UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 20182019

or

¨[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to_________

 

Commission File Number 1-10324

 

THE INTERGROUP CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE 13-3293645
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)

 

1162012121 Wilshire Boulevard, Suite 350,610, Los Angeles, California 90025

(Address of principal executive offices) (Zip Code)

 

(310) 889-2500

(Registrant’s telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x[X] Yes¨ [  ] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x[X] Yes¨ [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

 Large accelerated filer¨ [  ]Accelerated filer¨ [  ]
   
 Non-accelerated filer¨ [  ]Smaller reporting companyx [X]
   
  Emerging growth company¨ [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):

¨

[  ] Yesx [X] No

Securities registered pursuant to section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stockINTGNASDAQ CAPITAL MARKET

 

The number of shares outstanding of registrant’s Common Stock, as of January 31, 201924, 2020 was 2,329,713.2,299,422.

 

 

 

 

TABLE OF CONTENTS

 

 PART I – FINANCIAL INFORMATIONPage
   
PART I – FINANCIAL INFORMATION
Item 1.Financial StatementsStatements. 
   
 Condensed Consolidated Balance Sheets as of December 31, 20182019 and June 30, 20182019 (Unaudited)3
 Condensed Consolidated Statements of Operations for the Three Months ended December 31, 2019 and 2018 and 2017 (Unaudited)4
 Condensed Consolidated Statements of Operations for the Six Months ended December 31, 2019 and 2018 and 2017 (Unaudited)5
 Condensed Consolidated Statements of Shareholders’ Deficit for the Quarters EndedSix Months ended December 31, 2019 and 2018 and 2017 (Unaudited)6
 Condensed Consolidated Statements of Cash Flows for the Six Months ended December 31, 2019 and 2018 and 2017 (Unaudited)7
 Notes to the Condensed Consolidated Financial Statements8-19
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.1920-26
   
Item 3.Quantitative and Qualitative Disclosures About Market RiskRisk.27
   
Item 4.Controls and ProceduresProcedures.27
   
 PART II – OTHER INFORMATION 
Item 1.Legal Proceedings.27
   
Item 1.1A.Legal ProceedingsRisk Factors.27
   
Item 1A.Risk Factors27
Item 2.Unregistered Sales of Equity Securities and Use of ProceedsProceeds.27
   
Item 3.Defaults Upon Senior SecuritiesSecurities.2827
   
Item 4.Mine Safety DisclosuresDisclosures.2827
   
Item 5.Other InformationInformation.2827
   
Item 6.ExhibitsExhibits.28
   
Signatures2829

 

 -2-- 2 -
 

 

PART I

FINANCIAL INFORMATION

 

Item 1 - Condensed Consolidated Financial Statements

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

As of December 31, 2018  June 30, 2018  December 31, 2019  June 30, 2019 
ASSETS                
Investment in hotel, net $40,258,000  $40,961,000 
Investment in Hotel, net $39,540,000  $39,836,000 
Investment in real estate, net  52,562,000   53,369,000   51,064,000   51,773,000 
Investment in marketable securities  7,586,000   13,841,000   8,148,000   9,696,000 
Other investments, net  733,000   813,000   564,000   612,000 
Cash and cash equivalents  8,978,000   8,053,000   8,456,000   11,837,000 
Restricted cash  10,551,000   9,458,000   14,884,000   13,295,000 
Other assets, net  4,736,000   5,185,000   2,464,000   2,362,000 
Deferred tax asset  1,097,000   1,468,000 
Total assets $125,404,000  $131,680,000  $126,217,000  $130,879,000 
                
        
LIABILITIES AND SHAREHOLDERS' DEFICIT        
LIABILITIES AND SHAREHOLDERS’ DEFICIT        
Liabilities:                
Accounts payable and other liabilities - Justice $8,647,000  $11,298,000 
Accounts payable and other liabilities $3,215,000  $3,299,000   4,054,000   3,766,000 
Accounts payable and other liabilities - Hotel  8,765,000   9,946,000 
Due to securities broker  412,000   1,887,000   2,355,000   1,629,000 
Obligations for securities sold  -   1,935,000   16,000   1,225,000 
Related party and other notes payable  5,550,000   5,735,000   4,950,000   5,261,000 
Capital leases  1,243,000   1,355,000 
Finance leases  1,282,000   1,486,000 
Line of credit payable  2,985,000   -   2,985,000   2,985,000 
Mortgage notes payable - Hotel, net  113,789,000   114,372,000   111,947,000   113,087,000 
Mortgage notes payable - real estate, net  59,311,000   62,873,000   57,812,000   58,571,000 
Deferred tax liability  515,000   245,000 
Total liabilities  195,785,000   201,647,000   194,048,000   199,308,000 
                
Shareholders' deficit:        
Shareholders’ deficit:        
Preferred stock, $.01 par value, 100,000 shares authorized; none issued  -   -   -   - 
Common stock, $.01 par value, 4,000,000 shares authorized; 3,404,982 and 3,395,616 issued; 2,329,713 and 2,334,197 outstanding, respectively  33,000   33,000 
Common stock, $.01 par value, 4,000,000 shares authorized; 3,404,982 and 3,404,982 issued; 2,299,422 and 2,309,962 outstanding, respectively  33,000   33,000 
Additional paid-in capital  10,550,000   10,522,000   10,166,000   10,342,000 
Accumulated deficit  (41,614,000)  (41,217,000)  (39,176,000)  (39,760,000)
Treasury stock, at cost, 1,075,269 and 1,061,419 shares, respectively  (13,732,000)  (13,268,000)
Total InterGroup shareholders' deficit  (44,763,000)  (43,930,000)
Treasury stock, at cost, 1,105,560 and 1,095,020 shares, respectively  (14,693,000)  (14,347,000)
Total InterGroup shareholders’ deficit  (43,670,000)  (43,732,000)
Noncontrolling interest  (25,618,000)  (26,037,000)  (24,161,000)  (24,697,000)
Total shareholders' deficit  (70,381,000)  (69,967,000)
Total shareholders’ deficit  (67,831,000)  (68,429,000)
                
Total liabilities and shareholders' equity $125,404,000  $131,680,000 
Total liabilities and shareholders’ deficit $126,217,000  $130,879,000 

 

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

 

 -3-- 3 -
 

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

For the three months ended December 31, 2018  2017  2019  2018 
Revenues:                
Hotel $13,997,000  $13,187,000  $14,901,000  $13,997,000 
Real estate  3,752,000   3,625,000   3,839,000   3,752,000 
Total revenues  17,749,000   16,812,000   18,740,000   17,749,000 
Costs and operating expenses:                
Hotel operating expenses  (11,236,000)  (10,743,000)  (11,730,000)  (11,236,000)
Real estate operating expenses  (1,866,000)  (2,102,000)  (2,089,000)  (1,866,000)
Depreciation and amortization expenses  (1,249,000)  (1,267,000)  (1,232,000)  (1,249,000)
General and administrative expenses  (479,000)  (730,000)  (581,000)  (479,000)
                
Total costs and operating expenses  (14,830,000)  (14,842,000)  (15,632,000)  (14,830,000)
                
Income from operations  2,919,000   1,970,000   3,108,000   2,919,000 
                
Other income (expense):                
Interest expense - mortgages  (2,405,000)  (2,490,000)  (2,330,000)  (2,405,000)
Net (loss) gain on marketable securities  (1,945,000)  907,000 
Net loss on marketable securities  (53,000)  (1,945,000)
Net loss on marketable securities - Comstock  (26,000)  (2,085,000)  (66,000)  (26,000)
Impairment loss on other investments  -   (200,000)
Dividend and interest income  88,000   48,000   111,000   88,000 
Trading and margin interest expense  (193,000)  (313,000)  (241,000)  (193,000)
Total other expense, net  (4,481,000)  (4,133,000)  (2,579,000)  (4,481,000)
                
Loss before income taxes  (1,562,000)  (2,163,000)
Income tax benefit (expense)  440,000   (344,000)
Net loss  (1,122,000)  (2,507,000)
Less: Net loss attributable to the noncontrolling interest  95,000   1,302,000 
Net loss attributable to InterGroup Corporation $(1,027,000) $(1,205,000)
Income (loss) before income taxes  529,000   (1,562,000)
Income tax (expense) benefit  (149,000)  440,000 
Net income (loss)  380,000   (1,122,000)
Less: Net (income) loss attributable to the noncontrolling interest  (132,000)  95,000 
Net income (loss) attributable to InterGroup Corporation $248,000  $(1,027,000)
                
Net loss per share        
Basic and diluted $(0.48) $(1.06)
Net income (loss) per share        
Basic $0.17  $(0.48)
Diluted $0.14    N/A 
                
Net loss per share attributable to InterGroup Corporation        
Basic and diluted $(0.44) $(0.51)
Net income (loss) per share attributable to InterGroup Corporation        
Basic $0.11  $(0.44)
Diluted $0.09    N/A 
                
Weighted average number of basic and diluted common shares outstanding  2,327,007   2,371,125 
Weighted average number of basic common shares outstanding  2,302,748   2,327,007 
Weighted average number of diluted common shares outstanding  2,633,143    N/A 

 

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

 

 -4-- 4 -
 

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

For the six months ended December 31, 2018  2017  2019  2018 
Revenues:                
Hotel $29,807,000  $27,624,000  $30,330,000  $29,807,000 
Real estate  7,431,000   7,302,000   7,556,000   7,431,000 
Total revenues  37,238,000   34,926,000   37,886,000   37,238,000 
Costs and operating expenses:                
Hotel operating expenses  (22,046,000)  (21,332,000)  (23,078,000)  (22,046,000)
Real estate operating expenses  (3,878,000)  (3,997,000)  (4,039,000)  (3,878,000)
Depreciation and amortization expenses  (2,492,000)  (2,541,000)  (2,445,000)  (2,492,000)
General and administrative expenses  (1,122,000)  (1,561,000)  (1,341,000)  (1,122,000)
                
