UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended MarchDecember 31, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to_________
Commission File Number 1-10324
THE INTERGROUP CORPORATION
(Exact name of registrant as specified in its charter)
| 13-3293645 | ||
(State or other jurisdiction of | ||
Incorporation or organization) | (I.R.S. Employer Identification No.) |
1516 S. Bundy Dr., Suite 200, Los Angeles, California90025
(Address of principal executive offices) (Zip Code)
(310) (310) 889-2500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] ☒ Yes [ ] ☐ No
Indicate by check mark whether the registrant has submitted electronically 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] ☒ Yes [ ] ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
| Large accelerated filer | Accelerated filer | |||
| Non-accelerated filer | Smaller reporting company | |||
| Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
[ ]☐ Yes [X]☒ No
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common stock | INTG | NASDAQ CAPITAL MARKET |
The number of shares outstanding of registrant’s Common Stock, as of May 21, 2021February 14, 2022 was 2,236,714..
TABLE OF CONTENTS
| Page | |||
| PART I – FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements. | 3 | |
| 3 | |||
| 4 | |||
| 5 | |||
| 6 | |||
| 7 | |||
| Notes to the Condensed Consolidated Financial Statements | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | ||
| Item 4. | Controls and Procedures. | ||
| PART II – OTHER INFORMATION | |||
| Item 1. | Legal Proceedings. | ||
| Item 1A. | Risk Factors. | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | ||
| Item 3. | Defaults Upon Senior Securities. | ||
| Item 4. | Mine Safety Disclosures. | ||
| Item 5. | Other Information. | ||
| Item 6. | Exhibits. | ||
| Signatures |
PART I
FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| December 31, 2021 | June 30, 2021 | |||||||
| (unaudited) | ||||||||
| As of | ||||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | 37,822,000 | $ | 37,651,000 | ||||
| Investment in real estate, net | 47,173,000 | 47,709,000 | ||||||
| Investment in marketable securities | 21,148,000 | 35,792,000 | ||||||
| Cash and cash equivalents | 12,168,000 | 6,808,000 | ||||||
| Restricted cash | 8,646,000 | 8,584,000 | ||||||
| Other assets, net | 2,514,000 | 1,662,000 | ||||||
| Deferred tax asset | 4,172,000 | 2,140,000 | ||||||
| Total assets | $ | 133,643,000 | $ | 140,346,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities - Hotel | $ | 6,949,000 | $ | 7,408,000 | ||||
| Accounts payable and other liabilities | 3,516,000 | 3,357,000 | ||||||
| Due to securities broker | 654,000 | 7,917,000 | ||||||
| Obligations for securities sold | 2,310,000 | 6,419,000 | ||||||
| Related party and other notes payable | 3,804,000 | 4,088,000 | ||||||
| Other notes payable - SBA Loans | - | 2,000,000 | ||||||
| Mortgage notes payable - Hotel, net | 109,329,000 | 110,134,000 | ||||||
| Mortgage notes payable - real estate, net | 85,410,000 | 70,259,000 | ||||||
| Total liabilities | 211,972,000 | 211,582,000 | ||||||
| Shareholders’ deficit: | ||||||||
| Preferred stock, $ par value, shares authorized; issued | - | - | ||||||
| Common stock, $ par value, shares authorized; and issued; and outstanding, respectively | 33,000 | 33,000 | ||||||
| Additional paid-in capital | 2,118,000 | 2,172,000 | ||||||
| Accumulated deficit | (41,557,000 | ) | (36,394,000 | ) | ||||
| Treasury stock, at cost, and shares, respectively | (18,957,000 | ) | (17,370,000 | ) | ||||
| Total InterGroup shareholders’ deficit | (58,363,000 | ) | (51,559,000 | ) | ||||
| Noncontrolling interest | (19,966,000 | ) | (19,677,000 | ) | ||||
| Total shareholders’ deficit | (78,329,000 | ) | (71,236,000 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 133,643,000 | $ | 140,346,000 | ||||
| As of | March 31, 2021 | June 30, 2020 | ||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | 37,599,000 | $ | 38,769,000 | ||||
| Investment in real estate, net | 46,225,000 | 50,338,000 | ||||||
| Investment in marketable securities | 36,996,000 | 6,178,000 | ||||||
| Other investments, net | 41,000 | 278,000 | ||||||
| Cash and cash equivalents | 8,880,000 | 14,163,000 | ||||||
| Restricted cash | 7,643,000 | 14,123,000 | ||||||
| Other assets, net | 3,184,000 | 1,985,000 | ||||||
| Deferred tax asset | 2,725,000 | 4,383,000 | ||||||
| Total assets | $ | 143,293,000 | $ | 130,217,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities - Justice | $ | 5,967,000 | $ | 7,414,000 | ||||
| Accounts payable and other liabilities | 3,171,000 | 4,213,000 | ||||||
| Due to securities broker | 9,021,000 | 1,576,000 | ||||||
| Obligations for securities sold | 5,261,000 | 294,000 | ||||||
| Related party and other notes payable | 4,229,000 | 4,654,000 | ||||||
| Finance leases | 783,000 | 1,098,000 | ||||||
| Other notes payable - SBA Loans | 6,719,000 | 5,172,000 | ||||||
| Line of credit payable | - | 2,985,000 | ||||||
| Mortgage notes payable - Hotel, net | 110,465,000 | 111,446,000 | ||||||
| Mortgage notes payable - real estate, net | 69,280,000 | 65,612,000 | ||||||
| Total liabilities | 214,896,000 | 204,464,000 | ||||||
| Shareholders’ deficit: | ||||||||
| Preferred stock, $.01 par value, 100,000 shares authorized; none issued | - | - | ||||||
| Common stock, $.01 par value, 4,000,000 shares authorized; 3,404,982 and 3,404,982 issued; 2,250,765 and 2,288,809 outstanding, respectively | 33,000 | 33,000 | ||||||
| Additional paid-in capital | 6,638,000 | 6,626,000 | ||||||
| Accumulated deficit | (37,574,000 | ) | (43,541,000 | ) | ||||
| Treasury stock, at cost, 1,154,217 and 1,116,173 shares, respectively | (16,333,000 | ) | (14,995,000 | ) | ||||
| Total InterGroup shareholders’ deficit | (47,236,000 | ) | (51,877,000 | ) | ||||
| Noncontrolling interest | (24,367,000 | ) | (22,370,000 | ) | ||||
| Total shareholders’ deficit | (71,603,000 | ) | (74,247,000 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 143,293,000 | $ | 130,217,000 | ||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the three months ended December 31, | 2021 | 2020 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 6,348,000 | $ | 3,109,000 | ||||
| Real estate | 3,866,000 | 3,554,000 | ||||||
| Total revenues | 10,214,000 | 6,663,000 | ||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | (6,479,000 | ) | (5,133,000 | ) | ||||
| Real estate operating expenses | (2,276,000 | ) | (2,100,000 | ) | ||||
| Depreciation and amortization expenses | (1,135,000 | ) | (1,181,000 | ) | ||||
| General and administrative expenses | (576,000 | ) | (560,000 | ) | ||||
| Total costs and operating expenses | (10,466,000 | ) | (8,974,000 | ) | ||||
| Loss from operations | (252,000 | ) | (2,311,000 | ) | ||||
| Other (expense) income: | ||||||||
| Interest expense - mortgages | (2,282,000 | ) | (2,241,000 | ) | ||||
| Gain on sale of real estate | ||||||||
| Net (loss) gain on marketable securities | (120,000 | ) | 3,501,000 | |||||
| Net loss on marketable securities - Comstock | (2,231,000 | ) | (44,000 | ) | ||||
| Gain on extinguishment of debt | 1,665,000 | - | ||||||
| Impairment loss on other investments | (41,000 | ) | (27,000 | ) | ||||
| Dividend and interest income | 462,000 | 81,000 | ||||||
| Trading and margin interest expense | (360,000 | ) | (287,000 | ) | ||||
| Total other (expense) income, net | (2,907,000 | ) | 983,000 | |||||
| Loss before income taxes | (3,159,000 | ) | (1,328,000 | ) | ||||
| Income tax benefit | 916,000 | 265,000 | ||||||
| Net loss | (2,243,000 | ) | (1,063,000 | ) | ||||
| Less: Net loss attributable to the noncontrolling interest | 240,000 | 998,000 | ||||||
| Net loss attributable to InterGroup Corporation | $ | (2,003,000 | ) | $ | (65,000 | ) | ||
| Net loss per share | ||||||||
| Basic | $ | (1.02 | ) | $ | (0.47 | ) | ||
| Diluted | N/A | N/A | ||||||
| Net loss per share attributable to InterGroup Corporation | ||||||||
| Basic | $ | (0.91 | ) | $ | (0.03 | ) | ||
| Diluted | N/A | N/A | ||||||
| Weighted average number of basic common shares outstanding | 2,204,137 | 2,283,229 | ||||||
| Weighted average number of diluted common shares outstanding | N/A | N/A | ||||||
| For the three months ended March 31, | 2021 | 2020 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 2,902,000 | $ | 11,259,000 | ||||
| Real estate | 3,465,000 | 3,757,000 | ||||||
| Total revenues | 6,367,000 | 15,016,000 | ||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | (3,990,000 | ) | (10,060,000 | ) | ||||
| Real estate operating expenses | (2,043,000 | ) | (2,071,000 | ) | ||||
| Depreciation and amortization expenses | (1,127,000 | ) | (1,216,000 | ) | ||||
| General and administrative expenses | (605,000 | ) | (890,000 | ) | ||||
| Total costs and operating expenses | (7,765,000 | ) | (14,237,000 | ) | ||||
| (Loss) income from operations | (1,398,000 | ) | 779,000 | |||||
| Other income (expense): | ||||||||
| Interest expense - mortgages | (2,180,000 | ) | (2,251,000 | ) | ||||
| Net gain (loss) on marketable securities | 768,000 | (2,367,000 | ) | |||||
| Net gain (loss) on marketable securities - Comstock | 4,870,000 | (26,000 | ) | |||||
| Gain on extinguishment of debt | 453,000 | - | ||||||
| Impairment loss on other investments | (30,000 | ) | (103,000 | ) | ||||
| Dividend and interest income | 158,000 | 105,000 | ||||||
| Trading and margin interest expense | (362,000 | ) | (256,000 | ) | ||||
| Total other income (expense), net | 3,677,000 | (4,898,000 | ) | |||||
| Income (loss) before income taxes | 2,279,000 | (4,119,000 | ) | |||||
| Income tax (expense) benefit | (880,000 | ) | 1,060,000 | |||||
| Net income (loss) | 1,399,000 | (3,059,000 | ) | |||||
| Less: Net (income) loss attributable to the noncontrolling interest | (289,000 | ) | 479,000 | |||||
| Net income (loss) attributable to InterGroup Corporation | $ | 1,110,000 | $ | (2,580,000 | ) | |||
| Net income (loss) per share | ||||||||
| Basic | $ | 0.62 | $ | (1.33 | ) | |||
| Diluted | $ | 0.54 | N/A | |||||
| Net income per share attributable to InterGroup Corporation | ||||||||
| Basic | $ | 0.49 | $ | (1.12 | ) | |||
| Diluted | $ | 0.43 | N/A | |||||
| Weighted average number of basic common shares outstanding | 2,267,115 | 2,298,064 | ||||||
| Weighted average number of diluted common shares outstanding | 2,604,710 | N/A | ||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the nine months ended March 31, | 2021 | 2020 | ||||||||||||||
| For the six months ended December 31, | 2021 | 2020 | ||||||||||||||
| Revenues: | ||||||||||||||||
| Hotel | $ | 9,436,000 | $ | 41,589,000 | $ | 13,153,000 | $ | 6,534,000 | ||||||||
| Real estate | 10,503,000 | 11,313,000 | 7,982,000 | 7,038,000 | ||||||||||||
| Total revenues | 19,939,000 | 52,902,000 | 21,135,000 | 13,572,000 | ||||||||||||
| Costs and operating expenses: | ||||||||||||||||
| Hotel operating expenses | (14,156,000 | ) | (33,138,000 | ) | (12,812,000 | ) | (10,166,000 | ) | ||||||||
| Real estate operating expenses | (6,031,000 | ) | (6,110,000 | ) | (4,350,000 | ) | (3,988,000 | ) | ||||||||
| Depreciation and amortization expenses | (3,499,000 | ) | (3,661,000 | ) | (2,283,000 | ) | (2,372,000 | ) | ||||||||
| General and administrative expenses | (2,531,000 | ) | (2,231,000 | ) | (1,386,000 | ) | (1,926,000 | ) | ||||||||
| Total costs and operating expenses | (26,217,000 | ) | (45,140,000 | ) | (20,831,000 | ) | (18,452,000 | ) | ||||||||
| (Loss) income from operations | (6,278,000 | ) | 7,762,000 | |||||||||||||
| Income (loss) from operations | 304,000 | (4,880,000 | ) | |||||||||||||
| Other income (expense): | ||||||||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense - mortgages | (6,736,000 | ) | (6,978,000 | ) | (4,524,000 | ) | (4,556,000 | ) | ||||||||
| Gain from sale of real estate | 12,043,000 | - | ||||||||||||||
| Net gain (loss) on marketable securities | 4,016,000 | (2,565,000 | ) | |||||||||||||
| Net gain (loss) on marketable securities - Comstock | 4,921,000 | (396,000 | ) | |||||||||||||
| Gain on sale of real estate | - | 12,043,000 | ||||||||||||||
| Net (loss) gain on marketable securities | (1,938,000 | ) | 3,248,000 | |||||||||||||
| Net (loss) gain on marketable securities - Comstock | (2,581,000 | ) | 51,000 | |||||||||||||
| Gain on extinguishment of debt | 453,000 | - | 1,665,000 | - | ||||||||||||
| Impairment loss on other investments | (119,000 | ) | (103,000 | ) | (41,000 | ) | (89,000 | ) | ||||||||
| Dividend and interest income | 363,000 | 346,000 | 649,000 | 205,000 | ||||||||||||
| Trading and margin interest expense | (918,000 | ) | (790,000 | ) | (714,000 | ) | (556,000 | ) | ||||||||
| Total other income (expense), net | 14,023,000 | (10,486,000 | ) | |||||||||||||
| Total other (expense) income, net | (7,484,000 | ) | 10,346,000 | |||||||||||||
| Income before income taxes | 7,745,000 | (2,724,000 | ) | |||||||||||||
| Income tax (expense) benefit | (2,590,000 | ) | 689,000 | |||||||||||||
| Net income (loss) | 5,155,000 | (2,035,000 | ) | |||||||||||||
| (Loss) income before income taxes | (7,180,000 | ) | 5,466,000 | |||||||||||||
| Income tax benefit (expense) | 2,031,000 | (1,710,000 | ) | |||||||||||||
| Net (loss) income | (5,149,000 | ) | 3,756,000 | |||||||||||||
| Less: Net loss attributable to the noncontrolling interest | 440,000 | 39,000 | 985,000 | 729,000 | ||||||||||||
| Net income (loss) attributable to InterGroup Corporation | $ | 5,595,000 | $ | (1,996,000 | ) | |||||||||||
| Net (loss) income attributable to InterGroup Corporation | $ | (4,164,000 | ) | $ | 4,485,000 | |||||||||||
| Net income per share | ||||||||||||||||
| Net (loss) income per share | ||||||||||||||||
| Basic | $ | 2.26 | $ | (0.88 | ) | $ | (2.33 | ) | $ | 1.64 | ||||||
| Diluted | $ | 1.97 | N/A | N/A | $ | 1.43 | ||||||||||
| Net income per share attributable to InterGroup Corporation | ||||||||||||||||
| Net loss (income) per share attributable to InterGroup Corporation | ||||||||||||||||
| Basic | $ | 2.46 | $ | (0.87 | ) | $ | (1.88 | ) | $ | 1.96 | ||||||
| Diluted | $ | 2.14 | N/A | N/A | $ | 1.71 | ||||||||||
