UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20222023
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, INCINC..
(Exact name of registrant as specified in its charter)
| california | 94-1674111 | |
| (I.R.S. Employer | ||
| Incorporation or organization) | Identification No.) |
1516 S. Bundy Dr., Suite 200, Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
(310) 889-2500
(Registrant’s telephone number, including area code)
_________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☒ | Smaller reporting company ☒ | |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
☐☐ Yes ☒ No
The number of shares outstanding of registrant’s Common Stock, as of November 4, 202214, 2023 was .
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| NONE | NONE | NONE |
TABLE OF CONTENTS
| -2- |
PART 1
FINANCIAL INFORMATION
Item 1 – Condensed Consolidated Financial Statements
PORTSMOUTH SQUARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | September 30, 2022 | September 30, 2023 | ||||||||||||||
| (unaudited) | June 30, 2022 | (unaudited) | June 30, 2023 | |||||||||||||
| ASSETS | ||||||||||||||||
| Investment in hotel, net | $ | 32,235,000 | $ | 31,230,000 | $ | 34,315,000 | $ | 34,381,000 | ||||||||
| Investment in marketable securities | 295,000 | 541,000 | 271,000 | 359,000 | ||||||||||||
| Cash and cash equivalents | 2,643,000 | 2,662,000 | 4,149,000 | 2,295,000 | ||||||||||||
| Restricted cash | 6,274,000 | 6,226,000 | 2,853,000 | 2,911,000 | ||||||||||||
| Accounts receivable, net | 251,000 | 377,000 | 453,000 | 419,000 | ||||||||||||
| Other assets, net | 513,000 | 852,000 | 730,000 | 735,000 | ||||||||||||
| Deferred tax assets | 7,914,000 | 7,911,000 | ||||||||||||||
| Total assets | $ | 50,125,000 | $ | 49,799,000 | $ | 42,771,000 | $ | 41,100,000 | ||||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Accounts payable and other liabilities - Hotel | $ | 12,804,000 | $ | 11,615,000 | ||||||||||||
| Accounts payable and other liabilities | $ | 9,523,000 | $ | 8,725,000 | 46,000 | 66,000 | ||||||||||
| Accounts payable to related party | 5,215,000 | 4,908,000 | 8,207,000 | 7,283,000 | ||||||||||||
| Due to securities broker | - | 130,000 | ||||||||||||||
| Related party notes payable | 17,579,000 | 17,721,000 | 17,200,000 | 15,700,000 | ||||||||||||
| Other notes payable | 2,813,000 | 2,954,000 | ||||||||||||||
| Mortgage notes payable, net | 108,249,000 | 108,747,000 | 106,896,000 | 107,117,000 | ||||||||||||
| Total liabilities | 140,566,000 | 140,231,000 | 147,966,000 | 144,735,000 | ||||||||||||
| Shareholders’ deficit: | ||||||||||||||||
| Common stock, no par value: Authorized shares - ; shares issued and outstanding shares as of September 30, 2022 and June 30, 2022, respectively | 2,092,000 | 2,092,000 | ||||||||||||||
| Common stock, no par value: Authorized shares - ; shares issued and outstanding shares as of September 30, 2023 and June 30, 2023, respectively | 2,092,000 | 2,092,000 | ||||||||||||||
| Accumulated deficit | (92,533,000 | ) | (92,524,000 | ) | (107,287,000 | ) | (105,727,000 | ) | ||||||||
| Total shareholders’ deficit | (90,441,000 | ) | (90,432,000 | ) | (105,195,000 | ) | (103,635,000 | ) | ||||||||
| Total liabilities and shareholders’ deficit | $ | 50,125,000 | $ | 49,799,000 | $ | 42,771,000 | $ | 41,100,000 | ||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
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PORTSMOUTH SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For the three months ended September 30, | 2022 | 2021 | 2023 | 2022 | ||||||||||||
| Revenue - Hotel | $ | 12,310,000 | $ | 6,805,000 | $ | 11,093,000 | $ | 12,310,000 | ||||||||
| Costs and operating expenses | ||||||||||||||||
| Hotel operating expenses | (9,306,000 | ) | (6,333,000 | ) | (9,281,000 | ) | (9,306,000 | ) | ||||||||
| Hotel depreciation and amortization expense | (627,000 | ) | (529,000 | ) | (821,000 | ) | (627,000 | ) | ||||||||
| General and administrative expense | (309,000 | ) | (328,000 | ) | (319,000 | ) | (309,000 | ) | ||||||||
| Total costs and operating expenses | (10,242,000 | ) | (7,190,000 | ) | (10,421,000 | ) | (10,242,000 | ) | ||||||||
| Income (loss) from operations | 2,068,000 | (385,000 | ) | |||||||||||||
| Income from operations | 672,000 | 2,068,000 | ||||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense - mortgage | (1,632,000 | ) | (1,661,000 | ) | (1,606,000 | ) | (1,632,000 | ) | ||||||||
| Interest expense - related party | (430,000 | ) | (237,000 | ) | (502,000 | ) | (430,000 | ) | ||||||||
| Net loss on marketable securities | (10,000 | ) | (268,000 | ) | (88,000 | ) | (10,000 | ) | ||||||||
| Net loss on marketable securities - Comstock | - | (177,000 | ) | |||||||||||||
| Dividend and interest income | 26,000 | 34,000 | 3,000 | 26,000 | ||||||||||||
| Trading and margin interest expense | (34,000 | ) | (56,000 | ) | (38,000 | ) | (34,000 | ) | ||||||||
| Total other expense, net | (2,080,000 | ) | (2,365,000 | ) | (2,231,000 | ) | (2,080,000 | ) | ||||||||
| Loss before income taxes | (12,000 | ) | (2,750,000 | ) | (1,559,000 | ) | (12,000 | ) | ||||||||
| Income tax benefit | 3,000 | 775,000 | ||||||||||||||
| Income tax (expense) benefit | (1,000 | ) | 3,000 | |||||||||||||
| Net Loss | $ | (9,000 | ) | $ | (1,975,000 | ) | $ | (1,560,000 | ) | $ | (9,000 | ) | ||||
| Basic and diluted net loss per share | $ | (0.01 | ) | $ | (2.69 | ) | $ | ) | $ | ) | ||||||
| Weighted average number of common shares outstanding - basic and diluted | 734,187 | 734,187 | ||||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| -4- |
PORTSMOUTH SQUARE, INC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(unaudited)
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Total | ||||||||||||||||
| Common Stock | Accumulated | Shareholders’ | ||||||||||||||
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Balance at | ||||||||||||||||
| July 1, 2023 | 734,187 | $ | 2,092,000 | $ | (105,727,000 | ) | $ | (103,635,000 | ) | |||||||
| Balance | 734,187 | $ | 2,092,000 | $ | (105,727,000 | ) | $ | (103,635,000 | ) | |||||||
| Net loss | - | - | (1,560,000 | ) | (1,560,000 | ) | ||||||||||
| Balance at | ||||||||||||||||
| September 30, 2023 | 734,187 | $ | 2,092,000 | $ | (107,287,000 | ) | $ | (105,195,000 | ) | |||||||
| Balance | 734,187 | $ | 2,092,000 | $ | (107,287,000 | ) | $ | (105,195,000 | ) | |||||||
| Total | ||||||||||||||||
| Common Stock | Accumulated | Shareholders’ | ||||||||||||||
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Balance at | ||||||||||||||||
| July 1, 2022 | 734,187 | $ | 2,092,000 | $ | (92,524,000 | ) | $ | (90,432,000 | ) | |||||||
| Balance | 734,187 | $ | 2,092,000 | $ | (92,524,000 | ) | $ | (90,432,000 | ) | |||||||
| Net loss | - | - | (9,000 | ) | (9,000 | ) | ||||||||||
| Balance at | ||||||||||||||||
| September 30, 2022 | 734,187 | $ | 2,092,000 | $ | (92,533,000 | ) | $ | (90,441,000 | ) | |||||||
| Balance | 734,187 | $ | 2,092,000 | $ | (92,533,000 | ) | $ | (90,441,000 | ) | |||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| -5- |
PORTSMOUTH SQUARE, INC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(unaudited)
| Portsmouth | Total | |||||||||||||||||||||||
| Common Stock | Accumulated | Shareholders’ | Noncontrolling | Shareholders’ | ||||||||||||||||||||
| Shares | Amount | Deficit | Deficit | Interest | Deficit | |||||||||||||||||||
| Balance at July 1, 2022 | 734,187 | $ | 2,092,000 | $ | (92,524,000 | ) | $ | (90,432,000 | ) | $ | - | $ | (90,432,000 | ) | ||||||||||
| Net loss | - | - | (9,000 | ) | (9,000 | ) | - | (9,000 | ) | |||||||||||||||
| Balance at September 30, 2022 | 734,187 | $ | 2,092,000 | $ | (92,533,000 | ) | $ | (90,441,000 | ) | $ | - | $ | (90,441,000 | ) | ||||||||||
| Portsmouth | Total | |||||||||||||||||||||||
| Common Stock | Accumulated | Shareholders’ | Noncontrolling | Shareholders’ | ||||||||||||||||||||
| Shares | Amount | Deficit | Deficit | Interest | Deficit | |||||||||||||||||||
| Balance at July 1, 2021 | 734,187 | $ | 2,092,000 | $ | (84,960,000 | ) | $ | (82,868,000 | ) | $ | (655,000 | ) | $ | (83,523,000 | ) | |||||||||
| Net loss | - | - | (1,975,000 | ) | (1,975,000 | ) | - | (1,975,000 | ) | |||||||||||||||
| Reclassify noncontrolling interest due to purchase of Partnership interest | - | - | (999,000 | ) | (999,000 | ) | 999,000 | - | ||||||||||||||||
| Purchase of Partnership interest | - | - | - | - | (344,000 | ) | (344,000 | ) | ||||||||||||||||
| Balance at September 30, 2021 | 734,187 | $ | 2,092,000 | $ | (87,934,000 | ) | $ | (85,842,000 | ) | $ | - | $ | (85,842,000 | ) | ||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
PORTSMOUTH SQUARE, INC.
CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the three months ended September 30, | 2022 | 2021 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (9,000 | ) | $ | (1,975,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Net unrealized (gain) loss on marketable securities | (90,000 | ) | 401,000 | |||||
| Deferred taxes | (3,000 | ) | (775,000 | ) | ||||
| Depreciation and amortization | 546,000 | 459,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Investment in marketable securities | 336,000 | 630,000 | ||||||
| Accounts receivable | 126,000 | (21,000 | ) | |||||
| Other assets | 339,000 | 92,000 | ||||||
| Accounts payable and other liabilities | 851,000 | 1,434,000 | ||||||
| Accounts payable related party | 307,000 | 203,000 | ||||||
| Due to securities broker | (130,000 | ) | (545,000 | ) | ||||
| Obligations for securities sold | - | 54,000 | ||||||
| Net cash provided by (used in) operating activities | 2,273,000 | (43,000 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Payments for hotel furniture, equipment and building improvements | (1,632,000 | ) | (240,000 | ) | ||||
| Investment in Partnership interest | - | (344,000 | ) | |||||
| Net cash used in investing activities | (1,632,000 | ) | (584,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related party note payable | - | 1,500,000 | ||||||
| Issuance cost from refinance of related party loan | - | (50,000 | ) | |||||
| Payments of mortgage notes payable | (612,000 | ) | (510,000 | ) | ||||
| Net cash provided by (used in) financing activities | (612,000 | ) | 940,000 | |||||
| Net increase in cash, cash equivalents, and restricted cash | 29,000 | 313,000 | ||||||
| Cash, cash equivalents, and restricted cash at the beginning of the period | 8,888,000 | 8,532,000 | ||||||
| Cash, cash equivalents, and restricted cash at the end of the period | $ | 8,917,000 | $ | 8,845,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 2,061,000 | $ | 1,677,000 | ||||
| For the three months ended September 30, | 2023 | 2022 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,560,000 | ) | $ | (9,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Net unrealized loss (gain) on marketable securities | 88,000 | (90,000 | ) | |||||
| Amortization of other notes payable | (141,000 | ) | (142,000 | ) | ||||
| Deferred taxes | - | (3,000 | ) | |||||
| Depreciation and amortization | 821,000 | 627,000 | ||||||
| Amortization of loan cost | 60,000 | 61,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Investment in marketable securities | - | 336,000 | ||||||
| Accounts receivable | (34,000 | ) | 126,000 | |||||
| Other assets | 5,000 | 339,000 | ||||||
| Accounts payable and other liabilities - Hotel | (898,000 | ) | 851,000 | |||||
| Accounts payable and other liabilities | 2,067,000 | - | ||||||
| Accounts payable related party | 924,000 | 307,000 | ||||||
| Due to securities broker | - | (130,000 | ) | |||||
| Net cash provided by operating activities | 1,332,000 | 2,273,000 | ||||||
| Cash flows from investing activities: | ||||||||
| Payments for hotel furniture, equipment and building improvements | (755,000 | ) | (1,632,000 | ) | ||||
| Net cash used in investing activities | (755,000 | ) | (1,632,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related party note payable | 1,500,000 | - | ||||||
| Payments of mortgage notes payable | (281,000 | ) | (612,000 | ) | ||||
| Net cash provided by (used in) financing activities | 1,219,000 | (612,000 | ) | |||||
| Net increase in cash, cash equivalents, and restricted cash | 1,796,000 | 29,000 | ||||||
| Cash, cash equivalents, and restricted cash at the beginning of the period | 5,206,000 | 8,888,000 | ||||||
| Cash, cash equivalents, and restricted cash at the end of the period | $ | 7,002,000 | $ | 8,917,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 1,606,000 | $ | 2,061,000 | ||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| -6- |
PORTSMOUTH SQUARE, INC.
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”), 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, 2022.2023. The JuneSeptember 30, 20222023 condensed consolidated balance sheet was derived from the consolidated balance sheet as included in the Company’s Form 10-K for the year ended June 30, 2022.2023.
The unaudited condensed consolidated financial statements include the accounts of our wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended September 30, 20222023 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2023.2024.
Portsmouth’s primary business was conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California limited partnership (“Justice” or the “Partnership”). Effective July 15, 2021, Portsmouth completed the purchase of 100% of the limited partnership interest of Justice through the acquisition of the remaining 0.7% non-controlling interest. Effective December 23, 2021, the Partnership was dissolved. The financial statements of Justice were consolidated with those of the Company.
Prior to its dissolution effective December 23, 2021, Justice owned and operated a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”). Mezzanine was a wholly owned subsidiary of the Partnership; Operating is a wholly owned subsidiary of Mezzanine. Effective December 23, 2021, Portsmouth replaced Justice as the single member of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (“Hilton”) through January 31, 2030.
Operating entered into a hotel management agreement (“HMA”) with Aimbridge Hospitality (“Aimbridge”) to manage the Hotel, along with its five level parking garage, with an effective date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the February 3, 2017 date and automatically renews for successive one (1) year periods, not to exceed five years in the aggregate, subject to certain conditionsconditions.. Under the terms on the HMA, base management fee payable to Aimbridge shall be one and seven-tenths percent (1.70%) of total Hotel revenue.
As of September 30, 2022,2023, The InterGroup Corporation (“InterGroup”), a public company, owns approximately 75.075.7% of the outstanding common shares of Portsmouth and the Company’s Chairman of the Board and Chief Executive Officer, John V. Winfield, owns approximately2.5% of the outstanding common shares of the Company. Mr. Winfield also serves as the President, Chairman of the Board and Chief Executive Officer of InterGroup and owns approximately 6868.6% of the outstanding common shares of InterGroup as of September 30, 2022.2023.
There have been no material changes to the Company’s significant accounting policies during the three months ended September 30, 2022.2023. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 20222023 for a summary of the significant accounting policies.
| -7- |
Reclassifications
Certain prior year amountsline items on the statement of cash flows for the three months ended September 30, 2022, have been reclassified for consistency withto conform to the current period presentation on the condensed consolidated balance sheet. Finance leasespresentation. Net cash provided by (used in) operating, investing, and financing activities did not change as a result of $this reclassification.
130,000 and $183,000 as of September 30, 2022 and June 30, 2022, respectively, and accounts payable - Hotel of $9,202,000 and $8,307,000 as of September 30, 2022 and June 30, 2022, respectively, were reclassified to Accounts Payable and Other Liabilities. These reclassifications had no effect on the reported results of operations and financial position.
Recently Issued and Adopted Accounting Pronouncements
As of September 30, 2022, management does not expect a2023, there was no material impact from the recent adoption of new accounting pronouncements, nor expected material impact from recently issued accounting pronouncements yet to be adopted, on the Company’s condensed consolidated financial statements.
