UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20162017
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to_________
Commission File Number 0-4057
PORTSMOUTH SQUARE, INC.
(Exact name of registrant as specified in its charter)
| CALIFORNIA | 94-1674111 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| Incorporation or organization) | Identification No.) |
10940 Wilshire Blvd., Suite 2150,1100 Glendon Avenue, PH1, Los Angeles, California 90024
(Address of principal executive offices)(Zip Code)
(310) 889-2500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
xYes¨No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer¨ | Accelerated filer¨ |
| Non-accelerated filer¨ | Smaller reporting companyx |
| Emerging growth company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
¨ Yesx No
The number of shares outstanding of registrant’s Common Stock, as of April 22, 2016,28, 2017 was 734,183.
TABLE OF CONTENTS
| - 2 - |
FINANCIAL INFORMATION
Item 1 – Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | March 31, 2016 | June 30, 2015 | ||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | 37,753,000 | $ | 36,567,000 | ||||
| Investment in real estate | 973,000 | 973,000 | ||||||
| Investment in marketable securities | 3,838,000 | 1,301,000 | ||||||
| Other investments, net | 380,000 | 5,003,000 | ||||||
| Cash and cash equivalents | 5,265,000 | 1,077,000 | ||||||
| Restricted cash - mortgage impounds | 394,000 | 587,000 | ||||||
| Accounts receivable - Hotel, net | 2,909,000 | 6,791,000 | ||||||
| Other assets, net | 2,503,000 | 3,399,000 | ||||||
| Deferred tax asset | 11,103,000 | 8,351,000 | ||||||
| Total assets | $ | 65,118,000 | $ | 64,049,000 | ||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities | $ | 15,557,000 | $ | 14,622,000 | ||||
| Obligations for securities sold | 19,000 | - | ||||||
| Related party and other notes payable | 14,212,000 | 9,155,000 | ||||||
| Mortgage notes payable - Hotel | 117,000,000 | 117,000,000 | ||||||
| Total liabilities | 146,788,000 | 140,777,000 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders' deficit: | ||||||||
| Common stock, no par value: Authorized shares - 750,000; 734,183 shares issued and outstanding shares | 2,092,000 | 2,092,000 | ||||||
| Accumulated deficit | (77,049,000 | ) | (72,523,000 | ) | ||||
| Total Portsmouth shareholders' deficit | (74,957,000 | ) | (70,431,000 | ) | ||||
| Noncontrolling interest | (6,713,000 | ) | (6,297,000 | ) | ||||
| Total shareholders' deficit | (81,670,000 | ) | (76,728,000 | ) | ||||
| Total liabilities and shareholders' deficit | $ | 65,118,000 | $ | 64,049,000 | ||||
| As of | March 31, 2017 | June 30, 2016 | ||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | 35,887,000 | $ | 37,744,000 | ||||
| Investment in real estate | 973,000 | 973,000 | ||||||
| Investment in marketable securities | 3,855,000 | 4,038,000 | ||||||
| Other investments, net | 394,000 | 359,000 | ||||||
| Cash and cash equivalents | 5,569,000 | 3,378,000 | ||||||
| Restricted cash - mortgage impounds | 2,337,000 | 898,000 | ||||||
| Accounts receivable - Hotel, net | 2,992,000 | 3,218,000 | ||||||
| Other assets, net | 937,000 | 1,274,000 | ||||||
| Deferred tax asset | 10,742,000 | 11,088,000 | ||||||
| Total assets | $ | 63,686,000 | $ | 62,970,000 | ||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities | $ | 14,931,000 | $ | 17,181,000 | ||||
| Due to securities broker | 750,000 | 291,000 | ||||||
| Obligations for securities sold | 381,000 | 29,000 | ||||||
| Related party and other notes payable | 13,006,000 | 11,246,000 | ||||||
| Mortgage notes payable - Hotel, net | 116,008,000 | 116,160,000 | ||||||
| Total liabilities | 145,076,000 | 144,907,000 | ||||||
| Shareholders' deficit: | ||||||||
| Common stock, no par value: Authorized shares - 750,000; 734,183 shares issued and outstanding shares | 2,092,000 | 2,092,000 | ||||||
| Accumulated deficit | (76,960,000 | ) | (77,365,000 | ) | ||||
| Total Portsmouth shareholders' deficit | (74,868,000 | ) | (75,273,000 | ) | ||||
| Noncontrolling interest | (6,522,000 | ) | (6,664,000 | ) | ||||
| Total shareholders' deficit | (81,390,000 | ) | (81,937,000 | ) | ||||
| Total liabilities and shareholders' deficit | $ | 63,686,000 | $ | 62,970,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| - 3 - |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months ended March 31, | 2016 | 2015 | 2017 | 2016 | ||||||||||||
| Revenue - Hotel | $ | 14,481,000 | $ | 13,983,000 | $ | 13,495,000 | $ | 14,481,000 | ||||||||
| Costs and operating expenses | ||||||||||||||||
| Hotel operating expenses | (11,831,000 | ) | (11,997,000 | ) | (10,333,000 | ) | (11,831,000 | ) | ||||||||
| Hotel restructuring costs | (5,236,000 | ) | - | - | (5,236,000 | ) | ||||||||||
| Hotel depreciation and amortization expense | (731,000 | ) | (696,000 | ) | (641,000 | ) | (731,000 | ) | ||||||||
| General and administrative expense | (163,000 | ) | (159,000 | ) | (141,000 | ) | (163,000 | ) | ||||||||
| Total costs and operating expenses | (17,961,000 | ) | (12,852,000 | ) | (11,115,000 | ) | (17,961,000 | ) | ||||||||
| Income (loss) from operations | (3,480,000 | ) | 1,131,000 | 2,380,000 | (3,480,000 | ) | ||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense - mortgage | (1,921,000 | ) | (1,913,000 | ) | (2,005,000 | ) | (1,921,000 | ) | ||||||||
| Net loss on marketable securities | (166,000 | ) | (244,000 | ) | (250,000 | ) | (166,000 | ) | ||||||||
| Net unrealized loss on other investments | - | (18,000 | ) | |||||||||||||
| Impairment loss on other investments | (91,000 | ) | (145,000 | ) | (44,000 | ) | (91,000 | ) | ||||||||
| Dividend and interest income | 4,000 | - | 13,000 | 4,000 | ||||||||||||
| Trading and margin interest expense | (28,000 | ) | (72,000 | ) | (39,000 | ) | (28,000 | ) | ||||||||
| Other expense, net | (2,202,000 | ) | (2,392,000 | ) | ||||||||||||
| Total other expense, net | (2,325,000 | ) | (2,202,000 | ) | ||||||||||||
| Loss before income taxes | (5,682,000 | ) | (1,261,000 | ) | ||||||||||||
| Income tax benefit | 1,970,000 | 503,000 | ||||||||||||||
| Income (loss) before income taxes | 55,000 | (5,682,000 | ) | |||||||||||||
| Income tax (expense) benefit | (18,000 | ) | 1,970,000 | |||||||||||||
| Net loss | (3,712,000 | ) | (758,000 | ) | ||||||||||||
| Less: Net loss attributable to the noncontrolling interest | 369,000 | 53,000 | ||||||||||||||
| Net income (loss) | 37,000 | (3,712,000 | ) | |||||||||||||
| Less: Net (income) loss attributable to the noncontrolling interest | (26,000 | ) | 369,000 | |||||||||||||
| Net loss attributable to Portsmouth | $ | (3,343,000 | ) | $ | (705,000 | ) | ||||||||||
| Net income (loss) attributable to Portsmouth Square, Inc. | $ | 11,000 | $ | (3,343,000 | ) | |||||||||||
| Basic and diluted net loss per share attributable to Portsmouth | $ | (4.55 | ) | $ | (0.96 | ) | ||||||||||
| Basic and diluted net income (loss) per share attributable to Portsmouth Square, Inc. | $ | 0.01 | $ | (4.55 | ) | |||||||||||
| Weighted average number of common shares outstanding - basic and diluted | 734,183 | 734,183 | 734,183 | 734,183 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| - 4 - |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the nine months ended March 31, | 2016 | 2015 | 2017 | 2016 | ||||||||||||
| Revenue - Hotel | $ | 43,332,000 | $ | 42,857,000 | $ | 40,937,000 | $ | 43,332,000 | ||||||||
| Costs and operating expenses | ||||||||||||||||
| Hotel operating expenses | (34,993,000 | ) | (35,868,000 | ) | (30,515,000 | ) | (34,993,000 | ) | ||||||||
| Hotel restructuring costs | (5,236,000 | ) | - | - | (5,236,000 | ) | ||||||||||
| Hotel depreciation and amortization expense | (2,153,000 | ) | (2,002,000 | ) | (2,065,000 | ) | (2,153,000 | ) | ||||||||
| General and administrative expense | (536,000 | ) | (504,000 | ) | (439,000 | ) | (536,000 | ) | ||||||||
| Total costs and operating expenses | (42,918,000 | ) | (38,374,000 | ) | (33,019,000 | ) | (42,918,000 | ) | ||||||||
| Income from operations | 414,000 | 4,483,000 | 7,918,000 | 414,000 | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense - mortgage | (5,803,000 | ) | (5,876,000 | ) | (5,902,000 | ) | (5,803,000 | ) | ||||||||
| Loss on disposal of assets | (30,000 | ) | (51,000 | ) | - | (30,000 | ) | |||||||||
| Net loss on marketable securities | (1,940,000 | ) | (1,277,000 | ) | (985,000 | ) | (1,940,000 | ) | ||||||||
| Net unrealized loss on other investments | (32,000 | ) | (39,000 | ) | - | (32,000 | ) | |||||||||
| Impairment loss on other investments | (173,000 | ) | (145,000 | ) | (55,000 | ) | (173,000 | ) | ||||||||
| Dividend and interest income | 6,000 | 169,000 | 33,000 | 6,000 | ||||||||||||
| Trading and margin interest expense | (86,000 | ) | (233,000 | ) | (116,000 | ) | (86,000 | ) | ||||||||
| Other expense, net | (8,058,000 | ) | (7,452,000 | ) | ||||||||||||
| Total other expense, net | (7,025,000 | ) | (8,058,000 | ) | ||||||||||||
| Loss before income taxes | (7,644,000 | ) | (2,969,000 | ) | ||||||||||||
| Income tax benefit | 2,752,000 | 1,232,000 | ||||||||||||||
| Income (loss) before income taxes | 893,000 | (7,644,000 | ) | |||||||||||||
| Income tax (expense) benefit | (346,000 | ) | 2,752,000 | |||||||||||||
| Net loss | (4,892,000 | ) | (1,737,000 | ) | ||||||||||||
| Less: Net loss attributable to the noncontrolling interest | 366,000 | 94,000 | ||||||||||||||
| Net income (loss) | 547,000 | (4,892,000 | ) | |||||||||||||
| Less: Net (income) loss attributable to the noncontrolling interest | (142,000 | ) | 366,000 | |||||||||||||
| Net loss attributable to Portsmouth | $ | (4,526,000 | ) | $ | (1,643,000 | ) | ||||||||||
| Net income (loss) attributable to Portsmouth Square, Inc. | $ | 405,000 | $ | (4,526,000 | ) | |||||||||||