| Weighted average number of basic common shares outstanding | 2,276,220 | 2,303,421 | 2,213,520 | 2,283,657 | ||||||||||||
| Weighted average number of diluted common shares outstanding | 2,613,815 | N/A | N/A | 2,617,652 | ||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(Unaudited)
| Additional | InterGroup | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Treasury | Shareholders’ | Noncontrolling | Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2020 | 3,404,982 | $ | 33,000 | $ | 6,626,000 | $ | (43,541,000 | ) | $ | (14,995,000 | ) | $ | (51,877,000 | ) | $ | (22,370,000 | ) | $ | (74,247,000 | ) | ||||||||||||
| Net income | - | - | - | 4,550,000 | - | 4,550,000 | 269,000 | 4,819,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 5,000 | - | - | 5,000 | - | 5,000 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (140,000 | ) | (140,000 | ) | - | (140,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2020 | 3,404,982 | 33,000 | 6,631,000 | (38,991,000 | ) | (15,135,000 | ) | (47,462,000 | ) | (22,101,000 | ) | (69,563,000 | ) | |||||||||||||||||||
| Net income (loss) | - | - | - | (65,000 | ) | - | (65,000 | ) | (998,000 | ) | (1,063,000 | ) | ||||||||||||||||||||
| Stock options expense | - | - | 5,000 | - | - | 5,000 | - | 5,000 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (116,000 | ) | (116,000 | ) | - | (116,000 | ) | |||||||||||||||||||||
| Balance at December 31, 2020 | 3,404,982 | 33,000 | 6,636,000 | (39,056,000 | ) | (15,251,000 | ) | (47,638,000 | ) | (23,099,000 | ) | (70,737,000 | ) | |||||||||||||||||||
| Net income | - | - | - | 1,110,000 | - | 1,110,000 | 289,000 | 1,399,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 2,000 | - | - | 2,000 | - | 2,000 | ||||||||||||||||||||||||
| Reclassify NCI to INTG | - | - | - | 372,000 | - | 372,000 | (372,000 | ) | - | |||||||||||||||||||||||
| Investment in Justice | - | - | - | - | - | - | (206,000 | ) | (206,000 | ) | ||||||||||||||||||||||
| Distribution to NCI | - | - | - | - | - | - | (979,000 | ) | (979,000 | ) | ||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (1,082,000 | ) | (1,082,000 | ) | - | (1,082,000 | ) | |||||||||||||||||||||
| Balance at March 31, 2021 | 3,404,982 | $ | 33,000 | $ | 6,638,000 | $ | (37,574,000 | ) | $ | (16,333,000 | ) | $ | (47,236,000 | ) | $ | (24,367,000 | ) | $ | (71,603,000 | ) | ||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Treasury | InterGroup Shareholders’ | Noncontrolling | Total Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at | ||||||||||||||||||||||||||||||||
| July 1, 2021 | 3,404,982 | $ | 33,000 | $ | 2,172,000 | $ | (36,394,000 | ) | $ | (17,370,000 | ) | $ | (51,559,000 | ) | $ | (19,677,000 | ) | $ | (71,236,000 | ) | ||||||||||||
| Net Loss | - | - | - | (2,161,000 | ) | - | (2,161,000 | ) | (745,000 | ) | (2,906,000 | ) | ||||||||||||||||||||
| Stock options expense | - | - | 2,000 | - | - | 2,000 | - | 2,000 | ||||||||||||||||||||||||
| Investment in Portsmouth | - | - | (25,000 | ) | - | - | (25,000 | ) | 17,000 | (8,000 | ) | |||||||||||||||||||||
| Purchase of remaining interest in Justice | - | - | - | (999,000 | ) | - | (999,000 | ) | 999,000 | - | ||||||||||||||||||||||
| Investment in Justice | - | - | - | - | - | - | (344,000 | ) | (344,000 | ) | ||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (74,000 | ) | (74,000 | ) | - | (74,000 | ) | |||||||||||||||||||||
| Balance at | ||||||||||||||||||||||||||||||||
| September 30, 2021 | 3,404,982 | 33,000 | 2,149,000 | (39,554,000 | ) | (17,444,000 | ) | (54,816,000 | ) | (19,750,000 | ) | (74,566,000 | ) | |||||||||||||||||||
| Net Loss | - | - | - | (2,003,000 | ) | - | (2,003,000 | ) | (240,000 | ) | (2,243,000 | ) | ||||||||||||||||||||
| Stock options expense | - | - | 2,000 | - | - | 2,000 | - | 2,000 | ||||||||||||||||||||||||
| Investment in Portsmouth | - | - | (33,000 | ) | - | - | (33,000 | ) | 24,000 | (9,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (1,513,000 | ) | (1,513,000 | ) | - | (1,513,000 | ) | |||||||||||||||||||||
| Balance at | ||||||||||||||||||||||||||||||||
| December 31, 2021 | 3,404,982 | $ | 33,000 | $ | 2,118,000 | $ | (41,557,000 | ) | $ | (18,957,000 | ) | $ | (58,363,000 | ) | $ | (19,966,000 | ) | $ | (78,329,000 | ) | ||||||||||||
| Additional | InterGroup | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Treasury | Shareholders’ | Noncontrolling | Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2019 | 3,404,982 | $ | 33,000 | $ | 10,342,000 | $ | (39,760,000 | ) | $ | (14,347,000 | ) | $ | (43,732,000 | ) | $ | (24,697,000 | ) | $ | (68,429,000 | ) | ||||||||||||
| Net income | - | - | - | 336,000 | - | 336,000 | 308,000 | 644,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 8,000 | - | - | 8,000 | - | 8,000 | ||||||||||||||||||||||||
| Investment in Santa Fe | - | - | (147,000 | ) | - | - | (147,000 | ) | 74,000 | (73,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (156,000 | ) | (156,000 | ) | - | (156,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2019 | 3,404,982 | 33,000 | 10,203,000 | (39,424,000 | ) | (14,503,000 | ) | (43,691,000 | ) | (24,315,000 | ) | (68,006,000 | ) | |||||||||||||||||||
| Net income | - | - | - | 248,000 | - | 248,000 | 132,000 | 380,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 9,000 | - | - | 9,000 | - | 9,000 | ||||||||||||||||||||||||
| Investment in Santa Fe | - | - | (46,000 | ) | - | - | (46,000 | ) | 22,000 | (24,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (190,000 | ) | (190,000 | ) | - | (190,000 | ) | |||||||||||||||||||||
| Balance at December 31, 2019 | 3,404,982 | 33,000 | 10,166,000 | (39,176,000 | ) | (14,693,000 | ) | (43,670,000 | ) | (24,161,000 | ) | (67,831,000 | ) | |||||||||||||||||||
| Net loss | - | - | - | (2,580,000 | ) | - | (2,580,000 | ) | (479,000 | ) | (3,059,000 | ) | ||||||||||||||||||||
| Stock options expense | - | - | 121,000 | - | - | 121,000 | - | 121,000 | ||||||||||||||||||||||||
| Investment in Santa Fe | - | - | (4,279,000 | ) | - | - | (4,279,000 | ) | 3,353,000 | (926,000 | ) | |||||||||||||||||||||
| Investment in Portsmouth | - | - | (124,000 | ) | - | - | (124,000 | ) | 62,000 | (62,000 | ) | |||||||||||||||||||||
| Investment in Woodland | - | - | 913,000 | - | - | 913,000 | - | 913,000 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (222,000 | ) | (222,000 | ) | - | (222,000 | ) | |||||||||||||||||||||
| Balance at March 31, 2020 | 3,404,982 | $ | 33,000 | $ | 6,797,000 | $ | (41,756,000 | ) | $ | (14,915,000 | ) | $ | (49,841,000 | ) | $ | (21,225,000 | ) | $ | (71,066,000 | ) | ||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Treasury | InterGroup Shareholders’ | Noncontrolling | Total Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at | ||||||||||||||||||||||||||||||||
| July 1, 2020 | 3,404,982 | $ | 33,000 | $ | 6,626,000 | $ | (43,541,000 | ) | $ | (14,995,000 | ) | $ | (51,877,000 | ) | $ | (22,370,000 | ) | $ | (74,247,000 | ) | ||||||||||||
| Net income | - | - | - | 4,550,000 | - | 4,550,000 | 269,000 | 4,819,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 5,000 | - | - | 5,000 | - | 5,000 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (140,000 | ) | (140,000 | ) | - | (140,000 | ) | |||||||||||||||||||||
| Balance at | ||||||||||||||||||||||||||||||||
| September 30, 2020 | 3,404,982 | 33,000 | 6,631,000 | (38,991,000 | ) | (15,135,000 | ) | (47,462,000 | ) | (22,101,000 | ) | (69,563,000 | ) | |||||||||||||||||||
| Beginning Balance | 3,404,982 | 33,000 | 6,631,000 | (38,991,000 | ) | (15,135,000 | ) | (47,462,000 | ) | (22,101,000 | ) | (69,563,000 | ) | |||||||||||||||||||
| Net income (loss) | - | - | - | (65,000 | ) | - | (65,000 | ) | (998,000 | ) | (1,063,000 | ) | ||||||||||||||||||||
| Stock options expense | - | - | 5,000 | - | - | 5,000 | - | 5,000 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (116,000 | ) | (116,000 | ) | - | (116,000 | ) | |||||||||||||||||||||
| Balance at | ||||||||||||||||||||||||||||||||
| December 31, 2020 | 3,404,982 | $ | 33,000 | $ | 6,636,000 | $ | (39,056,000 | ) | $ | (15,251,000 | ) | $ | (47,638,000 | ) | $ | (23,099,000 | ) | $ | (70,737,000 | ) | ||||||||||||
| Ending Balance | 3,404,982 | $ | 33,000 | $ | 6,636,000 | $ | (39,056,000 | ) | $ | (15,251,000 | ) | $ | (47,638,000 | ) | $ | (23,099,000 | ) | $ | (70,737,000 | ) | ||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the nine months ended March 31, | 2021 | 2020 | ||||||||||||||
| For the six months ended December 31, | 2021 | 2020 | ||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income (loss) | $ | 5,155,000 | $ | (2,035,000 | ) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||||||||||
| Net (loss) income | $ | (5,149,000 | ) | $ | 3,756,000 | |||||||||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||||||||||
| Depreciation and amortization | 3,332,000 | 3,594,000 | 2,223,000 | 2,260,000 | ||||||||||||
| Gain from sale of real estate | (12,043,000 | ) | - | |||||||||||||
| Gain on Extinguishment of Debt | (453,000 | ) | - | |||||||||||||
| Gain on extinguishment of debt | (2,000,000 | ) | - | |||||||||||||
| Gain on sale of real estate | - | (12,043,000 | ) | |||||||||||||
| Deferred taxes | 1,658,000 | (688,000 | ) | (2,032,000 | ) | (596,000 | ) | |||||||||
| Net unrealized (gain) loss on marketable securities | (9,604,000 | ) | 1,771,000 | |||||||||||||
| Net unrealized loss (gain) on marketable securities | 3,519,000 | (4,232,000 | ) | |||||||||||||
| Impairment loss on other investments | 119,000 | 103,000 | 41,000 | 89,000 | ||||||||||||
| Stock compensation expense | 12,000 | 138,000 | 4,000 | 10,000 | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Investment in marketable securities | (21,214,000 | ) | 5,072,000 | 11,125,000 | (11,598,000 | ) | ||||||||||
| Other assets | (1,199,000 | ) | 233,000 | (893,000 | ) | 3,000 | ||||||||||
| Accounts payable and other liabilities - Justice | (1,447,000 | ) | (3,182,000 | ) | (217,000 | ) | (1,383,000 | ) | ||||||||
| Accounts payable and other liabilities | (1,042,000 | ) | 96,000 | 159,000 | (452,000 | ) | ||||||||||
| Due to securities broker | 7,445,000 | (1,606,000 | ) | (7,263,000 | ) | 6,744,000 | ||||||||||
| Obligations for securities sold | 4,967,000 | (1,225,000 | ) | (4,109,000 | ) | 410,000 | ||||||||||
| Net cash (used in) provided by operating activities | (24,314,000 | ) | 2,271,000 | |||||||||||||
| Net cash used in operating activities | (4,592,000 | ) | (17,032,000 | ) | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Payments for hotel investments | (1,262,000 | ) | (333,000 | ) | ||||||||||||
| Payments for real estate investments | (654,000 | ) | (483,000 | ) | ||||||||||||
| Payments for investment in Portsmouth | (17,000 | ) | - | |||||||||||||
| Payments for investment in Justice | (344,000 | ) | - | |||||||||||||
| Proceeds from sale of real estate | 15,178,000 | - | - | 15,178,000 | ||||||||||||
| Proceeds from other investments | 118,000 | 115,000 | - | 118,000 | ||||||||||||
| Investment in Justice | (206,000 | ) | - | |||||||||||||
| Payments for hotel investments | (491,000 | ) | (1,207,000 | ) | ||||||||||||
| Payments for real estate investments | (830,000 | ) | (848,000 | ) | ||||||||||||
| Distribution to NCI | (979,000 | ) | - | |||||||||||||
| Payments for investment in Santa Fe | - | (1,023,000 | ) | |||||||||||||
| Payments for investment in Portsmouth | - | (62,000 | ) | |||||||||||||
| Investment in Woodland | - | 913,000 | ||||||||||||||
| Net cash provided by (used in) investing activities | 12,790,000 | (2,112,000 | ) | |||||||||||||
| Net cash (used in) provided by investing activities | (2,277,000 | ) | 14,480,000 | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from refinance of mortgage notes paybles | 5,384,000 | - | ||||||||||||||
| Proceeds from SBA loan | 2,000,000 | - | ||||||||||||||
| Payments of mortgage and other notes payable | (3,040,000 | ) | (3,236,000 | ) | (2,130,000 | ) | (4,517,000 | ) | ||||||||
| Payment of LOC | (2,985,000 | ) | - | |||||||||||||
| Issuance cost from renewing line of credit | - | (5,000 | ) | |||||||||||||
| Proceeds from refinance of mortgage notes payable | 16,099,000 | 4,327,000 | ||||||||||||||
| Issuance costs of refinancing mortgage and other notes payable | (91,000 | ) | (233,000 | ) | ||||||||||||
| Issuance costs | ||||||||||||||||
| Purchase of treasury stock | (1,338,000 | ) | (568,000 | ) | (1,587,000 | ) | (256,000 | ) | ||||||||
| Issuance cost from refinance of mortgage notes payable - real estate | (255,000 | ) | - | |||||||||||||
| Issuance cost from renewing line of credit | (5,000 | ) | - | |||||||||||||
| Net cash used in financing activities | (239,000 | ) | (3,804,000 | ) | ||||||||||||
| Net cash provided by (used in) financing activities | 12,291,000 | (684,000 | ) | |||||||||||||
| Net decrease in cash, cash equivalents and restricted cash | (11,763,000 | ) | (3,645,000 | ) | ||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 5,422,000 | (3,236,000 | ) | |||||||||||||
| Cash, cash equivalents and restricted cash at the beginning of the period | 28,286,000 | 25,132,000 | 15,392,000 | 28,286,000 | ||||||||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 16,523,000 | $ | 21,487,000 | $ | 20,814,000 | $ | 25,050,000 | ||||||||
| Supplemental information: | ||||||||||||||||
| Interest paid | $ | 6,914,000 | $ | 7,083,000 | $ | 4,093,000 | $ | 4,631,000 | ||||||||
| Taxes paid | $ | 2,745,000 | $ | 41,000 | $ | 679,000 | $ | 2,741,000 | ||||||||
| Non-cash transaction: | ||||||||||||||||
| Additions to Hotel equipment through capital lease | $ | 30,000 | $ | 30,000 | ||||||||||||
| Additions to Hotel equipment through finance lease | $ | - | $ | 30,000 | ||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
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’s Annual Report on Form 10-K for the year ended June 30, 2020.2021. The March 31,June 30, 2021 Condensed Consolidated Balance Sheet was derived from the Consolidated Balance Sheet as included in the Company’s Form 10-K for the year ended June 30, 2020.2021.