Total costs and operating expenses  (29,538,000)  (29,431,000)  (30,903,000)  (29,538,000)
                
Income from operations  7,700,000   5,495,000   6,983,000   7,700,000 
                
Other income (expense):                
Interest expense - mortgages  (4,970,000)  (4,983,000)  (4,727,000)  (4,970,000)
Net (loss) gain on marketable securities  (1,680,000)  554,000 
Net loss on marketable securities  (198,000)  (1,680,000)
Net loss on marketable securities - Comstock  (462,000)  (2,754,000)  (370,000)  (462,000)
Impairment loss on other investments  -   (200,000)
Dividend and interest income  185,000   131,000   241,000   185,000 
Trading and margin interest expense  (497,000)  (626,000)  (534,000)  (497,000)
Total other expense, net  (7,424,000)  (7,878,000)  (5,588,000)  (7,424,000)
                
Income (loss) before income taxes  276,000   (2,383,000)
Income before income taxes  1,395,000   276,000 
Income tax expense  (270,000)  (419,000)  (371,000)  (270,000)
Net income (loss)  6,000   (2,802,000)
Less: Net (income) loss attributable to the noncontrolling interest  (403,000)  1,185,000 
Net loss attributable to InterGroup Corporation $(397,000) $(1,617,000)
Net income  1,024,000   6,000 
Less: Net income attributable to the noncontrolling interest  (440,000)  (403,000)
Net income (loss) attributable to InterGroup Corporation $584,000  $(397,000)
                
Net income (loss) per share        
Net income per share        
Basic $0.003  $(1.18) $0.44  $0.003 
Diluted $0.002  $(1.18) $0.39  $0.002 
                
Net loss per share attributable to InterGroup Corporation        
Basic and diluted $(0.17) $(0.68)
Net income (loss) per share attributable to InterGroup Corporation        
Basic $0.25  $(0.17)
Diluted $0.22    N/A 
                
Weighted average number of basic common shares outstanding  2,330,213   2,371,445   2,306,070   2,330,213 
Weighted average number of diluted common shares outstanding  2,657,008   2,371,445   2,636,465   2,657,008 

 

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

 

 -5-- 5 -
 

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ DEFICIT

(Unaudited)

 

      Additional       InterGroup     Total       Additional       InterGroup     Total 
 Common Stock  Paid-in     Treasury  Shareholders'  Noncontrolling  Shareholders'  Common Stock  Paid-in  Accumulated   Treasury  Shareholder’  Noncontrolling  Shareholder’ 
 Shares  Amount  Capital  AccumulatedDeficit  Stock  Deficit  Interest  Deficit  Shares  Amount  Capital  Deficit  Stock  Deficit  Interest  Deficit 
                                  
Balance at July 1, 2018  3,395,616  $33,000  $10,522,000  $(41,217,000) $(13,268,000) $(43,930,000) $(26,037,000) $(69,967,000)
Balance at July 1, 2019  3,404,982  $33,000  $10,342,000  $(39,760,000) $(14,347,000) $(43,732,000) $(24,697,000) $(68,429,000)
                                                                
Net Income  -   -   -   630,000   -   630,000   498,000   1,128,000   -   -   -   336,000   -   336,000   308,000   644,000 
                                
Stock options expense  -   -   30,000   -   -   30,000   -   30,000 
                                
Purchase of treasury stock  -   -   -   -   (198,000)  (198,000)  -   (198,000)
                                
Balance at September 30, 2018  3,395,616   33,000   10,552,000   (40,587,000)  (13,466,000)  (43,468,000)  (25,539,000)  (69,007,000)
                                
Issuance of stock  9,366   -   -   -   -   -   -   - 
                                
Net loss  -   -   -   (1,027,000)  -   (1,027,000)  (95,000)  (1,122,000)
                                                                
Stock options expense  -   -   29,000   -   -   29,000   -   29,000   -   -   8,000   -   -   8,000   -   8,000 
                                                                
Investment in Santa Fe  -   -   (31,000)  -   -   (31,000)  16,000   (15,000)  -   -   (147,000)  -   -   (147,000)  74,000   (73,000)
                                                                
Purchase of treasury stock  -   -   -   -   (266,000)  (266,000)  -   (266,000)  -   -   -   -   (156,000)  (156,000)  -   (156,000)
                                                                
Balance at December 31, 2018  3,404,982  $33,000  $10,550,000  $(41,614,000) $(13,732,000) $(44,763,000) $(25,618,000) $(70,381,000)
Balance at September 30, 2019  3,404,982   33,000   10,203,000   (39,424,000)  (14,503,000)  (43,691,000)  (24,315,000)  (68,006,000)
                                
Net income  -   -   -   248 ,000   -   248,000   132,000   380,000 
                                
Stock options expense  -   -   9,000   -   -   9,000   -   9,000 
                                
Investment in Santa Fe  -   -   (46,000)  -   -   (46,000)  22,000   (24,000)
                                
Purchase of treasury stock  -   -   -   -   (190,000)  (190,000)  -   (190,000)
                                
Balance at December 31, 2019  3,404,982  $33,000  $10,166,000  $(39,176,000) $(14,693,000) $(43,670,000) $(24,161,000) $(67,831,000)

 

        Additional        InterGroup     Total 
  Common Stock  Paid-in     Treasury  Shareholders'  Noncontrolling  Shareholders' 
  Shares  Amount  Capital  AccumulatedDeficit  Stock  Deficit  Interest  Deficit 
                         
Balance at July 1, 2017  3,395,616  $33,000  $10,346,000  $(45,298,000) $(12,626,000) $(47,545,000) $(27,773,000) $(75,318,000)
                                 
Net (loss) Income  -   -   -   (412,000)  -   (412,000)  117,000   (295,000)
                                 
Stock options expense  -   -   62,000   -   -   62,000   -   62,000 
                                 
Balance at September 30, 2017  3,395,616   33,000   10,408,000   (45,710,000)  (12,626,000)  (47,895,000)  (27,656,000)  (75,551,000)
                                 
Net loss  -   -   -   (1,205,000)  -   (1,205,000)  (1,302,000)  (2,507,000)
                                 
Stock options expense  -   -   60,000   -   -   60,000   -   60,000 
                                 
Purchase of treasury stock  -   -   -   -   (109,000)  (109,000)  -   (109,000)
                                 
Balance at December 31, 2017  3,395,616  $33,000  $10,468,000  $(46,915,000) $(12,735,000) $(49,149,000) $(28,958,000) $(78,107,000)

The accompanying notes are an integral part of these consolidated financial statements.

- 6 -

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the six months ended December 31, 2018  2017 
Cash flows from operating activities:        
Net income (loss) $6,000  $(2,802,000)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization  2,461,000   2,597,000 
Deferred taxes  270,000   419,000 
Net unrealized loss on marketable securities  2,664,000   2,081,000 
Impairment loss on other investments  -   200,000 
Stock compensation expense  59,000   122,000 
Changes in operating assets and liabilities:        
Investment in marketable securities  3,591,000   1,887,000 
Other assets  449,000   290,000 
Accounts payable and other liabilities  (1,265,000)  (939,000)
Due to securities broker  (1,475,000)  (220,000)
Obligations for securities sold  (1,935,000)  (1,639,000)
Net cash provided by operating activities  4,825,000   1,996,000 
         
Cash flows from investing activities:        
Payments for hotel investments  (583,000)  (109,000)
Payments for real estate investments  (399,000)  (578,000)
Payments for investment in Santa Fe  (15,000)  - 
Proceeds from other investments  80,000   48,000 
Net cash used in investing activities  (917,000)  (639,000)
         
Cash flows from financing activities:        
Net payments of mortgage and other notes payable  (4,411,000)  (1,526,000)
Proceeds from line of credit  2,985,000   - 
Purchase of treasury stock  (464,000)  (109,000)
Net cash used in financing activities  (1,890,000)  (1,635,000)
         
Net increase (decrease) in cash, cash equivalents and restricted cash  2,018,000   (278,000)
Cash, cash equivalents and restricted cash at the beginning of the period  17,511,000   10,273,000 
Cash, cash equivalents and restricted cash at the end of the period $19,529,000  $9,995,000 
         
Supplemental information:        
Interest paid $5,081,000  $5,336,000 
Taxes paid $265,000  $489,000 
        Additional        InterGroup     Total 
  Common Stock  Paid-in  Accumulated   Treasury  Shareholder’  Noncontrolling  Shareholder’ 
  Shares  Amount  Capital  Deficit  Stock  Deficit  Interest  Deficit 
                         
Balance at July 1, 2018  3,395,616  $33,000  $10,522,000  $(41,217,000) $(13,268,000) $(43,930,000) $(26,037,000) $(69,967,000)
                                 
Net Income  -   -   -   630,000   -   630,000   498,000   1,128,000 
                                 
Stock options expense  -   -   30,000   -   -   30,000   -   30,000 
                                 
Purchase of treasury stock  -   -   -   -   (198,000)  (198,000)  -   (198,000)
                                 
Balance at September 30, 2018  3,395,616   33,000   10,552,000   (40,587,000)  (13,466,000)  (43,468,000)  (25,539,000)  (69,007,000)
                                 
Net loss  -   -   -   (1,027,000)  -   (1,027,000)  (95,000)  (1,122,000)
                                 