| Basic and diluted net loss per share attributable to Portsmouth | $ | (6.16 | ) | $ | (2.24 | ) | ||||||||||
| Basic and diluted net income (loss) per share attributable to Portsmouth Square, Inc. | $ | 0.55 | $ | (6.16 | ) | |||||||||||
| Weighted average number of common shares outstanding - basic and diluted | 734,183 | 734,183 | 734,183 | 734,183 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| - 5 - |
CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the nine months ended March 31, | 2016 | 2015 | 2017 | 2016 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net loss | $ | (4,892,000 | ) | $ | (1,737,000 | ) | ||||||||||
| Adjustments to reconcile net loss to net cash privided by (used in) operating activities: | ||||||||||||||||
| Net income (loss) | $ | 547,000 | $ | (4,892,000 | ) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
| Net unrealized loss on marketable securities | 1,979,000 | 1,292,000 | 1,071,000 | 1,979,000 | ||||||||||||
| Deferred taxes | 346,000 | (2,752,000 | ) | |||||||||||||
| Unrealized loss on other investments | 41,000 | 18,000 | - | 41,000 | ||||||||||||
| Impairment loss on other investments | 173,000 | - | 55,000 | 173,000 | ||||||||||||
| Loss on disposal of assets | 30,000 | 51,000 | - | 30,000 | ||||||||||||
| Depreciation and amortization | 2,153,000 | 2,002,000 | ||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Depreciation | 2,065,000 | 2,153,000 | ||||||||||||||
| Amortization of loan costs | 84,000 | 84,000 | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Investment in marketable securities | (107,000 | ) | 174,000 | (888,000 | ) | (107,000 | ) | |||||||||
| Accounts receivable | 3,882,000 | 301,000 | 2,226,000 | 3,882,000 | ||||||||||||
| Other assets | 1,023,000 | 14,000 | 337,000 | 939,000 | ||||||||||||
| Accounts payable and other liabilities | 935,000 | (1,444,000 | ) | (2,250,000 | ) | 935,000 | ||||||||||
| Due to securities broker | - | (155,000 | ) | 459,000 | - | |||||||||||
| Obligations for securities sold | 19,000 | - | 352,000 | 19,000 | ||||||||||||
| Deferred tax asset | (2,752,000 | ) | (1,232,000 | ) | ||||||||||||
| Net cash provided by (used in) operating activities | 2,484,000 | (716,000 | ) | |||||||||||||
| Net cash provided by operating activities | 4,404,000 | 2,484,000 | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Payments for hotel furniture, equipment and building improvements | (3,496,000 | ) | (4,083,000 | ) | (208,000 | ) | (3,496,000 | ) | ||||||||
| Investment in other investments | (90,000 | ) | - | |||||||||||||
| Net cash used in investing activities | (3,496,000 | ) | (4,083,000 | ) | (298,000 | ) | (3,496,000 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Restricted cash - withdrawal of mortgage impounds, net | 193,000 | 341,000 | ||||||||||||||
| Net proceeds from mortgage and other notes payable | 5,057,000 | 4,509,000 | ||||||||||||||
| Restricted cash - (payments to) withdrawal of mortgage impounds, net | (1,439,000 | ) | 193,000 | |||||||||||||
| Net (payments) proceeds from mortgage and other notes payable | (476,000 | ) | 5,057,000 | |||||||||||||
| Redemption of noncontrolling interest | (50,000 | ) | - | - | (50,000 | ) | ||||||||||
| Net cash provided by financing activities | 5,200,000 | 4,850,000 | (1,915,000 | ) | 5,200,000 | |||||||||||
| Net increase in cash and cash equivalents | 4,188,000 | 51,000 | 2,191,000 | 4,188,000 | ||||||||||||
| Cash and cash equivalents at the beginning of the period | 1,077,000 | 1,058,000 | 3,378,000 | 1,077,000 | ||||||||||||
| Cash and cash equivalents at the end of the period | $ | 5,265,000 | $ | 1,109,000 | $ | 5,569,000 | $ | 5,265,000 | ||||||||
| Supplemental information: | ||||||||||||||||
| Interest paid | $ | 5,804,000 | $ | 5,906,000 | $ | 5,942,000 | $ | 5,804,000 | ||||||||
| Non-cash transaction: | ||||||||||||||||
| Key money incentive fee | 2,000,000 | - | ||||||||||||||
| Conversion of other investments to marketable securities | $ | 4,410,000 | $ | - | $ | - | $ | 4,410,000 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| - 6 - |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have been prepared by Portsmouth Square, Inc. (“Portsmouth” or the “Company”), without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance with generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which included only normal recurring adjustments) necessary for a fair statement of the financial position, cash flows and results of operations as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial statements of Portsmouth and the notes therein included in the Company's Annual Report on Form 10-K for the year ended June 30, 2015.2016. The June 30, 20152016 Condensed Consolidated Balance Sheet was derived from the Company’s Form 10-K for the year ended June 30, 2015.2016.
The results of operations for the three and nine months ended March 31, 20162017 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2016.2017.
ForPortsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California limited partnership (“Justice” or the three“Partnership”).Portsmouth has a 93.1% limited partnership interest in Justice and nine months ended March 31, 2016 and 2015,is the Company had no componentssole general partner. The financial statements of comprehensive income other than net income itself.Justice are consolidated with those of the Company.
As of March 31, 2016,2017, Santa Fe Financial Corporation (“Santa Fe”), a public company, owns approximately 68.8% of the outstanding common shares of Portsmouth Square, Inc. (“Portsmouth” or the “Company”).Portsmouth. Santa Fe is an 81.7%81.8%-owned subsidiary of The InterGroup Corporation (“InterGroup”), a public company. InterGroup also directly owns approximately 13.3%13.4% of the common stock of Portsmouth.
Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors, a California limited partnership (“Justice” or the “Partnership”).Portsmouth controls approximately 93% of the voting interest in Justice and is the sole general partner.
Justice, through its subsidiaries Justice Holdings Company, LLC (“Holdings”), a Delaware Limited Liability Company, Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”), owns a 543-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the Hotel)“Hotel”) and related facilities including a five level underground parking garage. Holdings and Mezzanine are both a wholly-owned subsidiaries of the Partnership; Operating is a wholly-owned subsidiary of Mezzanine. Mezzanine is the Mezzanine 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). Justice also hashad a Management Agreementmanagement agreement with Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. The management agreement with Prism had an original term of ten years, and can be terminatedsubject to the Partnership’s right to terminate at any time with or without cause by the Partnership owner.cause. Effective January 2014, the management agreement with Prism was amended by the Partnership.Partnership to change the nature of the services provided by Prism and the compensation payable to Prism, among other things. Prism’s management agreement was terminated upon its expiration date of February 3, 2017. Effective December 1, 2013, GMP Management, Inc. (“GMP”), a company owned by a Justice limited partner and a related party, also providesprovided management services for the Partnership pursuant to a management services agreement, with a three year term, subject to the Partnership’s right to terminate earlier for cause. In June 2016, GMP resigned. After a lengthy review process of several national third party hotel management companies, on February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Services Agreement, whichCompany, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to advance a termkey money incentive fee to the Hotel for capital improvements in the amount of 3 years, but which can be terminated earlier by$2,000,000 under certain terms and conditions described in a separate key money agreement. The $2,000,00 is included in accounts receivable in the Partnership for cause.
Portsmouth also receives management feescondensed consolidated balance sheets as a general partner of Justice for its services in overseeing and managing the Partnership’s assets. Those fees are eliminated in consolidation.
Basic loss per share is calculated based upon the weighted average number of common shares outstanding during each period. During the three and nine months March 31, 2016 and 2015, the Company did not have any potentially dilutive securities outstanding.2017.
| - 7 - |
SettlementThe parking garage that is part of Evon Litigationthe Hotel property was managed by Ace Parking pursuant to a contract with the Partnership. The contract was terminated with an effective termination date of October 4, 2016. The Company began managing the parking garage in-house after the termination of Ace Parking. Effective February 3, 2017, Interstate took over the management of the parking garage along with the Hotel.
On February 13, 2014, Evon Corporation ("Evon") filed a complaint in San Francisco Superior Court againstDue to Securities Broker
Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.
Obligations for Securities Sold
Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in the condensed consolidated statements of operations.
Income Tax
The Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax (expense) benefit during the nine months ended March 31, 2017 and 2016 represents the income tax effect on the Company’s pretax income (loss) which includes its share in the net income (loss) of the Hotel.
FINANCIAL CONDITION AND LIQUIDITY
The Company’s cash flows are primarily generated from its Hotel operations. The Company also receives cash generated from the investment of its cash and marketable securities and other investments.