The results of operations for the ninesix months ended MarchDecember 31, 2021 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2021.2022.
Basic and diluted income per share is computed by dividing net income 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’s only potentially dilutive common shares are stock options.
Effective February 19, 2021, the Company’s 83.7%83.7% owned subsidiary, Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF), was liquidated and all of its assets including its 68.8%68.8% interest in Portsmouth Square Inc. (“Portsmouth”), a public company (OTCBB: PRSI) was distributed to its shareholders in exchange for their Santa Fe common stock. InterGroup received cash of $5,013,000 $5,013,000 and shares of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. As a former 3.7%3.7% shareholder of Santa Fe, the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield, received cash of $221,000 $221,000 and shares of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of Dissolution from the State of Nevada, and Santa Fe is effectively fully dissolved and no longer in legal existence. The liquidation and distribution of Santa Fe did not have an impact on the condensed consolidated statement of operations for the fiscal year ended June 30, 2021 but rather on the condensed consolidated balance sheets as of June 30, 2021 as a reclass between noncontrolling interests and accumulated deficit. As of MarchDecember 31, 2021, InterGroup owns approximately 71.3%75% of the outstanding common shares of Portsmouth. As of MarchDecember 31, 2021, the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield, owns approximately 2.5%2.5% of the outstanding common shares of Portsmouth. Mr. Winfield also serves as the President, Chairman of the Board and Chief Executive Officer of Portsmouth.
Portsmouth’s primary business iswas conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California limited partnership (“Justice” or the “Partnership”). AsEffective July 15, 2021, Portsmouth completed the purchase of March 31, 2021, Portsmouth has a 97.5%100% of the limited partnership interest in Justice and isof Justice. Effective December 23, 2021, the sole general partner.partnership was dissolved. The financial statements of Justice arewere consolidated with those of the Company.
Prior to its dissolution effective December 23, 2021, Justice through its subsidiaries Justice Operating Company, LLC (“Operating”)owned and Justice Mezzanine Company, LLC (“Mezzanine”) owns and operatesoperated 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.garage through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine isCompany, LLC (“Mezzanine”). Mezzanine was a wholly-ownedwholly owned subsidiary of the Partnership; Operating is a wholly-ownedwholly owned subsidiary of Mezzanine. Effective December 23, 2021, Portsmouth replaced Justice as the single member of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton)(“Hilton”) through January 31, 2030.
JusticeOperating entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLCAimbridge Hospitality (“Interstate”Aimbridge”) to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the takeoverFebruary 3, 2017 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 InterstateAimbridge shall be one and seven-tenths percent (1.70%(1.70%) of total Hotel revenue. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the Americas.
| -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 fifteensixteen 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 MarchDecember 31, 2021, all of the Company’s residential and commercial rental properties are managed in-house.
Due to Securities Broker
Various securities brokersThere have advanced fundsbeen no material changes to the CompanyCompany’s significant accounting policies during the six months ended December 31, 2021. Please refer to the Company’s Annual Report on Form 10-K for the purchaseyear ended June 30, 2021 for a summary of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.the significant accounting policies.
ObligationsCertain prior year amounts have been reclassified for Securities Sold
Obligation for securities sold represents the fair market value of shares soldconsistency 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 inperiod presentation on the condensed consolidated statementsbalance sheet. Other investment, net of operations.
Income Tax
The Company consolidates Justice (“Hotel”) for financial reporting purposes$41,000 as of June 30, 2021 was reclassed to Other asset, net. Finance leases of $664,000 as of June 30, 2021 was reclassed to Accounts payable and is not taxed on its non-controlling interest in theother liabilities - Hotel. The income tax expense during the nine months ended March 31, 2021 and 2020 represent the income taxThese reclassifications had no effect on the Company’s pretax income which includes its share in the net (loss) incomereported results of the Hotel.operations and financial position.
Recently Issued and Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. 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 guidance, including the election to carryforward historical lease classification. We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of 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 adoption of the new standard as the aggregate value of the ROU assets and operating lease liabilities are immaterial relative to our total assets and liabilities as of June 30, 2020 and 2019. The standard did not have an impact on our other finance leases, statements of operations or cash flows. See Note 4 and Note 12 for balances of finance lease ROU assets and liabilities, respectively.None.
In August 2018, the FASB issued Accounting Standard Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) (ASU 2018-13), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company has adopted the new standard effective July 1, 2020 and the adoption of this guidance does not have a material impact on its condensed consolidated financial statements.
NOTE 2 - LIQUIDITY
Historically, our cash flows have been primarily generated from our Hotel and real estate operations. However, the responses by federal, state, and local civil authorities to the COVID-19 pandemic has had a material detrimental impact on our liquidity. For the ninesix months ended MarchDecember 31, 2021, our net cash flow used in operations was $24,314,000.$4,592,000. For the ninesix months ended MarchDecember 31, 2020, our net cash flow provided byused in operations was $2,271,000.$17,032,000. We have taken several steps to preserve capital and increase liquidity at our Hotel, including implementing strict cost management measures to eliminate non-essential expenses, postponing capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets.
The Company had cash and cash equivalents of $8,880,000 $12,168,000 and $14,163,000 $6,808,000 as of MarchDecember 31, 2021 and June 30, 2020,2021, respectively. The Company had net funds available from its investments in marketable securities, net of $22,714,000 as of March 31, 2021 after $9,021,000margin due to securities broker brokers, of $18,184,000 and $5,261,000 obligations for securities sold. As of June 30, 2020, the Company had net funds available from investments in marketable securities of $4,308,000 after $1,576,000 due to securities broker and $294,000 obligations for securities sold. In addition, the Hotel had $5,785,000 and $10,666,000 of restricted cash held by its senior lender Wells Fargo Bank, N.A. (“Lender”) $21,456,000 as of MarchDecember 31, 2021 and June 30, 2021, respectively. These marketable securities are short-term investments and liquid in nature.
| -9- |
On December 16, 2020, respectively. OfJustice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000. Upon the $10,666,000 restricted cash held asdissolution of June 30, 2020, $2,432,000 was for a possible future property improvement plan (“PIP”) requested by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i) January 2030, which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. On August 19, 2020, Lender released PIP depositsJustice in December 2021, Portsmouth assumed Justice’s note payable to InterGroup in the amount of $2,379,000 $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. During the six months ending December 31, 2021, InterGroup advanced $4,700,000 to the Hotel.Hotel, bringing the total amount due to InterGroup to $11,350,000at December 31, 2021. Portsmouth could amend its by-laws and increase the number of authorized shares in order to issue additional shares to raise capital in the public markets if needed.
In order to increase our liquidity position and to take advantage of the favorable interest rate environment, we refinanced our 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, we refinanced one of our California properties and generated net proceeds of $1,144,000. During the fiscal year ended June 30, 2021, we completed refinancing on six of our California properties and generated net proceeds of $6,762,000. During the six months ending December 31, 2021, we refinanced five of our properties’ existing mortgages and obtained a mortgage note payable on one of our California properties, generating net proceeds totaling $16,099,000 as a result. We are currently evaluating other refinancing opportunities and we could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. The funds were utilizedCompany has an uncollateralized $5,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) and the entire $5,000,000 is available to fund operating expenses, including franchise and management fees and other expenses.be drawn down as of December 31, 2021 should additional liquidity be necessary.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”Loan”) with CIBC Bank USA under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES ActAct”) administered by the U.S. Small Business Administration. The PartnershipAdministration (the “SBA”). Justice received proceeds of $4,719,000$4,719,000 from the SBA Loan - Justice.Loan. In accordance with the requirements of the CARES Act, Justice has used the proceeds from the loan primarilySBA Loan for payroll costs. As of March 31, 2021, Justice had used all proceeds of the SBA Loan - Justice incosts and other qualified expenses. The SBA Loan - Justice iswas scheduled to mature on April 9, 2022 with a 1.00% interest rate and has a 1.00% interest rate. is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. On June 10, 2021, the SBA Loan was forgiven in full.
On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of March 31, 2021,$453,000. InterGroup had used all of the $453,000 $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup was scheduled to mature on April 27, 2022and had a 1.00%1.00% interest rate. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. If the SBA approves the forgiveness amount, all payments of principal and interest are deferred until the date the forgiveness amount is remitted by the SBA to CIBC. If the SBA does not forgive any amount of the loan, payments would start within 30 days. All unforgiven portion of the principal and accrued interest will be due at maturity. During the quarter ended December 31, 2020, Justice and the Company submitted applications for full loan forgiveness. As ofOn March 31,17, 2021, the SBA has not forgiven the SBA Loan – Justice. As of March 31, 2021, the SBA hasInterGroup was forgiven the full $453,000 of the SBA Loan – InterGroup.in full.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice received proceeds of $2,000,000 $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice will usehad used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan iswas scheduled to mature on February 3, 2026 and has, had a 1.00%1.00% interest rate, and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. As of March 31,On November 19, 2021, unused portion of the Second SBA Loan was $350,000.
In order to increase its liquidity positionforgiven in full and to take advantage$2,000,000 was recorded as gain on debt extinguishment on the condensed consolidated statement of operations for the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, InterGroup refinanced one of its California properties and generated net proceeds of $1,144,000. During the ninesix months ended MarchDecember 31, 2021, InterGroup completed refinancing on three of its California properties and generated net proceeds of $5,384,000. InterGroup is currently evaluating other refinancing opportunities and it could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. InterGroup has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) and the entire $8,000,000 is available to be drawn down as of March 31, 2021 should additional liquidity be necessary. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000 and realized a gain on the sale of approximately $12,043,000. Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000 as InterGroup had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale.2021.
As the sole general partner of Justice that controls approximately 97.5% of the voting interest in the Partnership, Portsmouth has the ability to amend the partnership agreement to allow for capital calls to the limited partners of Justice if needed. The majority of any capital calls will be met by Portsmouth. Portsmouth will have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup to meet any capital calls and its other obligations during the next twelve months and beyond. On August 28, 2020, the Board of InterGroup passed resolution to provide funding to Portsmouth if necessary. On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000. Since December 2020, InterGroup has advanced $2,950,000 to Justice per the aforementioned loan modification agreement. The Partnership is also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order to raise additional capital. As of March 31, 2021, Justice has an outstanding loan balance of $5,950,000 due to InterGroup.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy and low revenue per available room (“RevPAR”) were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.
The following table provides a summary as of MarchDecember 31, 2021, the Company’s material financial obligations which also includes interest payments.
SCHEDULE OF MATERIAL FINANCIAL OBLIGATION
| 3 Months | Year | Year | Year | Year | 6 Months | Year | Year | Year | Year | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 181,041,000 | $ | 764,000 | $ | 3,199,000 | $ | 28,470,000 | $ | 108,407,000 | $ | 3,797,000 | $ | 36,404,000 | $ | 196,118,000 | $ | 1,431,000 | $ | 12,960,000 | $ | 108,321,000 | $ | 3,866,000 | $ | 1,066,000 | $ | 68,474,000 | ||||||||||||||||||||||||||||
| SBA loans and other notes payable | 7,502,000 | 119,000 | 5,200,000 | 183,000 | - | - | 2,000,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Related party notes payable | 4,228,000 | 379,000 | 567,000 | 567,000 | 567,000 | 567,000 | 1,581,000 | 3,804,000 | 283,000 | 567,000 | 567,000 | 567,000 | 567,000 | 1,253,000 | ||||||||||||||||||||||||||||||||||||||||||
| Interest | 30,600,000 | 1,816,000 | 8,778,000 | 7,981,000 | 4,761,000 | 1,243,000 | 6,021,000 | 34,564,000 | 4,533,000 | 8,723,000 | 5,376,000 | 2,241,000 | 2,126,000 | 11,565,000 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 223,371,000 | $ | 3,078,000 | $ | 17,744,000 | $ | 37,201,000 | $ | 113,735,000 | $ | 5,607,000 | $ | 46,006,000 | $ | 234,486,000 | $ | 6,247,000 | $ | 22,250,000 | $ | 114,264,000 | $ | 6,674,000 | $ | 3,759,000 | $ | 81,292,000 | ||||||||||||||||||||||||||||
NOTE 3 – REVENUE
Our revenue from real estate is primarily rental income from residential and commercial property leases which is recorded when due from residents and is recognized monthly as earned. The following table present our Hotel revenue disaggregated by revenue streams.
SCHEDULE OF DISAGGREGATION OF REVENUE
| For the three months ended March 31, | 2021 | 2020 | ||||||||||||||
| For the three months ended December 31, | 2021 | 2020 | ||||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 2,368,000 | $ | 9,642,000 | $ | 5,218,000 | $ | 2,584,000 | ||||||||
| Food and beverage | 17,000 | 874,000 | 296,000 | 76,000 | ||||||||||||
| Garage | 479,000 | 650,000 | 768,000 | 424,000 | ||||||||||||
| Other operating departments | 38,000 | 93,000 | 66,000 | 25,000 | ||||||||||||
| Total hotel revenue | $ | 2,902,000 | $ | 11,259,000 | $ | 6,348,000 | $ | 3,109,000 | ||||||||
| For the nine months ended March 31, | 2021 | 2020 | ||||||||||||||
| For the six months ended December 31, | 2021 | 2020 | ||||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 7,842,000 | $ | 35,453,000 | $ | 10,780,000 | $ | 5,474,000 | ||||||||
| Food and beverage | 130,000 | 3,521,000 | 562,000 | 113,000 | ||||||||||||
| Garage | 1,373,000 | 2,162,000 | 1,675,000 | 894,000 | ||||||||||||
| Other operating departments | 91,000 | 453,000 | 136,000 | 53,000 | ||||||||||||
| Total hotel revenue | $ | 9,436,000 | $ | 41,589,000 | $ | 13,153,000 | $ | 6,534,000 | ||||||||
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. |
| -11- |
Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.
We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.
Contract assets and liabilities
We do not have any material contract assets as of MarchDecember 31, 2021 and June 30, 20202021 other than trade and other receivables, net on our condensed consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.Based on historical trends, the Hotel applies a 50% rate of default to receivables between 90 and 120 days and a 100% rate of default to receivables over 120 days. InterGroup applies a 50% rate of default to receivables from tenants that are over 30 days.
We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities on our condensed consolidated balance sheets. Contract liabilities decreasedincreased to $173,000$445,000 as of MarchDecember 31, 2021, from $375,000$161,000 as of June 30, 2020.2021. The decreaseincrease for the ninesix months ended MarchDecember 31, 2021 was primarily driven by $202,000$284,000 of revenue recognized and refunds issued to guests as a result of the COVID-19 outbreak.advance deposits received for future reservations.
Contract costs
We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as incurred as our contracts with customers and lease agreements do not extend beyond one year.
