NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Description
of Business
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 conditions. 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 June 30, 2022, The InterGroup Corporation (“InterGroup”), a public company, owns approximately 75.0% of the outstanding
common shares of Portsmouth. As of June 30, 2022, the Company’s Chairman of the Board and Chief Executive Officer, John V. Winfield,
owns approximately 2.5% 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 67.8% of the outstanding common shares of InterGroup as of June 30,
2022.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and Justice up to its dissolution in December 2021 at which time
all subsidiaries of Justice became subsidiaries of Portsmouth as the Company replaced Justice as the single member of Justice’s
subsidiaries where appropriate. All significant inter-company transactions and balances have been eliminated.
Investment
in Hotel, Net
Property
and equipment are stated at cost. Building improvements are depreciated on a straight-line basis over their useful lives ranging from
3 to 39 years. Furniture, fixtures, and equipment are depreciated on a straight-line basis over their useful lives ranging from 3 to
7 years.
Repairs
and maintenance are charged to expense as incurred. Costs of significant renewals and improvements are capitalized and depreciated over
the shorter of its remaining estimated useful life or life of the asset. The cost of assets sold or retired and the related accumulated
depreciation are removed from the accounts; any resulting gain or loss is included in other income (expenses).
The
Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable in accordance with generally accepted accounting principles (“GAAP”). If the carrying amount
of the asset, including any intangible assets associated with that asset, exceeds its estimated undiscounted net cash flow, before interest,
the Company will recognize an impairment loss equal to the difference between the assets’ carrying amount and its estimated fair
value. If impairment is recognized, the reduced carrying amount of the asset will be accounted for as its new cost. For a depreciable
asset, the new cost will be depreciated over the asset’s remaining useful life. Generally, fair values are estimated using discounted
cash flow, replacement cost or market comparison analyses. The process of evaluating for impairment requires estimates as to future events
and conditions, which are subject to varying market and economic factors. Therefore, it is reasonably possible that a change in estimate
resulting from judgments as to future events could occur which would affect the recorded amounts of the property. No impairment losses
were recorded for the years ended June 30, 2022 and 2021.
Investment
in Marketable Securities
Marketable
securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date. Marketable
securities are classified as trading securities with all unrealized gains and losses on the Company’s investment portfolio recorded
through the consolidated statements of operations.
Cash
and Cash Equivalents
Cash
equivalents consist of highly liquid investments with an original maturity of three months or less when purchased and are carried at
cost, which approximates fair value. As of June 30, 2022 and 2021, the Company does not have any cash equivalents.
Restricted
Cash
Restricted
cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for
the Hotel. It also includes key money received from Aimbridge that is restricted for capital improvements.
Accounts
Receivable - Hotel, Net
Accounts
receivable from Hotel customers are carried at cost less an allowance for doubtful accounts that is based on management’s assessment
of the collectability of accounts receivable. The net accounts receivable balance on July 1, 2020 was $251,000. As of June 30, 2022 and
2021, the Company has gross accounts receivable of $392,000 and $211,000 respectively, and allowance for doubtful accounts of $15,000
and $17,000, respectively. The Company extends unsecured credit to its customers but mitigates the associated credit risk by performing
ongoing credit evaluations of its customers.
Other
Assets
Other
assets include prepaid insurance, estimated life insurance proceeds, prepaid expenses, other investments, net, and other miscellaneous
assets. Other investments include non-marketable securities (carried at cost, net of any impairments loss). The Company has no significant
influence or control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary
impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not
limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than
cost, (iii) the financial condition and near-term prospects of the issuer and (iv) our ability to hold the investment for a period of
time sufficient to allow for any anticipated recovery in fair value. For the years ended June 30, 2022 and 2021, the Company recorded
impairment losses related to other investments of $20,000 and $38,000, respectively. As of June 30, 2022 and 2021, cumulative
impairment losses were $2,269,000 and $2,249,000, respectively.
Income
Taxes
The
Company consolidated Justice (“Hotel”) for financial reporting purposes up to its dissolution in December 2021 and was not
taxed on its non-controlling interest in the Hotel. Effective July 15, 2021, the Company become the owner of 100% of Justice and began
to include all the Hotel’s income and expense accounts into its income taxes calculations. The income tax expense or benefit during
the fiscal years ended June 30, 2022 and 2021, respectively, represent the income tax effect on the Company’s pretax loss
which includes its share in the net loss of the Hotel accordingly.
Deferred
income taxes are calculated under the liability method. Deferred income tax assets and liabilities are based on differences between the
financial statement and tax basis of assets and liabilities at the current enacted tax rates. Changes in deferred income tax assets and
liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to
changes in enacted tax rates are charged or credited to income tax expense in the period of enactment. Valuation allowances are established
for certain deferred tax assets where realization is not likely.
We
have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and Economic
Security (CARES) Act enacted on March 27, 2020, and the American Rescue Plan Act enacted on March 11, 2021. The effect of tax law changes
is required to be recognized either in the interim period in which the legislation is enacted or reflected in the computation of the
annual effective tax rate, depending on the nature of the change. As of June 30, 2022 and 2021, we evaluated the income tax provisions
of the CARES Act and the American Rescue Plan Act and have determined there to be no material effect on the fiscal years’ tax provision.
We will continue to evaluate the income tax provisions of both acts and monitor the tax law changes that could have income tax accounting
and disclosure implications.
The
Company accounts for its uncertain tax positions pursuant to ASC 740, Income Taxes. This guidance prescribes a recognition threshold
and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax
return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
The Company believes its income tax filing positions and deductions will be sustained upon examination and that there are no significant
uncertain tax positions. Further, any interest or penalties associated with uncertain tax positions shall be recorded in the income tax
provision. As of June 30, 2022 there were no uncertain tax positions or any associated penalties and interest.