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due thru January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period thru its maturity date of January 2024. As additional security for the mortgage loan, there is a limited guaranty executed by the Company in favor of mortgage lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan bears interest at 9.75% per annum and matures in January 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by the Company in favor of mezzanine lender.
Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors (“Justice” orlimited partnership’s $97,000,000 mortgage loan and the “Partnership"), a subsidiary$20,000,000 mezzanine loan, in order to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth was unable to satisfy independently as of March 31, 2017.
Despite an uncertain economy, the Hotel has continued to generate positive operating income. While the debt service requirements related the loans may create some additional risk for the Company and a limited partner and related party of Justice asserting contract and tort claims based on Justice’s withholding of $4.7 million from a payment dueits ability to Holdings to pay the transfer tax related to a redemption of partnership interestsgenerate cash flows in the Partnership previously reported byfuture, management believes that cash flows from the Company (the "Redemption"). On April 1, 2014, the defendants in the action removed the action to the United States District Court for the Northern District of California. Evon dismissed its complaint on April 8, 2014 and, that same day, filed a second complaint in San Francisco Superior Court substantially similar to the dismissed complaint, except for the omission of a federal cause of action. Evon alleged causes of action for breach of contract and breachoperations of the implied covenant of good faithHotel and fair dealing against Justice only; breach of fiduciary duty against Portsmouth only; conversion against Justice and Portsmouth; and fraud and concealment against Justice, Portsmouth and a Justice limited partner and a related party.
On June 27, 2014, the Partnership commenced an action in San Francisco Superior Court against Evon, Justice Holdings Company, LLC, a subsidiary of the Partnership (“Holdings”), and certain partners of the Partnership who elected an alternative redemption structure in the Partnership. The action seeks a declaration of the correct interpretation of (i) the special allocations sections of the Amended and Restated Agreement of Limited Partnership of Justice, with an effective date of January 1, 2013; and (ii) whether certain partners who elected the alternative redemption structure breached the governing Limited Partnership Interest Redemption Option Agreement. The complaint states that these declarations are relevantgarage will continue to preparationbe sufficient to meet all of the Partnership’s 2013 and 2014 state and federal tax returns and the associated Forms K-1 to be issued to affected current and former partners. The Partnership filed a First Amended Complaint on October 31, 2014. Evon filed a cross-complaint on December 9, 2014, alleging fraudulent concealmentfuture obligations and promissory fraud against the Partnership in connection with the redemption transaction.financial requirements.
On May 5, 2016, Justice Investors and Portsmouth entered into a settlement agreement relating to previously reported litigation with Evon Corporation and certain other parties. Under the settlement agreement, Justice Investors, a subsidiary of Portsmouth,will pay Evon Corporation $5,575,000 no later than January 10, 2017. This amount was recorded as restructuring cost during the quarter ended March 31, 2016. As of May 13, 2016, payments totaling approximately $2,600,000 were made related to this settlement.
Settlement of CCSF Litigation
During the quarter, the Company settled a legal matter that resulted in a benefit of approximately $389,000, this amount was recorded as a reduction of Hotel restructuring costs.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods beginning after December 15, 2016, which will require the Company to adopt these provisions in the first quarter of fiscal 2018. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. The Company has not yet selected a transition date nor have we determinedinvested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company's marketable securities are classified as trading with unrealized gains and losses recorded through the effectconsolidated statements of operations.
Management believes that its cash, marketable securities, and the standard on our ongoing financial reporting.cash flows generated from those assets and from the partnership management fees, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.
| - 8 - |
Recently Issued Accounting Pronouncements
In January 2016,August 2014, the FASB issued ASU No. 2014-15,Disclosure of Uncertainties about an update (ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): RecognitionEntity’s Ability to Continue as a Going Concern that requires management to evaluate whether there are conditions and Measurement of Financial Assetsevents that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and Financial Liabilities). The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entityannual basis. Management is required to measureprovide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the investment at fair value. 3) Eliminate the requirementCompany’s ability to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value ofcontinue as a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update becomegoing concern. ASU No. 2014-15 becomes effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.2016 and for interim reporting periods thereafter. The Company is currently evaluatingdoes not expect the impactadoption of adopting the new guidance on the consolidated financial statements, but it is not expectedthis ASU to have a material impact on its consolidated financial statements.
In November 2015,On June 16, 2016, the FASB issued Accounting Standards Update 2015-17,ASU 2016-13, “Income Taxes: Balance SheetFinancial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2020. The Company is currently reviewing the effect of ASU No. 2016-13.
On August 26, 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Deferred Taxes,Certain Cash Receipts and Cash Payments (Topic230)which.” This ASU is intended to improvereduce the diversity in practice around how deferred taxescertain transactions are classified on organizations’ balance sheets by eliminatingwithin the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrentstatement of cash flows. The Company adopted ASU No. 2016-15 in a classified balance sheet. Instead, organizations will now be required to classify all deferred tax assets and liabilities as noncurrent. The changes are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which means the first quarter of the Company’s fiscal year 2018. We are currently reviewing the ASU and assessing the potential2017 with no material impact on the consolidated financial statements.
In July 2015, the FASB issued Accounting Standard Update No. 2015-11,Simplifying the Measurement of Inventory("ASU 2015-11") which requires entities to measure most inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for annual and interim periods beginning after December 15, 2016. Though permitted, the Company does not plan to early adopt. We are currently evaluating the impact ASU 2015-11 will have on the Company's consolidatedour financial statements.
In April 2015, the FASB issued ASU 2015-03,Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual and interim periods within these annual periods beginning after December 15, 2015 and early application is permitted.We are in the process of evaluating this guidance.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810):Amendments to the Consolidation Analysis, which changes the consolidation analysis for both the variable interest model and for the voting model for limited partnerships and similar entities. ASU 2015-02 is effective for annual and interim periods beginning after December 15, 2015 and for interim periods within those fiscal years, early application is permitted. ASU 2015-02 provides for one of two methods of transition: retrospective application to each prior period presented; or recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. We are in the process of evaluating this guidance and our method of adoption.
In April 2014, the FASB issued ASU 2014-08,Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)(“ASU 2014-08”). The amendments in ASU 2014-08 provide guidance for the recognition of discontinued operations, change the requirements for reporting discontinued operations in ASC 205-20, “Discontinued Operations” (“ASC 205-20”) and require additional disclosures about discontinued operations. ASU 2014-08 is effective for the Company for annual periods beginning after December 15, 2014. The Company adopted this standard inbeginning with the quarter ended SeptemberDecember 31, 2016 and reclassified the debt issuance costs of $840,000 from Other Assets to Mortgage notes payable – Hotel, net on the June 30, 2015 and it did not have an impact on its2016 condensed consolidated financial statements as it relates primarily to how items are presented in the financial statements.balance sheet.
In May 2014, the FinancialFASB issued Accounting Standards Board (the "FASB") issued Accounting Standard Update No. 2014-09,Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)(“ASU 2014-09”) amending2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance isstandard will be effective for annual and interimthe Company in the first quarter of 2019, with the option to adopt it in the first quarter of 2018. We currently anticipate adopting the new standard effective July 1, 2019. The new standard also permits two methods of adoption: retrospectively to each prior reporting periods beginning after December 15, 2017,period presented (full retrospective method), or retrospectively with early adoption permitted for annual and interim reporting periods beginning after December 15, 2016.the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company does not plan to early adopt. We are currently evaluatinganticipates adopting the standard using the modified retrospective method. While the Company is still in the process of completing the analysis on the impact ASU 2014-09this guidance will have on the Company's consolidated financial statements.
In August 2014, the FASB issued Accounting Standard Update No. 2014-15,Presentation of Financial Statements—Going Concern("ASU 2014-15"). The new guidance explicitly requires that management assess an entity's ability to continue as a going concernstatements and may require additional detailed disclosures. ASU 2014-15 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Though permitted,related disclosures, the Company does not planexpect the impact to early adopt. The Company does not believe that this standard will have a significant impact on its consolidated financial statements.be material.
NOTE 2 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| March 31, 2016 | Cost | Depreciation | Value | |||||||||||||||||||||
| March 31, 2017 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||||||||
| Furniture and equipment | 26,778,000 | (22,729,000 | ) | 4,049,000 | 27,674,000 | (24,212,000 | ) | 3,462,000 | ||||||||||||||||
| Building and improvements | 55,968,000 | (23,388,000 | ) | 32,580,000 | 55,918,000 | (24,617,000 | ) | 31,301,000 | ||||||||||||||||
| $ | 83,870,000 | $ | (46,117,000 | ) | $ | 37,753,000 | $ | 84,716,000 | $ | (48,829,000 | ) | $ | 35,887,000 | |||||||||||
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| June 30, 2015 | Cost | Depreciation | Value | |||||||||||||||||||||
| June 30, 2016 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||||||||
| Furniture and equipment | 25,958,000 | (21,605,000 | ) | 4,353,000 | 28,857,000 | (23,097,000 | ) | 5,760,000 | ||||||||||||||||
| Building and improvements | 53,641,000 | (22,551,000 | ) | 31,090,000 | 54,517,000 | (23,657,000 | ) | 30,860,000 | ||||||||||||||||
| $ | 80,723,000 | $ | (44,156,000 | ) | $ | 36,567,000 | $ | 84,498,000 | $ | (46,754,000 | ) | $ | 37,744,000 | |||||||||||
NOTE 3 - 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 March 31, 20162017 and June 30, 2015,2016, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:
| - |
| Gross | Gross | Net | Fair | |||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Value | |||||||||||||||
| As of March 31, 2016 | ||||||||||||||||||||
| Corporate Equities | $ | 6,522,000 | $ | 251,000 | $ | (2,935,000 | ) | $ | (2,684,000 | ) | $ | 3,838,000 | ||||||||
| As of June 30, 2015 | ||||||||||||||||||||
| Corporate Equities | $ | 2,009,000 | $ | 240,000 | $ | (948,000 | ) | $ | (708,000 | ) | $ | 1,301,000 | ||||||||
| Gross | Gross | Net | Fair | |||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Value | |||||||||||||||
| As of March 31, 2017 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 7,744,000 | $ | 283,000 | $ | (4,172,000 | ) | $ | (3,889,000 | ) | $ | 3,855,000 | ||||||||
| As of June 30, 2016 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 6,877,000 | $ | 272,000 | $ | (3,111,000 | ) | $ | (2,839,000 | ) | $ | 4,038,000 | ||||||||
As of March 31, 2017 and June 30, 2016, approximately 87%51% and 77%, respectively, of the investment marketable securities balance above is comprised of the common stock of Comstock Mining, Inc.