Issuance of stock  9,366   -   -   -   -   -   -   - 
                                 
Stock options expense  -   -   29,000   -   -   29,000   -   29,000 
                                 
Investment in Santa Fe  -   -   (31,000)  -   -   (31,000)  16,000   (15,000)
                                 
Purchase of treasury stock  -   -   -   -   (266,000)  (266,000)  -   (266,000)
                                 
Balance at December 31, 2018  3,404,982  $33,000  $10,550,000  $(41,614,000) $(13,732,000) $(44,763,000) $(25,618,000) $(70,381,000)

 

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

 

 -6-- 7 -
 

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the six months ended December 31, 2019  2018 
Cash flows from operating activities:        
Net income $1,024,000  $6,000 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  2,417,000   2,461,000 
Deferred taxes  371,000   270,000 
Net unrealized loss on marketable securities  491,000   2,664,000 
Stock compensation expense  17,000   59,000 
Changes in operating assets and liabilities:        
Investment in marketable securities  1,057,000   3,591,000 
Other assets  (102,000)  449,000 
Accounts payable and other liabilities - Justice  (2,651,000)  (1,181,000)
Accounts payable and other liabilities  288,000   (84,000)
Due to securities broker  726,000   (1,475,000)
Obligations for securities sold  (1,209,000)  (1,935,000)
Net cash provided by operating activities  2,429,000   4,825,000 
         
Cash flows from investing activities:        
Payments for hotel investments  (909,000)  (583,000)
Payments for real estate investments  (531,000)  (399,000)
Payments for investment in Santa Fe  (97,000)  (15,000)
Proceeds from other investments  48,000   80,000 
Net cash used in investing activities  (1,489,000)  (917,000)
         
Cash flows from financing activities:        
Net payments of mortgage and other notes payable  (2,386,000)  (4,411,000)
Proceeds from line of credit  -   2,985,000 
Purchase of treasury stock  (346,000)  (464,000)
Net cash used in financing activities  (2,732,000)  (1,890,000)
         
Net (decrease) increase in cash, cash equivalents and restricted cash  (1,792,000)  2,018,000 
Cash, cash equivalents and restricted cash at the beginning of the period  25,132,000   17,511,000 
Cash, cash equivalents and restricted cash at the end of the period $23,340,000  $19,529,000 
         
Supplemental information:        
Interest paid $4,799,000  $5,081,000 
Taxes paid $39,000  $265,000 

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

 -7-

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, 2018.2019. The December 31, 20182019 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, 2018.2019.

 

The results of operations for the six months ended December 31, 20182019 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2019.2020.

 

Basic and diluted lossincome (loss) per share is computed by dividing net lossincome (loss) available to common stockholders by the weighted average number of common shares outstanding. The computation of diluted income per share is similar to the computation of basic earnings per share except that the weighted-average number of common shares is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. The Company'sCompany’s only potentially dilutive common shares are stock options.

 

As of December 31, 2018,2019, the Company had the power to vote 85.9%86.3% of the voting shares of Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF). This percentage includes the power to vote an approximately 4% 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). Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership; a California limited partnership (“Justice” or the “Partnership”). InterGroup also directly owns approximately 13.4% of the common stock of Portsmouth.

 

Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”), and Justice Mezzanine Company, LLC (“Mezzanine”) owns and Kearny Street Parking, LLC (“Parking”) ownsoperates a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Mezzanine and Parking are bothis a wholly-owned subsidiariessubsidiary of the Partnership; Operating is a wholly-owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton) through January 31, 2030.

 

Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, to not exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, base management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue.

The Company began managing On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the parking garage that is partcompletion of the Hotel in-housemerger, the newly combined company will be positioned under the Aimbridge Hospitality name in 2016. Effective February 3, 2017, Interstate took over the management of the parking garage along with the Hotel.Americas.

 

 -8-- 8 -
 

 

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 sixteen apartment complexes, one commercial real estate property and three single-family houses. The properties are located throughout the United States, but are concentrated in Dallas, Texas and Southern California. The Company also has an investment in unimproved real property. As of December 31, 2018,2019, all of the Company’s residential and commercial rental properties are managed in-house.

 

Due to Securities Broker

 

Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.

 

Obligations for Securities Sold

 

Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in the condensed consolidated statements of operations.

 

Income Tax

 

The Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense during the six months ended December 31, 2019 and 2018 and 2017 represents primarilyrepresent the income tax effect ofon the pretax loss at InterGroup and theCompany’s pretax income of Portsmouth which includes its share in the net income of the Hotel. For the quarter ended December 31, 2017, a provisional net charge of $879,000 was included in the income tax expense as a result of reducing our deferred tax asset to the lower federal base rate of 21%.

 

Financial Condition and Liquidity

 

The Company’s cash flows are primarily generated from the ownership and management of real estate.

 

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.loan in December 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due through January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 2024. Outstanding principal balance on the loan was $94,349,000$92,914,000 and $95,018,000$93,746,000 as of December 31, 20182019 and June 30, 2018,2019, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by Portsmouth in favor of the mortgage lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan bearshad an interest atrate of 9.75% per annum and matures ina maturity date of January 1, 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. On July 31, 2019, Mezzanine refinanced the mezzanine loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan which had a 9.75% per annum interest rate was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.

 

Effective 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, 2018,2019, InterGroup is in compliance with both requirements.

 

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Los Angeles,Santa Monica, California and is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest arewere due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC.

 

 -9-- 9 -
 

 

On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off a mortgage note payable on a single-family house located in Los Angeles, California. On September 28, 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. Net proceeds of $995,000 received as a result of the refinance was used to pay down the RLOC.

 

Despite an uncertain economy, theThe Hotel has continued to generate positive operating income. While the debt service requirements related to the loans may create some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements.

 

The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company'sCompany’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 its real estate assets, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.

 

The following table provides a summary as of December 31, 2018,2019, the Company’s material financial obligations which also includesincluding interest payments.

 

    6 Months Year Year Year Year       6 Months Year Year Year Year   
 Total  2019  2020  2021  2022  2023  Thereafter  Total 2020 2021 2022 2023 2024 Thereafter 
Mortgage and subordinated notes payable $173,972,000  $1,508,000  $3,061,000  $12,490,000  $3,102,000  $37,820,000  $115,991,000  $170,968,000  $1,433,000  $12,483,000  $3,095,000  $37,812,000  $107,655,000  $8,490,000 
Other notes payable  9,778,000   504,000   3,918,000   913,000   927,000   641,000   2,875,000   9,217,000   585,000   3,991,000   1,022,000   744,000   567,000   2,308,000 
Interest  45,160,000   4,635,000   9,508,000   9,132,000   8,644,000   7,636,000   5,605,000   33,535,000   4,460,000   8,598,000   8,148,000   7,014,000   3,401,000   1,914,000 
Total $228,910,000  $6,647,000  $16,487,000  $22,535,000  $12,673,000  $46,097,000  $124,471,000  $213,720,000  $6,478,000  $25,072,000  $12,265,000  $45,570,000  $111,623,000  $12,712,000 

 

Recently Issued and Adopted Accounting Pronouncements

 

In NovemberFebruary 2016, the Financial Accounting Standards Board (“FASB”)(FASB) issued Accounting Standard Update (“ASU”) 2016-18, Restricted Cash. ASU 2016-182016-02,Leases (Topic 842). ASU 2016-02 requires companieslessees to include restricted cashrecognize lease assets and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shownlease liabilities on the statement of cash flows. Additionally, ASU 2016-18 requires a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents.requires expanded disclosures about leasing arrangements. ASU 2016-182016-02 is effective for reporting periodsfiscal years beginning after December 15, 2017,2018, and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, and will be applied retrospectively to all periods presented. The Company adopted ASU 2018-16 effectivepermitted. In July 1, 2018. The adoption of ASU 2016-18 impacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015,2018, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers2018-11,Leases (Topic 606)842): Deferral of the Effective Date, which delays the effective date ofTargeted Improvements. ASU 2014-09 by one year. The FASB also agreed to allow2018-11 provides entities another option for transition, allowing entities to choose to adoptnot apply 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 standard permits two methodsin the comparative periods they present in their financial statements in the year 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). We appliedadoption. Effective July 1, 2019, we adopted ASU 2016-02 using the modified retrospective approach provided by ASU 2018-11. We elected certain practical expedients permitted under the transition methodguidance, including the election to all contractscarryforward historical lease classification. We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets. In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the present value of the fixed payments without performing an allocation of lease and non-lease components. We did not record any operating lease right-of-use (“ROU”) assets and operating lease liabilities upon the adoption of ASU 2014-09 effective July 1, 2018. We provided the additional required disclosures, butnew standard as the cumulative adjustment fromaggregate value of the ROU assets and operating lease liabilities are immaterial relative to our comparative periods was zero intotal assets and liabilities as of June 30, 2019. The standard did not have an impact on our condensed consolidated financial statements.other finance leases, statements of operations or cash flows. See Note 2.3 and Note 10 for balances of finance lease ROU assets and liabilities, respectively.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which supersedes existing guidance on accounting for leases in Leases (Topic 840) and generally requires all leases, including operating leases, to be recognized in the statement of financial position as right-of-use assets and lease liabilities by lessees. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. We intend to adopt the standard on July 1, 2019. The Company is currently reviewing the effect of ASU No. 2016-02.

On June 16, 2016, the FASB issued ASU 2016-13, “Financial“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2020.2023. The Company is currently reviewing the effect of ASU No. 2016-13.