NOTE 4 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
SCHEDULE OF INVESTMENT IN HOTEL, NET
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| March 31, 2021 | Cost | Depreciation | Value | |||||||||||||||||||||
| December 31, 2021 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||||||||
| Finance lease ROU assets | 1,805,000 | (527,000 | ) | 1,278,000 | 1,805,000 | (764,000 | ) | 1,041,000 | ||||||||||||||||
| Furniture and equipment | 30,438,000 | (27,857,000 | ) | 2,581,000 | 32,276,000 | (28,201,000 | ) | 4,075,000 | ||||||||||||||||
| Building and improvements | 64,585,000 | (33,583,000 | ) | 31,002,000 | 64,587,000 | (34,619,000 | ) | 29,968,000 | ||||||||||||||||
| Investment in Hotel, net | $ | 99,566,000 | $ | (61,967,000 | ) | $ | 37,599,000 | $ | 101,406,000 | $ | (63,584,000 | ) | $ | 37,822,000 | ||||||||||
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| June 30, 2020 | Cost | Depreciation | Value | |||||||||||||||||||||
| June 30, 2021 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||||||||
| Finance lease ROU assets | 1,775,000 | (291,000 | ) | 1,484,000 | 1,805,000 | (606,000 | ) | 1,199,000 | ||||||||||||||||
| Furniture and equipment | 30,528,000 | (27,498,000 | ) | 3,030,000 | 31,014,000 | (27,957,000 | ) | 3,057,000 | ||||||||||||||||
| Building and improvements | 64,005,000 | (32,488,000 | ) | 31,517,000 | 64,585,000 | (33,928,000 | ) | 30,657,000 | ||||||||||||||||
| Investment in Hotel, net | $ | 99,046,000 | $ | (60,277,000 | ) | $ | 38,769,000 | $ | 100,142,000 | $ | (62,491,000 | ) | $ | 37,651,000 | ||||||||||
Finance lease ROU assets, furniture and equipment are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 3 to 7 years. Building and improvements are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 15 to 39 years. Depreciation expense related to our investment in hotel for the six months ended December 31, 2021 and December 31, 2020 are $1,093,000 and $1,162,000, respectively.
NOTE 5 – INVESTMENT IN REAL ESTATE, NET
The Company’s investment in real estate includes fifteensixteen 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. land located in Maui, Hawaii.
Investment in real estate consisted of the following:
SCHEDULE OF INVESTMENT IN REAL ESTATE
| As of | March 31, 2021 | June 30, 2020 | December 31, 2021 | June 30, 2021 | ||||||||||||
| Land | $ | 21,568,000 | $ | 23,565,000 | $ | 22,998,000 | $ | 22,998,000 | ||||||||
| Buildings, improvements and equipment | 67,517,000 | 69,417,000 | 68,827,000 | 68,173,000 | ||||||||||||
| Accumulated depreciation | (44,328,000 | ) | (44,112,000 | ) | (46,120,000 | ) | (44,930,000 | ) | ||||||||
| 44,757,000 | 48,870,000 | 45,705,000 | 46,241,000 | |||||||||||||
| Land held for development | 1,468,000 | 1,468,000 | 1,468,000 | 1,468,000 | ||||||||||||
| Investment in real estate, net | $ | 46,225,000 | $ | 50,338,000 | $ | 47,173,000 | $ | 47,709,000 | ||||||||
On August 28,
Building, improvements, and equipment are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 5 to 40 years. Depreciation expense related to our investment in real estate for the six months ended December 31, 2021 and December 31, 2020 Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000are $1,190,000 and realized a gain on the sale of approximately $12,043,000. Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of the RLOC of $2,985,000 as the Company had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property.$1,210,000, respectively.
On November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California to InterGroup for $1,530,000 in exchange for a reduction of $1,196,000 of its obligation to InterGroup. Santa Fe acquired the property on February 1, 2002 for $785,000. Outstanding mortgage on the property for $334,000 was simultaneously transferred to InterGroup. Santa Fe realized a gain on the sale of approximately $901,000, which was eliminated in consolidation at InterGroup. The sales price of the property represents its current value as of the sale date as appraised by a licensed independent third-party appraiser. The fairness of the sale terms of the transaction were reviewed and approved by the independent directors of Santa Fe and InterGroup, and unanimously approved by the entire Board of Directors of both companies.
In March 2021, in an effort to make both companies more efficient, InterGroup purchased back the 50% interest of InterGroup Uluniu Inc. from Portsmouth for $980,000, which represents Portsmouth’s carrying cost of the investment. No gains or losses were realized as a result of the transaction since it was a related-party transaction. As a related-party transaction, the fairness of the financial terms of the transactions were reviewed and approved by the independent director of the Company.
NOTE 6 – 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 MarchDecember 31, 2021 and June 30, 2020,2021, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments, along with the changes in amounts due to broker are included in earnings. Trading securities are summarized as follows:
| Gross | Gross | Net | ||||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Gain (Loss) | Fair Value | |||||||||||||||
| As of | ||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||
| Corporate Equities | $ | 32,500,000 | $ | 7,857,000 | $ | (3,361,000 | ) | $ | 4,496,000 | $ | 36,996,000 | |||||||||
| As of | ||||||||||||||||||||
| June 30, 2020 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 11,459,000 | $ | 902,000 | $ | (6,183,000 | ) | $ | (5,281,000 | ) | $ | 6,178,000 | ||||||||
SCHEDULE OF TRADING SECURITIES
| Gross | Gross | Net | Fair | |||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Gain | Value | |||||||||||||||
| As of | ||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 19,124,000 | $ | 3,798,000 | $ | (1,774,000 | ) | $ | 2,024,000 | $ | 21,148,000 | |||||||||
| As of | ||||||||||||||||||||
| June 30, 2021 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 29,816,000 | $ | 8,634,000 | $ | (2,658,000 | ) | $ | 5,976,000 | $ | 35,792,000 | |||||||||
As of March 31, 2021 and June 30, 2020,2021, approximately 6% and 11%, respectively,4% of the investment in marketable securities balance above is comprised of the common stock of Comstock Mining IncInc. (“Comstock”) - NYSE AMERICAN: LODE). As of MarchDecember 31, 2021, the Company does not have any investment in the common stock of Comstock. The Company’s director and Chairman of the Audit Committee, William J. Nance, serves as Comstock’s director and Chairman of the Audit and Finance, Compensation and Nominating and Governance Committees of Comstock.
As of December 31, 2021 and June 30, 2020,2021, the Company had $2,210,000$122,000 and $5,734,000,$2,176,000, respectively, of unrealized losses related to securities held for over one year; of which $1,794,000$0 and $5,427,000$1,933,000 are related to its investment in Comstock, respectively.
Net gains (losses) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of net (losses) gains (losses) on marketable securities for the three and ninesix months ended MarchDecember 31, 2021 and 2020, respectively:
| For the three months ended March 31, | 2021 | 2020 | ||||||
| Realized gain (loss) on marketable securities, net | $ | 1,845,000 | $ | (1,113,000 | ) | |||
| Realized loss on marketable securities related to Comstock | (1,578,000 | ) | - | |||||
| Unrealized gain (loss) on marketable securities, net | 501,000 | (1,254,000 | ) | |||||
| Unrealized gain (loss) on marketable securities related to Comstock | 4,870,000 | (26,000 | ) | |||||
| Net gain (loss) on marketable securities | $ | 5,638,000 | $ | (2,393,000 | ) |
| For the nine months ended March 31, | 2021 | 2020 | ||||||
| Realized gain (loss) on marketable securities, net | $ | 911,000 | $ | (1,190,000 | ) | |||
| Realized loss on marketable securities related to Comstock | (1,578,000 | ) | - | |||||
| Unrealized gain (loss) on marketable securities, net | 4,683,000 | (1,375,000 | ) | |||||
| Unrealized gain (loss) on marketable securities related to Comstock | 4,921,000 | (396,000 | ) | |||||
| Net gain (loss) on marketable securities | $ | 8,937,000 | $ | (2,961,000 | ) | |||
��
NOTE 7 – OTHER INVESTMENTS,SCHEDULE OF NET LOSS ON MARKETABLE SECURITIES COMPRISING OF REALIZED AND UNREALIZED GAINS (LOSSES)
| For the three months ended December 31, | 2021 | 2020 | ||||||
| Realized loss on marketable securities, net | $ | (813,000 | ) | $ | (672,000 | ) | ||
| Realized loss on marketable securities related to Comstock | (2,441,000 | ) | - | |||||
| Unrealized gain on marketable securities, net | 693,000 | 4,173,000 | ||||||
| Unrealized gain (loss) on marketable securities related to Comstock | 210,000 | (44,000 | ) | |||||
| Net (loss) gain on marketable securities | $ | (2,351,000 | ) | $ | 3,457,000 | |||
The Company may also invest, with the approval of the Executive Strategic Real Estate and Securities Investment Committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company’s consolidated balance sheet as part of other investments, net of other than temporary impairment losses.
Other investments, net consist of the following:
| Type | March 31, 2021 | June 30, 2020 | ||||||
| Private equity hedge fund, at cost | $ | 41,000 | $ | 157,000 | ||||
| Other preferred stock, at cost | - | 121,000 | ||||||
| $ | 41,000 | $ | 278,000 | |||||
| For the six months ended December 31, | 2021 | 2020 | ||||||
| Realized gain (loss) on marketable securities, net | $ | 1,580,000 | $ | (934,000 | ) | |||
| Realized loss on marketable securities related to Comstock | (2,581,000 | ) | - | |||||
| Unrealized (loss) gain on marketable securities, net | (3,518,000 | ) | 4,182,000 | |||||
| Unrealized gain on marketable securities related to Comstock | - | 51,000 | ||||||
| Unrealized gain (loss) on marketable securities related to Comstock | - | 51,000 | ||||||
| Net (loss) gain on marketable securities | $ | (4,519,000 | ) | $ | 3,299,000 | |||
NOTE 87 - 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 and liabilities measured at fair value on a recurring basis are as follows:
| As of | March 31, 2021 | June 30, 2020 | ||||||
| Assets: | Total - Level 1 | Total - Level 1 | ||||||
| Investment in marketable securities: | ||||||||
| REITs and real estate companies | $ | 11,190,000 | $ | 2,365,000 | ||||
| Financial services | 7,033,000 | 282,000 | ||||||
| Energy | 5,977,000 | 767,000 | ||||||
| Industrials | 3,294,000 | 484,000 | ||||||
| Basic material | 3,055,000 | 1,209,000 | ||||||
| Consumer cyclical | 2,350,000 | 295,000 | ||||||
| Technology | 1,397,000 | 121,000 | ||||||
| Healthcare | 1,285,000 | 43,000 | ||||||
| Other | 736,000 | 38,000 | ||||||
| Communication services | 679,000 | 157,000 | ||||||
| Corporate bonds | - | 417,000 | ||||||
| Liabilities: | ||||||||
| Due to securities broker: | (9,021,000 | ) | (1,576,000 | ) | ||||
| Obligations for securities sold: | (5,261,000 | ) | (294,000 | ) | ||||
| $ | 22,714,000 | $ | 4,308,000 | |||||
SCHEDULE OF FAIR VALUE MEASUREMENT ON RECURRING BASIS
| As of | December 31, 2021 | June 30, 2021 | ||||||
| Total - Level 1 | Total - Level 1 | |||||||
| Assets: | ||||||||
| Investment in marketable securities: | ||||||||
| REITs and real estate companies | $ | 7,014,000 | $ | 11,624,000 | ||||
| Communication services | 4,732,000 | 4,872,000 | ||||||
| Financial services | 2,951,000 | 3,873,000 | ||||||
| Technology | 1,930,000 | 442,000 | ||||||
| Industrials | 1,487,000 | 3,746,000 | ||||||
| Energy | 1,427,000 | 6,374,000 | ||||||
| Consumer cyclical | 745,000 | 1,702,000 | ||||||
| Basic material | 357,000 | 1,797,000 | ||||||
| Healthcare | 237,000 | 981,000 | ||||||
| Other | 268,000 | 381,000 | ||||||
| Total | 21,148,000 | 35,792,000 | ||||||
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. The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:
SCHEDULE OF FAIR VALUE MEASUREMENTS ON NON-RECURRING BASIS
| Net loss for the nine months ended | Net loss for the six months ended | |||||||||||||||||||||||
| Assets | Level 3 | March 31, 2021 | March 31, 2021 | Level 3 | December 31, 2021 | December 31, 2021 | ||||||||||||||||||
| Other non-marketable investments | $ | 41,000 | $ | 41,000 | $ | (119,000 | ) | $ | - | $ | - | $ | (41,000 | ) | ||||||||||
| Net loss for the nine months ended | Net loss for the six months ended | |||||||||||||||||||||||
| Assets | Level 3 | June 30, 2020 | March 31, 2020 | Level 3 | June 30, 2021 | December 31, 2020 | ||||||||||||||||||
| Other non-marketable investments | $ | 278,000 | $ | 278,000 | $ | (103,000 | ) | $ | 41,000 | $ | 41,000 | $ | (89,000 | ) | ||||||||||
For the ninesix months ended MarchDecember 31, 2021 and 2020, we received distribution from other non-marketable investments of $118,000zero and $115,000,$118,000, 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 termnear-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 98 – 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 | March 31, 2021 | June 30, 2020 | ||||||
| Cash and cash equivalents | $ | 8,880,000 | $ | 14,163,000 | ||||
| Restricted cash | 7,643,000 | 14,123,000 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 16,523,000 | $ | 28,286,000 | ||||
SCHEDULE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
| As of | December 31, 2021 | June 30, 2021 | ||||||
| Cash and cash equivalents | $ | 12,168,000 | $ | 6,808,000 | ||||
| Restricted cash | 8,646,000 | 8,584,000 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 20,814,000 | $ | 15,392,000 | ||||
Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for the Hotel. As of June 30, 2020, restricted cash also includes key money received from Interstate that is restricted for capital improvements for the Hotel. As of March 31, 2021, the key money balance was zero as Hotel obtained approval from Interstate to use the funds for hotel operations during the first quarter of fiscal year 2021.and real estate properties.
The Company follows Accounting Standard Codification (ASC) Topic 718 “Compensation – Stock Compensation”, which addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units.
Please refer to Note 16 – Stock Based Compensation Plans in the Company’s Form 10-K for the year ended June 30, 20202021 for more detailed information on the Company’s stock-based compensation plans.
During the threesix months ended MarchDecember 31, 2021 and 2020, the Company recorded stock option compensation cost of $2,000$ and $121,000, respectively, related to stock options that were previously issued. During the nine months ended March 31, 2021 and 2020, the Company recorded stock option compensation cost of $12,000 and $138,000,$, respectively, related to stock options that were previously issued. As of MarchDecember 31, 2021, there was a total of $6,000 of unamortizedall compensation related to stock options which is expected to be recognized over the weighted-average period of 0.92 years.have been recognized.
On February 25, 2020, shareholders of the Company voted in favor of amendments to the Company’s 2010 Omnibus Employee Incentive Plan (the “2010 Incentive Plan”) which would amend Section 1.3 of the 2010 Incentive Plan to extend the term from ten (10) years to sixteen (16) years, and Section 6.4 of the 2010 Incentive Plan to change “tenth (10th) anniversary date” to “twentieth (20th) anniversary date”. This would increase the term of the 2010 Incentive Plan to 20 years (expiring in February 2030 instead of February 2020) and also permit the existence of options with a term longer than ten years. The purpose of the amendment to the term is to extend its existence as our only equity incentive plan. The purpose of amendment of the allowable term of options is so that the Board may extend the term of the 100,000 options granted to John Winfield on March 16, 2010 from ten years to sixteen years so that these options will terminate on March 16, 2026 instead of on March 16, 2020, in recognition of Mr. Winfield’s contributions to and leadership of our Company. Upon approval of these amendments by the shareholders, our Board of Directors extended the term of Mr. Winfield’s options as described in this paragraph. As a result of extending Mr. Winfield’s options, the Company recorded stock option compensation cost of $116,000 in March 2020.
Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history. The Company has selected to use the simplified method for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.
| Number of | Weighted Average | Weighted Average | Aggregate | |||||||||||||
| Shares | Exercise Price | Remaining Life | Intrinsic Value | |||||||||||||
| Oustanding at | July 1, 2019 | 341,195 | $ | 16.95 | 3.07 years | $ | 4,680,000 | |||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Exchanged | - | - | ||||||||||||||
| Outstanding at | June 30, 2020 | 341,195 | $ | 16.95 | 3.83 years | $ | 3,271,000 | |||||||||
| Exercisable at | June 30, 2020 | 323,195 | $ | 16.38 | 3.67 years | $ | 3,271,000 | |||||||||
| Vested and Expected to vest at | June 30, 2020 | 341,195 | $ | 16.95 | 3.83 years | $ | 3,271,000 | |||||||||
| Oustanding at | July 1, 2020 | 341,195 | $ | 16.95 | 3.83 years | $ | 3,271,000 | |||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Exchanged | - | - | ||||||||||||||
| Outstanding at | March 31, 2021 | 341,195 | $ | 16.95 | 3.08 years | $ | 6,689,000 | |||||||||
| Exercisable at | March 31, 2021 | 337,595 | $ | 16.84 | 3.05 years | $ | 6,656,000 | |||||||||
| Vested and Expected to vest at | March 31, 2021 | 341,195 | $ | 16.95 | 3.08 years | $ | 6,689,000 | |||||||||
SCHEDULE OF STOCK OPTION ACTIVITY
| Number of | Weighted Average | Weighted Average | Aggregate | ||||||||||||||||
| Shares | Exercise Price | Remaining Life | Intrinsic Value | ||||||||||||||||
| Oustanding at | July 1, 2020 | 341,195 | $ | 16.95 | years | $ | 3,271,000 | ||||||||||||
| Granted | - | - | |||||||||||||||||
| Exercised | - | - | |||||||||||||||||
| Forfeited | - | - | |||||||||||||||||
| Exchanged | - | - | |||||||||||||||||
| Outstanding at | June 30, 2021 | 341,195 | $ | 16.95 | years | $ | 8,890,000 | ||||||||||||
| Exercisable at | June 30, 2021 | 337,595 | $ | 16.84 | years | $ | 8,833,000 | ||||||||||||
| Vested and Expected to vest at | June 30, 2021 | 341,195 | $ | 16.95 | years | $ | 8,890,000 | ||||||||||||
| Oustanding at | July 1, 2021 | 341,195 | $ | 16.95 | years | $ | 8,890,000 | ||||||||||||
| Granted | - | - | |||||||||||||||||
| Exercised | - | - | |||||||||||||||||
| Forfeited | - | - | |||||||||||||||||
| Exchanged | - | - | |||||||||||||||||
| Outstanding at | December 31, 2021 | 341,195 | $ | 16.95 | years | $ | 11,616,000 | ||||||||||||
| Exercisable at | December 31, 2021 | 337,595 | $ | 16.84 | years | $ | 11,531,000 | ||||||||||||
| Vested and Expected to vest at | December 31, 2021 | 341,195 | $ | 16.95 | years | $ | 11,616,000 | ||||||||||||
NOTE 1110 – SEGMENT INFORMATION
The Company operates in three3 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 three3 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.
| -16- |
Information below represents reported segments for the three and ninesix months ended MarchDecember 31, 2021 and 2020. Operating income (loss) from hotel operations consists of the operation of the hotel and the garage. Operating income from real estate operations consists of the operation of rental properties. Operating gains (losses) from investment transactions consists of net investment 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) benefit for the entire Company.
| As of and for the three months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended March 31, 2021 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 2,902,000 | $ | 3,465,000 | $ | - | $ | - | $ | 6,367,000 | ||||||||||
| Segment operating expenses | (3,990,000 | ) | (1,944,000 | ) | - | (704,000 | ) | (6,638,000 | ) | |||||||||||
| Segment income (loss) from operations | (1,088,000 | ) | 1,521,000 | - | (704,000 | ) | (271,000 | ) | ||||||||||||
| Interest expense - mortgage | (1,642,000 | ) | (538,000 | ) | - | - | (2,180,000 | ) | ||||||||||||
| Gain from debt extinguishment | - | - | - | 453,000 | 453,000 | |||||||||||||||
| Depreciation and amortization expense | (529,000 | ) | (598,000 | ) | - | - | (1,127,000 | ) | ||||||||||||
| Gain from investments | - | - | 5,404,000 | - | 5,404,000 | |||||||||||||||
| Income tax expense | - | - | - | (880,000 | ) | (880,000 | ) | |||||||||||||
| Net income (loss) | $ | (3,259,000 | ) | $ | 385,000 | $ | 5,404,000 | $ | (1,131,000 | ) | $ | 1,399,000 | ||||||||
| Total assets | $ | 46,316,000 | $ | 46,225,000 | $ | 37,037,000 | $ | 13,715,000 | $ | 143,293,000 | ||||||||||
SCHEDULE OF SEGMENT REPORTING INFORMATION
| For the three months | Hotel | Real Estate | Investment | |||||||||||||||||||||||||||||||||||||
| ended March 31, 2020 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| As of and for the three months | Hotel | Real Estate | Investment | |||||||||||||||||||||||||||||||||||||
| ended December 31, 2021 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 11,259,000 | $ | 3,757,000 | $ | - | $ | - | $ | 15,016,000 | $ | 6,348,000 | $ | 3,866,000 | $ | - | $ | - | $ | 10,214,000 | ||||||||||||||||||||
| Segment operating expenses | (10,060,000 | ) | (2,071,000 | ) | - | (890,000 | ) | (13,021,000 | ) | (6,479,000 | ) | (2,276,000 | ) | - | (576,000 | ) | (9,331,000 | ) | ||||||||||||||||||||||
| Segment income (loss) from operations | 1,199,000 | 1,686,000 | - | (890,000 | ) | 1,995,000 | ||||||||||||||||||||||||||||||||||
| Segment (loss) income | (131,000 | ) | 1,590,000 | - | (576,000 | ) | 883,000 | |||||||||||||||||||||||||||||||||
| Interest expense - mortgage | (1,663,000 | ) | (588,000 | ) | - | - | (2,251,000 | ) | (1,654,000 | ) | (628,000 | ) | - | - | (2,282,000 | ) | ||||||||||||||||||||||||
| Depreciation and amortization expense | (597,000 | ) | (619,000 | ) | - | - | (1,216,000 | ) | (539,000 | ) | (596,000 | ) | - | - | (1,135,000 | ) | ||||||||||||||||||||||||
| Gain (loss) from extinguishment of debt | 2,000,000 | (335,000 | ) | - | - | 1,665,000 | ||||||||||||||||||||||||||||||||||
| Gain from sale of real estate | - | 12,043,000 | - | - | 12,043,000 | |||||||||||||||||||||||||||||||||||
| Loss from investments | - | - | (2,647,000 | ) | - | (2,647,000 | ) | - | - | (2,290,000 | ) | - | (2,290,000 | ) | ||||||||||||||||||||||||||
| Income tax benefit | - | - | - | 1,060,000 | 1,060,000 | - | - | - | 916,000 | 916,000 | ||||||||||||||||||||||||||||||
| Net income (loss) | $ | (1,061,000 | ) | $ | 479,000 | $ | (2,647,000 | ) | $ | 170,000 | $ | (3,059,000 | ) | |||||||||||||||||||||||||||
| Net (loss) income | $ | (324,000 | ) | $ | 31,000 | $ | (2,290,000 | ) | $ | 340,000 | $ | (2,243,000 | ) | |||||||||||||||||||||||||||
| Total assets | $ | 45,741,000 | $ | 47,173,000 | $ | 21,148,000 | $ | 19,581,000 | $ | 133,643,000 | ||||||||||||||||||||||||||||||
| For the three months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2020 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 3,109,000 | $ | 3,554,000 | $ | - | $ | - | $ | 6,663,000 | ||||||||||
| Segment operating expenses | (5,133,000 | ) | (2,101,000 | ) | - | (559,000 | ) | (7,793,000 | ) | |||||||||||
| Segment (loss) income | (2,024,000 | ) | 1,453,000 | - | (559,000 | ) | (1,130,000 | ) | ||||||||||||
| Interest expense - mortgage | (1,668,000 | ) | (573,000 | ) | - | - | (2,241,000 | ) | ||||||||||||
| Depreciation and amortization expense | (582,000 | ) | (599,000 | ) | - | - | (1,181,000 | ) | ||||||||||||
| Gain from investments | - | - | 3,224,000 | - | 3,224,000 | |||||||||||||||
| Income tax benefit | - | - | - | 265,000 | 265,000 | |||||||||||||||
| Net (loss) income | $ | (4,274,000 | ) | $ | 281,000 | $ | 3,224,000 | $ | (294,000 | ) | $ | (1,063,000 | ) | |||||||
| As of and for the six months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2021 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 13,153,000 | $ | 7,982,000 | $ | - | $ | - | $ | 21,135,000 | ||||||||||
| Segment operating expenses | (12,812,000 | ) | (4,350,000 | ) | - | (1,386,000 | ) | (18,548,000 | ) | |||||||||||
| Segment income (loss) | 341,000 | 3,632,000 | - | (1,386,000 | ) | 2,587,000 | ||||||||||||||
| Interest expense - mortgage | (3,315,000 | ) | (1,209,000 | ) | - | - | (4,524,000 | ) | ||||||||||||
| Depreciation and amortization expense | (1,093,000 | ) | (1,190,000 | ) | - | - | (2,283,000 | ) | ||||||||||||
| Gain (loss) from extinguishment of debt | 2,000,000 | (335,000 | ) | - | - | 1,665,000 | ||||||||||||||
| Loss from investments | - | - | (4,625,000 | ) | - | (4,625,000 | ) | |||||||||||||
| Income tax benefit | - | - | - | 2,031,000 | 2,031,000 | |||||||||||||||
| Net (loss) income | $ | (2,067,000 | ) | $ | 898,000 | $ | (4,625,000 | ) | $ | 645,000 | $ | (5,149,000 | ) | |||||||
| Total assets | $ | 45,741,000 | $ | 47,173,000 | $ | 21,148,000 | $ | 19,581,000 | $ | 133,643,000 | ||||||||||
| For the six months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2020 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 6,534,000 | $ | 7,038,000 | $ | - | $ | - | $ | 13,572,000 | ||||||||||
| Segment operating expenses | (10,166,000 | ) | (3,988,000 | ) | - | (1,926,000 | ) | (16,080,000 | ) | |||||||||||
| Segment (loss) income | (3,632,000 | ) | 3,050,000 | - | (1,926,000 | ) | (2,508,000 | ) | ||||||||||||
| Interest expense - mortgage | (3,368,000 | ) | (1,188,000 | ) | - | - | (4,556,000 | ) | ||||||||||||
| Depreciation and amortization expense | (1,161,000 | ) | (1,211,000 | ) | - | - | (2,372,000 | ) | ||||||||||||
| Gain from sale of real estate | - | 12,043,000 | - | - | 12,043,000 | |||||||||||||||
| Gain from investments | - | - | 2,859,000 | - | 2,859,000 | |||||||||||||||
| Income tax expense | - | - | - | (1,710,000 | ) | (1,710,000 | ) | |||||||||||||
| Net (loss) income | $ | (8,161,000 | ) | $ | 12,694,000 | $ | 2,859,000 | $ | (3,636,000 | ) | $ | 3,756,000 | ||||||||
| As of and for the nine months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended March 31, 2021 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 9,436,000 | $ | 10,503,000 | $ | - | $ | - | $ | 19,939,000 | ||||||||||
| Segment operating expenses | (14,156,000 | ) | (5,932,000 | ) | - | (2,630,000 | ) | (22,718,000 | ) | |||||||||||
| Segment income (loss) from operations | (4,720,000 | ) | 4,571,000 | - | (2,630,000 | ) | (2,779,000 | ) | ||||||||||||
| Interest expense - mortgage | (5,010,000 | ) | (1,726,000 | ) | - | - | (6,736,000 | ) | ||||||||||||
| Gain on extinguishment of debt | - | - | - | 453,000 | 453,000 | |||||||||||||||
| Gain on sale of real estate | 12,043,000 | 12,043,000 | ||||||||||||||||||
| Depreciation and amortization expense | (1,690,000 | ) | (1,809,000 | ) | - | - | (3,499,000 | ) | ||||||||||||
| Gain from investments | - | - | 8,263,000 | - | 8,263,000 | |||||||||||||||
| Income tax expense | - | - | - | (2,590,000 | ) | (2,590,000 | ) | |||||||||||||
| Net income (loss) | $ | (11,420,000 | ) | $ | 13,079,000 | $ | 8,263,000 | $ | (4,767,000 | ) | $ | 5,155,000 | ||||||||
| Total assets | $ | 46,316,000 | $ | 46,225,000 | $ | 37,037,000 | $ | 13,715,000 | $ | 143,293,000 | ||||||||||
| For the nine months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended March 31, 2020 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 41,589,000 | $ | 11,313,000 | $ | - | $ | - | $ | 52,902,000 | ||||||||||
| Segment operating expenses | (33,138,000 | ) | (6,110,000 | ) | - | (2,231,000 | ) | (41,479,000 | ) | |||||||||||
| Segment income (loss) from operations | 8,451,000 | 5,203,000 | - | (2,231,000 | ) | 11,423,000 | ||||||||||||||
| Interest expense - mortgage | (5,190,000 | ) | (1,788,000 | ) | - | - | (6,978,000 | ) | ||||||||||||
| Depreciation and amortization expense | (1,801,000 | ) | (1,860,000 | ) | - | - | (3,661,000 | ) | ||||||||||||
| Loss from investments | - | - | (3,508,000 | ) | - | (3,508,000 | ) | |||||||||||||
| Income tax benefit | - | - | - | 689,000 | 689,000 | |||||||||||||||
| Net income (loss) | $ | 1,460,000 | $ | 1,555,000 | $ | (3,508,000 | ) | $ | (1,542,000 | ) | $ | (2,035,000 | ) | |||||||
NOTE 1211 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The following summarizes the balances of related party and other notes payable as of MarchDecember 31, 2021 and June 30, 2020,2021, respectively.
SCHEDULE OF RELATED PARTY AND OTHER NOTES PAYABLE
| As of | March 31, 2021 | June 30, 2020 | ||||||
| Note payable - Hilton | 2,771,000 | 3,008,000 | ||||||
| Note payable - Interstate | 1,458,000 | 1,646,000 | ||||||
| SBA Loans | 6,719,000 | 5,172,000 | ||||||
| Total related party and other notes payable | $ | 10,948,000 | $ | 9,826,000 | ||||
| As of | December 31, 2021 | June 30, 2021 | ||||||
| Note Payable - Hilton | $ | 2,533,000 | $ | 2,692,000 | ||||
| Related party note payable - Aimbridge | 1,271,000 | 1,396,000 | ||||||
| SBA Loans | - | 2,000,000 | ||||||
| Total related party and other notes payable | $ | 3,804,000 | $ | 6,088,000 | ||||
Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $316,000$316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.