As of March 31, 20162017 and June 30, 2015,2016, the Company had $1,181,000$4,126,000 and $940,000,$1,138,000, respectively, of unrealized losses related to securities held for over one year.
Net loss (gain) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of the two components for the three and nine months ended March 31, 20162017 and 2015,2016, respectively.
| For the three months ended March 31, | 2016 | 2015 | 2017 | 2016 | ||||||||||||
| Realized gain (loss) on marketable securities | $ | 64,000 | $ | (41,000 | ) | |||||||||||
| Realized gain on marketable securities | $ | 48,000 | $ | 64,000 | ||||||||||||
| Unrealized loss on marketable securities | (230,000 | ) | (203,000 | ) | (298,000 | ) | (230,000 | ) | ||||||||
| Net loss on marketable securities | $ | (166,000 | ) | $ | (244,000 | ) | $ | (250,000 | ) | $ | (166,000 | ) | ||||
| For the nine months ended March 31, | 2016 | 2015 | 2017 | 2016 | ||||||||||||
| Realized gain on marketable securities | $ | 39,000 | $ | 15,000 | $ | 86,000 | $ | 39,000 | ||||||||
| Unrealized loss on marketable securities | (1,979,000 | ) | (1,292,000 | ) | (1,071,000 | ) | (1,979,000 | ) | ||||||||
| Net loss on marketable securities | $ | (1,940,000 | ) | $ | (1,277,000 | ) | $ | (985,000 | ) | $ | (1,940,000 | ) | ||||
NOTE 4 – OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the Securities Investment Committeesecurities 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 condensed balance sheetsheets as part of other investments, net of other than temporary impairment losses. Other investments also include non-marketable warrants carried at fair value.
Other investments, net consist of the following:following as of:
| Type | March 31, 2016 | June 30, 2015 | ||||||
| Preferred stock - Comstock, at cost | $ | - | $ | 4,410,000 | ||||
| Private equity hedge fund, at cost | 333,000 | 456,000 | ||||||
| Other preferred stock | 47,000 | 112,000 | ||||||
| Warrants - at fair value | - | 25,000 | ||||||
| $ | 380,000 | $ | 5,003,000 | |||||
| Type | March 31, 2017 | June 30, 2016 | ||||||
| Private equity hedge fund, at cost | $ | 289,000 | $ | 333,000 | ||||
| Other investments | 105,000 | 26,000 | ||||||
| $ | 394,000 | $ | 359,000 | |||||
As of June 30, 2015, the Company had $4,410,000 (4,410 preferred shares) held in Comstock Mining, Inc. (“Comstock” – OTCBB: LODE) 7 1/2% Series A-1 Convertible Preferred Stock (the “A-1 Preferred”).
| - 10 - |
On August 27, 2015, all of such preferred stock was converted into common stock of Comstock. Such shares are now included on the balance sheet under “Investment in marketable securities”.
NOTE 5 - FAIR VALUE MEASUREMENTS
The carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities) or the nature and terms of the obligation (i.e., related party and other notes payable and mortgage notes payable).
The assets measured at fair value on a recurring basis are as follows:
| As of March 31, 2016 | Level 1 | Level 3 | Total | |||||||||
| Assets: | ||||||||||||
| Investment in marketable securities: | ||||||||||||
| Basic materials | $ | 3,351,000 | $ | - | $ | 3,351,000 | ||||||
| Other | 487,000 | - | 487,000 | |||||||||
| 3,838,000 | - | 3,838,000 | ||||||||||
| As of June 30, 2015 | Level 1 | Level 3 | Total | |||||||||||||||||
| As of | March 31, 2017 | June 30, 2016 | ||||||||||||||||||
| Assets: | Total - Level 1 | Total - Level 1 | ||||||||||||||||||
| Other investments - warrants | $ | - | $ | 25,000 | $ | 25,000 | ||||||||||||||
| Investment in marketable securities: | ||||||||||||||||||||
| Basic materials | 926,000 | - | 926,000 | $ | 2,014,000 | $ | 3,102,000 | |||||||||||||
| Energy | 655,000 | 388,000 | ||||||||||||||||||
| Other | 375,000 | - | 375,000 | 1,186,000 | 548,000 | |||||||||||||||
| 1,301,000 | - | 1,301,000 | $ | 3,855,000 | $ | 4,038,000 | ||||||||||||||
| $ | 1,301,000 | $ | 25,000 | $ | 1,326,000 | |||||||||||||||
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date. The fair value of the warrants was determined based upon a Black-Scholes option valuation model.
Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments, net (non-marketable securities),” that were initially measured at cost and have been written down to fair value as a result of impairment or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt instruments). The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:
| Net loss for the nine months | ||||||||||||
| Assets | Level 3 | March 31, 2017 | ended March 31, 2017 | |||||||||
| Other non-marketable investments | $ | 394,000 | $ | 394,000 | $ | (55,000 | ) | |||||
| Net loss for the nine months | ||||||||||||
| Assets | Level 3 | March 31, 2016 | ended March 31, 2016 | |||||||||
| Other non-marketable investments | $ | 380,000 | $ | 380,000 | $ | (173,000 | ) | |||||
| Net loss for the nine months | Net loss for the nine months | |||||||||||||||||||||||
| Assets | Level 3 | June 30, 2015 | ended March 31, 2015 | Level 3 | June 30, 2016 | ended March 31, 2016 | ||||||||||||||||||
| Other non-marketable investments | $ | 4,978,000 | $ | 4,978,000 | $ | (145,000 | ) | $ | 359,000 | $ | 359,000 | $ | (173,000 | ) | ||||||||||
Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments and holds less than 20% ownership in each of the investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
NOTE 6 - SEGMENT INFORMATION
The Company operates in two reportable segments, the operation of the hotel (“Hotel Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These two operating segments, as presented in the condensed consolidated financial statements, reflect how management internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this same information.
| - 11 - |
Information below represents reporting segments for the three and nine months ended March 31, 2017 and 2016, and 2015, respectively. OperatingSegment income from Hotel operations consists of the operation of the hotel and operation of the garage. Income (loss) from investment transactions consist of net investment gain (loss), impairment loss on other investments, net unrealized gain (loss) on other investments, dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative expenses and the income tax expense for the entire Company.
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended March 31, 2016 | Operations | Transactions | Other | Total | ||||||||||||
| Revenues | $ | 14,481,000 | $ | - | $ | - | $ | 14,481,000 | ||||||||
| Segment operating expenses | (17,067,000 | ) | - | (163,000 | ) | (17,230,000 | ) | |||||||||
| Segment loss | (2,586,000 | ) | - | (163,000 | ) | (2,749,000 | ) | |||||||||
| Interest expense - mortgage | (1,921,000 | ) | - | - | (1,921,000 | ) | ||||||||||
| Depreciation and amortization expense | (731,000 | ) | - | - | (731,000 | ) | ||||||||||
| Loss from investments | - | (281,000 | ) | - | (281,000 | ) | ||||||||||
| Income tax benefit | - | - | 1,970,000 | 1,970,000 | ||||||||||||
| Net income (loss) | $ | (5,238,000 | ) | $ | (281,000 | ) | $ | 1,807,000 | $ | (3,712,000 | ) | |||||
| Total assets | $ | 48,313,000 | $ | 4,218,000 | $ | 12,587,000 | $ | 65,118,000 | ||||||||
| As of and for the three months | Hotel | Investment | Hotel | Investment | ||||||||||||||||||||||||||||
| ended March 31, 2015 | Operations | Transactions | Other | Total | ||||||||||||||||||||||||||||
| ended March 31, 2017 | Operations | Transactions | Corporate | Total | ||||||||||||||||||||||||||||
| Revenues | $ | 13,983,000 | $ | - | $ | - | $ | 13,983,000 | $ | 13,495,000 | $ | - | $ | - | $ | 13,495,000 | ||||||||||||||||
| Segment operating expenses | (11,997,000 | ) | - | (159,000 | ) | (12,156,000 | ) | (10,333,000 | ) | - | (141,000 | ) | (10,474,000 | ) | ||||||||||||||||||
| Segment income (loss) | 1,986,000 | - | (159,000 | ) | 1,827,000 | 3,162,000 | - | (141,000 | ) | 3,021,000 | ||||||||||||||||||||||
| Interest expense - mortgage | (1,913,000 | ) | - | - | (1,913,000 | ) | (2,005,000 | ) | - | - | (2,005,000 | ) | ||||||||||||||||||||
| Depreciation and amortization expense | (696,000 | ) | - | - | (696,000 | ) | (641,000 | ) | - | - | (641,000 | ) | ||||||||||||||||||||
| Loss from investments | - | (479,000 | ) | - | (479,000 | ) | - | (320,000 | ) | - | (320,000 | ) | ||||||||||||||||||||
| Income tax expense | - | - | (18,000 | ) | (18,000 | ) | ||||||||||||||||||||||||||
| Net income (loss) | $ | 516,000 | $ | (320,000 | ) | $ | (159,000 | ) | $ | 37,000 | ||||||||||||||||||||||
| Total assets | $ | 44,667,000 | $ | 4,249,000 | $ | 14,770,000 | $ | 63,686,000 | ||||||||||||||||||||||||
| As of and for the three months | Hotel | Investment | ||||||||||||||||||||||||||||||
| ended March 31, 2016 | Operations | Transactions | Other | Total | ||||||||||||||||||||||||||||
| Revenues | $ | 14,481,000 | $ | - | $ | - | $ | 14,481,000 | ||||||||||||||||||||||||