Due
to Securities Broker
Various
securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These
advanced funds are recorded as a liability.
Accounts
Payable and Other Liabilities
Accounts
payable and other liabilities include trade payables, advance customer deposits, accrued wages, accrued real estate taxes, and other
liabilities.
Fair
Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”)
in an orderly transaction between market participants at the measurement date. Accounting standards for fair value measurement establishes
a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would
use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs
are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability
of inputs as follows:
Level
1–inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2–inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level
3–inputs to the valuation methodology are unobservable and significant to the fair value.
Revenue
Recognition
On
July 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach to all contracts
resulting in no cumulative adjustment to accumulated deficit. The adoption of this standard did not impact the timing of our revenue
recognition based on the short-term, day-to-day nature of our operations. See Note 3 – Revenue.
Advertising
Costs
Advertising
costs are expensed as incurred and are included in Hotel operating expenses in the consolidated statements of operations. Advertising
costs were $61,000 and $110,000 for the years ended June 30, 2022 and 2021, respectively.
Basic
and Diluted Loss per Share
Basic
loss per share is calculated based upon the weighted average number of common shares outstanding during each fiscal year. As of June
30, 2022 and 2021, the Company did not have any potentially dilutive securities outstanding.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S.
GAAP) requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates
primarily relate to the recording of allowance for doubtful accounts which are based on management’s
assessment of the collectability of accounts receivable, as of the
end of the fiscal year. Actual results may differ from those estimates. Management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets
and when appropriate, records tax valuation allowances based on that evidence and estimates.
Debt
Issuance Costs
Debt
issuance costs related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from the
carrying amount of the debt liability and are amortized over the life of the debt. Loan amortization costs are included in interest expense
in the consolidated statement of operations.
Recently
Issued and Adopted Accounting Pronouncements
As
of June 30, 2022, 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 consolidated financial statements.
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 fiscal years ended June 30, 2022 our
net cash used in operating activities was $2,761,000.
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 improve, we will continue to evaluate what services we bring back and anticipate
making upgrades to our guest rooms during fiscal year 2023.
The
Company had cash and cash equivalents of $2,662,000 and $2,310,000 as of June 30, 2022 and 2021, respectively. The Company had restricted
cash of $6,226,000 and $6,222,000 as of June 30, 2022 and 2021, respectively. The Company had marketable securities, net of margin due
to securities brokers, of $411,000 and $1,821,000 as of June 30, 2022 and 2021, respectively. These marketable securities are short-term
investments and liquid in nature.
On
December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup
as needed up to $10,000,000 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 Justice in December 2021, Portsmouth assumed Justice’s note payable
to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement
which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. During the fiscal year ending June 30, 2022,
InterGroup advanced $7,550,000 to the Hotel, bringing the total amount due to InterGroup to $14,200,000 as of June 30, 2022. 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.
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). Justice
received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice used the proceeds from
the SBA Loan for payroll costs and other qualified expenses. The SBA Loan was scheduled to mature on April 9, 2022 with a 1.00% interest
rate and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the
CARES Act. On June 10, 2021, the SBA Loan was forgiven in full and $4,719,000 was recorded as gain on debt extinguishment on the consolidated
statement of operations for the fiscal year ending June 30, 2021.
On
February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the
SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice used all proceeds from the Second
SBA Loan primarily for payroll costs. The Second SBA Loan was scheduled to mature on February 3, 2026, had a 1.00% interest rate, and
was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act.
On November 19, 2021, the Second SBA Loan was forgiven in full and $2,000,000 was recorded as gain on debt extinguishment on the consolidated
statement of operations for the fiscal year ending June 30, 2022.
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, 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 June 30, 2022, the Company’s material financial obligations which also including interest
payments:
SCHEDULE OF FINANCIAL OBLIGATIONS INCLUDING INTEREST PAYMENTS
| |
| | |
Year | | |
Year | | |
Year | | |
Year | | |
Year | | |
| |
| |
Total | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
2027 | | |
Thereafter | |
Mortgage notes payable | |
$ | 109,114,000 | | |
$ | 1,721,000 | | |
$ | 107,393,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Related party notes payable | |
| 17,721,000 | | |
| 567,000 | | |
| 14,767,000 | | |
| 567,000 | | |
| 567,000 | | |
| 462,000 | | |
| 791,000 | |
Interest | |
| 11,080,000 | | |
| 7,871,000 | | |
| 3,209,000 | | |
| - | | |
| - | | |
| - | | |
| - | |
Total | |
$ | 137,915,000 | | |
$ | 10,159,000 | | |
$ | 125,369,000 | | |
$ | 567,000 | | |
$ | 567,000 | | |
$ | 462,000 | | |
$ | 791,000 | |
NOTE
3 - REVENUE
The
following table present our revenue disaggregated by revenue streams.
SCHEDULE OF REVENUE DISAGGREGATION BY REVENUE STREAMS
For the year ended June 30, | |
2022 | | |
2021 | |
Hotel revenues: | |
| | | |
| | |
Hotel rooms | |
$ | 26,599,000 | | |
$ | 12,138,000 | |
Food and beverage | |
| 1,471,000 | | |
| 293,000 | |
Garage | |
| 3,112,000 | | |
| 2,117,000 | |
Other operating departments | |
| 352,000 | | |
| 120,000 | |
Total Hotel revenue | |
$ | 31,534,000 | | |
$ | 14,668,000 | |
Performance
obligations
We
identified the following performance obligations for which revenue is recognized as the respective performance obligations are satisfied,
which results in recognizing the amount we expect to be entitled to for providing the goods or services:
|
● |
Cancelable room reservations
or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when
the room stay occurs. |
|
|
|
|
● |
Noncancelable room reservations
and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each
distinct good or service is provided, which is reflected by the duration of the room reservation. |
|
|
|
|
● |
Other ancillary goods
and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance
obligations, which are satisfied when the related good or service is provided to the hotel guest. |
|
|
|
|
● |
Components of package
reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations
and are satisfied as set forth above. |
Hotel
revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package
reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied
or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are
provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the
estimated standalone selling prices of each component.