On February 1, 2017, JusticeOperating entered into an HMA with InterstateAimbridge to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for InterstateAimbridge to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8)(8) year period commencing on the second anniversary of the takeover date. As of March 31, 2021, the key money balance was zero as Hotel obtained approval from Interstate to use the funds for hotel operations duringDuring the first quarter of fiscal year 2021. As of June 30, 2020, balance of2021, the Hotel obtained approval from Aimbridge to use the key money plus accrued interest is $1,009,000for hotel operations and is included in restricted cash in the condensed consolidated balance sheet.funds were exhausted by December 31, 2020. Unamortized portion of the key money is included in the related party notes payable in the condensed consolidated balance sheets.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of March 31, 2021, Justice had used all proceeds of the SBA Loan - Justice in qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of March 31, 2021, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup was scheduled to mature on April 27, 2022 and had a 1.00% interest rate. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. If the SBA approves the forgiveness amount, all payments of principal and interest are deferred until the date the forgiveness amount is remitted by the SBA to CIBC. If the SBA does not forgive any amount of the loan, payments would start within 30 days. All unforgiven portion of the principal and accrued interest will be due at maturity. During the quarter ended December 31, 2020, Justice and InterGroup submitted applications for full loan forgiveness. As of March 31, 2021, the SBA has not forgiven the SBA Loan – Justice. As of March 31, 2021, the SBA has forgiven the full $453,000 of the SBA Loan – InterGroup.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice received proceeds of $2,000,000 $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice will usehad used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan iswas scheduled to mature on February 3, 2026 and has, had a 1.00%1.00% interest rate, and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. As of March 31,On November 19, 2021, unused portion of the Second SBA Loan was $350,000.forgiven in full and $2,000,000 was recorded as gain on debt extinguishment on the condensed consolidated statement of operations for the six months ended December 31, 2021.
As of March 31, 2021, the Company had finance lease obligations outstanding of $783,000. These finance leases expire in various years through 2023 at rates ranging from 4.62% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of March 31, 2021 are as follows:
| For the year ending June 30, | ||||
| 2021 | $ | 130,000 | ||
| 2022 | 508,000 | |||
| 2023 | 188,000 | |||
| Total minimum lease payments | 826,000 | |||
| Less interest on finance lease | (43,000 | ) | ||
| Present value of future minimum lease payments | $ | 783,000 | ||
Future minimum principal payments and amortizations for all related party and other financing transactions are as follows:
| For the year ending June 30, | ||||
| 2021 | $ | 498,000 | ||
| 2022 | 5,767,000 | |||
| 2023 | 750,000 | |||
| 2024 | 567,000 | |||
| 2025 | 567,000 | |||
| Thereafter | 3,581,000 | |||
| $ | 11,730,000 | |||
SCHEDULE OF FUTURE MINIMUM PRINCIPAL PAYMENTS
| For the year ending June 30, | ||||
| 2022 | $ | 283,000 | ||
| 2023 | 567,000 | |||
| 2024 | 567,000 | |||
| 2025 | 567,000 | |||
| 2026 | 567,000 | |||
| Thereafter | 1,253,000 | |||
| Long term debt | $ | 3,804,000 | ||
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000,$42,940,000, Justice obtained a $97,000,000$97,000,000 mortgage loan and a $20,000,000$20,000,000 mezzanine loan in December 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275%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 2024.2024. Outstanding principal balance on the loan was $91,130,000$89,818,000 and $92,292,000$90,745,000 as of MarchDecember 31, 2021 and June 30, 2020,2021, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by Portsmouth in favor of the mortgage lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan had an interest rate of 9.75%9.75% per annum and a maturity date of January 1, 2024.2024. 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.$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%7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.
| -18- |
Effective May 11, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 $97,000,000 mortgage loan and the $20,000,000 $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain certain net worth and liquidity. As of MarchDecember 31, 2021, InterGroup is in compliance with both requirements. However, due to the Hotel’s current low occupancy and its negative impact on the Hotel’s cash flow, Justice Operating Company, LLC mayhave not meetbeen meeting certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lock-box by the Lender for all cash collected by the Hotel. However, such lockbox has been created and utilized from the loan inception and will be in place up to loan maturity regardless of the DSCR.
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000$4,250,000 at 12%12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3%3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 1, 2021.31, 2022. On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000$10,000,000. Upon the dissolution of Justice in December 2021, Portsmouth replaced Justice as the single member of Mezzanine and assumed Justice’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from its current loan balanceInterGroup as needed up to $16,000,000. As of $3,000,000 due to InterGroup. The balance of this loan was $5,950,00 and $3,000,000 as of MarchDecember 31, 2021 and June 30, 2020,2021, the balance of the loan was $11,350,000 and $6,650,000, respectively, and is eliminated in the condensed consolidated balance sheets.
In July 2018, InterGroup obtained a revolving $5,000,000$5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000$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 Santa Monica, California and is a subsidiary of Santa Fe and the Company. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date of the RLOC from July 24, 2019 to July 23, 2020. The $2,969,000$2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC. In July 2020, InterGroup entered into a second modification agreement with CIBC which extended the maturity date of its RLOC to July 21, 2021. The $2,969,000 mortgage due to InterGroup was also extended to July 1, 2021. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000$15,650,000 and received net proceeds of $12,163,000$12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000.$2,985,000. Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000$662,000 from the sale.
On November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California to InterGroup for $1,530,000$1,530,000 in exchange for a reduction of $1,196,000$1,196,000 of its obligation to InterGroup. Santa Fe acquired the property on February 1, 2002 for $785,000.$785,000. Outstanding mortgage on the property for $334,000$334,000 was simultaneously transferred to InterGroup. Santa Fe realized a gain on the sale of approximately $901,000,$901,000, which was eliminated in consolidation at InterGroup. The sales price of the property represents its current value as of the sale date as appraised by a licensed independent third-party appraiser. The fairness of the sale terms of the transaction were reviewed and approved by the independent directors of Santa Fe and InterGroup, and unanimously approved by the entire Board of Directors of both companies.
As disclosed in its Definitive Information Statement on Schedule 14C, filed with the SEC on January 25, 2021, Santa Fe received shareholder approval to distribute its assets, as described and subsequently dissolve, all as set forth in the Information Statement. As InterGroup formerly owned 83.7% of the outstanding common stock of Santa Fe, the Company received cash of $5,013,000$5,013,000 and shares of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. As a former 3.7%3.7% shareholder of Santa Fe, the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield, received cash of $221,000$221,000 and shares of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of Dissolution from the State of Nevada, and Santa Fe is effectively fully dissolved and no longer in legal existence.
Four of the Portsmouth directors serve as directors of InterGroup. The Company’s Vice President Real Estate was elected President of Portsmouth in May 2021. The Company’s director and Chairman of the Audit Committee, William J. Nance, serves as Comstock’s director and Chairman of the Audit and Finance, Compensation and Nominating and Governance Committees of Comstock.
As Chairman of the Executive Strategic Real Estate and Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Board of Portsmouth and oversees the investment activity of Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk factors, the Chief Executive Officer and Portsmouth 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 Portsmouth, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.
NOTE 1312 – ACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICEHOTEL
The following summarizes the balances of accounts payable and other liabilities – JusticeHotel as of MarchDecember 31, 2021 and June 30, 2020.2021.
SCHEDULE OF ACCOUNTS PAYABLE AND OTHER LIABILITIES - HOTEL
| As of | December 31, 2021 | June 30, 2021 | ||||||
| Payroll and related accruals | $ | 2,458,000 | $ | 2,345,000 | ||||
| Trade payable | 2,083,000 | 2,113,000 | ||||||
| Withholding and other taxes payable | 536,000 | 885,000 | ||||||
| Advance deposits | 484,000 | 161,000 | ||||||
| Finance leases | 422,000 | 664,000 | ||||||
| Security deposit | 52,000 | 52,000 | ||||||
| Mortgage interest payable | - | 582,000 | ||||||
| Other payables | 914,000 | 606,000 | ||||||
| Total accounts payable and other liabilities - Hotel | $ | 6,949,000 | $ | 7,408,000 | ||||
As of December 31, 2021, the Company had finance lease obligations outstanding of $422,000. These finance leases expire in various years through 2023 at rates ranging from 4.62% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of December 31, 2021 are as follows:
SCHEDULE OF MINIMUM FUTURE LEASE PAYMENTS FOR ASSETS
| For the year ending June 30, | ||||
| 2022 | $ | 249,000 | ||
| 2023 | 188,000 | |||
| Total minimum lease payments | 437,000 | |||
| Less interest on finance lease | (15,000 | ) | ||
| Present value of future minimum lease payments | $ | 422,000 | ||
| -20- |
| As of | March 31, 2021 | June 30, 2020 | ||||||
| Trade payable | $ | 1,924,000 | $ | 3,000,000 | ||||
| Advance deposits | 173,000 | 375,000 | ||||||
| Property tax payable | 14,000 | 523,000 | ||||||
| Payroll and related accruals | 2,484,000 | 1,969,000 | ||||||
| Mortgage interest payable | 414,000 | 527,000 | ||||||
| Withholding and other taxes payable | 515,000 | 370,000 | ||||||
| Security deposit | 52,000 | 52,000 | ||||||
| Other payables | 900,000 | 598,000 | ||||||
| Total accounts payable and other liabilities - Justice | $ | 6,476,000 | $ | 7,414,000 | ||||
NOTE 1413 – ACCOUNTS PAYABLE AND OTHER LIABILITIES
The following summarizes the balances of accounts payable and other liabilities as of MarchDecember 31, 2021 and June 30, 2020.2021.
| As of | March 31, 2021 | June 30, 2020 | ||||||
| Trade payable | $ | 573,000 | $ | 709,000 | ||||
| Advance deposits | 290,000 | 422,000 | ||||||
| Property tax payable | 222,000 | 554,000 | ||||||
| Payroll and related accruals | 131,000 | 42,000 | ||||||
| Interest payable | 215,000 | 218,000 | ||||||
| Withholding and other taxes payable | 768,000 | 1,189,000 | ||||||
| Security deposit | 761,000 | 745,000 | ||||||
| Other payables | 213,000 | 334,000 | ||||||
| Total accounts payable and other liabilities | $ | 3,173,000 | $ | 4,213,000 | ||||
SCHEDULE OF ACCOUNTS PAYABLE AND OTHER LIABILITIES
| As of | December 31, 2021 | June 30, 2021 | ||||||
| Trade payable | $ | 545,000 | $ | 485,000 | ||||
| Advance deposits | 312,000 | 282,000 | ||||||
| Property tax payable | 942,000 | 559,000 | ||||||
| Payroll and related accruals | 48,000 | 42,000 | ||||||
| Interest payable | 239,000 | 142,000 | ||||||
| Withholding and other taxes payable | 263,000 | 867,000 | ||||||
| Tenant security deposit | 803,000 | 789,000 | ||||||
| Other payables | 364,000 | 191,000 | ||||||
| Total accounts payable and other liabilities | $ | 3,516,000 | $ | 3,357,000 | ||||
Basic (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the reporting period. Diluted loss per common share is computed similarly to basic loss per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.
SCHEDULE OF COMPUTATION OF DILUTED NET LOSS PER SHARE OF COMMON STOCK
| 2021 | 2020 | |||||||
| For the three and six months ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Options outstanding | 337,595 | 333,995 | ||||||
| Total | 337,595 | 333,995 | ||||||
NOTE 15 – SUBSEQUENT EVENTSEVENT
On May 14, 2021, the Company purchased a strategic 4-unit apartment complex located in Los Angeles, California for $2,600,000 in an all-cash transaction and is in the process of obtaining a permanent mortgage.None.
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,” “might” and similar expressions, are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry; the impact of terrorism and war on the national and international economies, including tourism, 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 or the outbreak of COVID-19 or similar outbreaks; 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, 2020.2021. These risks and uncertainties could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
NEGATIVE EFFECTS OF CIVIL AUTHORITY ACTIONS ON OUR BUSINESS
On February 25, 2020, the City of San Francisco issued the proclamation by the Mayor declaring the existence of a local emergency. The negative effects of the civil authority actions related to the novel strain of coronavirus (“COVID-19”) on our business have been significant. In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. To mitigate the harm from the pandemic, on March 16, 2020, the City and County of San Francisco, along with a group of five other Bay Area counties and the City of Berkeley, issued parallel health officer orders imposing shelter in place limitations across the Bay Area, requiring everyone to stay safe at home except for certain essential needs. Since February 2020, several unfavorable events and civil authority actions have unfolded causing demand for our hotel rooms to suffer including cancellations of all citywide conventions, reduction of flights in and out of the Bay Area and decline in both leisure and business travel.
In December 2020, due to the surge in COVID-19 cases and hospitalizations, the Health Officer of the City and County of San Francisco has suspended or restricted certain activities. Health Order C19-07q (the “Order”) incorporates suspensions, reductions in capacity limits, and other restrictions contained in the Regional Stay At Home Order issued by the California Department of Public Health on December 3, 2020. Effective December 17, 2020, the Bay Area Region, including San Francisco, is required to comply with the State’s December 3, 2020 Regional Stay-at-Home Order. The Order strongly discourages anyone in the County from travelling for leisure, recreation, business or other purposes that can be postponed until after the current surge. With limited exceptions, this Order imposed a mandatory quarantine on anyone traveling, moving, or returning to the County from anywhere outside the Bay Area. Effective January 20, 2021, Health Order C19-07rC19- 07r revised and replaced the previous Order; it continues to temporarily prohibit certain businesses and activities from resuming but allows certain other businesses, activities, travel and governmental functions to occur subject to specified health and safety restrictions, limitations, and conditions to limit the transmission of COVID-19. Quarantine and isolation requirements and recommendations upon moving to, traveling to, or returning to the County have not changed from the previous Order.
On March 24, 2021, the City and County of San Francisco announced it moved into the orange tier which removed the suggested Shelter in Place for guests travelling to San Francisco. This was a very positive step for the hotel community. This tier opens up activities in the city including expanded restaurant capacities, museums and attractions. For the hotel it allows for guests to gather in public spaces and for outlets and amenities to open up at limited capacities including fitness centers. It does not change the very stringent cleaning and sanitation requirements set forth by the Health Officer of the City and County of San Francisco which proves to be a costly measure to maintain. Effective May 6, 2021, the City and County of San Francisco moved into the yellow tier guidelines. We continue to closely monitor the very fluid changes that the Center for Disease Control, San Francisco Department of Health and other authorities implement with regards to the COVID-19 pandemic.
On August 20, 2021, San Francisco announced vaccination requirements for indoor activities. This order requires restaurants, theaters, and entertainment venues where food or drink is served inside, as well as gyms, recreation facilities, yoga studios, dance studios and other fitness establishments, clubs involving elevated breathing to show proof of vaccination.
On January 11, 2022, a new Health Order has been issued. The primary change to the Order is to comply with changes the state made lowering the threshold for mega events to 500 attendees indoor and 5,000 attendees outdoor beginning January 15, 2022. This will have significant impact on the demand for major event drivers, primarily citywide events that many attendees will not be able to attend due to vaccination status along with the organizers cancelling events based on decreased anticipated attendance because of these regulations.
The San Francisco hospitality market has seen the two largest citywide events go virtual with DreamForce in September 2021 and JP Morgan Healthcare Conference in January 2022. RSA Conference originally scheduled for February 2022 was moved to June 2022 and Google Could Next was cancelled for 2022. We expect to continue to see cancellation of citywide events throughout the year.