 

 -10-- 10 -
 

 

NOTE 2 – REVENUE

 

On July 1, 2018, we adopted ASC 606, RevenueOur revenue from Contracts with Customers, real estate is primarily rental income from residential and commercial property leases which is recorded when due from residents and is recognized monthly as described in Note 1, using the modified retrospective approach to all contracts resulting in no cumulative adjustment to accumulated deficit. The adoption of this standard did not impact the timing of our revenue recognition based on the short-term, day-to-day nature of our operations.

earned. The following table present our hotel revenuesHotel revenue disaggregated by revenue streams. Revenues from real estate are not affected by the new guidance.

 

For the three months ended December 31, 2018  2017  2019  2018 
Hotel revenues:                
Hotel rooms $11,565,000  $10,710,000  $12,497,000  $11,565,000 
Food and beverage  1,565,000   1,614,000   1,425,000   1,565,000 
Garage  734,000   735,000   776,000   734,000 
Other operating departments  133,000   128,000   203,000   133,000 
Total hotel revenue $13,997,000  $13,187,000  $14,901,000  $13,997,000 

For the six months ended December 31, 2018  2017  2019  2018 
Hotel revenues:                
Hotel rooms $25,087,000  $22,552,000  $25,811,000  $25,087,000 
Food and beverage  3,014,000   3,373,000   2,647,000   3,014,000 
Garage  1,508,000   1,516,000   1,512,000   1,508,000 
Other operating departments  198,000   183,000   360,000   198,000 
Total hotel revenue $29,807,000  $27,624,000  $30,330,000  $29,807,000 

 

Performance obligations

 

We identified the following performance obligations, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:

 

•●Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
  
•●Noncancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
  
•●Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
  
•●Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.

 

Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.

 

- 11 -

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.

 

 -11-

Contract assets and liabilities

We do not have any material contract assets as of December 31, 20182019 and June 30, 20182019 other than trade and other receivables, net on our Condensed Consolidated Balance Sheet.condensed consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.

 

We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities on our Condensed Consolidated Balance Sheets.condensed consolidated balance sheets. Contract liabilities increaseddecreased to $1,255,000$1,027,000 as of December 31, 20182019, from $571,000$1,215,000 as of June 30, 2018.2019. The increasedecrease for the six months ended December 31, 20182019 was primarily driven by deposits received from upcoming groups, partially offset by $560,000$188,000 revenue recognized that was included in the advanced deposits balance as of June 30, 2018.2019.

 

Contract costs

We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as incurred as our contracts with customers and lease agreements do not extend beyond one year.

 

NOTE 3 – INVESTMENT IN HOTEL, NET

 

Investment in hotel consisted of the following as of:

 

    Accumulated Net Book    Accumulated Net Book 
December 31, 2018 Cost  Depreciation  Value 
December 31, 2019 Cost Depreciation Value 
              
Land $2,738,000  $-  $2,738,000  $2,738,000  $-  $2,738,000 
Finance lease ROU assets  1,746,000   (137,000)  1,609,000 
Furniture and equipment  29,932,000   (26,418,000)  3,514,000   30,268,000   (27,206,000)  3,062,000 
Building and improvements  64,336,000   (30,330,000)  34,006,000   63,879,000   (31,748,000)  32,131,000 
 $97,006,000  $(56,748,000) $40,258,000 
Investment in Hotel, net $98,631,000  $(59,091,000) $39,540,000 

 

    Accumulated Net Book    Accumulated Net Book 
June 30, 2018 Cost  Depreciation  Value 
June 30, 2019 Cost Depreciation Value 
              
Land $2,738,000  $-  $2,738,000  $2,738,000  $-  $2,738,000 
Finance lease ROU assets  521,000   (35,000)  486,000 
Furniture and equipment  29,350,000   (25,876,000)  3,474,000   30,585,000   (26,842,000)  3,743,000 
Building and improvements  64,336,000   (29,587,000)  34,749,000   63,879,000   (31,010,000)  32,869,000 
 $96,424,000  $(55,463,000) $40,961,000 
Investment in Hotel, net $97,723,000  $(57,887,000) $39,836,000 

 

NOTE 4 – INVESTMENT IN REAL ESTATE, NET

 

The Company’s investment in real estate includes sixteen apartment complexes, one commercial real estate property and three single-family houses. The properties are located throughout the United States, but are concentrated in Dallas, Texas and Southern California. The Company also has an investment in unimproved real property. Investment in real estate consisted of the following:

 

As of December 31, 2019  June 30, 2019 
Land $23,566,000  $23,566,000 
Buildings, improvements and equipment  68,899,000   68,369,000 
Accumulated depreciation  (42,869,000)  (41,629,000)
   49,596,000   50,306,000 
Land held for development  1,468,000   1,467,000 
Investment in real estate, net $51,064,000  $51,773,000 

 -12-- 12 -
 

As of December 31, 2018  June 30, 2018 
Land $25,033,000  $25,033,000 
Buildings, improvements and equipment  67,936,000   67,536,000 
Accumulated depreciation  (40,407,000)  (39,200,000)
Investment in real estate, net $52,562,000  $53,369,000 

 

NOTE 5 – 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-based companies and REITs, where financial benefit could transfer to its shareholders through income and/or capital gain.

 

At December 31, 20182019 and June 30, 2018,2019, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:

 

     Gross  Gross  Net  Fair 
Investment Cost  Unrealized Gain  Unrealized Loss  Unrealized Loss  Value 
                
As of December 31, 2018                    
Corporate Equities $18,847,000 $934,000  $(12,195,000) $(11,261,000) $7,586,000 
                     
As of June 30, 2018                    
Corporate Equities $22,388,000  $2,450,000  $(10,997,000) $(8,547,000) $13,841,000 
     Gross  Gross  Net  Fair 
Investment Cost  Unrealized Gain  Unrealized Loss  Unrealized Loss  Value 
                
As of December 31, 2019            
Corporate               
Equities $10,576,000 $1,672,000  $(4,100,000) $(2,428,000) $8,148,000 
                     
As of June 30, 2019                  
Corporate                    
Equities $19,204,000  $1,753,000  $(11,261,000) $(9,508,000) $9,696,000 

 

As of December 31, 2018,2019, and June 30, 2018,2019, approximately 4% and 7%, respectively, of the investment in marketable securities balance above is comprised of the common stock of Comstock Mining Inc (“Comstock”). As of December 31, 2019, and June 30, 2019, the Company had $3,845,000 and $11,088,000, respectively, of unrealized losses of $11,495,000 and $10,819,000, respectively, related to securities held for over one year. Asyear; of December 31, 2018,which $3,684,000 and June 30, 2018, unrealized losses$10,900,000 are related to the Company’sits investment in Comstock, Mining Inc. (“Comstock” - NYSE AMERICAN: LODE) were $11,107,000 and $10,646,000, respectively. For the six months ended December 31, 2019, the decrease in unrealized losses is a result of reclassing $7,586,000 of unrealized gain related to Comstock that was included in the cost basis as of June 30, 2019.

 

Net lossgains (losses) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of net loss on marketable securities for the respective periods:three and six months ended December 31, 2019 and 2018, respectively:

 

For the three months ended December 31, 2018  2017  2019  2018 
Realized gain on marketable securities $530,000  $181,000 
Unrealized (loss) gain on marketable securities  (2,475,000)  726,000 
Realized (loss) gain on marketable securities, net $(3,000) $530,000 
Unrealized loss on marketable securities, net  (50,000)  (2,475,000)
Unrealized loss on marketable securities related to Comstock  (26,000)  (2,085,000)  (66,000)  (26,000)
Net loss on marketable securities $(1,971,000) $(1,178,000) $(119,000) $(1,971,000)

For the six months ended December 31, 2019  2018 
Realized (loss) gain on marketable securities, net $(77,000) $522,000 
Unrealized loss on marketable securities, net  (121,000)  (2,202,000)
Unrealized loss on marketable securities related to Comstock  (370,000)  (462,000)
Net loss on marketable securities $(568,000) $(2,142,000)

 

 -13-- 13 -
 

For the six months ended December 31, 2018  2017 
Realized gain (loss) on marketable securities $522,000  $(119,000)
Unrealized (loss) gain on marketable securities  (2,202,000)  673,000 
Unrealized loss on marketable securities related to Comstock  (462,000)  (2,754,000)
Net loss on marketable securities $(2,142,000) $(2,200,000)

 

NOTE 6 – OTHER INVESTMENTS, NET

 

The Company may also invest, with the approval of the securities investment committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary impairment losses. Other investments also include non-marketable warrants carried at fair value.

 

Other investments, net consist of the following:

 

Type December 31, 2018  June 30, 2018  December 31, 2019  June 30, 2019 
Private equity hedge fund, at cost $474,000  $554,000  $376,000  $376,000 
Other preferred stock, at cost  259,000   259,000   188,000   236,000 
 $733,000  $813,000  $564,000  $612,000 

 

NOTE 7 - FAIR VALUE MEASUREMENTS

 

The carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).