Going Concern
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As discussed in Note 9 – Related Party and Other Financing Transactions, as of September 30, 2023, the outstanding balance consists of a senior mortgage loan and mezzanine loan totaling $106,896,000. Both loans mature on January 1, 2024, in addition, the Company has recurring losses and has an accumulated deficit of $107,287,000.
Due to these factors and the uncertainty around the Company’s ability to successfully refinance the debt on favorable terms in the current lending environment gives rise to substantial doubt about the Company’s ability to continue as a going concern for one year after the financial statement issuance date.
The Company is exploring the possibility of refinancing its senior mortgage and mezzanine debt with potential lenders. Alternatively, the Company is also exploring the possibility of a loan modification or extension to the existing debt with the current lenders, however, the Company may be unable to access further financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. During 2021 and first part of calendar 2022, we took advantage of the slow periods to make certain capital improvements including complete refinishing of all guest room furniture, resurfacing half of the hotel bathtubs that needed repair, refreshed meeting space and lobby paint and vinyl, replaced all bed frames and socks, and completed the carpet and wall covering corridor installation. In November 2022, we began our guestroom renovation and had completed approximately 307 guestrooms as of September 30, 2023. Hotel improvements are ongoing to remain competitive and we anticipate completing the guestroom renovations by the end March 2024. Once the Company completes its full renovation, management anticipates its high occupancy to continue and its average daily rates to increase as it completes renovation up to the point of generating a positive cash flows.
The financial statements do not include any adjustments to the carrying amounts of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
NOTE 2 - LIQUIDITY
Historically, our cash flows have been primarily generated from our Hotel operations. However, the responses by federal, state, and local civil authorities to the COVID-19 pandemic continues to have a material detrimental impact on our liquidity. For the three months ended September 30, 20222023 our net cash provided by operating activities was $2,273,0001,332,000. We have taken several steps to preserve capital and increase liquidity at our Hotel, including implementing strict cost management measures to eliminate non-essential expenses, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets. As the hospitality and travel environment continues to recover, we will continue to evaluate what services wethe Company will bring back. During the three months ended September 30, 2022,2023, the Company continued to make capital improvements to the hotel in the amount of $1,632,000755,000 and anticipates continuing its guest room upgrade program during the remaining of fiscal year 2023.2024.
The Company had cash and cash equivalents of $2,643,0004,149,000 and $2,662,0002,295,000 as of September 30, 20222023 and June 30, 2022,2023, respectively. The Company had restricted cash of $6,274,0002,853,000 and $6,226,0002,911,000 as of September 30, 20222023 and June 30, 2022,2023, respectively. The Company had marketable securities net of margin due to securities brokers, of $295,000271,000 and $411,000359,000 as of September 30, 20222023 and June 30, 2022,2023, respectively. These marketable securities are short-term investments and liquid in nature.
| -8- |
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 31, 2023. On December 16, 2020 Justice, the Partnership and InterGroup entered into a loan modification agreement which increased Justice’sthe Partnership’s borrowing from InterGroup as needed up to $10,000,000 and extended the maturity date of the loan to July 31, 2021. As of the date of this report, the maturity date was extended to July 31, 2023. Upon the dissolution of Justicethe Partnership in December 2021, Portsmouth assumed Justice’sthe Partnership’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. DuringIn July 2023, the fiscal year ending June 30, 2022, InterGroup advanced $note maturity date was extended to 7,550,000July 31, 2025 toand the Hotel, bringing the totalborrowing amount due to InterGroupavailable was increased to $14,200,00020,000,000 as. As of June 30, 20222023 the balance of the loan was $15,700,000 net of loan amortization costs of zero. The Company agreed to a 0.5% loan extension and September 30, 2022.modification fee payable to InterGroup. During the three months ended September 30, 2022,2023, the Company did not need anyneeded additional funding and does not anticipate any need for funding from InterGroup in the near future.amount of $1,500,000. As of September 30, 2022,2023 the Companybalance of the loan was $17,200,000 and has not made any paid-downs to its note payable to InterGroup. The Company could amend its by-laws and increase the number of authorized shares to issue additional shares to raise capital in the public markets if needed.
The Company’s known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of occupancy and revenue per occupied room (“RevPAR”, calculated by multiplying the hotel’s average daily room rate by its occupancy percentage) were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.
The following table provides a summary as of September 30, 2022,2023, the Company’s material financial obligations which also including interest payments:
SCHEDULE OF FINANCIAL OBLIGATIONS INCLUDING INTEREST PAYMENTS
| 9 Months | Year | Year | Year | Year | 9 Months | Year | Year | Year | Year | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||
| Mortgage notes payable | $ | 108,554,000 | $ | 1,315,000 | $ | 107,239,000 | $ | - | $ | - | $ | - | $ | - | $ | 106,802,000 | $ | 106,802,000 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||
| Related party notes payable | 17,579,000 | 425,000 | 14,767,000 | 567,000 | 567,000 | 463,000 | 790,000 | $ | 17,200,000 | $ | - | $ | - | $ | 17,200,000 | $ | - | $ | - | $ | - | |||||||||||||||||||||||||||||||||||
| Other notes payable | 2,813,000 | 425,000 | 567,000 | 567,000 | 463,000 | 317,000 | 474,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest | 8,408,000 | 5,341,000 | 3,067,000 | - | - | - | - | 5,141,000 | 3,079,000 | 2,062,000 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 134,541,000 | $ | 7,081,000 | $ | 125,073,000 | $ | 567,000 | $ | 567,000 | $ | 463,000 | $ | 790,000 | $ | 131,956,000 | $ | 110,306,000 | $ | 2,629,000 | $ | 17,767,000 | $ | 463,000 | $ | 317,000 | $ | 474,000 | ||||||||||||||||||||||||||||
NOTE 3 – REVENUE
The following table present our revenues disaggregated by revenue streams.
SCHEDULE OF REVENUE DISAGGREGATION BY REVENUE STREAMS
| For the three months ended September 30, | 2022 | 2021 | 2023 | 2022 | ||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 10,802,000 | $ | 5,562,000 | $ | 9,561,000 | $ | 10,802,000 | ||||||||
| Food and beverage | 535,000 | 266,000 | 627,000 | 535,000 | ||||||||||||
| Garage | 822,000 | 907,000 | 825,000 | 822,000 | ||||||||||||
| Other operating departments | 151,000 | 70,000 | 80,000 | 151,000 | ||||||||||||
| Total hotel revenue | $ | 12,310,000 | $ | 6,805,000 | $ 11,093,000 | $ | 12,310,000 | |||||||||
Performance obligations
We identified the following performance obligations for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:
● Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
| -9- |
● Non-cancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
● Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
● Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.
Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.
We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.
Contract assets and liabilities
We doThe Company does not have any material contract assets as of September 30, 20222023 and June 30, 2022,2023, other than trade and other receivables, net on our condensed consolidated balance sheets. Our receivables are primarily the result of contracts with customers, that were entered into within the past 12 months, which are reduced by an allowancea reserve for doubtful accountsestimated credit losses that reflects our estimate of amounts that will not be collected.collected and amount to $0 and $1,000 at September 30, 2023 and June 30, 2023, respectively.
We recordThe Company records contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities on our condensed consolidated balance sheets and had a balance of $493,000290,000 at July 1, 2022.2023. During the three months ended September 30, 2022, the entire2023 $493,000158,000 was recognizedrecorded was received and increased in advance of guests and recorded as revenue and $148,000 was recognized during the three months ended September 30, 2021.contract liabilities. Contract liabilities increased to $1,061,000 as of September 30, 2022 from $493,000 as of June 30, 2022. The increased for the three months ended September 30, 20222023 was primarily driven by advance deposits received from customers for services to be performed after September 30, 2022.2023.