We
do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the
nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at
our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds
related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are
rendered.
Contract
assets and liabilities
We
do not have any material contract assets as of June 30, 2022 and 2021, other than trade and other receivables, net on our consolidated
balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful
accounts that reflects our estimate of amounts that will not be collected.
We
record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within
accounts payable and other liabilities on our consolidated balance sheets and had a balance of $375,000 at July 1, 2020. Contract liabilities
increased to $493,000 as of June 30, 2022 from $161,000 as of June 30, 2021. The increase for the twelve months ended June 30, 2022 was
primarily driven by advance deposits received from customers for services to be performed after June 30, 2022.
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.
NOTE
4 – INVESTMENT IN HOTEL, NET
Investment
in Hotel consisted of the following as of:
SCHEDULE OF INVESTMENT IN HOTEL, NET
| |
| | |
Accumulated | | |
Net Book | |
June 30, 2022 | |
Cost | | |
Depreciation | | |
Value | |
| |
| | |
| | |
| |
Land | |
$ | 1,124,000 | | |
$ | - | | |
$ | 1,124,000 | |
Finance lease ROU assets | |
| 1,805,000 | | |
| (922,000 | ) | |
| 883,000 | |
Furniture and equipment | |
| 32,860,000 | | |
| (28,567,000 | ) | |
| 4,293,000 | |
Building and improvements | |
| 56,274,000 | | |
| (31,344,000 | ) | |
| 24,930,000 | |
Investment in Hotel, net | |
$ | 92,063,000 | | |
$ | (60,833,000 | ) | |
$ | 31,230,000 | |
| |
| | |
Accumulated | | |
Net Book | |
June 30, 2021 | |
Cost | | |
Depreciation | | |
Value | |
| |
| | |
| | |
| |
Land | |
$ | 1,124,000 | | |
$ | - | | |
$ | 1,124,000 | |
Finance lease ROU assets | |
| 1,805,000 | | |
| (606,000 | ) | |
| 1,199,000 | |
Furniture and equipment | |
| 31,014,000 | | |
| (27,956,000 | ) | |
| 3,058,000 | |
Building and improvements | |
| 56,194,000 | | |
| (30,062,000 | ) | |
| 26,132,000 | |
Investment in Hotel, net | |
$ | 90,137,000 | | |
$ | (58,624,000 | ) | |
$ | 31,513,000 | |
NOTE
5 – INVESTMENT IN REAL ESTATE
In
August 2007, the Company agreed to acquire 50% interest in InterGroup Uluniu, Inc. (“Uluniu”), a Hawaiian corporation and
a 100% owned subsidiary of InterGroup, for $973,000, which represents an amount equal to the costs paid by InterGroup for the acquisition
and carrying costs of approximately two acres of unimproved land held for development located in Maui, Hawaii. In March 2021, to make
both companies more efficient, InterGroup purchased back the 50% interest of Uluniu from Portsmouth for $980,000, which represents Portsmouth’s
carrying cost of the investment. No gains or losses were realized as a result of the transaction since it was a related-party transaction.
As a related-party transaction, the fairness of the financial terms of the transactions were reviewed and approved by the independent
director of the Company.
NOTE
6 - INVESTMENT IN MARKETABLE SECURITIES
The
Company’s investment in marketable securities consists primarily of corporate equities. The Company has also invested in income
producing securities, which may include interests in real estate-based companies and REITs, where financial benefit could insure to its
shareholders through income and/or capital gain.
As
of June 30, 2022 and 2021, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized
gains and losses on these investments are included in earnings. Trading securities are summarized as follows:
SCHEDULE OF CHANGES IN UNREALIZED GAINS AND LOSSES ON INVESTMENTS
| |
| | |
Gross | | |
Gross | | |
Net | | |
| |
Investment | |
Cost | | |
Unrealized Gain | | |
Unrealized Loss | | |
Unrealized Loss | | |
Fair Value | |
| |
| | |
| | |
| | |
| | |
| |
As of June 30, 2022 | |
| | | |
| | | |
| | | |
| | | |
| | |
Corporate | |
| | | |
| | | |
| | | |
| | | |
| | |
Equities | |
$ | 643,000 | | |
$ | 42,000 | | |
$ | (144,000 | ) | |
$ | (102,000 | ) | |
$ | 541,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
As of June 30, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | |
Corporate | |
| | | |
| | | |
| | | |
| | | |
| | |
Equities | |
$ | 4,987,000 | | |
$ | 438,000 | | |
$ | (1,889,000 | ) | |
$ | (1,451,000 | ) | |
$ | 3,536,000 | |
As
of June 30, 2021, approximately 19% of the investment marketable securities balance above is comprised of the common stock of Comstock
Mining, Inc. (“Comstock” - NYSE AMERICAN: LODE). As of June 30, 2022, the Company
does not have any investment in the common stock of Comstock. The Company’s director and Chairman of the Audit Committee, William
J. Nance, serves as Comstock’s director and Chairman of the Audit and Finance, Compensation and Nominating and Governance Committees
of Comstock.
As
of June 30, 2022 and 2021, the Company had $73,000 and $1,873,000, respectively, of unrealized losses related to securities held for
over one year; of which $0 and $1,789,000 are related to its investment in Comstock, respectively.