 

The assets measured at fair value on a recurring basis are as follows:

 

As of 12/31/2018  6/30/2018 
 Total - Level 1  Total - Level 1 
Assets:      
Investment in marketable securities:        
REITs and real estate companies $1,664,000  $4,300,000 
Corporate Bonds  2,415,000   2,282,000 
Energy  774,000   311,000 
Technology  656,000   1,813,000 
Healthcare  653,000   1,777,000 
Industrials  519,000   404,000 
Basic material  496,000   1,038,000 
Communications  -   1,071,000 
Other  409,000   845,000 
  $7,586,000  $13,841,000 

- 14 -

 12/31/2019  06/30/2019 
As of Total - Level 1  Total - Level 1 
Assets:      
Investment in marketable securities:        
REITs and real estate companies $3,263,000  $3,069,000 
Energy  1,278,000   950,000 
Insurance  1,109,000   - 
Corporate bonds  883,000   1,420,000 
Consumer cyclical  572,000   1,448,000 
Basic material  546,000   829,000 
Financial services  278,000   951,000 
Technology  149,000   651,000 
Industrials  70,000   193,000 
Healthcare  -   185,000 
  $8,148,000  $9,696,000 

 

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

 -14-

 

Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments in non-marketable securities,” that were initially measured at cost and have been written down to fair value as a result of impairment or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt instruments).impairment. The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:

 

Assets Level 3  December 31, 2018  Net loss for the six months
ended December 31, 2018		  Level 3 December 31, 2019 Net loss for the
six months ended December 31, 2019		 
                   
Other non-marketable investments $733,000  $733,000  $-  $564,000  $564,000  $        - 

 

      Net loss for the six months 
Assets Level 3  June 30, 2018  ended December 31, 2017  Level 3 June 30, 2019 Net loss for the
six months ended
December 31, 2018		 
                        
Other non-marketable investments $813,000  $813,000  $-  $612,000  $612,000  $        - 

For the six months ended December 31, 2019 and 2018, we received distribution from other non-marketable investments of $48,000 and $80,000, respectively.

 

Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments and holds less than 20% ownership in each of the investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

 

NOTE 8 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows.

 

As of 12/31/2018  6/30/2018  12/31/2019  06/30/2019 
          
Cash and cash equivalents $8,978,000  $8,053,000  $8,456,000  $11,837,000 
Restricted cash  10,551,000   9,458,000   14,884,000   13,295,000 
Total cash, cash equivalents, and restricted cash
shown in the condensed consolidated statement of cash flows		 $19,529,000  $17,511,000  $23,340,000  $25,132,000 

 

Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves. It also includes key money received from Interstate that is restricted for capital improvements for the Hotel.

 

NOTE 9 – STOCK BASED COMPENSATION PLANS

 

The Company follows Accounting Standard Codification (ASC) Topic 718 “Compensation – Stock Compensation”, which addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units.

 

Please refer to Note 16 – Stock Based Compensation Plans in the Company'sCompany’s Form 10-K for the year ended June 30, 20182019 for more detailed information on the Company’s stock-based compensation plans.

 

During the three months ended December 31, 20182019 and 2017,2018, the Company recorded stock option compensation cost of $29,000$9,000 and $60,000,$29,000, respectively, related to stock options that were previously issued. During the six months ended December 31, 20182019 and 2017,2018, the Company recorded stock option compensation cost of $59,000$17,000 and $122,000,$59,000, respectively, related to stock options that were previously issued. As of December 31, 2018,2019, there was a total of $61,000$28,000 of unamortized compensation related to stock options which is expected to be recognized over the weighted-average period of 3.172.17 years.

- 15 -

 

In December 2018, the Company’s President and Chief Executive Officer, (CEO), John V. Winfield exercised 26,805 vested Incentive Stock Options by surrendering 17,439 shares of the Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional compensation expense was recorded related to the issuance.

 -15-

 

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history. The Company has selected to use the simplified method for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.

 

The following table summarizes the stock options activity from July 1, 20172018 through December 31, 2018:2019:

 

  Number of Weighted Average Weighted Average Aggregate  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, 2017  368,000  $17.21  5.17 years $3,046,000 
Oustanding at July 1, 2018  368,000  $17.21   4.17  $3,505,000 
Granted    -   -         -   -         
Exercised    -   -         (26,805)  20.52         
Forfeited    -   -         -   -         
Exchanged    -   -         -   -         
Outstanding at June 30, 2018  368,000  $17.21  4.17 years $3,505,000 
Exercisable at June 30, 2018  318,000  $16.47  3.79 years $3,257,000 
Vested and Expected to vest at June 30, 2018  368,000  $17.21  4.17 years $3,505,000 
Outstanding at June 30, 2019  341,195  $16.95   3.07 years  $4,680,000 
Exercisable at June 30, 2019  330,395  $16.62   2.92 years  $4,643,000 
Vested and Expected to vest at June 30, 2019  341,195  $16.95   3.07 years  $4,680,000 
                                
Oustanding at July 1, 2018  368,000  $17.21  4.17 years $3,505,000 
Oustanding at July 1, 2019  341,195  $16.95   3.07 years  $4,680,000 
Granted    -   -         -   -         
Exercised    (26,805)  20.52         -   -         
Forfeited    -   -         -   -         
Exchanged                  -   -         
Outstanding at December 31, 2018  341,195  $16.95  3.57 years $5,195,000 
Exercisable at December 31, 2018  326,795  $16.50  3.36 years $5,125,000 
Vested and Expected to vest at December 31, 2018  341,195  $16.95  3.57 years $5,195,000 
Outstanding at December 31, 2019  341,195  $16.95   2.57 years  $6,993,000 
Exercisable at December 31, 2019  330,395  $16.62   2.42 years  $6,883,000 
Vested and Expected to vest at December 31, 2019  341,195  $16.95   2.57 years  $6,993,000 

 

NOTE 10 – SEGMENT INFORMATION

 

The Company operates in three reportable segments, the operation of the hotel (“Hotel Operations”), the operation of its multi-family residential properties (“Real Estate Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this information.

 

Information below represents reported segments for the three and six months ended December 31, 20182019 and 2017.2018. Operating income from hotel operations consist of the operation of the hotel and operation of the garage. Operating income for rental properties consistconsists of rental income. Operating loss for investment transactions consist of net investment gain (loss)gains (losses), impairment loss on other investments, net unrealized gain (loss) on other investments, dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative expenses and the income tax expense for the entire Company.

 

 -16-- 16 -
 

 

As of and for the three months Hotel  Real Estate  Investment       
ended December 31, 2019 Operations  Operations  Transactions  Corporate  Total 
Revenues $14,901,000  $3,839,000  $-  $-  $18,740,000 
Segment operating expenses  (11,730,000)  (2,089,000)  -   (581,000)  (14,400,000)
Segment income (loss) from operations  3,171,000   1,750,000   -   (581,000)  4,340,000 
Interest expense - mortgage  (1,735,000)  (595,000)  -   -   (2,330,000)
Depreciation and amortization expense  (611,000)  (621,000)  -   -   (1,232,000)
Loss from investments  -   -   (249,000)  -   (249,000)
Income tax expense  -   -   -   (149,000)  (149,000)
Net income (loss) $825,000  $534,000  $(249,000) $(730,000) $380,000 
Total assets $59,981,000  $51,064,000  $8,712,000  $6,460,000  $126,217,000 

 

As of and for the three months Hotel Real Estate Investment      
For the three months Hotel Real Estate Investment      
ended December 31, 2018 Operations  Operations  Transactions  Corporate  Total  Operations  Operations  Transactions  Corporate  Total 
Revenues $13,997,000  $3,752,000  $-  $-  $17,749,000  $13,997,000  $3,752,000  $-  $-  $17,749,000 
Segment operating expenses  (11,236,000)  (1,866,000)  -   (479,000)  (13,581,000)  (11,236,000)  (1,866,000)  -   (479,000)  (13,581,000)
Segment income (loss) from operations  2,761,000   1,886,000   -   (479,000)  4,168,000   2,761,000   1,886,000   -   (479,000)  4,168,000 
Interest expense - mortgage  (1,797,000)  (608,000)  -   -   (2,405,000)  (1,797,000)  (608,000)  -   -   (2,405,000)
Depreciation and amortization expense  (643,000)  (606,000)  -   -   (1,249,000)  (643,000)  (606,000)  -   -   (1,249,000)
Loss from investments  -   -   (2,076,000)  -   (2,076,000)  -   -   (2,076,000)  -   (2,076,000)
Income tax benefit  -   -   -   440,000   440,000   -   -   -   440,000   440,000 
Net income (loss) $321,000  $672,000  $(2,076,000) $(39,000) $(1,122,000) $321,000  $672,000  $(2,076,000) $(39,000) $(1,122,000)
Total assets $58,380,000  $52,562,000  $8,319,000  $6,143,000  $125,404,000 

 

For the three months Hotel Real Estate Investment      
ended December 31, 2017 Operations  Operations  Transactions  Corporate  Total 
As of and for the six months Hotel Real Estate Investment      
ended December 31, 2019 Operations  Operations  Transactions  Corporate  Total 
Revenues $13,187,000  $3,625,000  $-  $-  $16,812,000  $30,330,000  $7,556,000  $-  $-  $37,886,000 
Segment operating expenses  (10,743,000)  (2,102,000)  -   (730,000)  (13,575,000)  (23,078,000)  (4,039,000)  -   (1,341,000)  (28,458,000)
Segment income (loss) from operations  2,444,000   1,523,000   -   (730,000)  3,237,000   7,252,000   3,517,000   -   (1,341,000)  9,428,000 
Interest expense - mortgage  (1,850,000)  (640,000)  -   -   (2,490,000)  (3,527,000)  (1,200,000)  -   -   (4,727,000)
Depreciation and amortization expense  (682,000)  (585,000)  -   -   (1,267,000)  (1,204,000)  (1,241,000)  -   -   (2,445,000)
Loss from investments  -   -   (1,643,000)  -   (1,643,000)  -   -   (861,000)  -   (861,000)
Income tax expense  -   -   -   (344,000)  (344,000)  -   -   -   (371,000)  (371,000)
Net income (loss) $(88,000) $298,000  $(1,643,000) $(1,074,000) $(2,507,000) $2,521,000  $1,076,000  $(861,000) $(1,712,000) $1,024,000 
Total assets $59,981,000  $51,064,000  $8,712,000  $6,460,000  $126,217,000 