Contract costs
We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as incurred as our contracts with customers are less than one year.
| -10- |
NOTE 4 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
SCHEDULE OF INVESTMENT IN HOTEL, NET
| Accumulated | Net Book | |||||||||||
| September 30, 2022 | Cost | Depreciation | Value | |||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||
| Finance lease ROU assets | 1,805,000 | (1,002,000 | ) | 803,000 | ||||||||
| Furniture and equipment | 34,492,000 | (28,793,000 | ) | 5,699,000 | ||||||||
| Building and improvements | 56,274,000 | (31,665,000 | ) | 24,609,000 | ||||||||
| Investment in Hotel, net | $ | 93,695,000 | $ | (61,460,000 | ) | $ | 32,235,000 | |||||
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| June 30, 2022 | Cost | Depreciation | Value | |||||||||||||||||||||
| September 30, 2023 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||||||||
| Finance lease ROU assets | 1,805,000 | (922,000 | ) | 883,000 | 1,805,000 | (1,318,000 | ) | 487,000 | ||||||||||||||||
| Furniture and equipment | 32,860,000 | (28,567,000 | ) | 4,293,000 | 39,481,000 | (30,087,000 | ) | 9,394,000 | ||||||||||||||||
| Building and improvements | 56,274,000 | (31,344,000 | ) | 24,930,000 | 56,274,000 | (32,964,000 | ) | 23,310,000 | ||||||||||||||||
| Investment in Hotel, net | $ | 92,063,000 | $ | (60,833,000 | ) | $ | 31,230,000 | $ | 98,684,000 | $ | (64,369,000 | ) | $ | 34,315,000 | ||||||||||
| Accumulated | Net Book | |||||||||||
| June 30, 2023 | Cost | Depreciation | Value | |||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||
| Finance lease ROU assets | 1,805,000 | (1,239,000 | ) | 566,000 | ||||||||
| Furniture and equipment | 38,727,000 | (29,682,000 | ) | 9,045,000 | ||||||||
| Building and improvements | 56,273,000 | (32,627,000 | ) | 23,646,000 | ||||||||
| Investment in Hotel, net | $ | 97,929,000 | $ | (63,548,000 | ) | $ | 34,381,000 | |||||
Finance lease ROU assets, furniture and equipment are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 3 to 7 years and amortized over the life of the lease. Building and improvements are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 15 to 39 years. Depreciation expense for the three months ended September 30, 20222023 and 20212022 are $627,000821,000 and $529,000627,000, respectively.
NOTE 5 -– INVESTMENT IN MARKETABLE SECURITIES, NETNET
The Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically invested in 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.
As of September 30, 2022,2023, and June 30, 2022,2023, all the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:
SCHEDULE OF CHANGES IN UNREALIZED GAINS AND LOSSES ON INVESTMENTSTRADING SECURITIES
| Gross | Gross | Net | Gross | Gross | Net Unrealized | Fair | ||||||||||||||||||||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Fair Value | Cost | Unrealized Gain | Unrealized Loss | Gain (Loss) | Value | ||||||||||||||||||||||||||||||
| As of September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
| As of September 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||||
| Equities | $ | 307,000 | $ | 61,000 | $ | (73,000 | ) | $ | (12,000 | ) | $ | 295,000 | $ | 274,000 | $ | 49,000 | $ | (52,000 | ) | $ | (3,000 | ) | $ | 271,000 | ||||||||||||||||
| As of June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
| As of June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||||
| Equities | $ | 643,000 | $ | 42,000 | $ | (144,000 | ) | $ | (102,000 | ) | $ | 541,000 | $ | 274,000 | $ | 133,000 | $ | (48,000 | ) | $ | 85,000 | $ | 359,000 | |||||||||||||||||
As of September 30, 2022, and June 30, 2022, the Company had $22,000 and $73,000, respectively, of unrealized losses related to securities held for over one year.
Net losses(loss) gain on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses).losses. Below is the compositionbreakdown of net gains (losses) on marketable securitiesthe two components for the three months ended September 30, 2023 and 2022, and 2021, respectively:respectively.
| -11- |
SCHEDULE OF NET GAINGAINS (LOSSES) ON MARKETABLE SECURITIES COMPRISING OF REALIZED AND UNREALIZED GAINS (LOSSES)
| For the three months ended September 30, | 2022 | 2021 | ||||||
| Realized loss on marketable securities, net | $ | (100,000 | ) | $ | (5,000 | ) | ||
| Realized loss on marketable securities related to Comstock | - | (40,000 | ) | |||||
| Unrealized gain (loss) on marketable securities, net | 90,000 | (263,000 | ) | |||||
| Unrealized loss on marketable securities related to Comstock | - | (137,000 | ) | |||||
| Net loss on marketable securities | $ | (10,000 | ) | $ | (445,000 | ) | ||
| For the three months ended September 30, | 2023 | 2022 | ||||||
| Realized loss on marketable securities, net | $ | - | $ | (100,000 | ) | |||
| Unrealized (loss) gain on marketable securities, net | (88,000 | ) | 90,000 | |||||
| Net loss on marketable securities | $ | (88,000 | ) | $ | (10,000 | ) | ||
NOTE 6 - 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)liabilities, due to securities broker and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).
The assets measured at fair value on a recurring basis are as follows:
SCHEDULE OF FAIR VALUE, ASSETS MEASURED ON RECURRING BASIS
| As of | September 30, 2023 | June 30, 2023 | ||||||||||||||
| September 30, 2022 | June 30, 2022 | Total - Level 1 | Total - Level 1 | |||||||||||||
| As of | Total - Level 1 | Total - Level 1 | ||||||||||||||
| Assets: | ||||||||||||||||
| Investment in marketable securities: | ||||||||||||||||
| REITs and real estate companies | $ | 181,000 | $ | 162,000 | $ | 265,000 | $ | 350,000 | ||||||||
| Communication services | 93,000 | 355,000 | ||||||||||||||
| Utilities | 11,000 | 5,000 | ||||||||||||||
| Basic materials | 9,000 | 18,000 | 6,000 | 9,000 | ||||||||||||
| Technology | 1,000 | 1,000 | ||||||||||||||
| Investment in marketable securities | $ | 295,000 | $ | 541,000 | $ | 271,000 | $ | 359,000 | ||||||||
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.
NOTE 7 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows:
SCHEDULE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
| As of | September 30, | June 30, | ||||||||||||||
| September 30, | June 30, | 2023 | 2023 | |||||||||||||
| As of | 2022 | 2022 | ||||||||||||||
| Cash and cash equivalents | $ | 2,643,000 | $ | 2,662,000 | $ | 4,149,000 | $ | 2,295,000 | ||||||||
| Restricted cash | 6,274,000 | 6,226,000 | 2,853,000 | 2,911,000 | ||||||||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 8,917,000 | $ | 8,888,000 | $ | 7,002,000 | $ | 5,206,000 | ||||||||
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Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for the Hotel.
NOTE 8 - 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 consolidated financial statements, reflect how management internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this same information.
Information below represents reporting segments for the three months ended September 30, 2023 and 2022, and 2021, respectively. Operating incomeSegment loss from Hotel operations consists of the operation of the hotelHotel and operation of the garage. Loss from investment transactions consistinvestments consists of net investment gain (loss), dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative expenses and the income tax benefit for the entire Company.investment related expenses.
SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT
| For the three months | Hotel | Investment | ||||||||||||||||||||||||||||||
| ended September 30, 2022 | Operations | Transactions | Corporate | Total | ||||||||||||||||||||||||||||
| For the three months ended September 30, 2023 | Hotel | Investment | ||||||||||||||||||||||||||||||
| Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||
| Revenues | $ | 12,310,000 | $ | - | $ | - | $ | 12,310,000 | $ | 11,093,000 | $ | - | $ | - | $ | 11,093,000 | ||||||||||||||||
| Segment operating expenses | (9,306,000 | ) | - | (309,000 | ) | (9,615,000 | ) | (9,281,000 | ) | - | (319,000 | ) | (9,600,000 | ) | ||||||||||||||||||
| Segment income (loss) | 3,004,000 | - | (309,000 | ) | 2,695,000 | 1,812,000 | - | (319,000 | ) | 1,493,000 | ||||||||||||||||||||||
| Interest expense - mortgage | (1,632,000 | ) | - | - | (1,632,000 | ) | (1,606,000 | ) | - | - | (1,606,000 | ) | ||||||||||||||||||||
| Interest expense - related party | (430,000 | ) | - | - | (430,000 | ) | (502,000 | ) | - | - | (502,000 | ) | ||||||||||||||||||||
| Depreciation and amortization expense | (627,000 | ) | - | - | (627,000 | ) | (821,000 | ) | - | - | (821,000 | ) | ||||||||||||||||||||
| Loss from investments | - | (18,000 | ) | - | (18,000 | ) | - | (123,000 | ) | - | (123,000 | ) | ||||||||||||||||||||
| Income tax benefit | - | - | 3,000 | 3,000 | ||||||||||||||||||||||||||||
| Net income (loss) | $ | 315,000 | $ | (18,000 | ) | $ | (306,000 | ) | $ | (9,000 | ) | |||||||||||||||||||||
| Income tax expense | - | - | (1,000 | ) | (1,000 | ) | ||||||||||||||||||||||||||
| Net loss | $ | (1,117,000 | ) | $ | (123,000 | ) | $ | (320,000 | ) | $ | (1,560,000 | ) | ||||||||||||||||||||
| Total assets | $ | 41,514,000 | $ | 295,000 | $ | 8,316,000 | $ | 50,125,000 | $ | 42,187,000 | $ | 271,000 | $ | 313,000 | $ | 42,771,000 | ||||||||||||||||
| As of and for the three months | Hotel | Investment | ||||||||||||||||||||||||||||||
| ended September 30, 2021 | Operations | Transactions | Corporate | Total | ||||||||||||||||||||||||||||
| As of and for the three months ended September 30, 2022 | Hotel | Investment | ||||||||||||||||||||||||||||||
| Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||
| Revenues | $ | 6,805,000 | $ | - | $ | - | $ | 6,805,000 | $ | 12,310,000 | $ | - | $ | - | $ | 12,310,000 | ||||||||||||||||
| Segment operating expenses | (6,333,000 | ) | - | (328,000 | ) | (6,661,000 | ) | (9,306,000 | ) | - | (309,000 | ) | (9,615,000 | ) | ||||||||||||||||||
| Segment income (loss) | 472,000 | - | (328,000 | ) | 144,000 | 3,004,000 | - | (309,000 | ) | 2,695,000 | ||||||||||||||||||||||
| Interest expense - mortgage | (1,661,000 | ) | - | - | (1,661,000 | ) | (1,632,000 | ) | - | - | (1,632,000 | ) | ||||||||||||||||||||
| Interest expense - related party | (237,000 | ) | - | - | (237,000 | ) | (430,000 | ) | - | - | (430,000 | ) | ||||||||||||||||||||
| Depreciation and amortization expense | (529,000 | ) | - | - | (529,000 | ) | (627,000 | ) | - | - | (627,000 | ) | ||||||||||||||||||||
| Loss from investments | - | (467,000 | ) | - | (467,000 | ) | - | (18,000 | ) | - | (18,000 | ) | ||||||||||||||||||||
| Income tax benefit | - | - | 775,000 | 775,000 | - | - | 3,000 | 3,000 | ||||||||||||||||||||||||
| Net income (loss) | $ | (1,955,000 | ) | $ | (467,000 | ) | $ | 447,000 | $ | (1,975,000 | ) | $ | 315,000 | $ | (18,000 | ) | $ | (306,000 | ) | $ | (9,000 | ) | ||||||||||
| Total assets | $ | 40,704,000 | $ | 2,525,000 | $ | 9,020,000 | $ | 52,249,000 | $ | 41,514,000 | $ | 295,000 | $ | 8,316,000 | $ | 50,125,000 | ||||||||||||||||
| -13- |
NOTE 9 -RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The following summarizes the balances of related party and other notes payable as of September 30, 20222023 and June 30, 2022,2023, respectively.
SCHEDULE OF RELATED PARTY AND OTHER NOTES PAYABLE
| As of | September 30, 2022 | June 30, 2022 | ||||||
| Note payable - InterGroup | $ | 14,200,000 | $ | 14,200,000 | ||||
| Note payable - Hilton | 2,296,000 | 2,375,000 | ||||||
| Note payable - Aimbridge | 1,083,000 | 1,146,000 | ||||||
| Total related party and other notes payable | $ | 17,579,000 | $ | 17,721,000 | ||||
| As of | September 30, 2023 | June 30, 2023 | ||||||
| Related party note payable - InterGroup | $ | 17,200,000 | $ | 15,700,000 | ||||
| Other note payable - Hilton | 1,979,000 | 2,058,000 | ||||||
| Other note payable - Aimbridge | 834,000 | 896,000 | ||||||
| Total related party and other notes payable | $ | 20,013,000 | $ | 18,654,000 | ||||
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 31, 2023.2023. On December 16, 2020 Justice, the Partnership and InterGroup entered into a loan modification agreement which increased Justice’sthe Partnership’s borrowing from InterGroup as needed up to $10,000,000. Upon the dissolution of Justicethe Partnership in December 2021, Portsmouth assumed Justice’sthe Partnership’s note payable to InterGroup in the amount of $11,350,000. InOn December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. In July 2023, the note maturity date was extended to July 31, 2025 and the borrowing amount available was increased to $20,000,000. As of September 30, 2022 and June 30, 2022,2023 the balance of the loan was $14,200,00015,700,000. The Company agreed to a 0.5% loan extension and modification fee payable to InterGroup. During the three months ended September 30, 2023, the Company needed additional funding in the amount of $1,500,000. As of September 30, 2023 the balance of the loan was $17,200,000 and has not made any paid-downs to its note payable to InterGroup.
Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $317,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.
On February 1, 2017, Operating entered into an HMA with Ambridge to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Ambridge to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second anniversary of the takeover date. During the first quarter of fiscal year 2021, the Hotel obtained approval from Ambridge to use the key money for hotel operations and the funds were exhausted by December 31, 2020. The unamortized portion of $1,083,000834,000 and $1,146,000896,000 of the key money is included in the related party notes payable in the consolidated balance sheets as of September 30, 20222023 and June 30, 2022,2023, respectively.
Future minimum principal payments for all related party and other financing transactions are as follows:
SCHEDULE OF FUTURE MINIMUM PRINCIPAL PAYMENTS
| For the year ending June 30, | |||||||||
| 2023 | $ | 425,000 | |||||||
| 2024 | 14,767,000 | ||||||||
| 2024 (9 months) | $ | 425,000 | |||||||
| 2025 | 567,000 | 567,000 | |||||||
| 2026 | 567,000 | 17,767,000 | |||||||
| 2027 | 463,000 | 463,000 | |||||||
| 2028 | 317,000 | ||||||||
| Thereafter | 790,000 | 474,000 | |||||||
| Long term debt | $ | 17,579,000 | $ | 20,013,000 | |||||
As of September 30, 20222023 and June 30, 2022,2023, the Company had accounts payable to related party of $5,215,0008,207,000 and $4,908,0007,283,000, respectively. These are amounts due to InterGroup and represent accrued interests and certain shared costs and expenses, primarily general and administrative expenses, rent, insurance, and other expenses.
| -14- |
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December 2013. The mortgage loan is secured by the Company’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due through January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 20242024.. Outstanding principal balance on the loan was $88,554,00086,802,000 and $89,114,00087,240,000 as of September 30, 20222023 and June 30, 2022,2023, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by Portsmouth in favor of the mortgage lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan had an interest rate of 9.75% per annum and a maturity date of January 1, 20242024.. As additional security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. On July 31, 2019, Mezzanine refinanced the mezzanine loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan which had a 9.75% per annum interest rate was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.
Effective May 11, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain certain net worth and liquidity. As of SeptemberJune 30, 2022,2023, InterGroup is in compliance with both requirements. However, due to the Hotel’s ongoing recovery from the negative impact of Covid19 in the Hotel’s cash flow, Justice Operating Company, LLC havehas not been meeting certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lockbox by the Lender for all cash collected by the Hotel. However, such lockbox has been created and utilized from the loan inception and will be in place up to loan maturity regardless of the DSCR.
The Company’s Board of Directors is currently comprised of directors John V. Winfield, William J. Nance, John C. Love, Yvonne Murphy, and Steve Grunwald. Director Jerold R. Babin, 90, passed away on October 20, 2022 and was replaced by Yvonne Murphy. All the Company’s directors also serve as directors of InterGroup. The Company’s director and Chairman of the Audit Committee, William J. Nance, serves as Comstock’s director and Chairman of the Audit and Finance, Compensation and Nominating and Governance Committees of Comstock.
John V. Winfield serves as Chief Executive Officer and Chairman of the Company and InterGroup. Effective June 2016, Mr. Winfield became the Managing Director of Justice until its dissolution in December 2021. Depending on certain market conditions and various risk factors, the Chief Executive Officer 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 InterGroup, at risk in connection with investment decisions made on behalf of the Company.