Net
(loss) gain on marketable securities on the statement of operations is comprised of realized and unrealized losses. Below is the breakdown
of the two components for the years ended June 30, 2022 and 2021, respectively.
SCHEDULE
OF NET (LOSS) GAIN ON MARKETABLE SECURITIES
For the year ended June 30, | |
2022 | | |
2021 | |
Realized (loss) gain on marketable securities | |
$ | (433,000 | ) | |
$ | 32,000 | |
Realized loss on marketable securities related to Comstock | |
| (2,056,000 | ) | |
| (572,000 | ) |
Unrealized gain on marketable securities | |
| 1,348,000 | | |
| 336,000 | |
Unrealized gain on marketable securities related to Comstock | |
| - | | |
| 1,603,000 | |
Net (loss) gain on marketable securities | |
$ | (1,141,000 | ) | |
$ | 1,399,000 | |
NOTE
7 - FAIR VALUE MEASUREMENTS
The
carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate
fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities, 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 June 30, 2022 | |
Level 1 | |
Assets: | |
| | |
Investment in marketable securities: | |
| | |
Communication services | |
$ | 355,000 | |
REITs and real estate companies | |
| 162,000 | |
Basic materials | |
| 18,000 | |
Utilities | |
| 5,000 | |
Technology | |
| 1,000 | |
Investment
in marketable securities | |
$ | 541,000 | |
As of June 30, 2021 | |
Level 1 | |
Assets: | |
| | |
Investment in marketable securities: | |
| | |
Communication services | |
$ | 1,334,000 | |
Basic materials | |
| 720,000 | |
Industrials | |
| 653,000 | |
REITs and real estate companies | |
| 438,000 | |
Energy | |
| 250,000 | |
Healthcare | |
| 141,000 | |
Investment
in marketable securities | |
$ | 3,536,000 | |
The
fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance
sheet date.
Financial
assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments
in non-marketable securities,” that were initially measured at cost and have been written down to fair value as a result of impairment
or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt
instruments). The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as
follows:
SCHEDULE OF FAIR VALUE, ASSETS MEASURED ON NONRECURRING BASIS
Assets | |
Level 3 | | |
June 30, 2022 | | |
Net loss for the
year ended June 30, 2022 | |
| |
| | |
| | |
| |
Other non-marketable investments | |
$ | - | | |
$ | - | | |
$ | (20,000 | ) |
| |
| | |
| | |
Net loss for the | |
Assets | |
Level 3 | | |
June 30, 2021 | | |
year ended June 30, 2021 | |
| |
| | |
| | |
| |
Other non-marketable investments | |
$ | 20,000 | | |
$ | 20,000 | | |
$ | (38,000 | ) |
For
fiscal year ended June 30, 2022 and 2021, we received distribution from other non-marketable investments of zero and $30,000, respectively.
Other
investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or
control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary impairment.
When determining the fair value of these investments on a non-recurring basis, the Company uses valuation techniques such as the market
approach and the unobservable inputs include factors such as conversion ratios and the stock price of the underlying convertible instruments.
The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to:
(i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii)
the financial condition and near-term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient
to allow for any anticipated recovery in fair value.
NOTE
8 – OTHER ASSETS
Other
assets consist of the following as of June 30:
SCHEDULE
OF OTHER ASSETS
| |
2022 | | |
2021 | |
Inventory - Hotel | |
$ | 27,000 | | |
$ | 37,000 | |
Prepaid expenses | |
| 534,000 | | |
| 381,000 | |
Miscellaneous assets | |
| 291,000 | | |
| 283,000 | |
Total other assets | |
$ | 852,000 | | |
$ | 701,000 | |
NOTE
9 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The
following summarizes the balances of related party and other notes payable as of June 30, 2022 and 2021, respectively.
SCHEDULE OF RELATED PARTY AND OTHER NOTES PAYABLE
As of June 30, | |
2022 | | |
2021 | |
Note payable - InterGroup | |
$ | 14,200,000 | | |
$ | 6,650,000 | |
Note payable - Hilton | |
| 2,375,000 | | |
| 2,692,000 | |
Note payable - Aimbridge | |
| 1,146,000 | | |
| 1,396,000 | |
SBA Loan - Justice | |
| - | | |
| 2,000,000 | |
Total related party and other notes payable | |
$ | 17,721,000 | | |
$ | 12,738,000 | |
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 and InterGroup entered into a loan modification
agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000. Upon the dissolution of Justice in December
2021, Portsmouth assumed Justice’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and
InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000.
As of June 30, 2022 and 2021, the balance of the loan was $14,200,000 and $6,650,000, net of loan amortization costs of zero, respectively.
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 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. Unamortized portion of the
key money is included in the related party notes payable in the consolidated balance sheets.
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). Justice
received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice used the proceeds from
the SBA Loan for payroll costs and other qualified expenses. The SBA Loan was scheduled to mature on April 9, 2022 with a 1.00% interest
rate and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the
CARES Act. On June 10, 2021, the SBA Loan was forgiven in full and $4,719,000 was recorded as gain on debt extinguishment on the consolidated
statement of operations for the fiscal year ending June 30, 2021.
On
February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the
SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice used all proceeds from the Second
SBA Loan primarily for payroll costs. The Second SBA Loan was scheduled to mature on February 3, 2026, had a 1.00% interest rate, and
was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act.
On November 19, 2021, the Second SBA Loan was forgiven in full and $2,000,000 was recorded as gain on debt extinguishment on the consolidated
statement of operations for the fiscal year ended June 30, 2022.