 

As of and for the six months Hotel  Real Estate  Investment       
ended December 31, 2018 Operations  Operations  Transactions  Corporate  Total 
Revenues $29,807,000  $7,431,000  $-  $-  $37,238,000 
Segment operating expenses  (22,046,000)  (3,878,000)  -   (1,122,000)  (27,046,000)
Segment income (loss) from operations  7,761,000   3,553,000   -   (1,122,000)  10,192,000 
Interest expense - mortgage  (3,611,000)  (1,359,000)  -   -   (4,970,000)
Depreciation and amortization expense  (1,285,000)  (1,207,000)  -   -   (2,492,000)
Loss from investments  -   -   (2,454,000)  -   (2,454,000)
Income tax expense  -   -   -   (270,000)  (270,000)
Net income (loss) $2,865,000  $987,000  $(2,454,000) $(1,392,000) $6,000 
Total assets $58,380,000  $52,562,000  $8,319,000  $6,143,000  $125,404,000 

For the six months Hotel  Real Estate  Investment       Hotel Real Estate Investment      
ended December 31, 2017 Operations Operations Transactions Corporate Total 
ended December 31, 2018 Operations  Operations  Transactions  Corporate  Total 
Revenues $27,624,000  $7,302,000  $-  $-  $34,926,000  $29,807,000  $7,431,000  $-  $-  $37,238,000 
Segment operating expenses  (21,332,000)  (3,997,000)  -   (1,561,000)  (26,890,000)  (22,046,000)  (3,878,000)  -   (1,122,000)  (27,046,000)
Segment income (loss) from operations  6,292,000   3,305,000   -   (1,561,000)  8,036,000   7,761,000   3,553,000   -   (1,122,000)  10,192,000 
Interest expense - mortgage  (3,703,000)  (1,280,000)  -   -   (4,983,000)  (3,611,000)  (1,359,000)  -   -   (4,970,000)
Depreciation and amortization expense  (1,381,000)  (1,160,000)  -   -   (2,541,000)  (1,285,000)  (1,207,000)  -   -   (2,492,000)
Loss from investments  -   -   (2,895,000)  -   (2,895,000)  -   -   (2,454,000)  -   (2,454,000)
Income tax expense  -   -   -   (419,000)  (419,000)  -   -   -   (270,000)  (270,000)
Net income (loss) $1,208,000  $865,000  $(2,895,000) $(1,980,000) $(2,802,000) $2,865,000  $987,000  $(2,454,000) $(1,392,000) $6,000 

 

 -17-- 17 -
 

 

NOTE 11 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS

On July 2, 2014, 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 current loan balance of $3,000,000 was extended to June 30, 2019. During the fiscal year ended June 30, 2018, the Partnership made principal paydown of $1,250,000.

 

The balancefollowing summarizes the balances of related party noteand other notes payable atas of December 31, 2018 includes obligation2019 and June 30, 2019, respectively.

As of 12/31/2019  06/30/2019 
       
Note payable - Hilton $3,167,000  $3,325,000 
Note payable - Interstate  1,771,000   1,896,000 
Other notes payable  12,000   40,000 
Total related party and other notes payable $4,950,000  $5,261,000 

Note payable to Hilton (Franchisor) in the form ofis a self-exhausting, interest free development incentive note which is reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton. The outstanding balance of the note as of December 31, 2018 and June 30, 2018, was $3,483,000 and $3,642,000, respectively.

 

On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is foran initial period of 10 years commencing on the takeover date and automatically renews for an additional yearnot to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. The $2,000,000As of December 31, 2019, and June 30, 2019, balance of the key money plus accrued interest is $1,004,000 and $2,049,000, respectively, and is included in restricted cash and related party note payable balances in the condensed consolidated balance sheets assheets. Unamortized portion of December 31, 2018 and June 30, 2018.

In April 2017, Portsmouth obtained from InterGroup an unsecured short-term loanthe key money is included in the amount of $1,000,000 at 5% per year fixed interest, with a term of five months and maturing September 6, 2017. On September 1st 2017,related party notes payable in the short-term loan was extended to September 15, 2017 and paid off on September 13, 2017.condensed consolidated balance sheets.

 

As of December 31, 2018,2019, the Company had capitalfinance lease obligations outstanding of $1,243,000.$1,282,000. These capitalfinance leases expire in various years through 2023 at rates ranging from 5.77% to 6.53%6.25% per annum. Minimum future lease payments for assets under capitalfinance leases as of December 31, 20182019 are as follows:

 

For the year ending June 30,      
2019 $168,000 
2020  384,000  $246,000 
2021  384,000   492,000 
2022  376,000   482,000 
2023  77,000   182,000 
Total minimum lease payments  1,389,000   1,402,000 
Less interest on capital lease  (146,000)
Less interest on finance lease  (120,000)
Present value of future minimum lease payments $1,243,000  $1,282,000 

 

Future minimum principal payments for all related party and other financing transactions are as follows:

 

For the year ending June 30,       
2019 $504,000 
2020  3,918,000  $585,000 
2021  913,000   3,991,000 
2022  927,000   1,022,000 
2023  641,000   744,000 
2024  567,000 
Thereafter  2,875,000   2,308,000 
 $9,778,000  $9,217,000 

 

 -18-- 18 -
 

 

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Los Angeles,Santa Monica, California and is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest arewere due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC.

 

Effective May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan, in order to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth was unable to satisfy independently as of March 31, 2017.

 

In connection with the redemption of the limited partnership interest of Justice, Justice Operating Company, LLC agreed to pay a total of $1,550,000 in fees to certain officers and directors of the Company for services rendered in connection with the redemption of the partnership interests, refinancing of the Justices properties and reorganization of Justice. This agreement was superseded by a letter dated December 11, 2013 from Justice, in which Justice assumed the payment obligations of Justice Operating Company, LLC. As of December 31, 2018, $200,000 of these fees remain payable and are included in related party and other notes payable on the accompanying condensed consolidated balance sheets.

As of September 30, 2017, Justice had an outstanding accounts payable balance to InterGroup for $116,000 for management of the Hotel from June to December of 2016. The balance was paid in full as of December 31, 2017.

Four of the Portsmouth directors serve as directors of InterGroup. ThreeTwo of those directors also serve as directors of Santa Fe. The threetwo Santa Fe directors also serve as directors of InterGroup.

 

As Chairman of the Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Portsmouth and Santa Fe and oversees the investment activity of those companies. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.

NOTE 12 – ACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICE

The following summarizes the balances of accounts payable and other liabilities – Justice as of December 31, 2019 and June 30, 2019.

As of 12/31/2019  06/30/2019 
       
Trade payable $1,953,000  $1,792,000 
Advance deposits  1,027,000   1,215,000 
Property tax payable  1,046,000   1,046,000 
Payroll and related accruals  1,826,000   2,584,000 
Interest payable  -   412,000 
Withholding and other taxes payable  882,000   1,831,000 
Security deposit  52,000   52,000 
Other payables  1,861,000   2,366,000 
Total accounts payable and other liabilities - Justice $8,647,000  $11,298,000 

NOTE 13 – ACCOUNTS PAYABLE AND OTHER LIABILITIES

The following summarizes the balances of accounts payable and other liabilities as of December 31, 2019 and June 30, 2019.

As of 12/31/2019  06/30/2019 
       
Trade payable $560,000  $521,000 
Advance deposits  324,000   378,000 
Property tax payable  935,000   595,000 
Payroll and related accruals  49,000   47,000 
Interest payable  223,000   221,000 
Withholding and other taxes payable  1,069,000   1,108,000 
Security deposit  743,000   736,000 
Other payables  151,000   160,000 
Total accounts payable and other liabilities $4,054,000  $3,766,000 

NOTE 14 – SUBSEQUENT EVENTS

Management has evaluated subsequent events through the date these financial statements were available to be issued. Based on our evaluation no material events have occurred that require disclosure.

 -19-

 

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

 

The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “could,” “will”, “would” and similar expressions, are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, such as national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry, the impact of terrorism and war on the national and international economies, including tourism and securities markets, energy and fuel costs, natural disasters, general economic conditions and competition in the hotel industry in the San Francisco area, seasonality, labor relations and labor disruptions, actual and threatened pandemics such as swine flu, partnership distributions, the ability to obtain financing at favorable interest rates and 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, 2018,2019, that 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.

 

- 19 -

RESULTS OF OPERATIONS

 

As of December 31, 2018,2019, the Company owned approximately 81.9%82.3% of the common shares of its subsidiary, Santa Fe and Santa Fe owned approximately 68.8% of the common shares of Portsmouth Square, Inc. InterGroup also directly owns approximately 13.4% of the common shares of Portsmouth. The Company'sCompany’s principal source of revenue continues to be derived from the general and limited partnership interests of its subsidiary, Portsmouth, in the Justice Investors limited partnership (“Justice” or the “Partnership”) inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. The Company also generates income from its investments in real estate properties and from investment of its cash and securities assets. Justice owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Justice 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 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.

 

 -20-

On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel and related facilities with an effective takeover date of February 3, 2017. The term of HMA is for an initial period of ten years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement.

The 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 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.

 

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, 2019 Compared to Three Months Ended December 31, 2018 Compared to the Three Months Ended December 31, 2017

 

The Company had anet income of $380,000 for the three months ended December 31, 2019 compared to net loss of $1,122,000 for the three months ended December 31, 2018 compared to net loss of $2,507,000 for the three months ended December 31, 2017.2018. The change is primarily attributable to increased revenue from Hotel operations.the decrease in loss on marketable securities.