On May 24, 2021, John V. Winfield resigned effective immediately as the Company’s President and the Company’s Board of Directors elected David C. Gonzalez as the Company’s new President, effective as of May 24, 2021. Mr. Gonzalez serves as Vice President Real Estate of InterGroup and is an advisor of the Executive Strategic Real Estate and Securities Investment Committee of InterGroup and Portsmouth.
NOTE 10 – ACCOUNTS PAYABLE AND OTHER LIABILITIES
The following summarizes the balances of accounts payable and other liabilities as of September 30, 20222023 and June 30, 2022,2023, respectively.
SCHEDULE OF ACCOUNTS PAYABLE AND OTHER LIABILITIES
| As of | September 30, 2022 | June 30, 2022 | September 30, 2023 | June 30, 2023 | ||||||||||||
| Trade payable | $ | 2,262,000 | $ | 2,841,000 | $ | 3,682,000 | $ | 2,815,000 | ||||||||
| Advance deposits | 1,061,000 | 493,000 | 448,000 | 301,000 | ||||||||||||
| Property tax payable | 504,000 | - | 571,000 | 59,000 | ||||||||||||
| Payroll and related accruals | 2,433,000 | 2,223,000 | 3,155,000 | 2,863,000 | ||||||||||||
| Mortgage interest payable | - | 513,000 | 382,000 | - | ||||||||||||
| Withholding and other taxes payable | 1,025,000 | 920,000 | 1,495,000 | 1,204,000 | ||||||||||||
| Security deposit | 52,000 | 52,000 | 52,000 | 52,000 | ||||||||||||
| Finance leases | 130,000 | 183,000 | ||||||||||||||
| Franchise fees | 1,707,000 | 2,510,000 | ||||||||||||||
| Management fees payable | 1,106,000 | 1,683,000 | ||||||||||||||
| Other payables | 2,056,000 | 1,500,000 | 252,000 | 194,000 | ||||||||||||
| Total accounts payable and other liabilities | $ | 9,523,000 | $ | 8,725,000 | $ | 12,850,000 | $ | 11,681,000 | ||||||||
NOTE 11 – SUBSEQUENT EVENTS
On October 20, 2022, Director Jerold R. Babin passed away. Mr. Babin was not a member of any Board of Directors committee. Yvonne Murphy replaced Mr. Babin and was elected unanimously by the Company’s Board of Directors until the next annual meeting.
The Company evaluated subsequent events through the date that the accompanying financial statements were issued, and has determined that no material subsequent events exist through the date of this filing, other than as described above.filing.
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Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, including anticipated repayment of certain of the Company’s indebtedness, the impact to our business and financial condition, and measures being taken in response to the novel strain of coronavirus and the disease it causes (“COVID-19”), the effects of competition and the effects of future legislation or regulations and other non-historical statements.statements, the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts). Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events.
Such statements are subject to certain risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry; the impact of terrorism and war on the national and international economies, including tourism, securities markets, energy and fuel costs; natural disasters; general economic conditions and competition in the hotel industry in the San Francisco area; seasonality, labor relations and labor disruptions; actual and threatened pandemics such as swine flu or the outbreak of COVID-19 or similar outbreaks; 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, 2022.2023. These risks and uncertainties could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
COVID19 UPDATE
The novel strain of coronavirus and the disease it causes (“COVID-19”) have continued to affect the hospitality industry and our business. Beginning in March 2020, travel restrictions and mandated closings of non-essential businesses were imposed, which resulted in temporary suspensions of operations in many hotels in San Francisco, however, the Company did not suspend operations and did not close the hotel. As vaccination rates across the country increased and COVID-19 related restrictions were eased or removed, we saw an increase in travel and hospitality spending beginning in the second calendar quarter of 2021. During the second quarter of calendar year 2022, we continued to witness robust leisure demand and an acceleration in group and business transient demand. However, the potential for an economic slowdown or a recession during the second half of 2022 may disrupt the positive momentum at the Company’s hotel and our industry.
We believe the distribution of the COVID-19 vaccine during 2021 drove the improvement in traveler sentiment we experienced and resulted in an improvement in occupancy, Average Daily Rate (“ADR”) and Revenue per Available Room (“RevPAR”) during 2021. If additional virus variants emerge causing re-imposed widespread travel restrictions, the hospitality industry will be negatively affected. While there can be no assurances that the Company will not experience further fluctuations in hotel revenues or earnings due to the uncertainty of COVID-19 and other macroeconomic factors, such as inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts, we expect to continue to recover through the remainder of fiscal year 2023 based on current demand trends.
RESULTS OF OPERATIONS
The Company’s principal source of revenue continues to be derived from its ownership in Justice Operating Company, LLC (“Operating”) inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. Operating owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Operating have been consolidated with those of the Company.
Three Months Ended September 30, 20222023 Compared to Three Months Ended September 30, 20212022
The Company had net loss of $1,560,000 for the three months ended September 30, 2023 compared to net loss of $9,000 for the three months ended September 30, 2022 compared to net loss of $1,975,000 for the three months ended September 30, 2021.2022. The decreaseincrease is primarily attributable to the increasedecrease in Hotel revenue, offset by operating expenses.
| -16- |
Hotel Operations
The Company had net incomeloss from Hotel operations of $1,117,000 for the three months ended September 30, 2023 compared to net income of $315,000 for the three months ended September 30, 2022 compared to net loss of $1,955,000 for the three months ended September 30, 2021.2022. The change is primarily attributable to increasedecrease in Hotel revenue.
The following table sets forth a more detailed presentation of Hotel operations for the three months ended September 30, 20222023 and 2021.2022.
| For the three months ended September 30, | 2022 | 2021 | 2023 | 2022 | ||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 10,803,000 | $ | 5,562,000 | $ | 9,561,000 | $ | 10,803,000 | ||||||||
| Food and beverage | 535,000 | 266,000 | 627,000 | 535,000 | ||||||||||||
| Garage | 822,000 | 907,000 | 825,000 | 822,000 | ||||||||||||
| Other operating departments | 150,000 | 70,000 | 80,000 | 150,000 | ||||||||||||
| Total hotel revenues | 12,310,000 | 6,805,000 | 11,093,000 | 12,310,000 | ||||||||||||
| Operating expenses excluding depreciation and amortization | (9,306,000 | ) | (6,333,000 | ) | (9,281,000 | ) | (9,306,000 | ) | ||||||||
| Operating income before interest, depreciation and amortization | 3,004,000 | 472,000 | 1,812,000 | 3,004,000 | ||||||||||||
| Interest expense | (2,062,000 | ) | (1,898,000 | ) | ||||||||||||
| Interest expense - mortgage | (1,606,000 | ) | (1,632,000 | ) | ||||||||||||
| Interest expense - related party | (502,000 | ) | (430,000 | ) | ||||||||||||
| Depreciation and amortization expense | (627,000 | ) | (529,000 | ) | (821,000 | ) | (627,000 | ) | ||||||||
| Net income (loss) from Hotel operations | $ | 315,000 | $ | (1,955,000 | ) | $ | (1,117,000 | ) | $ | 315,000 | ||||||
For the three months ended September 30, 2023, the Hotel had operating income of $1,812,000 before interest expense, depreciation, and amortization on total operating revenues of $11,093,000. For the three months ended September 30, 2022, the Hotel had operating income of $3,004,000 before interest expense, depreciation, and amortization on total operating revenues of $12,310,000 compared to operating income of $472,000 before interest expense, depreciation, and amortization on total operating revenues of $6,805,000 for the three months ended September 30, 2021.$12,310,000.
For the three months ended September 30, 2022,2023, room revenues increasedrevenue decreased by $5,241,000,$1,242,000 and food and beverage revenue increased by $269,000 and garage decreased by $85,000 due to less people driving into the City and taking public transportation as the COVID-19 pandemic subsided and restrictions were lifted,$92,000 compared to the three months ended September 30, 2021. The year over year increase in all the revenue sources except for garage revenues are as a result of the recovery from the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak since March 2020.2022. Total operating expenses increaseddecreased by $2,973,000$25,000 due to increase in salariesgeneral and wages, commission, credit card fees, management fees, and franchise fees.administrative expenses.
The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended September 30, 20222023 and 2021.2022.