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 | |
$ | 567,000 | |
2024 | |
| 14,767,000 | |
2025 | |
| 567,000 | |
2026 | |
| 567,000 | |
2027 | |
| 462,000 | |
Thereafter | |
| 791,000 | |
Long
term debt | |
$ | 17,721,000 | |
As
of June 30, 2022 and 2021, the Company had accounts payable to related party of $4,908,000 and $3,193,000, 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.
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 2024. Outstanding principal balance on
the loan was $89,114,000 and $90,745,000 as of June 30, 2022 and 2021, respectively. As additional security for the mortgage loan, there
is a limited guaranty executed by Portsmouth in favor of the mortgage lender. The mezzanine loan is secured by the Operating membership
interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan had an interest rate of 9.75% per
annum and a maturity date of January 1, 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by
Portsmouth in favor of the mezzanine lender. On July 31, 2019, Mezzanine refinanced the mezzanine loan by entering into a new mezzanine
loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine
Loan which had a 9.75% per annum interest rate was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on
January 1, 2024. Interest only payments are due monthly.
Effective
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 June 30, 2022, InterGroup is in compliance with
both requirements. Justice Operating Company, LLC has 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, Jerold R. Babin,
and Steve Grunwald. All the Company’s directors also serve as directors of InterGroup except for Mr. Grunwald. 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 till 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 – MORTGAGE NOTES PAYABLE
On
December 18, 2013: (i) Justice Operating Company, LLC, a Delaware limited liability company (“Operating”), entered into a
loan agreement (“Mortgage Loan Agreement”) with Bank of America (“Mortgage Lender”); and (ii) Justice Mezzanine
Company, a Delaware limited liability company (“Mezzanine”), entered into a mezzanine loan agreement (“Mezzanine Loan
Agreement” and, together with the Mortgage Loan Agreement, the “Loan Agreements”) with ISBI San Francisco Mezz Lender
LLC (“Mezzanine Lender” and, together with Mortgage Lender, the “Lenders”). The Partnership was the sole member
of Mezzanine until its dissolution in December 2021 when Portsmouth replaced the Partnership as the sole member of Mezzanine. Mezzanine
is the sole member of Operating.
The
Loan Agreements provide for a $97,000,000 Mortgage Loan and a $20,000,000 Mezzanine Loan. The proceeds of the Loan Agreements were used
to fund the redemption of limited partnership interests and the pay-off of the prior mortgage.
The
Mortgage Loan is secured by Operating’s principal asset, the Hilton San Francisco-Financial District (the “Property”).
The Mortgage Loan bears an interest rate of 5.275% per annum and matures in January 2024. The term of the loan is ten years with interest
only due in the first three years and principal and interest payments to be made during the remaining seven years of the loan based on
a thirty-year amortization schedule. The Mortgage Loan also requires payments for impounds related to property tax, insurance and capital
improvement reserves. As additional security for the Mortgage Loan, there is a limited guaranty (“Mortgage Guaranty”) executed
by the Company in favor of Mortgage Lender.
The
Mezzanine Loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The Mezzanine
Loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. Interest only payments were due monthly. On July
31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”)
with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off. Interest rate on the new mezzanine loan
is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. As additional security for the new mezzanine
loan, there is a limited guaranty executed by the Company in favor of Cred Reit Holdco LLC (the “Mezzanine Guaranty” and,
together with the Mortgage Guaranty, the “Guaranties”).
The
Guaranties are limited to what are commonly referred to as “bad boy” acts, including: (i) fraud or intentional misrepresentations;
(ii) gross negligence or willful misconduct; (iii) misapplication or misappropriation of rents, security deposits, insurance or condemnation
proceeds; and (iv) failure to pay taxes or insurance. The Guaranties are full recourse guaranties under identified circumstances, including
failure to maintain “single purpose” status which is a factor in a consolidation of Operating or Mezzanine in a bankruptcy
of another person, transfer or encumbrance of the Property in violation of the applicable loan documents, Operating or Mezzanine incurring
debts that are not permitted, and the Property becoming subject to a bankruptcy proceeding. Pursuant to the Guaranties, the Partnership
was required to maintain a certain minimum net worth and liquidity. Effective as of May 12, 2017, InterGroup agreed to become an additional
guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for the $97,000,000 mortgage loan
and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain a certain net worth and liquidity.
As of June 30, 2022 and 2021, InterGroup is in compliance with both requirements. Justice Operating Company, LLC is not meeting certain
of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lockbox and
cash sweep by the Lender for all cash collected by the Hotel, and under certain terms, would allow the Lender to request Operating to
replace its hotel management company. The DSCR for Operating had been below 1.00 from third quarter of fiscal year 2020 to third quarter
of fiscal year 2022 while it is required to maintain a DSCR of at least 1.10 to 1.00 for two consecutive quarters. 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. Justice has not
missed any of its debt service payments and does not anticipate missing any debt obligations for at least the next twelve months and
beyond. Additionally, Operating’s DSCR for the fourth quarter of fiscal year 2022 has reached 1.69 for the Mortgage Loan and 1.34
for the Mezzanine Loan.
Each
of the Loan Agreements contains customary representations and warranties, events of default, reporting requirements, affirmative covenants
and negative covenants, which impose restrictions on, among other things, organizational changes of the respective borrower, operations
of the Property, agreements with affiliates and third parties. Each of the Loan Agreements also provides for mandatory prepayments under
certain circumstances (including casualty or condemnation events) and voluntary prepayments, subject to satisfaction of prescribed conditions
set forth in the Loan Agreements.