 

Hotel Operations

 

The Company had net income from Hotel operations of $825,000 for the three months ended December 31, 2019 compared to net income of $321,000 for the three months ended December 31, 2018 compared to net loss of $88,000 for the three months ended December 31, 2017.2018. The change from net loss to net income is primarily dueattributable to increased room revenue.the increase in Hotel revenue, offset by the rise of Hotel operating expenses.

 

The following table sets forth a more detailed presentation of Hotel operations for the three months ended December 31, 20182019 and 2017.2018.

 

- 20 -

 

For the three months ended December 31, 2018  2017  2019  2018 
Hotel revenues:                
Hotel rooms $11,565,000  $10,710,000  $12,497,000  $11,565,000 
Food and beverage  1,565,000   1,614,000   1,425,000   1,565,000 
Garage  734,000   735,000   776,000   734,000 
Other operating departments  133,000   128,000   203,000   133,000 
Total hotel revenues  13,997,000   13,187,000   14,901,000   13,997,000 
Operating expenses excluding depreciation and amortization  (11,236,000)  (10,743,000)  (11,730,000)  (11,236,000)
Operating income before interest, depreciation and amortization  2,761,000   2,444,000   3,171,000   2,761,000 
Interest expense - mortgage  (1,797,000)  (1,850,000)  (1,735,000)  (1,797,000)
Depreciation and amortization expense  (643,000)  (682,000)  (611,000)  (643,000)
Net income (loss) from Hotel operations $321,000  $(88,000)
Net income from Hotel operations $825,000  $321,000 

 

For the three months ended December 31, 2018,2019, the Hotel had operating income of $3,171,000 before interest expense, depreciation and amortization on total operating revenues of $14,901,000 compared to operating income of $2,761,000 before interest expense, depreciation and amortization on total operating revenues of $13,997,000 compared to operating income of $2,444,000 before interest expense, depreciation and amortization on total operating revenues of $13,187,000 for the three months ended December 31, 2017. Room revenues increased2018. Hotel room revenue rose by $855,000$932,000 for the three months ended December 31, 20182019 compared to the three months ended December 31, 20172018. The increase is primarily due to our changethe timing of Dreamforce, one of the largest annual citywide conventions in strategySan Francisco, from September in 2018 to limit midweek group businessNovember in order to capture higher rate transient occupancy and to grow occupancy on shoulder dates with group rooms.2019. Food and beverage revenue decreased by $49,000$140,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the transient segment from groups with banquet and catering spending. Revenue from garage increased by $42,000 as a result of limiting midweek group business. Revenue from garagethe increase in occupancy and othermonthly parkers. Other operating departments remained relatively consistent year over year.revenue increased by $70,000 primarily due to increase in group cancellation revenue.

 

Total operating expenses increased by $493,000 this quarter$494,000 primarily due to annual wage increase in group commission, management fees, and increased labor costs as a result of increased occupancy.per union bargaining agreements.

 -21-

 

The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended December 31, 20182019 and 2017.2018.

 

Three Months

Ended December 31,

 

Average

Daily Rate

  

Average

Occupancy %

  

 

RevPAR

 
          
2018 $239   97% $232 
2017 $240   89% $212 

Three Months 

Ended December 31,

  

Average 

Daily Rate

  

Average

Occupancy %

  

  

RevPAR

 
 2019  $255   98% $250 
 2018  $239   97% $232 

 

The Hotel’s revenues increased by 6.1%6.5% this quarter as compared to the previous comparable quarter. Average daily rate decreasedincreased by $1,$16, average occupancy increased from 89% to 97%by 1%, and RevPAR increased by $20$18 for the three months ended December 31, 20182019 compared to the three months ended December 31, 2017.2018.

 

Real Estate Operations

 

Net income from real estate operations for the three months ended December 31, 2018 increased2019, decreased by $374,000 compare$138,000 compared to the three months ended December 31, 20172018, due to reduction in real estate taxes andan increase in revenue as a result of increased occupancy.payroll and repairs and maintenance. 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 $119,000 for the three months ended December 31, 2019 compared to a net loss on marketable securities of $1,971,000 for the three months ended December 31, 2018 compared to a net loss on marketable securities of $1,178,000 for2018. For the three months ended December 31, 2017.2019, the Company had a net realized loss of $3,000 and a net unrealized loss of $116,000. For the three months ended December 31, 2018, the Company had a net realized gain of $530,000 and a net unrealized loss of $2,501,000. For the three months ended December 31, 2017, the Company had a net realized gain of $181,000 and a net unrealized loss of $1,359,000.

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.

- 21 -

 

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 benefit (expense)expense (benefit) during the three months ended December 31, 20182019, and 20172018 represents primarily the income tax effect of the pretax lossincome (loss) at InterGroup and the pretax lossincome of Portsmouth, which includes its share in net income of the Hotel.

 

Six Months Ended December 31, 2019 Compared to Six Months Ended December 31, 2018 Compared to the Six Months Ended December 31, 2017

 

The Company had anet income of $1,024,000 for the six months ended December 31, 2019 compared to net income of $6,000 for the six months ended December 31, 2018 compared2018. The increase in net income is primarily attributable to a decrease in loss on marketable securities, the rise in Hotel revenue, offset by the increase in Hotel operating expenses.

Hotel Operations

The Company had net lossincome from Hotel operations of $2,802,000$2,521,000 for the six months ended December 31, 2017. The change is primarily attributable2019 compared to increased revenue from Hotel operations.

Hotel Operations

Netnet income from Hotel operations wasof $2,865,000 for the six months ended December 31, 2018 compared2018. The change is primarily attributable to net income of $1,208,000 for the six months ended December 31, 2017. Therise in Hotel operating expenses, offset by the increase in net income is primarily due to increase inHotel revenue.

 -22-

 

The following table sets forth a more detailed presentation of Hotel operations for the six months ended December 31, 20182019 and 2017.2018.

 

For the six months ended December 31, 2018  2017  2019  2018 
Hotel revenues:                
Hotel rooms $25,087,000  $22,552,000  $25,811,000  $25,087,000 
Food and beverage  3,014,000   3,373,000   2,647,000   3,014,000 
Garage  1,508,000   1,516,000   1,512,000   1,508,000 
Other operating departments  198,000   183,000   360,000   198,000 
Total hotel revenues  29,807,000   27,624,000   30,330,000   29,807,000 
Operating expenses excluding depreciation and amortization  (22,046,000)  (21,332,000)  (23,078,000)  (22,046,000)
Operating income before interest, depreciation and amortization  7,761,000   6,292,000   7,252,000   7,761,000 
Interest expense - mortgage  (3,611,000)  (3,703,000)  (3,527,000)  (3,611,000)
Depreciation and amortization expense  (1,285,000)  (1,381,000)  (1,204,000)  (1,285,000)
Net income from Hotel operations $2,865,000  $1,208,000  $2,521,000  $2,865,000 

 

For the six months ended December 31, 2018,2019, the Hotel had operating income of $7,252,000 before interest expense, depreciation and amortization on total operating revenues of $30,330,000 compared to operating income of $7,761,000 before interest expense, depreciation and amortization on total operating revenues of $29,807,000 compared to operating income of $6,292,000 before interest, depreciation and amortization on total operating revenues of $27,624,000 for the six months ended December 31, 2017.  Room revenues increased2018. Hotel room revenue rose by $2,535,000$724,000 for the six months ended December 31, 20182019 compared to the six months ended December 31, 20172018. The increase is primarily as the result of taking the right amount of group businessdue to replacing guaranteed room revenue at low rates with ancillary spending while growingroom revenue at higher rated transient segments.market rates driven by citywide conventions. Food and beverage revenue decreased by $359,000$367,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the result of fewer in-housetransient segment from groups with banquet events.and catering spending. Garage revenue remained relatively consistent year over year. Revenue from other operating departments increased by $15,000 as a result of collecting forfeited deposits.$162,000 primarily due to increase in group cancellation revenue.

 

Total operating expenses increased by $714,000 for the six months ended December 31, 2018 as compared to the six months ended December 31, 2017$1,032,000 primarily due to increased group commission, franchise fees, as well as management fees.annual wage increase per union bargaining agreements.

 

The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”)RevPAR of the Hotel for the six months ended December 31, 20182019 and 2017.2018.

 

Six months

Ended December 31,

 

Average

Daily Rate

  

Average

Occupancy %

  

 

RevPAR

 
          
2018 $258   97% $250 
2017 $247   91% $225 

- 22 -

Six months

Ended December 31,

  

Average

Daily Rate

  

Average

Occupancy %

  

 

RevPAR

 
           
 2019  $263   98% $258 
 2018  $258   97% $250 

 

The Hotel’s total revenues increased by 11.2%1.8% for the six months ended December 31, 20182019, as compared to the six months ended December 31, 2017.2018. Average daily rate increased by $11$5, average occupancy increased by 1%, and RevPAR increased by $25$8 for the six months ended December 31, 20182019, compared to the six months ended December 31, 2017. Average occupancy increased by 6% during the six months ended December 31, 2018 versus the comparable period.2018.

 

Real Estate Operations

 

Net income from real estate operations for the six months ended December 31, 20182019 increased by $122,000$89,000 compare to the six months ended December 31, 20172018 due to reduction in salary expense and increase in revenue as a result of increased occupancy.mortgage interest. 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 $568,000 for the six months ended December 31, 2019 compared to a net loss on marketable securities of $2,142,000 for the six months ended December 31, 2018 compared to a net loss on marketable securities of $2,200,000 for2018. For the six months ended December 31, 2017.2019, the Company had a net realized loss of $77,000 and a net unrealized loss of $491,000. For the six months ended December 31, 2018, the Company had a net realized gain of $522,000 and a net unrealized loss of $2,664,000. 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.