Three Months Ended September 30, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||
| 2022 | $ | 230 | 94 | % | $ | 216 | ||||||
| 2021 | $ | 141 | 79 | % | $ | 111 | ||||||
Three Months Ended September 30, | Average Daily Rate | Average Occupancy % |
RevPAR | ||||||||||
| 2023 | $ | 218 | 88 | % | $ | 191 | |||||||
| 2022 | $ | 230 | 94 | % | $ | 216 | |||||||
The Hotel’s revenues increaseddecreased by 81%9.9% this quarter as compared to the previous comparable quarter. Average daily rate increaseddecreased by $89,$12, average occupancy increaseddecreased by 15%6.0%, and RevPAR increasedRevPar decreased by $105$25 for the three months ended September 30, 20222023 compared to the three months ended September 30, 2021.2022.
Investment Transactions
The Company had a net loss on marketable securities of $88,000 for the three months ended September 30, 2023 compared to a net loss on marketable securities of $10,000 for the three months ended September 30, 2022 compared to a net loss on marketable securities of $445,000 for the three months ended September 30, 2021.2022. For the three months ended September 30, 2022,2023, the Company had a net realized loss of $100,000 and a net unrealized gain of $90,000. For the three months ended September 30, 2021, the Company had a net realized loss of $45,000 and a net unrealized loss of $400,000.$88,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
The Company consolidated Justice (“Hotel”) for financial reporting purposes and was not taxed on its non-controlling interest in the Hotel. However, effective July 15, 2021, the Company become the owner of 100% of Justice and will include all the Hotel’s income and expense accounts into its income taxes calculations going forward. The income tax benefit during the three months ended September 30, 20222023 and 20212022 represent the income tax effect on the Company’s pretax loss which includes the operations of the Hotel.
| -17- |
MARKETABLE SECURITIES
The following table shows the composition of the Company’s marketable securities portfolio as of September 30, 20222023 and June 30, 20222023 by selected industry groups.
| % of Total | ||||||||
| As of September 30, 2022 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | $ | 181,000 | 61.4 | % | ||||
| Communication services | 93,000 | 31.5 | % | |||||
| Utilities | 11,000 | 3.7 | % | |||||
| Basic materials | 9,000 | 3.1 | % | |||||
| Energy | 1,000 | 0.3 | % | |||||
| $ | 295,000 | 100.0 | % | |||||
| % of Total | ||||||||
| As of September 30, 2023 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | $ | 265,000 | 97.8 | % | ||||
| Basic materials | 6,000 | 2.2 | % | |||||
| $ | 271,000 | 100.0 | % | |||||
| % of Total | ||||||||
| As of June 30, 2022 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| Communication services | $ | 355,000 | 65.6 | % | ||||
| REITs and real estate companies | 162,000 | 29.9 | % | |||||
| Basic materials | 18,000 | 3.3 | % | |||||
| Utilities | 5,000 | 0.9 | % | |||||
| Technology | 1,000 | 0.3 | % | |||||
| $ | 541,000 | 100.0 | % | |||||
| % of Total | ||||||||
| As of June 30, 2023 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | 350,000 | 97.5 | % | |||||
| Basic materials | 9,000 | 2.5 | % | |||||
| $ | 359,000 | 100.0 | % | |||||
As of September 30, 2022,2023, the Company’s investment portfolio includes five equity positions. The Company holds twothree equity securities that are more than 10% of the equity value of the portfolio. The largest security position represents 61% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL) and is included in REITS and real estate companies industry group.
As of June 30, 2022,2023, the Company held five different equity positions in its investment portfolio. The Company held twothree equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 66%69% of the portfolio and consists of the common stock of Paramount Global - Preferred Stock (NASDAQ: PARAP), whichAmerican Realty Investors, Inc. (NYSE: ARL) and is included in the communication servicesREITS and real estate companies industry group.
The following table shows the net loss on the Company’s marketable securities and the associated margin interest and trading expenses for the respective periods:
| For the three months ended September 30, | 2022 | 2021 | 2023 | 2022 | ||||||||||||
| Net loss on marketable securities | $ | (10,000 | ) | $ | (445,000 | ) | $ | (88,000 | ) | $ | (10,000 | ) | ||||
| Dividend and interest income | 26,000 | 34,000 | 3,000 | 26,000 | ||||||||||||
| Margin interest expense | (6,000 | ) | (16,000 | ) | (10,000 | ) | (6,000 | ) | ||||||||
| Trading and management expenses | (28,000 | ) | (40,000 | ) | (28,000 | ) | (28,000 | ) | ||||||||
| $ | (18,000 | ) | $ | (467,000 | ) | $ | (123,000 | ) | $ | (18,000 | ) | |||||
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL SOURCES
The Company had cash, cash equivalents and restricted cash of $8,917,000$7,002,000 and $8,888,000$5,206,000 as of September 30, 20222023 and June 30, 2022,2023, respectively. The Company had marketable securities, net of margin due to securities brokers, of $295,000$271,000 and $411,000$359,000 as of September 30, 20222023 and June 30, 2022,2023, respectively. These marketable securities are short-term investments and liquid in nature.
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 31, 2023. On December 16, 2020, Justicethe Partnership and InterGroup entered into a loan modification agreement which increased Justice’sthe Partnership’s borrowing from InterGroup as needed up to $10,000,000 and extended the maturity date of the loan to July 31, 2021. The maturity date was extended to July 31, 2023.$10,000,000. Upon the dissolution of Justicethe Partnership in December 2021, Portsmouth assumed Justice’sthe Partnership’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. DuringIn July 2023, the fiscal year ending June 30, 2022, InterGroup advanced $7,550,000note maturity date was extended to July 31, 2025 and the Hotel, bringing the totalborrowing amount dueavailable was increased to InterGroup to $14,200,000 as$20,000,000. As of June 30, 2022.2023 the balance of the loan was $15,700,000. The Company agreed to a 0.5% loan extension and modification fee payable to InterGroup. During the three months ended September 30, 2022,2023, the Company did not need anyneeded additional funding and does not anticipate any need for funding from InterGroup in the near future. The Company could amendamount of $1,500,000. As of September 30, 2023 the balance of the loan was $17,200,000 and has not made any paid-downs to its by-laws and increase the number of authorized sharesnote payable to issue additional shares to raise capital in the public markets if needed.InterGroup.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of occupancy and revenue per occupied room (“RevPAR”, calculated by multiplying the hotel’s average daily room rate by its occupancy percentage) were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs,needs. The Partnership obtained from Intergroup has provided additional funding as needed to assist as a source of liquidity. As well as our capital lease and debt obligations, even if current levels of occupancy and revenue per occupied room (“RevPAR”, calculated by multiplying the hotel’s average daily room rate by its occupancy percentage) were to persist for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.
Going Concern
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As discussed in Note 9 – Related Party and Other Financing Transactions, as of September 30, 2023, the outstanding balance consists of a senior mortgage loan and mezzanine loan totaling $106,896,000. Both loans mature on January 1, 2024, in addition, the Company has recurring losses and has an accumulated deficit of $107,287,000.
Due to these factors and the uncertainty around the Company’s ability to successfully refinance the debt on favorable terms in the current lending environment gives rise to substantial doubt about the Company’s ability to continue as a going concern for one year after the financial statement issuance date.
The Company is exploring the possibility of refinancing its senior mortgage and mezzanine debt with potential lenders. Alternatively, the Company is also exploring the possibility of a loan modification or extension to the existing debt with the current lenders, however, the Company may be unable to access further financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. During 2021 and first part of calendar 2022, we took advantage of the slow periods to make certain capital improvements including complete refinishing of all guest room furniture, resurfacing half of the hotel bathtubs that needed repair, refreshed meeting space and lobby paint and vinyl, replaced all bed frames and socks, and completed the carpet and wall covering corridor installation. In November 2022, we began our guestroom renovation and had completed approximately 307 guestrooms as of September 30, 2023. Hotel improvements are ongoing to remain competitive and we anticipate completing the guestroom renovations by the end March 2024. Once the Company completes its full renovation, management anticipates its high occupancy to continue and its average daily rates to increase as it completes renovation up to the point of generating a positive cash flows.