As
of June 30, 2022 and 2021, the Company had the following mortgages:
SCHEDULE
OF MORTGAGES
June 30, 2022 | | |
June 30, 2021 | | |
Interest Rate | |
Origination Date | |
Maturity Date |
$ | 89,114,000 | | |
$ | 90,745,000 | | |
Fixed 5.28% | |
December 18, 2013 | |
January 1, 2024 |
| 20,000,000 | | |
| 20,000,000 | | |
Fixed 7.25% | |
July 31, 2019 | |
January 1, 2024 |
| 109,114,000 | | |
| 110,745,000 | | |
Mortgage notes payable - hotel | |
| |
|
| (367,000 | ) | |
| (611,000 | ) | |
Net debt issuance costs | |
| |
|
$ | 108,747,000 | | |
$ | 110,134,000 | | |
Total mortgage notes payable - hotel | |
| |
|
Future
minimum principal payments for mortgage notes payable are as follows:
SCHEDULE OF MORTGAGE NOTES PAYABLE FUTURE MINIMUM PRINCIPLE PAYMENTS
For the year ending June 30, | |
| |
2023 | |
$ | 1,721,000 | |
2024 | |
| 107,393,000 | |
| |
$ | 109,114,000 | |
NOTE
11 – MANAGEMENT AGREEMENTS
On
February 1, 2017, Operating entered into a Hotel management agreement (“HMA”) with Aimbridge Hospitality (“Aimbridge”)
to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of
10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject
to certain conditions. The HMA also provides for Aimbridge to advance a key money incentive fee to the Hotel for capital improvements
in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution
shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the
takeover date. As of June 30, 2021, the key money balance was zero as the Hotel obtained approval from Aimbridge to use the funds for
hotel operations during the first quarter of fiscal year 2021. As of June 30, 2022 and 2021, balance of the unamortized portion of the
key money are $1,146,000 and $1,396,000, respectively, and are included in the related party notes payable in the consolidated balance
sheets. For the fiscal years ended June 30, 2022 and 2021, hotel management fees were $1,055,000 and $242,000, respectively, offset by
key money amortization of $250,000 for both years and are included in Hotel operating expenses in the consolidated statements of operations.
NOTE
12 – CONCENTRATION OF CREDIT RISK
As
of June 30, 2022 and 2021, all accounts receivables are related to Hotel customers. The Hotel had two customers that accounted for 88%,
or $183,000 of accounts receivable at June 30, 2022, and two customers that accounted for 89%, or $64,000 of accounts receivable at June
30, 2021.
The
Company maintains its cash and cash equivalents and restricted cash with various financial institutions that are monitored regularly
for credit quality. At times, such cash and cash equivalents holdings may be in excess of the Federal Deposit Insurance Corporation (“FDIC”)
or other federally insured limits; however, the Company has never suffered any losses as a result of such high balances.
NOTE
13 - INCOME TAXES
The
provision for income tax (expense) benefit consists of the following:
SCHEDULE
OF PROVISION FOR INCOME TAX (EXPENSE) BENEFIT
For the years ended June 30, | |
2022 | | |
2021 | |
Federal | |
| | | |
| | |
Current tax expense | |
$ | - | | |
$ | - | |
Deferred tax (expense) benefit | |
| (310,000 | ) | |
| 1,606,000 | |
Federal
income tax benefit | |
| (310,000 | ) | |
| 1,606,000 | |
State | |
| | | |
| | |
Current tax (expense)benefit | |
| (1,000 | ) | |
| 65,000 | |
Deferred tax benefit | |
| 169,000 | | |
| 475,000 | |
State
and local income tax benefit | |
| 168,000 | | |
| 540,000 | |
Total income tax (expense) benefit | |
$ | (142,000 | ) | |
$ | 2,146,000 | |
A
reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:
SCHEDULE OF STATUTORY FEDERAL INCOME TAX RATE
For the years ended June 30, | |
2022 | | |
2021 | |
| |
| | |
| |
Statutory federal tax rate | |
| 21.0 | % | |
| 21.0 | % |
State income taxes, net of federal tax benefit | |
| 2.0 | % | |
| 5.8 | % |
Non-taxable PPP loan | |
| 21.7 | % | |
| - | |
Provision to return adjustment | |
| 8.3 | % | |
| 2.9 | % |
Valuation allowance | |
| -236.7 | % | |
| -4.3 | % |
Deferral True-Up – Justice Basis Diff in FA | |
| 180.9 | % | |
| - | |
Other | |
| 0.6 | % | |
| 3.6 | % |
Effective
income tax rate reconciliation percentage | |
| -2.2 | % | |
| 29.0 | % |
The
components of the Company’s deferred tax assets and (liabilities) as of June 30, 2022 and 2021 are as follows:
SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES
| |
2022 | | |
2021 | |
Deferred tax assets | |
| | | |
| | |
Net operating loss carryforward | |
$ | 10,925,000 | | |
$ | 9,802,000 | |
Investment reserve | |
| - | | |
| 671,000 | |
Interest expense | |
| 2,231,000 | | |
| 2,684,000 | |
Accruals and reserves | |
| 587,000 | | |
| - | |
Depreciation | |
| 15,646,000 | | |
| - | |
Other | |
| 1,800,000 | | |
| 1,423,000 | |
Deferred tax assets before valuation allowance | |
| 31,189,000 | | |
| 14,580,000 | |
Less Valuation allowance | |
| (22,775,000 | ) | |
| (951,000 | ) |
Deferred tax assets after valuation allowance | |
| 8,414,000 | | |
| 13,629,000 | |
| |
| | | |
| | |
Deferred tax liabilities | |
| | | |
| | |
Basis difference in Justice | |
| - | | |
| (5,092,000 | ) |
State taxes | |
| (503,000 | ) | |
| (482,000 | ) |
Deferred
Tax Liabilities | |
| (503,000 | ) | |
| (5,574,000 | ) |
Net deferred tax assets | |
$ | 7,911,000 | | |
$ | 8,055,000 | |
Management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets
to determine if it is more likely than not that the deferred tax asset will be realized. As of June 30, 2022, it has been determined that
it is more likely than not that the deferred tax asset will not be recognized with the exception of forecasted five-year projected income.