 -23-

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, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expense during the six months ended December 31, 20182019 and 20172018 represents primarily the income tax effect of the pretax lossincome at InterGroup and the pretax (income) lossincome of Portsmouth, 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, 20182019 and June 30, 20182019 by selected industry groups.

  

- 23 -
     % of Total 
As of December 31, 2019    Investment 
Industry Group Fair Value  Securities 
       
REIT’s and real estate ompanies $3,263,000   40.1%
Energy  1,278,000   15.7%
Insurance  1,109,000   13.6%
Corporate bonds  883,000   10.8%
Consumer cyclical  572,000   7.0%
Basic material  546,000   6.7%
Financial services  278,000   3.4%
Technology  149,000   1.8%
Industrials  70,000   0.9%
  $8,148,000   100.0%

 

     % of Total 
As of December 31, 2018    Investment 
Industry Group Fair Value  Securities 
       
REIT's and real estate ompanies $1,664,000   22.1%
Corporate Bonds  2,415,000   31.8%
Energy  774,000   10.2%
Technology  656,000   8.6%
Healthcare  653,000   8.6%
Industrials  519,000   6.8%
Basic material  496,000   6.5%
Other  409,000   5.4%
  $7,586,000   100.0%

    % of Total    % of Total 
As of June 30, 2018    Investment 
As of June 30, 2019   Investment 
Industry Group Fair Value  Securities  Fair Value Securities 
          
REIT's and real estate ompanies $4,300,000   31.2%
Corporate Bonds  2,282,000   16.5%
REITs and real estate companies $3,069,000   31.8%
Consumer cyclical  1,448,000   14.9%
Corporate bonds  1,420,000   14.6%
Financial  951,000   9.8%
Energy  950,000   9.8%
Basic material  829,000   8.5%
Technology  1,813,000   13.1%  651,000   6.7%
Industrials  193,000   2.0%
Healthcare  1,777,000   12.8%  185,000   1.9%
Communications  1,071,000   7.7%
Basic material  1,038,000   7.5%
Industrials  404,000   2.9%
Energy  311,000   2.2%
Other  845,000   6.1%
 $13,841,000   100.0% $9,696,000   100.0%

 

As of December 31, 2018, 20% of2019, the Company’s investment in marketableportfolio includes approximately 34 equity positions. The Company holds three equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 27% of the portfolio consistand consists of the common stock of American Realty Investors, Inc. (NYSE: ARL), which is included in the REITs and real estate companiescompanies’ industry group.

As of June 30, 2019, the Company’s investment portfolio includes approximately 29 equity positions. The Company holds three equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 18% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL), which is included in the REITs and real estate companies’ industry group.

 -24-

 

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:

 

- 24 -
For the three months ended December 31, 2019  2018 
Net loss on marketable securities $(119,000) $(1,971,000)
Dividend and interest income  111,000   88,000 
Margin interest expense  (116,000)  (132,000)
Trading and management expenses  (125,000)  (61,000)
Net loss from investment transactions $(249,000) $(2,076,000)

 

For the three months ended December 31, 2018  2017 
Net loss on marketable securities $(1,971,000) $(1,178,000)
Impairment loss on other investments  -   (200,000)
Dividend and interest income  88,000   48,000 
Margin interest expense  (132,000)  (162,000)
Trading and management expenses  (61,000)  (151,000)
Net loss from investment transactions $(2,076,000) $(1,643,000)

For the six months ended December 31, 2018  2017  2019  2018 
Net loss on marketable securities $(2,142,000) $(2,200,000) $(568,000) $(2,142,000)
Impairment loss on other investments  -   (200,000)
Dividend and interest income  185,000   131,000   241,000   185,000 
Margin interest expense  (288,000)  (352,000)  (252,000)  (288,000)
Trading and management expenses  (209,000)  (274,000)  (282,000)  (209,000)
Net loss from investment transactions $(2,454,000) $(2,895,000) $(861,000) $(2,454,000)

 

FINANCIAL CONDITION AND LIQUIDITY

 

The Company’s cash flows are primarily generated from its Hotel operations, itsand real estate operations, and theoperations. The Company may also receive cash from its investment of its cash in marketable securities and other investments.

 

To fund the redemption of limited partnership interests and to repay the prior mortgage, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December of 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum and matures in January 2024. Outstanding principal balance on the loan was $94,349,000$92,914,000 and $95,018,000$93,746,000 as of December 31, 20182019 and June 30, 2018,2019, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by the Portsmouth in favor of the mortgage lender. The mezzanine loan is a secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan bearshad an interest atrate of 9.75% per annum and matures ina 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. Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.

 

On July 2, 2014, the Partnership obtained from the CompanyInterGroup 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 current loan balance of $3,000,000 was extended to June 30, 2019. During the fiscal year ended2020. The balance of this loan was $3,000,000 as of December 31, 2019 and June 30, 2018, the Partnership made principal paydown of $1,250,000.

In April 2017, Portsmouth obtained from InterGroup an unsecured short-term loan2019, and is eliminated in the amount of $1,000,000 at 5% per year fixed interest, with a term of five months and maturing September 6, 2017. On September 1st 2017, the short-term loan was extended to September 15, 2017 and paid off on September 13, 2017.condensed consolidated balance sheets.

 

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Los Angeles,Santa Monica, California and is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest arewere due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC.

 

 -25-- 25 -
 

 

On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off a mortgage note payable on a single-family house located in Los Angeles, California. On September 28, 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. Net proceeds of $995,000 received as a result of the refinance was used to pay down the RLOC.

 

Despite an uncertain economy, the Hotel has continued to generate positive operating income. While the debt service requirements related to the loans may create some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements.

 

The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company'sCompany’s marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations.

 

Management believes that its cash, marketable securities, and the cash flows generated from those assets and from the partnership management fees, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has no off balance sheet arrangements.

 

MATERIAL CONTRACTUAL OBLIGATIONS

 

The following table provides a summary as of December 31, 2018,2019, the Company’s material financial obligations which also includesincluding interest payments.

 

    6 Months Year Year Year Year       6 Months Year Year Year Year   
 Total  2019  2020  2021  2022  2023  Thereafter  Total 2020 2021 2022 2023 2024 Thereafter 
Mortgage and subordinated notes payable $173,972,000  $1,508,000  $3,061,000  $12,490,000  $3,102,000  $37,820,000  $115,991,000  $170,968,000  $1,433,000  $12,483,000  $3,095,000  $37,812,000  $107,655,000  $8,490,000 
Other notes payable  9,778,000   504,000   3,918,000   913,000   927,000   641,000   2,875,000   9,217,000   585,000   3,991,000   1,022,000   744,000   567,000   2,308,000 
Interest  45,160,000   4,635,000   9,508,000   9,132,000   8,644,000   7,636,000   5,605,000   33,535,000   4,460,000   8,598,000   8,148,000   7,014,000   3,401,000   1,914,000 
Total $228,910,000  $6,647,000  $16,487,000  $22,535,000  $12,673,000  $46,097,000  $124,471,000  $213,720,000  $6,478,000  $25,072,000  $12,265,000  $45,570,000  $111,623,000  $12,712,000 

 

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 the CompanyInterstate has the power and ability to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company'sCompany’s income is not viewed by management as material.

 

The Company'sCompany’s residential rental properties provide income from short-term operating leases and no lease extends beyond one year. Rental increases are expected to offset anticipated increased property operating expenses.

 

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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

 

Critical accounting policies are those that are most significant to the presentation of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company’s critical accounting policies during the six months ended December 31, 20182019 except for the adoption of ASU 2016-18 and ASC 606.2016-02. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 20182019 for a summary of the critical accounting policies.

 -26-

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.

 

Item 4. Controls and Procedures.

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, and on the material weakness noted below, 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 not 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 Annual Report on Form 10-K for the year ended June 30, 2017, we identified a material weakness in internal control 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 a new tax CPA specialist to perform a detailed analysis which was completed for the year ended June 30, 2017. We also assigned our audit committee with oversight responsibilities for the process. The material weakness related to tax provision preparation had not been remediated in fiscal year 2018. While significant progress was made as of June 30, 2018, these controls were not operating completely effectively. The Company has taken further steps, including increased scrutiny over the tax provision preparation process, to remediate the material weakness and improved its internal control over financial reporting during the six months ended December 31, 2018.

last quarterly period

 

covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.

OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

During the period ending December 31, 2018,2019, there were no pending or threatened legal actions as follows:actions.

NONE

 

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.

- 27 -

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

There have been no events that are required to be reported under this Item.

 

Item 4. MINE SAFETY DISCLOSURES

 

There have been no events that are required to be reported under this Item.

 

Item 5. OTHER INFORMATION

 

There have been no events that are required to be reported under this Item.

 -27-

 

Item 6. EXHIBITS

 

31.1 Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
   
31.2 Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
   
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
   
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
101.DEF XBRL Taxonomy Extension Definition Linkbase
   
101.LAB XBRL Taxonomy Extension Label Linkbase
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase

 

 -28-

SIGNATURES

 

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:February 1, 2019January 24, 2020by/s/ John V. Winfield
  John V. Winfield
  President, Chairman of the Board and
  Chief Executive Officer
  

(Principal Executive Officer)

Date:February 1, 2019January 24, 2020by/s/ Danfeng Xu
  Danfeng Xu
  Treasurer and Controller
  (Principal Financial Officer)

 

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