in the public right-of-way and on City property” and the submission of a general bridge removal and restoration plan (the “Plan”). Portsmouth disputes the legality of the purported revocation of the Permit. Portsmouth further disputes any obligation to remove the Bridge at its expense. In particular, representatives of Portsmouth have participated in meetings with the City since August 1, 2019, discussing a collaborative process for the possible removal of the Bridge. Until the recent revocation of the Permit, the City representatives have repeatedly and consistently agreed that the City will pay for the associated costs of any Bridge removal. Nevertheless, without waiving any rights, in an effort to understand all of the available options, and to provide a response to the City’s new directives, Portsmouth has engaged a Project Manager, a structural engineering firm and an architect to advise on the process and for the development of a Plan for the Bridge removal, as well as the reconstruction of the front of the Hilton Hotel. The Plan is currently not expected to be completed until early in 2023. At this time, early estimates of the cost of the Plan exceed $2 million. Portsmouth is currently considering its options with regard to filing litigation to invalidate the revocation of the Permit so as to preclude removal of the Bridge, and/or to compel the City to honor its commitment to pay for the removal of the Bridge. Portsmouth is continuing to prepare its case and the progress is ongoing as of September 30, 2022.
The Company may be subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company will defend itself vigorously against any such claims. Management does not believe that the impact of such matters will have a material effect on the financial conditions or result of operations when resolved.
Item 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no events that are required to be reported under this Item.
Item 3. DEFAULTS UPON SENIOR SECURITIES
There have been no events that are required to be reported under this Item.
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Item 4. MINE SAFETY DISCLOSURES
There have been no events that are required to be reported under this Item.
Item 5. Exhibits.OTHER INFORMATION
There have been no events that are required to be reported under this Item.
Item 6. EXHIBITS
| 101.INS | Inline XBRL Instance Document |
| 101.SCH | Inline XBRL Taxonomy Extension Schema |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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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: | by: | /s/ John V. Winfield | |||
| John V. Winfield, President, | |||||
| Chairman of the Board and | |||||
| Chief Executive Officer | |||||
| Date: | by: | /s/ | |||
| Vice President Real Estate and | |||||
| Interim Principal Financial Officer | |||||
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