Thus, there was a valuation allowance of $22,775,000 as of June 30, 2022. This was an increase of $21,824,000 from June 30, 2021.
As
of June 30, 2022, the Company had net operating loss (“NOL”) carryforwards of approximately $35,011,000 and
$40,416,000 for
federal and state purposes, respectively. Of the $35,011,000 federal NOL’s carryforwards , $14,697,000 expire
in varying amount through 2037 and
$20,314,000 of post 2017 NOL’s can be carried forward indefinitely. Note that the post 2017 NOL’s may only offset 80% of future taxable income.
Assets
and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions
are judged to not meet the “more-likely-than-not” threshold based on the technical merits of the positions. As of June 30,
2022, it has been determined that there are no uncertain tax positions likely to impact the Company.
Utilization of the net operating loss carryover may be subject a substantial annual limitation if it should be determined that there has
been a change in the ownership of more than 50 percent of the value of the Company’s stock, pursuant to Section 382 of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating loss carryovers
before utilization.
The
Company and the Partnership files tax returns as prescribed by the tax laws of the jurisdictions in which it operates and is subject
to examination by federal, state and local jurisdictions, where applicable. Note that the Partnership was dissolved in 2021 and filed
its required final tax returns as a result of the Company completing the acquisition of 100% of Justice Investors LP.
As
of June 30, 2022, tax years beginning in fiscal years 2018 and 2017 remain open to examination by the major tax jurisdictions and are
subject to the statute of limitations.
NOTE
14 - 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 years ended June 30, 2022 and 2021, respectively. Segment loss from Hotel operations consists
of the operation of the Hotel and operation of the garage. Income (loss) from investments consists of net investment gain (loss), dividend
and interest income and investment related expenses.
SCHEDULE OF SEGMENT REPORTING INFORMATION, BY SEGMENT
As of and for the year | |
Hotel | | |
Investment | | |
| | |
| |
ended June 30, 2022 | |
Operations | | |
Transactions | | |
Other | | |
Total | |
Revenues | |
$ | 31,534,000 | | |
$ | - | | |
$ | - | | |
$ | 31,534,000 | |
Segment operating expenses | |
| (27,451,000 | ) | |
| - | | |
| (1,130,000 | ) | |
| (28,581,000 | ) |
Segment income (loss) | |
| 4,083,000 | | |
| - | | |
| (1,130,000 | ) | |
| 2,953,000 | |
Interest expense - mortgage | |
| (6,549,000 | ) | |
| - | | |
| - | | |
| (6,549,000 | ) |
Interest expense – related party | |
| (1,375,000 | ) | |
| - | | |
| - | | |
| (1,375,000 | ) |
Gain on debt forgiveness | |
| 2,000,000 | | |
| | | |
| | | |
| 2,000,000 | |
Depreciation and amortization expense | |
| (2,209,000 | ) | |
| - | | |
| - | | |
| (2,209,000 | ) |
Loss from investments | |
| - | | |
| (1,243,000 | ) | |
| - | | |
| (1,243,000 | ) |
Income tax expense | |
| - | | |
| - | | |
| (142,000 | ) | |
| (142,000 | ) |
Net loss | |
$ | (4,050,000 | ) | |
$ | (1,243,000 | ) | |
$ | (1,272,000 | ) | |
$ | (6,565,000 | ) |
Total assets | |
$ | 40,810,000 | | |
$ | 541,000 | | |
$ | 8,448,000 | | |
$ | 49,799,000 | |
As of and for the year | |
Hotel | | |
Investment | | |
| | |
| |
ended June 30, 2021 | |
Operations | | |
Transactions | | |
Other | | |
Total | |
Revenues | |
$ | 14,668,000 | | |
$ | - | | |
$ | - | | |
$ | 14,668,000 | |
Segment operating expenses | |
| (17,911,000 | ) | |
| - | | |
| (796,000 | ) | |
| (18,707,000 | ) |
Segment loss | |
| (3,243,000 | ) | |
| - | | |
| (796,000 | ) | |
| (4,039,000 | ) |
Segment income (loss) | |
| (3,243,000 | ) | |
| - | | |
| (796,000 | ) | |
| (4,039,000 | ) |
Interest expense – mortgage | |
| (6,710,000 | ) | |
| - | | |
| - | | |
| (6,710,000 | ) |
Interest expense – related party | |
| (572,000 | ) | |
| - | | |
| - | | |
| (572,000 | ) |
Gain on disposal of asset | |
| 12,000 | | |
| - | | |
| - | | |
| 12,000 | |
Gain on debt forgiveness | |
| 4,719,000 | | |
| - | | |
| - | | |
| 4,719,000 | |
Gain on debt forgiveness | |
| 4,719,000 | | |
| - | | |
| - | | |
| 4,719,000 | |
Depreciation and amortization expense | |
| (2,079,000 | ) | |
| - | | |
| - | | |
| (2,079,000 | ) |
Gain from investments | |
| - | | |
| 1,237,000 | | |
| - | | |
| 1,237,000 | |
Income (loss) from investments | |
| - | | |
| 1,237,000 | | |
| - | | |
| 1,237,000 | |
Income tax benefit | |
| - | | |
| - | | |
| 2,146,000 | | |
| 2,146,000 | |
Net income (loss) | |
$ | (7,873,000 | ) | |
$ | 1,237,000 | | |
$ | 1,350,000 | | |
$ | (5,286,000 | ) |
Total assets | |
$ | 40,367,000 | | |
$ | 3,556,000 | | |
$ | 8,628,000 | | |
$ | 52,551,000 | |
NOTE
15 – RELATED PARTY TRANSACTIONS
As
discussed in Note 9 – Related Party and Other Financing Transactions, upon the dissolution of Justice in December 2021, Portsmouth
assumed Justice’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered
into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. The maturity
date was extended to July 31, 2023. As of June 30, 2022 and 2021, the balance of the loan was $14,200,000 and $6,650,000, respectively,
and are included in the related party notes payable in the consolidated balance sheets.
