InnSuites Hospitality Trust: 2020 Q2 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended July 31, 2020, within fiscal 2021. InnSuites Hospitality Trust owned interests in two limited-service hotels totaling 270 suites in Tucson, Arizona, and Albuquerque, New Mexico, and managed those properties plus an affiliated Tempe hotel. The filing was signed March 1, 2021. The Trust is a smaller reporting company and disclosed that its SEC filings were delinquent.
Financial performance and key metrics
| Metric | Three months ended July 31, 2020 | Six months ended July 31, 2020 | Comparable change |
|---|---|---|---|
| Total revenue | $924,720 | $2,370,798 | Down 40% and 35%, respectively |
| Operating loss | $(1,233,747) | $(1,516,567) | Loss worsened from $(413,341) and $(575,005) |
| Consolidated net loss | $(1,267,385) | $(1,620,242) | Loss worsened from $(478,638) and $(760,390) |
| Net loss attributable to controlling interests | $(664,919) | $(806,791) | Compared with $(464,007) and $(804,822) |
| Basic and diluted loss per share | $(0.14) | $(0.18) | Compared with $(0.05) and $(0.08) |
| Adjusted EBITDA | $(420,000) | $(276,000) | Compared with $(146,000) and $(125,000) |
| FFO | $(840,000) | $(1,193,000) | Compared with $16,000 and $(266,000) |
Six-month room revenue declined 61.4% to approximately $2.1 million. Food and beverage revenue increased modestly, while management and trademark fee revenue was approximately $75,000. The six-month operating loss margin was approximately negative 64%, compared with negative 16% in the prior-year period; the quarterly operating loss margin was approximately negative 133%.
Hotel operating indicators deteriorated. Albuquerque occupancy fell to 53.85% from 95.32%, with REVPAR declining 50.28% to $35.65. Tucson occupancy fell to 57.06% from 69.23%; ADR increased 17.29% to $79.42, but REVPAR declined 3.33% to $45.32.
Cash flow, liquidity, debt and balance sheet
- Cash and cash equivalents declined to $130,409 from $1.20 million at January 31, 2020. Current assets were $1.70 million versus current liabilities of $2.76 million.
- The financial statements reported net cash used in operating activities of $392,546, compared with $410,803 provided in the prior-year period. The MD&A contains a conflicting reference to approximately $1.193 million of operating cash usage; investors should reconcile this discrepancy to the audited cash flow presentation.
- Investing activities used $400,060, primarily for the additional $400,000 UniGen investment. Financing activities used $277,513, including debt repayments, dividends, distributions to noncontrolling holders and $207,339 of treasury-stock repurchases.
- Mortgage notes payable totaled approximately $6.02 million, and other notes payable totaled approximately $1.26 million. Scheduled debt payments were approximately $767,000 in fiscal 2021 and $731,000 in fiscal 2022.
- Operating and finance lease liabilities totaled approximately $2.49 million. Total liabilities were $11.55 million, compared with total equity of $3.91 million.
- The Trust received three PPP loans totaling approximately $503,000. Management expected full forgiveness, but forgiveness remained subject to the SBA process at the reporting date.
- Management stated that available cash, a $1.0 million related-party facility, $1.0 million of affiliate advances, and a $150,000 bank line should provide liquidity for at least twelve months. This assessment depends on continued access to credit, hotel recovery, refinancing, asset sales and related-party repayments.
Material changes, outlook and unusual items
- COVID-19 travel restrictions materially reduced hotel demand, occupancy, revenue, operating cash flow and liquidity. Management expected partial occupancy recovery and modest rate improvement during the remainder of fiscal 2021, but provided no formal quantitative revenue or earnings guidance.
- The Trust recorded $766,000 of sales and occupancy tax expense related to a claimed additional 6% Pima County occupancy tax for the Tucson hotel. Management stated this item was not expected to recur.
- Operating expenses declined overall, but the tax charge caused quarterly operating expenses to increase despite lower occupancy. General and administrative expense declined by approximately $585,000 for the six-month period.
- The Trust invested $1.0 million in secured convertible UniGen debentures bearing 6% interest and received warrants. Management described additional potential funding and conversion opportunities, but UniGen profitability was not expected for 18 to 24 months or more.
- The Trust continued marketing both hotels for sale and stated a goal of selling one property within 12 to 18 months and the other within the following 12 months. The listed asking prices totaled $24.6 million, versus aggregate book value of approximately $10.6 million and mortgage balances of approximately $6.0 million. There was no assurance that the properties would sell at those prices or at all.
- The IBC note receivable was carried at approximately $1.93 million after a prior $825,000 impairment. Payments were deferred until November 2021 because of COVID-19-related conditions; management recorded no additional impairment.
- Subsequent events disclosed in the filing included repayment of approximately $1.0 million owed by the affiliated Tempe hotel and approximately $800,000 owed by Rare Earth Financial after the Tempe hotel sale on December 18, 2020, plus a $175,000 California tax refund received in August 2020.
- The Trust disclosed ineffective disclosure controls and unremediated material weaknesses in internal control over financial reporting, including insufficient accounting personnel and expertise, segregation-of-duties issues, entity-level controls, spreadsheet oversight and information-technology controls. Remediation was expected throughout fiscal 2022.
- The Trust received an NYSE American noncompliance notice for late filing of its fiscal 2020 Form 10-K and stated that it was also delinquent in filing subsequent quarterly reports. Continued listing remained a risk.
Most important facts for investors to verify
- Reconcile the conflicting MD&A and financial-statement figures for six-month operating cash flow.
- Confirm the final amount and timing of forgiveness for the approximately $503,000 of PPP loans.
- Assess hotel occupancy, REVPAR, cash generation and debt-service capacity as COVID-19 effects continue.
- Verify the status and enforceability of the $766,000 Tucson occupancy-tax liability and whether further assessments are possible.
- Evaluate liquidity absent timely hotel sales, refinancing, affiliate-loan repayments or continued availability of related-party credit.
- Monitor remediation of material weaknesses and the Trust’s compliance with SEC filing and NYSE American continued-listing requirements.
- Assess the valuation, collectability and dilution potential associated with the UniGen investment, warrants and convertible debentures.