| Segment operating expenses | (17,067,000 | ) | - | (163,000 | ) | (17,230,000 | ) | |||||||||||||||||||||||||
| Segment loss | (2,586,000 | ) | - | (163,000 | ) | (2,749,000 | ) | |||||||||||||||||||||||||
| Interest expense - mortgage | (1,921,000 | ) | - | - | (1,921,000 | ) | ||||||||||||||||||||||||||
| Depreciation and amortization expense | (731,000 | ) | - | - | (731,000 | ) | ||||||||||||||||||||||||||
| Loss from investments | - | (281,000 | ) | - | (281,000 | ) | ||||||||||||||||||||||||||
| Income tax benefit | - | - | 503,000 | 503,000 | - | - | 1,970,000 | 1,970,000 | ||||||||||||||||||||||||
| Net income (loss) | $ | (623,000 | ) | $ | (479,000 | ) | $ | 344,000 | $ | (758,000 | ) | $ | (5,238,000 | ) | $ | (281,000 | ) | $ | 1,807,000 | $ | (3,712,000 | ) | ||||||||||
| As of and for the nine months | Hotel | Investment | ||||||||||||||||||||||||||||||
| ended March 31, 2017 | Operations | Transactions | Corporate | Total | ||||||||||||||||||||||||||||
| Revenues | $ | 40,937,000 | $ | - | $ | - | $ | 40,937,000 | ||||||||||||||||||||||||
| Segment operating expenses | (30,515,000 | ) | - | (439,000 | ) | (30,954,000 | ) | |||||||||||||||||||||||||
| Segment income (loss) | 10,422,000 | - | (439,000 | ) | 9,983,000 | |||||||||||||||||||||||||||
| Interest expense - mortgage | (5,902,000 | ) | - | - | (5,902,000 | ) | ||||||||||||||||||||||||||
| Depreciation and amortization expense | (2,065,000 | ) | - | - | (2,065,000 | ) | ||||||||||||||||||||||||||
| Loss from investments | - | (1,123,000 | ) | - | (1,123,000 | ) | ||||||||||||||||||||||||||
| Income tax expense | - | - | (346,000 | ) | (346,000 | ) | ||||||||||||||||||||||||||
| Net income (loss) | $ | 2,455,000 | $ | (1,123,000 | ) | $ | (785,000 | ) | $ | 547,000 | ||||||||||||||||||||||
| Total assets | $ | 43,532,000 | $ | 6,952,000 | $ | 9,678,000 | $ | 60,162,000 | $ | 44,667,000 | $ | 4,249,000 | $ | 14,770,000 | $ | 63,686,000 | ||||||||||||||||
| As of and for the nine months | Hotel | Investment | ||||||||||||||||||||||||||||||
| ended March 31, 2016 | Operations | Transactions | Corporate | Total | ||||||||||||||||||||||||||||
| Revenues | $ | 43,332,000 | $ | - | $ | - | $ | 43,332,000 | ||||||||||||||||||||||||
| Segment operating expenses | (40,229,000 | ) | - | (536,000 | ) | (40,765,000 | ) | |||||||||||||||||||||||||
| Segment income (loss) | 3,103,000 | - | (536,000 | ) | 2,567,000 | |||||||||||||||||||||||||||
| Interest expense - mortgage | (5,803,000 | ) | - | - | (5,803,000 | ) | ||||||||||||||||||||||||||
| Loss on disposal of assets | (30,000 | ) | - | - | (30,000 | ) | ||||||||||||||||||||||||||
| Depreciation and amortization expense | (2,153,000 | ) | - | - | (2,153,000 | ) | ||||||||||||||||||||||||||
| Loss from investments | - | (2,225,000 | ) | - | (2,225,000 | ) | ||||||||||||||||||||||||||
| Incomt tax benefit | - | - | 2,752,000 | 2,752,000 | ||||||||||||||||||||||||||||
| Net income (loss) | $ | (4,883,000 | ) | $ | (2,225,000 | ) | $ | 2,216,000 | $ | (4,892,000 | ) | |||||||||||||||||||||
| - |
| As of and for the nine months | Hotel | Investment | ||||||||||||||
| ended March 31, 2016 | Operations | Transactions | Other | Total | ||||||||||||
| Revenues | $ | 43,332,000 | $ | - | $ | - | $ | 43,332,000 | ||||||||
| Segment operating expenses | (40,229,000 | ) | - | (536,000 | ) | (40,765,000 | ) | |||||||||
| Segment income (loss) | 3,103,000 | - | (536,000 | ) | 2,567,000 | |||||||||||
| Interest expense - mortgage | (5,803,000 | ) | - | - | (5,803,000 | ) | ||||||||||
| Loss on disposal of assets | (30,000 | ) | - | - | (30,000 | ) | ||||||||||
| Depreciation and amortization expense | (2,153,000 | ) | - | - | (2,153,000 | ) | ||||||||||
| Loss from investments | - | (2,225,000 | ) | - | (2,225,000 | ) | ||||||||||
| Income tax benefit | - | - | 2,752,000 | 2,752,000 | ||||||||||||
| Net income (loss) | $ | (4,883,000 | ) | $ | (2,225,000 | ) | $ | 2,216,000 | $ | (4,892,000 | ) | |||||
| Total assets | $ | 48,313,000 | $ | 4,218,000 | $ | 12,587,000 | $ | 65,118,000 | ||||||||
| As of and for the nine months | Hotel | Investment | ||||||||||||||
| ended March 31, 2015 | Operations | Transactions | Other | Total | ||||||||||||
| Revenues | $ | 42,857,000 | $ | - | $ | - | $ | 42,857,000 | ||||||||
| Segment operating expenses | (35,868,000 | ) | - | (504,000 | ) | (36,372,000 | ) | |||||||||
| Segment income (loss) | 6,989,000 | - | (504,000 | ) | 6,485,000 | |||||||||||
| Interest expense - mortgage | (5,876,000 | ) | - | - | (5,876,000 | ) | ||||||||||
| Loss on disposal of assets | (51,000 | ) | - | - | (51,000 | ) | ||||||||||
| Depreciation and amortization expense | (2,002,000 | ) | - | - | (2,002,000 | ) | ||||||||||
| Loss from investments | - | (1,525,000 | ) | - | (1,525,000 | ) | ||||||||||
| Income tax benefit | - | - | 1,232,000 | 1,232,000 | ||||||||||||
| Net income (loss) | $ | (940,000 | ) | $ | (1,525,000 | ) | $ | 728,000 | $ | (1,737,000 | ) | |||||
| Total assets | $ | 43,532,000 | $ | 6,952,000 | $ | 9,678,000 | $ | 60,162,000 | ||||||||
NOTE 7 - RELATED PARTY TRANSACTIONS
Certain shared costs and expenses, primarily administrative expenses, rent and insurance are allocated amongOn July 2, 2014, the Company,Partnership obtained from InterGroup (a related party) an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The proceeds of the loan were applied to the July 2014 payments to Holdings as described in Note 2 of the Company’s parent, Santa Fe andJune 30, 2016 10-K Report. The loan was extended to June 30, 2017. InterGroup is currently working on amending the parentloan agreement to extend the loan for a longer period.
In March 2017, Portsmouth obtained from InterGroup an unsecured loan in the principal amount of Santa Fe, based on management's estimate$2,700,000 at 5% per year fixed interest, with a term of 1 year, payable interest only each month. In April 2017, the balance of the pro rata utilization of resources. For the three and nine months ended March 31, 2016 and 2015, these expenses were approximately $18,000 and $54,000, for each respective period.
During the three months ended March 31, 2016 and 2015, the Company received management fees from Justice Investors totaling $141,000 and $138,000, respectively. During the nine months ended March 31, 2016 and 2015, the Company received management fees from Justice Investors totaling $441,000 and $419,000, respectively. These fees are eliminated in consolidation.loan was repaid along with all accrued interest.
In connectionApril 2017, Portsmouth obtained from InterGroup an unsecured short-term loan in the principal amount of $1,000,000 at 5% per year fixed interest, with a term of 5 months and maturing September 6, 2017. Accrued interest and monthly principal installments in the redemptionamount of limited partnership interests$200,000 are due and payable commencing on May 1, 2017 and continuing on the first day of Justice Investors, Limited Partnership (which took place during fiscal year ended June 30, 2014), Justice Operating Company, LLC agreed to pay a total of $1,550,000 in fees to certain officers and directors ofeach calendar month thereafter, until five months after the Company for services rendered in connection with the redemption of partnership interests, refinancing of Justice’s properties and reorganization of Justice Investors. This agreement was superseded by a letter dated December 11, 2013 from Justice Investors, Limited Partnership, in which Justice Investors Limited Partnership assumed the payment obligations of Justice Operating Company, LLC. The first payment under this agreement was made concurrently with the closingdate of the loan agreements, withat which time any unpaid balance of principal and interest on the remaining paymentsnote is due upon and payable.
Justice Investor’s having adequate available cash as described inhas an outstanding accounts payable balance to InterGroup for approximately $316,000 for management fees related to the letter. Asmanagement of March 31, 2016, $400,000the Hotel from June to December of these fees remains outstanding.2016.
Four of the Portsmouth directors serve as directors of Intergroup.InterGroup. Three of those directors also serve as directors of Santa Fe. The three Santa Fe directors also serve as directors of InterGroup.
John V. Winfield serves as Chief Executive Officer and Chairman of the Company, Santa Fe, and InterGroup. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Santa Fe and InterGroup may, at times, invest in the same companies in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer and the resources of Santa Fe and InterGroup, at risk in connection with investment decisions made on behalf of the Company.
NOTE 8 – SUBSEQUENT EVENTS
Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan, in order to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth was unable to satisfy independently as of March 31, 2017.