Certain
shared costs and expenses, primarily administrative expenses, rent and insurance are allocated between the Company and InterGroup based
on management’s estimate of the pro rata utilization of resources. For the years ended June 30, 2022 and 2021, these expenses were
approximately $144,000 and $96,000, respectively.
Four
of the Company’s Directors serve as directors of InterGroup.
As
Chairman of the Executive Strategic Real Estate and Securities Investment Committee and Chief Executive Officer (CEO), John V. Winfield,
directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors.
Mr. Winfield also serves as President, Chief Executive Officer, and Chairman of InterGroup and oversees the investment activity of InterGroup.
Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk factors,
the Chief Executive Officer and InterGroup may, at times, invest in the same companies in which the Company invests. Such investments
align the interests of the Company with the interests of these related parties because it places the personal resources of the Chief
Executive Officer and the resources of InterGroup at risk in substantially the same manner as the Company in connection with investment
decisions made on behalf of the Company.
NOTE
16 – COMMITMENTS AND CONTINGENCIES
Cash
Management Agreement
As
part of the Hotel refinancing effective December 18, 2013, Operating entered into a Cash Management Agreement with Bank of America, N.A.
(“Lender”) and Wells Fargo Bank, N.A. (“Cash Management Bank”) whereby all cash received by Operating is to be
deposited into a business checking account controlled by the Cash Management Bank up to the loan maturity date. Additionally, other terms
of the Cash Management Agreement provide that effective February 2019 or upon a Property Improvement Plan (“PIP”) requirement
by Hilton (“Franchisor”) deemed the “Cash Sweep Period” during which all excess cash generated by Operating beyond
the monthly budgeted expenses and debt services including principal and interest, insurance reserves, real estate taxes reserve, furniture
fixtures and equipment (“FF&E”) reserves, for the senior and mezzanine loans, will be held by the Cash Management Bank
for future hotel improvements as required by the date or a PIP. Currently, any and all funds are being controlled by the Cash Management
Bank according to the Cash Management Agreement.
Franchise
Agreements
The
Partnership entered into a Franchise License Agreement (the “License Agreement”) with the HLT Existing Franchise Holding
LLC (“Hilton”) on December 10, 2004. The term of the License agreement was for an initial period of 15 years commencing on
the date the Hotel began operating as a Hilton hotel, with an option to extend the License Agreement for another five years, subject
to certain conditions. On June 26, 2015, Operating and Hilton entered into an amended franchise agreement which amongst other things
extended the License Agreement through 2030, and also provided the Partnership certain key money cash incentives to be earned through
2030.
Since
the opening of the Hotel as a full brand Hilton in January 2006, it has incurred monthly royalties, program fees and information technology
recapture charges equal to a percentage of the Hotel’s gross room revenue. Fees for such services during fiscal year 2022 and 2021
totaled approximately $2,107,000 and $703,000, respectively.
Hotel
Employees
On
February 3, 2017, Aimbridge assumed all labor union agreements and retained employees of their choice to continue providing services
to the Hotel. As of June 30, 2022, approximately 86% of those employees were represented by one of three labor unions, and their terms
of employment were determined under various collective bargaining agreements (“CBAs”) to which Aimbridge was a party. CBA
for Local 2 (Hotel and Restaurant Employees) expired on August 13, 2022 and is currently under review. CBA for Local 856 (International
Brotherhood of Teamsters) will expire on December 31, 2022. CBA for Local 39 (Stationary Engineers) will expire on July 31, 2024.
Negotiation
of collective bargaining agreements, which includes not just terms and conditions of employment, but scope and coverage of employees,
is a regular and expected course of business operations for the Company and Aimbridge. The Company expects and anticipates that the terms
of conditions of CBAs will have an impact on wage and benefit costs, operating expenses, and certain hotel operations during the life
of each CBA and incorporates these principles into its operating and budgetary practices.
Legal
Matters
Portsmouth
Square Inc., through its operating company Justice Investors Operating Co., 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 improved pursuant to approvals granted by the City and County
of San Francisco (the “City”) in 1970. Those approvals included a Major Encroachment Permit (“Permit”) by which
the Company was authorized to construct an ornamental overhead pedestrian bridge across Kearny Street, connecting the Property to the
City park and underground parking garage known as Portsmouth Square (the “Bridge”). The construction of the Bridge was a
condition of the City’s approval of the construction of the hotel structure on the Property. Effective on May 24, 2022, the City
has revoked the Permit and 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 of a general bridge removal and restoration plan (the “Plan”). The Company disputes the
legality of the purported revocation of the Permit. The Company further disputes any obligation to remove the Bridge at its expense.
In particular, representatives of the Company have participated in meetings with the City since August 1, 2019, discussing a collaborative
process for the possible removal of the Bridge. Until the recent revocation of the Permit, the City representatives have repeatedly and
consistently 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. The Plan is currently not expected to be completed
until early in 2023. At this time, early estimates of the cost of the Plan exceed $2 million. The Company is currently considering its
options with regard to filing litigation to invalidate the revocation of the Permit so as to preclude removal of the Bridge, and/or to
compel the City to honor its commitment to pay for the removal of the Bridge.
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.
NOTE
17 – SUBSEQUENT EVENTS
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.