The financial statements do not include any adjustments to the carrying amounts of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
| -19- |
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of September 30, 2022, the Company’s material financial obligations which also including interest payments:
| 9 Months | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | ||||||||||||||||||||||
| Mortgage notes payable | $ | 108,554,000 | $ | 1,315,000 | $ | 107,239,000 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
| Related party notes payable | 17,579,000 | 425,000 | 14,767,000 | 567,000 | 567,000 | 463,000 | 790,000 | |||||||||||||||||||||
| Interest | 8,408,000 | 5,341,000 | 3,067,000 | - | - | - | - | |||||||||||||||||||||
| Total | $ | 134,541,000 | $ | 7,081,000 | $ | 125,073,000 | $ | 567,000 | $ | 567,000 | $ | 463,000 | $ | 790,000 | ||||||||||||||
| 9 Months | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | ||||||||||||||||||||||
| Mortgage notes payable | $ | 106,802,000 | $ | 106,802,000 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
| Related party notes payable | 17,200,000 | - | - | 17,200,000 | - | - | - | |||||||||||||||||||||
| Other notes payable | 2,813,000 | 425,000 | 567,000 | 567,000 | 463,000 | 317,000 | 474,000 | |||||||||||||||||||||
| Interest | 5,141,000 | 3,079,000 | 2,062,000 | - | - | - | - | |||||||||||||||||||||
| Total | $ | 131,956,000 | $ | 110,306,000 | $ | 2,629,000 | $ | 17,767,000 | $ | 463,000 | $ | 317,000 | $ | 474,000 | ||||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
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 Aimbridge has the power and ability under the terms of its management agreement to adjust Hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. 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 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 ongoing 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 ended September 30, 2022.2023.
INCOME TAXES
Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws, or interpretations thereof). In addition, we are subject to examination of our income tax returns by the IRS and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements. We evaluate tax positions taken or expected to be taken on a tax return to determine whether they are more likely than not of being sustained, assuming that the tax reporting positions will be examined by taxing authorities with full knowledge of all relevant information, prior to recording the related tax benefit in our consolidated financial statements. If a position does not meet the more likely than not standard, the benefit cannot be recognized. Assumptions, judgment, and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. A change in the assessment of the “more likely than not” standard with respect to a position could materially impact our consolidated financial statements.
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DEFERRED INCOME TAXES – VALUATION ALLOWANCE
We assess the realizability of our deferred tax assets quarterly and recognize a valuation allowance when it is more likely than not that some or all of our deferred tax assets are not realizable. This assessment is completed by tax jurisdiction and relies on the weight of both positive and negative evidence available, with significant weight placed on recent financial results. Cumulative pre-tax losses for the three-year period are considered significant objective negative evidence that some or all of our deferred tax assets may not be realizable. Cumulative reported pre-tax income is considered objectively verifiable positive evidence of our ability to generate positive pre-tax income in the future. In accordance with GAAP, when there is a recent history of pre-tax losses, there is little or no weight placed on forecasts for purposes of assessing the recoverability of our deferred tax assets. When necessary, we use systematic and logical methods to estimate when deferred tax liabilities will reverse and generate taxable income and when deferred tax assets will reverse and generate tax deductions. Assumptions, judgment, and the use of estimates are required when scheduling the reversal of deferred tax assets and liabilities, and the exercise is inherently complex and subjective. However, significant judgment will be required to determine the timing and amount of any reversal of the valuation allowance in future periods.
HOTEL ASSETS AND DEFINITE-LIVED INTANGIBLE ASSETS
We evaluate property and equipment, and definite-lived intangible assets for impairment quarterly, and when events or circumstances indicate the carrying value may not be recoverable, we evaluate the net book value of the assets by comparing to the projected undiscounted cash flows of the assets. We use judgment to determine whether indications of impairment exist and consider our knowledge of the hospitality industry, historical experience, location of the property, market conditions, and property-specific information available at the time of the assessment. The results of our analysis could vary from period to period depending on how our judgment is applied and the facts and circumstances available at the time of the analysis. When an indicator of impairment exists, judgment is also required in determining the assumptions and estimates to use within the recoverability analysis and when calculating the fair value of the asset or asset group, if applicable. Changes in economic and operating conditions impacting the judgments used could result in impairments to our long-lived assets in future periods. Historically, changes in estimates used in the property and equipment and definite-lived intangible assets impairment assessment process have not resulted in material impairment charges in subsequent periods as a result of changes made to those estimates. There were no indicators of impairment on its hotel investments or intangible assets and accordingly no impairment losses recorded during the three months ended September 30, 2023 and 2022, respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon suchtheir evaluation, theour Chief Executive Officer and PrincipalChief Financial Officer have concluded that as of the end of such period, the Company’sour disclosure controls and procedures are(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective because of a material weakness in ensuringour internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that information requiredthere is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, the Company’s management has concluded that our control around the interpretation and accounting for the deferred tax asset valuation allowance was not effectively designed or maintained. In light of this material weakness, we performed additional analysis as deemed necessary to be disclosedensure that our financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this filing is accumulatedQuarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and communicated to management and is recorded, processed, summarized and reported withincash flows for the time periods specified in the Securities and Exchange Commission rules and forms.period presented.
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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.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Portsmouth Square, Inc., through its operating company Justice Investors Operating Co.,Company, LLC, a Delaware limited liability company (the “Company”), is the owner of the real property located at 750 Kearny Street in San Francisco, currently improved with a 27 – story building which houses a Hilton Hotel (the “Property”). The Property was purchased and improved pursuant to approvals granted bya series of agreements with the City and County of San Francisco (the “City”) in 1970. Thosethe early 1970’s. The terms of the agreements and subsequent approvals and permits included a Major Encroachment Permit (“Permit”)condition by which the Company was authorizedrequired to construct an ornamental overhead pedestrian bridge across Kearny Street, connecting the Property to thea nearby City park and underground parking garage known as Portsmouth Square (the “Bridge”). The constructionIncluded in the approval process was the City’s issuance of a Major Encroachment Permit (“Permit”) allowing the Bridge was a conditionto span over Kearney Street. As of the City’s approval of the construction of the hotel structure on the Property. Effective on May 24, 2022, the City has revokedpurported to revoke the Permit and on June 13, 2022, directed the Company to remove the Bridge at the Company’s expense, including construction management costs and traffic control. Pursuant to a letter dated June 13, 2022, the City’s Department of Public works has specifically directed the “removal of the unpermitted pedestrian bridge and all related physical encroachments in the public right-of-way and on City property” and the submission ofsubmit a general bridge removal and restoration plan (the “Plan”). at the Company’s expense. The Company disputes the legality of the purported revocation of the Permit. The Company further disputes the existence of any legal or contractual obligation to remove the Bridge at its expense. In particular, representatives of the Company have participated in meetings with the City sinceon and at various times after August 1, 2019, discussingto discuss a collaborative process for the possible removal of the Bridge. Until the recentpurported revocation of the Permit in 2022, the City representatives have repeatedly and consistently promised and agreed that the City will pay for the associated costs of any Bridge removal. Nevertheless, without waiving any rights, in an effort to understand all of the available options, and to provide a response to the City’s new directives, the Company has engaged a Project Manager, a structural engineering firm and an architect to advise on the process and for the development of a Plan for the Bridge removal, as well as the reconstruction of the front of the Hilton Hotel. TheIn that regard, the Company has been working cooperatively with the City on the process for removal of the Bridge and its related physical encroachments, including obtaining regulatory approvals and necessary permits. A final Plan is currently not expected to be completed until late calendar year of 2023 or early in 2023. At this time, early estimates of2024, and permits are unlikely to be obtained until mid-2024 at the cost of the Plan exceed $2 million.earliest. The Company is currently considering its optionsin discussion with regard to filing litigation to invalidate the revocationCity regarding both the process and financial responsibility for the implementation of the Permit so as to preclude removalPlan and reconstruction of the Bridge, and/or to compel the City to honor its commitment to pay for the removalimpacted portions of the Bridge. The Company is continuingHotel. Those discussions are expected to prepare its casecontinue through the end of 2023 and the progress is ongoing as of September 30, 2022.into 2024.
The Company may be subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company will defend itself vigorously against any such claims. Management does not believe that the impact of such matters will have a material effect on the financial conditions or result of operations when resolved.
Item 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no events that are required to be reported under this Item.
Item 3. DEFAULTS UPON SENIOR SECURITIES
There have been no events that are required to be reported under this Item.
Item 4. MINE SAFETY DISCLOSURES
There have been no events that are required to be reported under this Item.
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Item 5. OTHER INFORMATION
There have been no events that are required to be reported under this Item.
Item 6. EXHIBITS
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB Inline XBRL Taxonomy Extension Label Linkbase
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PORTSMOUTH SQUARE, INC. | ||
| (Registrant) | ||
| Date: November | by | /s/ John V. Winfield |
| John V. Winfield | ||
| Chairman of the Board and | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: November | by | /s/ |
| ( |
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