We are involved from time to time in legal proceedings of types regarded as common in our business, including administrative or judicial proceedings, such as employment or labor disputes, breach of contract liability and premises liability litigation. Where appropriate, we may establish financial reserves for such proceedings. We also maintain insurance to mitigate certain of such risks.
In March 2017, the Company entered into a settlement agreement with RSUI Indemnity Company ("RSUI"), the insurer for the Company's Directors and Officers Liability Policies. Under this settlement agreement, Justice received $900,000 from RSUI to resolve allegations that RSUI had committed breach of contract and bad faith in handling a claim.
On May 5, 2016, Justice Investors and Portsmouth (parent Company) entered into a settlement agreement with Evon Corporation (“Evon”) and Holdings. Under this settlement agreement, the Partnership agreed to pay Evon $5,575,000 no later than January 10, 2017. As of January 10, 2017, all conditions of the settlement agreement have been satisfied by the Company.
| - |
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL 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”“will”, “would” and similar expressions, are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, such as national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry, the impact of terrorism and war on the national and international economies, including tourism and securities markets, energy and fuel costs, natural disasters, general economic conditions and competition in the hotel industry in the San Francisco area, seasonality, labor relations and labor disruptions, actual and threatened pandemics such as swine flu, partnership distributions, the ability to obtain financing at favorable interest rates and terms, securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015,2016, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company's principal business is conducted through its general and limited partnership interest in the Justice Investors limited partnershipLimited Partnership (“Justice” or the “Partnership”). Justice owns a 543 room hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the “Hilton San Francisco Financial District” (the “Hotel” or the “Property”) and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company.
The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement (the “License Agreement”) with HLT Franchise Holding LLC (Hilton)(“Hilton”). The Partnership entered into a Franchisethe License Agreement with the HLT Franchise Holding LLC (Hilton) on December 10, 2004. The term of the License Agreement was for an initial period of 15 years commencing on the opening date, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030. The key money cash incentives were received on July 1, 2015.
Justice also hashad a Management Agreementmanagement agreement with Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. The management agreement with Prism had an original term of ten years and can be terminated at any time with or without cause by the Partnership owner.Partnership. Effective January 2014, the management agreement with Prism was amended by the Partnership.Partnership to change the nature of the services provided by Prism and the compensation payable to Prism, among other things. Prism’s management agreement was terminated upon its expiration date of February 3, 2017. Effective December 1, 2013, GMP Management, Inc. (“GMP”), a company owned by a Justice limited partner and a related party, also providesbegan to provide management services for the Partnership pursuant to a Management Services Agreement, which is formanagement services agreement with a term of 3three years, but which can be terminatedsubject to the Partnership’s right to terminate earlier, by the Partnership for cause. In June 2016, GMP resigned. After a lengthy review process of several national third party hotel management companies, on February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The $2,000,00 is included in accounts receivable in the condensed consolidated balance sheets as of March 31, 2017.
| - 14 - |
The parking garage that is part of the Hotel property iswas managed by Ace Parking pursuant to a contract with the Partnership. Portsmouth also receives management fees as a general partnerThe contract was terminated with an effective termination date of Justice for its services in overseeing andOctober 4, 2016. The Company began managing the Partnership’s assets. Those fees are eliminated in consolidation.
On May 5, 2016, Justice Investors and Portsmouth entered into a settlement agreement relating to previously reported litigation with Evon Corporation and certain other parties. Underparking garage in-house after the settlement agreement, Justice Investors, a subsidiarytermination of Portsmouth,will pay Evon Corporation $5,575,000 no later than January 10, 2017. This amount was recorded as restructuring cost duringAce Parking. Effective February 3, 2017, Interstate took over the quarter ended March 31, 2016. As of May 13, 2016, payments totaling approximately $2,600,000 were made related to this settlement.
During the quarter, the Company settled a legal matter that resulted in a benefit of approximately $389,000, this amount was recorded as a reduction of Hotel restructuring costs.
Please see NOTE 1management of the condensed consolidated financial statements for further details onparking garage along with the two legal settlements.Hotel.
Three Months Ended March 31, 20162017 Compared to Three Months Ended March 31, 20152016
The Company had a net income of $37,000 for the three months ended March 31, 2017 compared to net loss of $3,712,000 for the three months ended March 31, 2016. The change is primarily attributable to the $5,236,000 of Hotel restructuring costs incurred during the three months ended March 31, 2016 compared to aand the decrease in Hotel operating expenses, partially offset by the decrease in Hotel revenues during the three months ended March 31, 2017.
Hotel Operations
The Company had net lossincome from Hotel operations of $758,000$516,000 for the three months ended March 31, 2015. The increase in the net loss is primarily attributable2017 compared to the Hotel related restructuring costs incurred during the quarter partially offset by the improvement in the Hotel operations.
The Company had a net loss from hotel operations of $5,238,000 for the three months ended March 31, 2016, compared2016. The change is primarily due to a net lossthe Hotel restructuring costs of $623,000 for$5,236,000 incurred during the three months ended March 31, 2015 primarily as the result of Hotel restructuring costs of $5,236,0002016 related to the twosettlement with Evon and Holdings and the decrease in the related legal settlements noted above. Hotel revenues increasedexpenses during the currentthree months ended March 31, 2017. Please see Note 17 of the Company’s June 30, 2016 10-K report for further information. Additionally, during the quarter whileended March 31, 2017, Justice reached a legal settlement with RSUI, the insurer for its Directors and Officers Liability Policies and received a payment in the amount of $900,000 from RSUI which was included as a reduction in operating expenses remained relatively consistent.expenses.
The following table sets forth a more detailed presentation of Hotel operations for the three months ended March 31, 20162017 and 2015.2016.
| For the three months ended March 31, | 2016 | 2015 | 2017 | 2016 | ||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 11,764,000 | $ | 10,824,000 | $ | 11,212,000 | $ | 11,764,000 | ||||||||
| Food and beverage | 1,739,000 | 2,164,000 | 1,394,000 | 1,739,000 | ||||||||||||
| Garage | 666,000 | 699,000 | 622,000 | 666,000 | ||||||||||||
| Other operating departments | 312,000 | 296,000 | 267,000 | 312,000 | ||||||||||||
| Total hotel revenues | 14,481,000 | 13,983,000 | 13,495,000 | 14,481,000 | ||||||||||||
| Operating expenses excluding restructuring costs, depreciation and amortization | (11,831,000 | ) | (11,997,000 | ) | ||||||||||||
| Operating expenses excluding depreciation and amortization | (10,333,000 | ) | (11,831,000 | ) | ||||||||||||
| Hotel restructuring costs | (5,236,000 | ) | - | - | (5,236,000 | ) | ||||||||||
| Operating (loss) income before interest, depreciation and amortization | (2,586,000 | ) | 1,986,000 | |||||||||||||
| Operating income (loss) before interest, depreciation and amortization | 3,162,000 | (2,586,000 | ) | |||||||||||||
| Interest expense - mortgage | (1,921,000 | ) | (1,913,000 | ) | (2,005,000 | ) | (1,921,000 | ) | ||||||||
| Depreciation and amortization expense | (731,000 | ) | (696,000 | ) | (641,000 | ) | (731,000 | ) | ||||||||
| Net loss from Hotel operations | $ | (5,238,000 | ) | $ | (623,000 | ) | ||||||||||
| Net income (loss) from Hotel operations | $ | 516,000 | $ | (5,238,000 | ) | |||||||||||
For the three months ended March 31, 2016,2017, the Hotel incurred anhad operating income of $3,162,000 before interest, depreciation and amortization on total operating revenues of $13,495,000 compared to operating loss of $2,586,000 before interest, depreciation and amortization on total operating revenues of $14,481,000 compared to operating income of $1,986,000 before interest, depreciation and amortization on total operating revenues of $13,983,000 for the three months ended March 31, 2015.2016. Room revenues increaseddecreased by $940,000$552,000 for the three months ended March 31, 20162017 compared to the three months ended March 31, 20152016 primarily as the result of the increasedecrease in the transient room rate and the new contract with Virgin Atlantic Airlines.group business. Food and beverage revenue decreased by $425,000$345,000 as the result of the Superbowl week andreduction in the catering and banquet services from groups not materializing as anticipated.
the decrease in the group business. Total operating expenses decreased by $166,000 this$1,498,000 during the quarter ended March 31, 2017 as compared to the previous comparable quarter primarily due to a decrease in franchise fees. Franchise fees decreasedsame period ended March 31, 2016 as the result of the new Hilton franchise agreement. $900,000 received from RSUI noted above and to a lesser extent, the decrease in various other Hotel operating expenses.
| - |
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”) of the Hotel for the three months ended March 31, 20162017 and 2015.2016.
Three Months Ended March 31, | Average Daily Rate | Average Occupancy % |
RevPAR | Average Daily Rate | Average Occupancy % | RevPAR | ||||||||||||||||||
| 2017 | $ | 272 | 85 | % | $ | 229 | ||||||||||||||||||
| 2016 | $ | 265 | 90 | % | $ | 238 | $ | 265 | 90 | % | $ | 238 | ||||||||||||
| 2015 | $ | 242 | 91 | % | $ | 221 | ||||||||||||||||||
The Hotel’s total revenues increaseddecreased by 3.6%6.8% this quarter as compared to the previous comparable quarter. Average daily rate increased by $23$7 and RevPAR increaseddecreased by $17$9 for the three months ended March 31, 20162017 compared to the three months ended March 31, 2015.2016. Average occupancy was 85% and 90%, for the respective comparable periods.
Our highest priority is guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition by building the most sustainable guest loyalty program. In order to make a large impact on guest experience, the hotel will continue training team members on Hilton brand standards and guest satisfaction, hiring and retaining talents in key operations, and enhancing the arrival experience. In addition, the Hotel replaced the carpet flooring in the lobby and the fourth floor with oak wood, creating an open and welcoming environment; modernized the furniture in the lobby, the porte cochere, and the second floor; and replaced the third floor carpets and doors. The Wellness Center on the fifth floor features a new spa with two treatment rooms and a room for manicure and pedicure which has been doing well. The fitness center has been expanded with state of the art equipment.