In response to the decrease in demand, we have since furloughed all managers at the Hotel except for members of the executive team and continue to limit hourly staff to a minimum. By the end of March 2020, we had temporarily closed all of our food and beverage outlets, valet parking, concierge and bell services, fitness center, as well as the executive lounge facility. We continue to implement social distancing standards and cleaning processes designed by InterstateAimbridge and Hilton to keep employees and guests safe. The full impact and duration of the COVID-19 outbreak continues to evolve as of the date of this report.Annual Report. The pandemic effectively eliminated our ability to generate any profits, due to the drastic decline in both leisure and business travel. As a result, management believes the ongoing length and severity of the economic downturn caused by the pandemic will have a material adverse impact on our future business, financial condition, liquidity and financial results. We are also assessing the potential impact on the impairment analysis of our long-lived assets and the realization of our deferred tax assets. As of the date of this report, the effects of the pandemic continue to affect our economy, business and leisure travel, and our needs to continue to curtail certain revenue generating activities at the Hotel. We expect that the effects will have a material adverse effect on our business until the pandemic ends.
As a result of the CARESCoronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020, additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration (“SBA”). The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the CARES Act. The PartnershipJustice received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used all proceeds from the loan primarilySBA Loan for payroll costs. As of March 31, 2021, Justice had used all proceeds of the SBA Loan - Justice incosts and other qualified expenses. The SBA Loan - Justice iswas scheduled to mature on April 9, 2022 and hashad a 1.00% interest rate.rate and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of March 31,June 30, 2021, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup was scheduled to mature on April 27, 2022 and had a 1.00% interest rate. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. If the SBA approves the forgiveness amount, all payments of principal and interest are deferred until the date the forgiveness amount is remitted by the SBA to CIBC. If the SBA does not forgive any amount of the loan, payments would start within 30 days. All unforgiven portion of the principal and accrued interest will be due at maturity. During the quarter ended December 31, 2020, Justice and InterGroup submitted applications for full loan forgiveness. As of March 31, 2021, the SBA has not forgivenBoth the SBA Loan – Justice. As of March 31, 2021, the SBA has forgiven the full $453,000 of theJustice and SBA Loan – InterGroup.InterGroup (collectively the “SBA Loans”) were forgiven in full by the SBA as of June 30, 2021.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice will usehad used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan iswas scheduled to mature on February 3, 2026, and hashad a 1.00% interest rate, and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. As of March 31,On November 19, 2021, unused portion of the Second SBA Loan was $350,000.forgiven in full and $2,000,000 was recorded as gain on debt extinguishment on the condensed consolidated statement of operations for the six months ended December 31, 2021.
RESULTS OF OPERATIONS
As of MarchDecember 31, 2021, the Company owns approximately 71.3%75% of the common shares of Portsmouth Square, Inc. Historically, the Company’s principal source of revenue is derived from the investment 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. Justice ownsowned the Hotel and related facilities, including a five-level underground parking garage.garage up to its dissolution on December 23, 2021 when Portsmouth replaced Justice as the owner of the Hotel. The financial statements of Justice havehad been consolidated with those of the Company. However, the impact of the COVID-19 pandemic is highly uncertain and management expects that the ongoing length and severity of the economic downturn will have a material adverse impact on our business, financial condition, liquidity and financial results.
The Hotel is operated by the Partnership as a full-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.
On February 1, 2017, JusticeOperating entered into an HMAa Hotel management agreement (“HMA”) with InterstateAimbridge Hospitality (“Aimbridge”) to manage the Hotel, and related facilitiesalong with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of HMAthe management agreement is for an initial period of ten years commencing on the takeoverFebruary 3, 2017 date and automatically renews for an additionalsuccessive one (1) year periods, to not to exceed five years in the aggregate, subject to certain conditions. TheUnder the terms on the HMA, also provides for Interstatebase management fee payable to advance a key money incentive fee to theAimbridge shall be one and seven-tenths percent (1.70%) of total Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement.revenue.
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 fifteensixteen 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 from time to time and will consider other investments if such investments offer growth or profit potential.
Three Months Ended MarchDecember 31, 2021 Compared to Three Months Ended MarchDecember 31, 2020
The Company had a net incomeloss of $1,399,000$2,243,000 for the three months ended MarchDecember 31, 2021 compared to a net loss of $3,059,000$1,063,000 for the three months ended MarchDecember 31, 2020. The change is primarily dueattributable to gains from$2,351,000 loss on marketable securities in the three months ended MarchDecember 31, 2021, offset by the decrease in operating income from the Hotel.2021.
Hotel Operations
The Company had net loss from Hotel operations of $3,259,000$324,000 for the three months ended MarchDecember 31, 2021 compared to net loss of $1,061,000$4,274,000 for the three months ended MarchDecember 31, 2020. The change is primarily attributable to the decreaseincrease in Hotel revenue.
The following table sets forth a more detailed presentation of Hotel operations for the three months ended MarchDecember 31, 2021 and 2020.
| For the three months ended March 31, | 2021 | 2020 | ||||||||||||||
| For the three months ended December 31, | 2021 | 2020 | ||||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 2,368,000 | $ | 9,642,000 | $ | 5,218,000 | $ | 2,584,000 | ||||||||
| Food and beverage | 17,000 | 874,000 | 296,000 | 76,000 | ||||||||||||
| Garage | 479,000 | 650,000 | 768,000 | 424,000 | ||||||||||||
| Other operating departments | 38,000 | 93,000 | 66,000 | 25,000 | ||||||||||||
| Total hotel revenues | 2,902,000 | 11,259,000 | 6,348,000 | 3,109,000 | ||||||||||||
| Operating expenses excluding depreciation and amortization | (3,990,000 | ) | (10,060,000 | ) | (6,479,000 | ) | (5,133,000 | ) | ||||||||
| Operating (loss) income before interest, depreciation and amortization | (1,088,000 | ) | 1,199,000 | |||||||||||||
| Operating loss before interest, depreciation and amortization | (131,000 | ) | (2,024,000 | ) | ||||||||||||
| Gain on extinguishment of debt | 2,000,000 | - | ||||||||||||||
| Interest expense - mortgage | (1,642,000 | ) | (1,663,000 | ) | (1,654,000 | ) | (1,668,000 | ) | ||||||||
| Depreciation and amortization expense | (529,000 | ) | (597,000 | ) | (539,000 | ) | (582,000 | ) | ||||||||
| Net loss from Hotel operations | $ | (3,259,000 | ) | $ | (1,061,000 | ) | $ | (324,000 | ) | $ | (4,274,000 | ) | ||||
For the three months ended MarchDecember 31, 2021, the Hotel had operating loss of $1,088,000$131,000 before interest expense, depreciation, and amortization on total operating revenues of $2,902,000$6,348,000 compared to operating incomeloss of $1,199,000$2,024,000 before interest expense, depreciation, and amortization on total operating revenues of $11,259,000$3,109,000 for the three months ended MarchDecember 31, 2020. For the three months ended MarchDecember 31, 2021, room revenues decreasedincreased by $7,274,000,$2,634,000, food and beverage revenue decreasedincreased by $857,000,$220,000, and garage revenue decreasedincreased by $171,000,$344,000, compared to the three months ended MarchDecember 31, 2020. The year over year declineincrease in all areasthe revenue sources are result of the recovery from the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak since March 2020. Total operating expenses decreasedincreased by $6,070,000$1,346,000 due to decreaseincrease in salaries and wages, rooms commission, credit card fees, management fees, and franchise fees.
The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended MarchDecember 31, 2021 and 2020.
Three Months Ended March 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||||||||||||||
Three Months Ended December 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||||||||||||||
| 2021 | $ | 103 | 47 | % | $ | 48 | $ | 138 | 75 | % | $ | 104 | ||||||||||||
| 2020 | $ | 242 | 76 | % | $ | 184 | $ | 107 | 48 | % | $ | 52 | ||||||||||||
The Hotel’s revenues decreasedincreased by 74%104% this quarter as compared to the previous comparable quarter. Average daily rate decreasedincreased by $139,$31, average occupancy dropped 29%increased by 27%, and RevPAR decreasedincreased by $136$52 for the three months ended MarchDecember 31, 2021 compared to the three months ended MarchDecember 31, 2020.
Real Estate Operations
Net income from real estate operations for the three months ended MarchDecember 31, 2021 decreasedincreased by $94,000$85,000 compared to the three months ended MarchDecember 31, 2020 as a result of decreasedue to increase in revenue. The decrease in revenueRevenue from real estate operations increased by $312,000 year over year is due to increased vacancy lossincrease in market rent and reduction in bad debt expense as the pandemic has affected some tenants’ ability to pay rent on time.debt. All of the Company’s properties are managed in-house. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.
Investment Transactions
The Company had a net loss on marketable securities of $2,351,000 for the three months ended December 31, 2021 compared to a net gain on marketable securities of $5,638,000$3,457,000 for the three months ended March 31, 2021 compared to a net loss on marketable securities of $2,393,000 for the three months ended MarchDecember 31, 2020. For the three months ended MarchDecember 31, 2021, the Company had a net realized gainloss of $267,000$3,254,000 and a net unrealized gain of $5,371,000.$903,000. For the three months ended MarchDecember, 31, 2021, Company had a net realized loss of $2,441,000 from its investment in Comstock. For the three months ended December 31, 2020, the Company had a net realized loss of $1,113,000$672,000 and a net unrealized lossgain of $1,280,000.$4,129,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
The Company and its subsidiaries,subsidiary Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expensebenefit during the three months ended MarchDecember 31, 2021 and 2020 represent primarily the income tax effect of the pretax (loss) income (loss) at InterGroup Santa Fe, and Portsmouth, which includes its share in net income (loss)loss of Justice.the Hotel.
Nine monthsSix Months Ended MarchDecember 31, 2021 Compared to Nine monthsSix Months Ended MarchDecember 31, 2020
The Company had net incomeloss of $5,155,000$5,149,000 for the ninesix months ended MarchDecember 31, 2021 compared to net lossincome of $2,035,000$3,756,000 for the ninesix months ended MarchDecember 31, 2020. The change is primarily attributable to gainsthe $12,043,000 gain from marketable securities and sale of real estates.estate in August 2020 and $4,519,000 loss on marketable securities in the six months ended December 31, 2021.
Hotel Operations
The Company had net loss from Hotel operations of $11,420,000$2,067,000 for the ninesix months ended MarchDecember 31, 2021 compared to net incomeloss of $1,460,000$8,161,000 for the ninesix months ended MarchDecember 31, 2020. The change is primarily attributable to the decreaseincrease in Hotel revenue.
The following table sets forth a more detailed presentation of Hotel operations for the ninesix months ended MarchDecember 31, 2021 and 2020.
| For the nine months ended March 31, | 2021 | 2020 | ||||||||||||||
| For the six months ended December 31, | 2021 | 2020 | ||||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 7,842,000 | $ | 35,453,000 | $ | 10,780,000 | $ | 5,474,000 | ||||||||
| Food and beverage | 130,000 | 3,521,000 | 562,000 | 113,000 | ||||||||||||
| Garage | 1,373,000 | 2,162,000 | 1,675,000 | 894,000 | ||||||||||||
| Other operating departments | 91,000 | 453,000 | 136,000 | 53,000 | ||||||||||||
| Total hotel revenues | 9,436,000 | 41,589,000 | 13,153,000 | 6,534,000 | ||||||||||||
| Operating expenses excluding depreciation and amortization | (14,156,000 | ) | (33,138,000 | ) | (12,812,000 | ) | (10,166,000 | ) | ||||||||
| Operating (loss) income before interest, depreciation and amortization | (4,720,000 | ) | 8,451,000 | |||||||||||||
| Operating income (loss) before interest, depreciation and amortization | 341,000 | (3,632,000 | ) | |||||||||||||
| Gain on extinguishment of debt | 2,000,000 | - | ||||||||||||||
| Interest expense - mortgage | (5,010,000 | ) | (5,190,000 | ) | (3,315,000 | ) | (3,368,000 | ) | ||||||||
| Depreciation and amortization expense | (1,690,000 | ) | (1,801,000 | ) | (1,093,000 | ) | (1,161,000 | ) | ||||||||
| Net (loss) income from Hotel operations | $ | (11,420,000 | ) | $ | 1,460,000 | |||||||||||
| Net loss from Hotel operations | $ | (2,067,000 | ) | $ | (8,161,000 | ) | ||||||||||
For the ninesix months ended MarchDecember 31, 2021, the Hotel had operating lossincome of $4,720,000$341,000 before interest expense, depreciation, and amortization on total operating revenues of $9,436,000$13,153,000 compared to operating incomeloss of $8,451,000$3,632,000 before interest expense, depreciation, and amortization on total operating revenues of $41,589,000$6,534,000 for the ninesix months ended MarchDecember 31, 2020. For the ninesix months ended MarchDecember 31, 2021, room revenues decreasedincreased by $27,611,000,$5,306,000, food and beverage revenue decreasedincreased by $3,391,000,$449,000, and garage revenue decreasedincreased by $789,000,$781,000, compared to the ninesix months ended MarchDecember 31, 2020. The year over year declineincrease in all areasthe revenue sources are result of the recovery from the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak since March 2020. Total operating expenses decreasedincreased by $18,982,000$2,646,000 due to decreaseincrease in salaries and wages, rooms commission, credit card fees, management fees, and franchise fees.
The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the ninesix months ended MarchDecember 31, 2021 and 2020.
| Nine Months Ended March 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||||||||||||||
Six Months Ended December 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||||||||||||||
| 2021 | $ | 106 | 49 | % | $ | 52 | $ | 139 | 77 | % | $ | 107 | ||||||||||||
| 2020 | $ | 256 | 91 | % | $ | 233 | $ | 107 | 51 | % | $ | 55 | ||||||||||||
The Hotel’s revenues decreasedincreased by 77%101% for the ninesix months ended MarchDecember 31, 2021 as compared to the ninesix months ended MarchDecember 31, 2020. Average daily rate decreasedincreased by $150,$32, average occupancy decreasedincreased by 42%26%, and RevPAR decreasedincreased by $181$52 for the ninesix months ended MarchDecember 31, 2021 compared to the ninesix months ended MarchDecember 31, 2020.
Real Estate Operations
Net income from real estate operations for the ninesix months ended MarchDecember 31, 2021 increaseddecreased by $11,524,000$11,796,000 compared to the ninesix months ended MarchDecember 31, 2020 due to the $12,043,000 gain from sale of real estate in August 2020. The changeRevenue from real estate operations increased by $944,000 year over year is due to the sale of the Santa Fe’s 27-unit apartment complex locatedreduction in Santa Monica, California for $15,650,000.vacancy and bad debt. All of the Company’s properties are managed in-house. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.
Investment Transactions
The Company had a net loss on marketable securities of $4,519,000 for the six months ended December 31, 2021 compared to a net gain on marketable securities of $8,937,000$3,299,000 for the ninesix months ended March 31, 2021 compared to a net loss on marketable securities of $2,961,000 for the nine months ended MarchDecember 31, 2020. For the ninesix months ended MarchDecember 31, 2021, the Company had a net realized loss of $667,000$1,001,000 and a net unrealized gainloss of $9,604,000.$3,518,000. For the ninesix months ended MarchDecember, 31, 2021, Company had a net realized loss of $2,581,000 from its investment in Comstock. For the six months ended December 31, 2020, the Company had a net realized loss of $1,190,000$934,000 and a net unrealized lossgain of $1,771,000.$4,233,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
The Company and its subsidiaries, 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 nine months ended March 31, 2021 and 2020 represent primarily the income tax effect of the pretax income (loss) at InterGroup, Santa Fe, and Portsmouth, which includes its share in net income (loss) of Justice.
MARKETABLE SECURITIES
The following table shows the composition of the Company’s marketable securities portfolio as of MarchDecember 31, 2021 and June 30, 20202021 by selected industry groups.
| As of | % of Total | |||||||||||||||
| March 31, 2021 | Investment | |||||||||||||||
| % of Total | ||||||||||||||||
| As of December 31, 2021 | Investment | |||||||||||||||
| Industry Group | Fair Value | Securities | Fair Value | Securities | ||||||||||||
| REITs and real estate companies | $ | 11,190,000 | 30.1 | % | $ | 7,014,000 | 33.2 | % | ||||||||
| Communication services | 4,732,000 | 22.4 | % | |||||||||||||
| Financial services | 7,033,000 | 19.0 | % | 2,951,000 | 14.0 | % | ||||||||||
| Technology | 1,930,000 | 9.1 | % | |||||||||||||
| Industrials | 1,487,000 | 7.0 | % | |||||||||||||
| Energy | 5,977,000 | 16.2 | % | 1,427,000 | 6.7 | % | ||||||||||
| Industrials | 3,294,000 | 8.9 | % | |||||||||||||
| Consumer cyclical | 745,000 | 3.5 | % | |||||||||||||
| Basic material | 3,055,000 | 8.3 | % | 357,000 | 1.7 | % | ||||||||||
| Consumer cyclical | 2,350,000 | 6.4 | % | |||||||||||||
| Technology | 1,397,000 | 3.8 | % | |||||||||||||
| Utilities | 268,000 | 1.3 | % | |||||||||||||
| Healthcare | 1,285,000 | 3.5 | % | 237,000 | 1.1 | % | ||||||||||
| Other | 736,000 | 2.0 | % | |||||||||||||
| Communication services | 679,000 | 1.8 | % | |||||||||||||
| $ | 36,996,000 | 100.0 | % | $ | 21,148,000 | 100.0 | % | |||||||||
| As of | % of Total | |||||||||||||||
| June 30, 2020 | Investment | |||||||||||||||
| % of Total | ||||||||||||||||
| As of June 30, 2021 | Investment | |||||||||||||||
| Industry Group | Fair Value | Securities | Fair Value | Securities | ||||||||||||
| REITs and real estate companies | $ | 2,365,000 | 38.3 | % | $ | 11,624,000 | 32.5 | % | ||||||||
| Energy | 6,374,000 | 17.8 | % | |||||||||||||
| Communication services | 4,872,000 | 13.6 | % | |||||||||||||
| Financial services | 3,873,000 | 10.8 | % | |||||||||||||
| Industrials | 3,746,000 | 10.5 | % | |||||||||||||
| Basic material | 1,209,000 | 19.6 | % | 1,797,000 | 5.0 | % | ||||||||||
| Energy | 767,000 | 12.4 | % | |||||||||||||
| Industrials | 484,000 | 7.8 | % | |||||||||||||
| Corporate bonds | 417,000 | 6.7 | % | |||||||||||||
| Consumer cyclical | 295,000 | 4.8 | % | 1,702,000 | 4.8 | % | ||||||||||
| Financial services | 282,000 | 4.6 | % | |||||||||||||
| Communication services | 157,000 | 2.5 | % | |||||||||||||
| Healthcare | 981,000 | 2.7 | % | |||||||||||||
| Technology | 121,000 | 2.0 | % | 442,000 | 1.2 | % | ||||||||||
| Other | 81,000 | 1.3 | % | 381,000 | 1.1 | % | ||||||||||
| $ | 6,178,000 | 100.0 | % | $ | 35,792,000 | 100.0 | % | |||||||||
As of MarchDecember 31, 2021, the Company’s investment portfolio is diversified with 13669 different equity positions. The Company does not hold anyheld one equity security that is more than 10% of the equity value of the portfolio. The largest security position represents 9%21% of the portfolio and consists of the common stock of Colony FinancialViacom CBS, Inc. (NYSE: CLNY)(NASDAQ: VIACP) which is included in the REITs and real estate companies’communication services industry group.
As of June 30, 2020,2021, the Company’s investment portfolio is diversified with 5983 different equity positions. The Company holds two equity securities that comprised more than 10% of the equity value of the portfolio. The two largest security position represents 19%positions represent 12% and 11% of the portfolio and consists of the common stock of American Realty Investors,DigitalBridge Group, Inc. (NYSE: ARL)(NASDAQ: DBRG) and Viacom CBS, Inc. (NASDAQ: VIACP), which isare included in the REITs and real estate companies’companies and communication services industry group.group, respectively.
The following table shows the net income (loss) gain on the Company’s marketable securities and the associated margin interest and trading expenses for the respective periods:
| For the three months ended December 31, | 2021 | 2020 | ||||||
| Net (loss) gain on marketable securities | $ | (120,000 | ) | $ | 3,501,000 | |||
| Net (loss) on marketable securities - Comstock | (2,231,000 | ) | (44,000 | ) | ||||
| Impairment loss on other investments | (41,000 | ) | (27,000 | ) | ||||
| Dividend and interest income | 462,000 | 81,000 | ||||||
| Margin interest expense | (204,000 | ) | (161,000 | ) | ||||
| Trading and management expenses | (156,000 | ) | (126,000 | ) | ||||
| Net (loss) gain from investment transactions | $ | (2,290,000 | ) | $ | 3,224,000 | |||
| -27- |
| For the three months ended March 31, | 2021 | 2020 | ||||||
| Net gain (loss) on marketable securities | $ | 5,638,000 | $ | (2,393,000 | ) | |||
| Impairment loss on other investments | (30,000 | ) | (103,000 | ) | ||||
| Dividend and interest income | 158,000 | 105,000 | ||||||
| Margin interest expense | (238,000 | ) | (114,000 | ) | ||||
| Trading and management expenses | (124,000 | ) | (142,000 | ) | ||||
| Net income (loss) from investment transactions | $ | 5,404,000 | $ | (2,647,000 | ) | |||
| For the nine months ended March 31, | 2021 | 2020 | ||||||||||||||
| Net gain (loss) on marketable securities | $ | 8,937,000 | $ | (2,961,000 | ) | |||||||||||
| For the six months ended December 31, | 2021 | 2020 | ||||||||||||||
| Net (loss) gain on marketable securities | $ | (1,938,000 | ) | $ | 3,248,000 | |||||||||||
| Net (loss) gain on marketable securities - Comstock | (2,581,000 | ) | 51,000 | |||||||||||||
| Impairment loss on other investments | (119,000 | ) | (103,000 | ) | (41,000 | ) | (89,000 | ) | ||||||||
| Dividend and interest income | 363,000 | 346,000 | 649,000 | 205,000 | ||||||||||||
| Margin interest expense | (519,000 | ) | (366,000 | ) | (426,000 | ) | (281,000 | ) | ||||||||
| Trading and management expenses | (399,000 | ) | (424,000 | ) | (288,000 | ) | (275,000 | ) | ||||||||
| Net income (loss) from investment transactions | $ | 8,263,000 | $ | (3,508,000 | ) | |||||||||||
| Net (loss) gain from investment transactions | $ | (4,625,000 | ) | $ | 2,859,000 | |||||||||||
FINANCIAL CONDITION AND LIQUIDITY
The Company had cash and cash equivalents of $8,880,000$12,168,000 and $14,163,000$6,808,000 as of MarchDecember 31, 2021 and June 30, 2021, respectively. The Company had marketable securities, net of margin due to securities brokers, of $18,184,000 and $21,456,000 as of December 31, 2021 and June 30, 2020, respectively. The Company had net funds available from its investments inThese marketable securities are short-term investments and liquid in nature.
On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000. Upon the dissolution of $22,714,000 as of March 31,Justice in December 2021, after $9,021,000 duePortsmouth assumed Justice’s note payable to securities broker and $5,261,000 obligations for securities sold. As of June 30, 2020, the Company had net funds available from investments in marketable securities of $4,308,000 after $1,576,000 due to securities broker and $294,000 obligations for securities sold. In addition, the Hotel had $5,785,000 and $10,666,000 of restricted cash held by its senior lender Wells Fargo Bank, N.A. (“Lender”) as of March 31, 2021 and June 30, 2020, respectively. Of the $10,666,000 restricted cash held as of June 30, 2020, $2,432,000 was for a possible future property improvement plan (“PIP”) requested by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i) January 2030, which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. On August 19, 2020, Lender released PIP depositsInterGroup in the amount of $2,379,000$11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. During the six months ending December 31, 2021, InterGroup advanced $4,700,000 to the Hotel.Hotel, bringing the total amount due to InterGroup to $11,350,000 at December 31, 2021. Portsmouth could amend its by-laws and increase the number of authorized shares in order to issue additional shares to raise capital in the public markets if needed.
In order to increase our liquidity position and to take advantage of the favorable interest rate environment, we refinanced our 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, we refinanced one of our California properties and generated net proceeds of $1,144,000. During the fiscal year ended June 30, 2021, we completed refinancing on six of our California properties and generated net proceeds of $6,762,000. During the six months ending December 31, 2021, we refinanced five of our properties’ existing mortgages and obtained a mortgage note payable on one of our California properties, generating net proceeds totaling $16,099,000 as a result. We are currently evaluating other refinancing opportunities and we could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. The funds were utilizedCompany has an uncollateralized $5,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) and the entire $5,000,000 is available to fund operating expenses, including franchise and management fees and other expenses.be drawn down as of December 31, 2021 should additional liquidity be necessary.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”Loan”) with CIBC Bank USA under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES ActAct”) administered by the U.S. Small Business Administration. The PartnershipAdministration (the “SBA”). Justice received proceeds of $4,719,000 from the SBA Loan - Justice.Loan. In accordance with the requirements of the CARES Act, Justice has used the proceeds from the loan primarilySBA Loan for payroll costs. As of March 31, 2021, Justice had used all proceeds of the SBA Loan - Justice incosts and other qualified expenses. The SBA Loan - Justice iswas scheduled to mature on April 9, 2022 and haswith a 1.00% interest rate. rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. On June 10, 2021, the SBA Loan was forgiven in full.
On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of March 31, 2021, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup was scheduled to mature on April 27, 2022 and had a 1.00% interest rate. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. If the SBA approves the forgiveness amount, all payments of principal and interest are deferred until the date the forgiveness amount is remitted by the SBA to CIBC. If the SBA does not forgive any amount of the loan, payments would start within 30 days. All unforgiven portion of the principal and accrued interest will be due at maturity. During the quarter ended December 31, 2020, Justice and InterGroup submitted applications for full loan forgiveness. As ofOn March 31,17, 2021, the SBA has not forgiven the SBA Loan – Justice. As of March 31, 2021, the SBA hasInterGroup was forgiven the full $453,000 of the SBA Loan – InterGroup.in full.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice will usehad used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan iswas scheduled to mature on February 3, 2026, and hashad a 1.00% interest rate, and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. As of March 31,On November 19, 2021, unused portion of the Second SBA Loan was $350,000.
In order to increase its liquidity positionforgiven in full and to take advantage$2,000,000 was recorded as gain on debt extinguishment on the condensed consolidated statement of operations for the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, InterGroup refinanced one of its California properties and generated net proceeds of $1,144,000. During the ninesix months ended MarchDecember 31, 2021, InterGroup completed refinancing on three of its California properties and generated net proceeds of $5,384,000. InterGroup is currently evaluating other refinancing opportunities and it could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. InterGroup has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) and the entire $8,000,000 is available to be drawn down as of March 31, 2021 should additional liquidity be necessary. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000 and realized a gain on the sale of approximately $12,043,000. Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000 as InterGroup had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale.2021.
| -28- |
As the sole general partner of Justice that controls approximately 97.5% of the voting interest in the Partnership, Portsmouth has the ability to amend the partnership agreement to allow for capital calls to the limited partners of Justice if needed. The majority of any capital calls will be met by Portsmouth. Portsmouth will have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup to meet any capital calls and its other obligations during the next twelve months and beyond. On August 28, 2020, the Board of InterGroup passed resolution to provide funding to Portsmouth if necessary. On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000. Since December 2020, InterGroup has advanced $2,950,000 to Justice per the aforementioned loan modification agreement. The Partnership is also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order to raise additional capital.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy and low revenue per available room (“RevPAR”) were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off balanceoff-balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of MarchDecember 31, 2021, the Company’s material financial obligations which also includes interest payments.
| 3 Months | Year | Year | Year | Year | 6 Months | Year | Year | Year | Year | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 181,041,000 | $ | 764,000 | $ | 3,199,000 | $ | 28,470,000 | $ | 108,407,000 | $ | 3,797,000 | $ | 36,404,000 | $ | 196,118,000 | $ | 1,431,000 | $ | 12,960,000 | $ | 108,321,000 | $ | 3,866,000 | $ | 1,066,000 | $ | 68,474,000 | ||||||||||||||||||||||||||||
| SBA loans and other notes payable | 7,502,000 | 119,000 | 5,200,000 | 183,000 | - | - | 2,000,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Related party notes payable | 4,228,000 | 379,000 | 567,000 | 567,000 | 567,000 | 567,000 | 1,581,000 | 3,804,000 | 283,000 | 567,000 | 567,000 | 567,000 | 567,000 | 1,253,000 | ||||||||||||||||||||||||||||||||||||||||||
| Interest | 30,600,000 | 1,816,000 | 8,778,000 | 7,981,000 | 4,761,000 | 1,243,000 | 6,021,000 | 34,564,000 | 4,533,000 | 8,723,000 | 5,376,000 | 2,241,000 | 2,126,000 | 11,565,000 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 223,371,000 | $ | 3,078,000 | $ | 17,744,000 | $ | 37,201,000 | $ | 113,735,000 | $ | 5,607,000 | $ | 46,006,000 | $ | 234,486,000 | $ | 6,247,000 | $ | 22,250,000 | $ | 114,264,000 | $ | 6,674,000 | $ | 3,759,000 | $ | 81,292,000 | ||||||||||||||||||||||||||||
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 InterstateAimbridge 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’s income is not viewed by management as material.
The Company’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.
| -29- |
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 ninesix months ended MarchDecember 31, 2021. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 20202021 for a summary of the critical accounting policies.
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, the Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company’s internal control over financial reporting during the 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.
OTHER INFORMATION
DuringItem 1. LEGAL PROCEEDINGS
The Company may be subject to legal proceedings, claims, and litigation arising in the period ending March 31, 2021, there were no pendingordinary course of business. The Company will defend itself vigorously against any such claims. Management does not believe that the impact of such matters will have a material effect on the financial conditions or threatened legal actions.result of operations when resolved.
Item 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no events that are required to be reported under this Item.
Item 3. DEFAULTS UPON SENIOR SECURITIES
There have been no events that are required to be reported under this Item.
Item 4. MINE SAFETY DISCLOSURES
There have been no events that are required to be reported under this Item.
As disclosed in its Definitive Information Statement on Schedule 14C, filed with the SEC on January 25, 2021, personnel of the former Santa Fe Financial Corporation (“Santa Fe”) received shareholder approvalItem 5. OTHER INFORMATION
There have been no events that are required to distribute its assets, as described and subsequently dissolve, all as set forth in the Information Statement. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of Dissolution from the State of Nevada, and Santa Fe is now fully dissolved and no longer in legal existence.be reported under this Item.
Item 6. EXHIBITS
| 101.INS | Inline XBRL Instance Document | ||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | ||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | ||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | ||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | ||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | ||
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 14, 2022 | by | ||
| /s/ John V. Winfield | |||
| John V. Winfield | |||
| President, Chairman of the Board and | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Date: | by | /s/ Danfeng Xu | |
| Danfeng Xu | |||
| Treasurer and Controller | |||
| (Principal Financial Officer) | |||