In order to further enhance the guest experience, the Hotel plans to renovate the fourth floor meeting rooms to make a state of the art meeting space and, concurrently, to renovate the fourth floor bathrooms. The hotel will remodel guest room bathrooms with modern shower amenities and update desk tables and the night stands with granite tops for a sleek and modern look. The Hotel is also looking into converting the carpet in the rooms to hardwood floors. Finally, the Hotel, in conjunction with the Chinese Cultural Center, is developing a landscape area on the Pedestrian Bridge that connects the Hotel to Portsmouth Square. We continue to take steps that further develop our ties with the local Chinese community and the city of San Francisco, representing good corporate citizenship and promoting important new business opportunities.Investment Transactions
The Company had a net loss on marketable securities of $250,000 for the three months ended March 31, 2017 compared to a net loss on marketable securities of $166,000 for the three months ended March 31, 2016 compared to a net loss on marketable securities of $244,000 for2016. For the three months ended March 31, 2015. The2017, the Company had anapproximately $356,000 in unrealized loss of $267,000losses related to the Company’s investment in the common stock of Comstock Mining, Inc. during(Comstock). For the comparative three months ended March 31, 2016. Such investments represent2016, the Company had approximately 87% of$267,000 in unrealized losses related to the Company’s portfolio asinvestment in the common stock of Comstock. For the three months ended March 31, 2016.2017, the Company had a net realized gain of $48,000 and a net unrealized loss of $298,000. For the three months ended March 31, 2016, the Company had a net realized gain of $64,000 and a net unrealized loss of $230,000. For the three months ended March 31, 2015, the Company had a net realized loss of $41,000 and a net unrealized loss of $203,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
During the three months ended March 31, 2016 and 2015, the Company performed an impairment analysis of its other investments and determined that its investments had an other than temporary impairment and recorded an impairment loss of $91,000 in the current quarter as compared to an impairment loss of $145,000 in the prior year comparable quarter.
The Company consolidates Justice (Hotel)(“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax (expense) benefit during the three months ended March 31, 20162017 and 20152016 represents the income tax effect on the Company’s pretax lossincome (loss) which includes its share in the net lossincome (loss) of the Hotel.
Nine Months Ended March 31, 20162017 Compared to Nine Months Ended March 31, 20152016
The Company had anet income of $547,000 for the nine months ended March 31, 2017 compared to net loss of $4,892,000 for the nine months ended March 31, 2016. The change is primarily due to the $5,236,000 of Hotel restructuring costs incurred during the nine months ended March 31, 2016 comparedand the decrease in Hotel operating expenses, partially offset by the decrease in Hotel revenues and to a net loss of $1,737,000lesser extent, the decrease in investment related losses.
Hotel Operations
Net income from Hotel operations was $2,455,000 for the nine months ended March 31, 2015 . The increase in the2017 compared to net loss is primarily attributable to the Hotel restructuring costs and the higher net loss on marketable securities as the result of the decrease in the market value of the Company’s holdings in common stock of Comstock Mining, Inc., partially offset by the improvement in the Hotel operations.
The Company had a net loss from hotel operations of $4,883,000 for the nine months ended March 31, 2016 compared2016. The change is due to a net loss of $940,000 for the nine months ended March 31, 2015 primarily as the result$5,236,000 of Hotel restructuring costs of $5,236,000 related to the two legal settlements noted above. Hotel revenues increasedincurred during the nine months ended March 31, 2016 whileand the decrease in Hotel operating expenses, also decreased duringpartially offset by the same period.decrease in Hotel revenues.
| - 16 - |
The following table sets forth a more detailed presentation of Hotel operations for the nine months ended March 31, 20162017 and 2015.2016.
| For the nine months ended March 31, | 2016 | 2015 | 2017 | 2016 | ||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 35,167,000 | $ | 34,084,000 | $ | 34,007,000 | $ | 35,167,000 | ||||||||
| Food and beverage | 5,247,000 | 5,810,000 | 4,349,000 | 5,247,000 | ||||||||||||
| Garage | 2,025,000 | 2,117,000 | 1,946,000 | 2,025,000 | ||||||||||||
| Other operating departments | 893,000 | 846,000 | 635,000 | 893,000 | ||||||||||||
| Total hotel revenues | 43,332,000 | 42,857,000 | 40,937,000 | 43,332,000 | ||||||||||||
| Operating expenses excluding restructuring costs, depreciation and amortization | (34,993,000 | ) | (35,868,000 | ) | ||||||||||||
| Operating expenses excluding depreciation and amortization | (30,515,000 | ) | (34,993,000 | ) | ||||||||||||
| Hotel restructuring costs | (5,236,000 | ) | - | - | (5,236,000 | ) | ||||||||||
| Operating income before loss on disposal of assets, interest and depreciation and amortization | 3,103,000 | 6,989,000 | ||||||||||||||
| Operating income before loss on disposal of assets, interest, depreciation and amortization | 10,422,000 | 3,103,000 | ||||||||||||||
| Loss on disposal of assets | (30,000 | ) | (51,000 | ) | - | (30,000 | ) | |||||||||
| Interest expense - mortgage | (5,803,000 | ) | (5,876,000 | ) | (5,902,000 | ) | (5,803,000 | ) | ||||||||
| Depreciation and amortization expense | (2,153,000 | ) | (2,002,000 | ) | (2,065,000 | ) | (2,153,000 | ) | ||||||||
| Net loss from Hotel operations | $ | (4,883,000 | ) | $ | (940,000 | ) | ||||||||||
| Net income (loss) from Hotel operations | $ | 2,455,000 | $ | (4,883,000 | ) | |||||||||||
For the nine months ended March 31, 2016,2017, the Hotel generatedhad operating income of $10,422,000 before loss on disposal of assets, interest, depreciation and amortization on total operating revenues of $40,937,000 compared to operating income of $3,103,000 before the loss on disposal of assets, and interest, and depreciation and amortization on total operating revenues of $43,332,000 compared to operating income of $6,989,000 before the loss on disposal of assets and interest and depreciation and amortization on total operating revenues of $42,857,000 for the nine months ended March 31, 2015.2016. Room revenues increaseddecreased by $1,083,000$1,160,000 for the nine months ended March 31, 20162017 compared to the nine months ended March 31, 20152016 primarily as the result of the increasedecrease in group business and the decrease in the transient room rate and the new contract with Virgin Atlantic Airlines.average daily rate. Food and beverage revenue decreased by $563,000$898,000 as the result of the Superbowl week andreduction in the catering and banquet services from groups not materializing as anticipated. the decrease in the group business.
OperatingTotal operating expenses decreased by $875,000$4,478,000 for the nine months ended March 31, 2017 as compared to the prior comparable periodnine months ended March 31, 2016 primarily due to reduced royalty fees per the new Hilton franchise agreement anddecrease in operating expenses related to the decrease in legal expenses as the result of the current litigation. settlement with Evon and Holdings, the resignation of GMP management and management efforts to reduce operating expenses in all areas.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”) of the Hotel for the nine months ended March 31, 20162017 and 2015.2016.
Nine months Ended March 31, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||
| 2016 | $ | 258 | 91 | % | $ | 235 | ||||||
| 2015 | $ | 248 | 92 | % | $ | 229 | ||||||
Nine months Ended March 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||||
| 2017 | $ | 254 | 90 | % | $ | 228 | ||||||||
| 2016 | $ | 258 | 91 | % | $ | 235 | ||||||||
The Hotel’s total revenues increaseddecreased by 1.1%5.5% for the nine months ended March 31, 2016 compared to the same period ended March 31, 2015. Average daily rate increased by $10 and RevPAR increased by $6 for the nine months ended March 31, 20162017 as compared to the nine months ended March 31, 2015. The increases were offset2016. Average daily rate decreased by $4 and RevPAR decreased by $7 for the decrease innine months ended March 31, 2017 compared to the averagenine months ended March 31, 2016. Average occupancy decreased by 1%.
Our highest priority is guest satisfaction. We believe that enhancing during the guest experience differentiatesnine months ended March 31, 2017 versus the Hotel from our competition by building the most sustainable guest loyalty program. In order to make a large impact on guest experience, the hotel will continue training team members on Hilton brand standards and guest satisfaction, hiring and retaining talents in key operations and enhancing the arrival experience. In addition, the Hotel replaced the carpet flooring in the lobby and the fourth floor with oak wood, creating an open and welcoming environment; modernized the furniture in the lobby, the porte cochere, and the second floor; and replaced the third floor carpets and doors. The Wellness Center on the fifth floor features a new spa with two treatment rooms and a room for manicure and pedicure which has been doing well. The fitness center has been expanded with state of the art equipment. comparable period.
In order to further enhance the guest experience, the Hotel plans to renovate the fourth floor meeting rooms to make a state of the art meeting space and, concurrently, to renovate the fourth floor bathrooms. The hotel will remodel guest room bathrooms with modern shower amenities and update desk tables and the night stands with granite tops for a sleek and modern look. The Hotel is also looking into converting the carpet in the rooms to hardwood floors. Finally, the Hotel, in conjunction with the Chinese Cultural Center, is developing a landscape area on the Pedestrian Bridge that connects the Hotel to Portsmouth Square. We continue to take steps that further develop our ties with the local Chinese community and the city of San Francisco, representing good corporate citizenship and promoting important new business opportunities.Investment Transactions
The Company had a net loss on marketable securities of $985,000 for the nine months ended March 31, 2017 compared to a net loss on marketable securities of $1,940,000 for the nine months ended March 31, 2016 compared to a net loss on marketable securities of $1,277,000 for2016. For the nine months ended March 31, 2015. Approximately $1,724,000 of2017, the $1,940,000Company had a net loss isof approximately $1,155,000 related to the Company’s investment in the common stock of Comstock Mining, Inc. Such investments representComstock. For the comparative nine months ended March 31, 2016, the Company had a net loss of approximately 87% of$1,724,000 related to the Company’s portfolio as ofinvestment in Comstock. For the nine months ended March 31, 2016.2017, the Company had a net realized gain of $86,000 and a net unrealized loss of $1,071,000. For the nine months ended March 31, 2016, the Company had a net realized gain of $39,00039,000 and a net unrealized loss of $1,979,000. For the nine months ended March 31, 2015, the Company had a net realized gain of $15,000 and a net unrealized loss of $1,292,000. 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.
| - 17 - |
During the nine months ended March 31, 2016 and 2015, the Company performed an impairment analysis of its other investments and determined that its investments had an other than temporary impairment and recorded impairment losses of $173,000 in the current period as compared to $145,000 in the prior year comparable period.
The Company consolidates Justice (Hotel)(“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax (expense) benefit during the nine months ended March 31, 20162017 and 20152016 represents the income tax effect on the Company’s pretax lossincome (loss) which includes its share in the net lossincome (loss) of the Hotel.
MARKETABLE SECURITIES
As of March 31, 2016 and June 30, 2015, the Company had investments in marketable equity securities of $3,838,000 and $1,301,000, respectively. The following table shows the composition of the Company’s marketable securities portfolio by selected industry groups as:
| As of March 31, 2016 | % of Total | |||||||
| Investment | ||||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 3,351,000 | 87.3 | % | ||||
| Other | 487,000 | 12.7 | % | |||||
| $ | 3,838,000 | 100.0 | % | |||||
| As of June 30, 2015 | % of Total | |||||||
| Investment | ||||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 926,000 | 71.2 | % | ||||
| Other | 375,000 | 28.8 | % | |||||
| $ | 1,301,000 | 100.0 | % | |||||
The Company’s investment in marketable securities portfolio consists primarily of (87%) of the common stock of Comstock Mining, Inc. (“Comstock” - NYSE MKT: LODE) which is included in the basic materials industry group. The significant increase in the Company’s investment in Comstock was due to the conversion of the $4,410,000 (4,410 preferred shares) held in Comstock Mining, Inc. (“Comstock” – OTCBB: LODE) 7 1/2% Series A-1 Convertible Preferred Stock (the “A-1 Preferred”) to common stock on August 27, 2015. The A-1 Preferred was previously included in other investments prior to its conversion.
Marketable securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date.
FINANCIAL CONDITION AND LIQUIDITY
The Company’s cash flows are primarily generated from its Hotel operations, and general partner management fees and limited partnership distributions from the Partnership.operations. The Company also receives cash generated from the investment of its cash and marketable securities and other investments.
On December 18, 2013, the Partnership completed an Offer to Redeem any and all limited partnership interests not held by Portsmouth. As a result, Portsmouth, which prior to the Offer to Redeem owned 50% of the then outstanding limited partnership interests now controls approximately 93%93.1% of the voting interest in Justice and is now its sole General Partner.
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan initially bears an interest rate of 5.28%5.275% per annum and matureswith interest only payments due thru January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period thru its maturity date of January 2024. As additional security for the mortgage loan, there is a limited guaranty executed by the Company in favor of mortgage lender. The mezzanine loan is a secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan initially bears interest at 9.75% per annum and matures in January 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by the Company in favor of mezzanine lender.
On
Effective as of May 5, 2016,12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan, in order to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth entered into a settlement agreement relatingwas unable to previously reported litigation with Evon Corporation and certain other parties. Under the settlement agreement, Justice Investors, a subsidiarysatisfy independently as of Portsmouth,will pay Evon Corporation $5,575,000 no later than January 10, 2017. This amount was recorded as restructuring cost during the quarter ended March 31, 2016. As of May 13, 2016, payments totaling approximately $2,600,000 were made related to this settlement.2017.
During the quarter, the Company settled a legal matter that resulted in a benefit of approximately $389,000, this amount was recorded as a reduction of Hotel restructuring costs.
Please see NOTE 1 of the condensed consolidated financial statements for further details on the two legal settlements.
On July 2, 2014, the Partnership obtained from the Intergroup Corporation (parent company of Portsmouth)InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. IntergroupInterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The proceeds of the loan were applied to the July 2014 payments to Holdings as described in Note 2 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.2016 10-K Report. The loan was extended to June 30, 2017. InterGroup is currently working on amending the loan agreement to extend the loan for a longer period.
In March 2017, Portsmouth obtained from InterGroup an unsecured loan in the principal amount of $2,700,000 at 5% per year fixed interest, with a term of 1 year, payable interest only each month. In April 2017, the balance of the loan was repaid along with all accrued interest.
In April 2017, Portsmouth obtained from InterGroup an unsecured short-term loan in the principal amount of $1,000,000 at 5% per year fixed interest, with a term of 5 months and maturing September 6, 2017. Accrued interest and monthly principal installments in the amount of $200,000 are due and payable commencing on May 1, 2017 and continuing on the first day of each calendar month thereafter, until five months after the date of the loan at which time any unpaid balance of principal and interest on the note is due and payable.
Despite an uncertain economy, the Hotel has continued to generate strong revenue growth.positive operating income. While the debt service requirements related the new loans and the legal settlement may create some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements.
The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company's marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations.
| - 18 - |
Management believes that its cash, marketable securities, and the cash flows generated from those assets and from the partnership management fees, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.
MARKETABLE SECURITIES
The following table shows the composition of the Company’s marketable securities portfolio as of March 31, 2017 and June 30, 2016 by selected industry groups.
| As of | 3/31/2017 | |||||||
| % of Total | ||||||||
| Investment | ||||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 2,014,000 | 52.2 | % | ||||
| Energy | 655,000 | 17.0 | % | |||||
| Technology | 590,000 | 15.3 | % | |||||
| Other | 596,000 | 15.5 | % | |||||
| $ | 3,855,000 | 100.0 | % | |||||
| As of | 6/30/2016 | |||||||
| % of Total | ||||||||
| Investment | ||||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 3,102,000 | 76.8 | % | ||||
| Energy | 388,000 | 9.6 | % | |||||
| Financial services | 198,000 | 4.9 | % | |||||
| Other | 350,000 | 8.7 | % | |||||
| $ | 4,038,000 | 100.0 | % | |||||
As of March 31, 2017, the Company’s investment in marketable securities portfolio consists primarily of 51% of the common stock of Comstock which is included in the basic materials industry group.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of March 31, 2016,2017, the Company’s material financial obligations which also including interest payments:
| 3 Months | Year | Year | Year | Year | 3 Months | Year | Year | Year | Year | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 117,000,000 | $ | - | $ | 672,000 | $ | 1,398,000 | $ | 1,473,000 | $ | 1,553,000 | $ | 111,904,000 | ||||||||||||||||||||||||||||||||||||||||||
| Other notes payable | 14,212,000 | 2,873,000 | 7,652,000 | 363,000 | 317,000 | 317,000 | 2,690,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage notes payable | $ | 116,764,000 | $ | 337,000 | $ | 1,393,000 | $ | 1,468,000 | $ | 1,547,000 | $ | 1,631,000 | $ | 110,388,000 | ||||||||||||||||||||||||||||||||||||||||||
| Related party and other notes payable | 11,006,000 | 7,284,000 | 317,000 | 317,000 | 317,000 | 317,000 | 2,454,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest | 43,802,000 | 1,805,000 | 7,284,000 | 6,560,000 | 5,979,000 | 5,451,000 | 16,723,000 | 46,344,000 | 1,892,000 | 7,003,000 | 6,928,000 | 6,849,000 | 6,765,000 | 16,907,000 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 175,014,000 | $ | 4,678,000 | $ | 15,608,000 | $ | 8,321,000 | $ | 7,769,000 | $ | 7,321,000 | $ | 131,317,000 | $ | 174,114,000 | $ | 9,513,000 | $ | 8,713,000 | $ | 8,713,000 | $ | 8,713,000 | $ | 8,713,000 | $ | 129,749,000 | ||||||||||||||||||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
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IMPACT OF INFLATION
Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since the Company 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.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-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 nine months March 31, 2016.2017. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 20152016 for a summary of the critical accounting policies.
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
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) Not applicable.
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(c) Purchases of equity securities by the small business issuer and affiliated purchasers.
Portsmouth did not repurchase any of its own securities during the third quarter of its fiscal year ending June 30, 2017 and does not have any publicly announced repurchase program. The following table reflects purchases of Portsmouth’s common stock made by its parent company, The InterGroup Corporation, for its own account, during the third quarter of fiscal 2017. InterGroup can be considered an affiliated purchaser.
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
| (c) Total Number | (d) Maximum Number | |||||||||||||
| (a) Total | (b) | of Shares Purchased | of Shares that May | |||||||||||
| Fiscal | Number of | Average | as Part of Publicly | Yet be Purchased | ||||||||||
| 2017 | Shares | Price Paid | Announced Plans | Under the Plans | ||||||||||
| Period | Purchased | Per Share | or Programs | or Programs | ||||||||||
| Month #1 | ||||||||||||||
| (January 1- | ||||||||||||||
| January 31) | - | - | - | N/A | ||||||||||
| Month #2 | ||||||||||||||
| (February 1- | ||||||||||||||
| February 28) | - | - | - | N/A | ||||||||||
| Month #3 | ||||||||||||||
| (March 1- | ||||||||||||||
| March 31) | 600 | $ | 60.00 | - | N/A | |||||||||
| TOTAL: | 600 | $ | 60.00 | - | N/A | |||||||||
31.1 Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PORTSMOUTH SQUARE, INC. | ||||
| (Registrant) | ||||
| Date: | May | 15, 2017 | by | /s/ John V. Winfield |
| John V. Winfield, President, | ||||
| Chairman of the Board and | ||||
| Chief Executive Officer | ||||
| Date: | May | 15, 2017 | by | /s/ David |
| David Nguyen, Treasurer | ||||
| and Controller | ||||
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