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Discontinued Operations

9 Months Ended

Oct. 31, 2018

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

10. Discontinued Operations

Sale of IBC

Discontinued operations during the nine months period ended October 31, 2018 consist of the operations from the IBC subsidiary. On August 15, 2018 Innsuites Hospitality Trust (IHT) entered into a final sale agreement for its subsidiary IBC Hotels LLC (IBC) with an effective sale date as of August 1, 2018 to a third party buyer (Buyer). The third-party purchaser hired IHT’s former Chief Operating Officer, who is a family member of IHT’s CEO. The sale price was $3,000,000 to be paid to IHT as follows:

	1.	$250,000 at closing, which was received on August 14, 2018;
	2.	A secured promissory note in the principal amount of $2,750,000 with interest to be accrued at 3.75% per annum, recorded in the accompanying condensed balance sheet in continuing operations. Interest shall accrue for the first 10 months (starting August 2018), thereafter for month 11 and 12 principal and interest payments of 50% ($25,632 per month), then the remaining amount to be amortized over 59 months (payments of $52,054 per month) with maturity in June 2024.

Note is secured by (1) pledge of the Buyer’s interest, and (2) a security interest in all assets of IBC, provided IHT shall agree to subordinate such equity interest to commercially reasonable debt financing upon request.

If after effective date IBC closes an equity transaction with net proceeds to IBC in excess of $2,500,000, IBC/Buyer shall pay to IHT an amount equal to (a) 50% of the net proceeds received by IBC and (b) 50% of the sum of the unpaid balance of the note and accrued interest accrued but unpaid interest thereon, as the date of receipt of the net proceeds by IBC.

IHT has agreed to provide continuing working capital support for a period of six months in the amount of approximately $37,500 per month to IBC for transitional purposes. IHT has no managerial control nor does IHT have the ability to direct the operations or capital requirements of IBC as of August 1, 2018. IHT has no rights to any benefits or losses from IBC as of August 1, 2018.

As a result of the sale, the Trust recorded a gain on sale of approximately $2,244,000, net of taxes of $0. The gain is determined by the sales prices of approximately $3,000,000 let the estimated book value of the assets acquired and liabilities assumed of approximately $431,000 and costs associated with the sale of approximately $325,000.

Default

If Buyer has not paid two or more payments on the note as scheduled, or if Buyer has not satisfied any other provisions in the note, IHT may give Buyer notice of default. If Buyer fails to cure the default within 30 days after notice (a) on or before February 5, 2020, then 75% of the issued and outstanding IBC interest shall be transferred to IHT, and (b) on or after February 5, 2020, then 51% of the issued and outstanding interest of the Company shall be transferred to IHT.

Debt/Working Capital adjustment

On or before the sixty calendar days following the effective date (August 1, 2018) Buyer shall prepare and deliver to IHT a written statement (closing statement) setting forth a calculation of the aggregate amount of (i) all indebtedness, (ii) working capital of IBC as of the close of business on the last business day immediately preceding the effective date (closing net working capital) , and (iii) a proposed adjustment to the principal amount of the note payable, calculated as follows:

	●	If the closing new working capital is between $0 and negative $100,000, the purchase price shall not be adjusted;
	●	If the closing working capital is less then negative $100,000, the principal amount of the note shall be decreased in amount equal to the amount by which the closing net working capital is greater than negative $100,000; and
	●	If the closing working capital is greater than $0, the principal amount of the note shall be increased in an amount equal to the closing working capital.

There were no working capital adjustments to the sale price at the conclusion of the 60 day adjustment period.

Office Lease/Contracts

IHT will maintain an existing reservation center contract with IBC requiring IHT to make payments of $7,500 per month for a minimum of 6 months after closing.

IHT will continue to rent office space to IBC on the same terms and conditions as in effect currently on a month to month basis at a monthly rent of approximately $2,500, terminable by either IHT or IBC on a 30-day prior written notice.

Indemnification

IHT has agreed to indemnify and hold harmless the Buyer from and against any and all losses suffered, sustained or incurred by any Buyer indemnified party, resulting from, arising in connection with or related to (i) any breach of a representation or warranty made by IHT, (ii) any breach of a seller fundamental representation by IHT, (iii) any breach of any covenant made by IHT in this agreement, certification or writing delivered pursuant to the agreement, (iv) any claims or liabilities under, related to or in connection with any person status as a security holder of the company prior to closing, or (v) any transaction expense or indebtedness not accounted for in the final determination of the purchase price.

Incentive Bonus

On September 4, 2018, the Board approved to pay a $15,000 bonus to the daughter of the CEO, and who is the former Chief Operating Officer, in connection with the sale of IBC. The CEO’s daughter is now employed by the Company that acquired IBC. In addition, the Board approved to pay a $10,000 bonus to the Executive Vice President of the Trust in connection with the sale of IBC. These bonuses will be paid upon receipt of the monthly payments to be received in connection with the note receivable described above starting in September 2019 at $1,000 per month.

The Trust also paid the former CFO a $5,000 compensation bonus related to the sale of IBC.

Sale of Yuma Property

Discontinued operations during the three and nine months ended October 31, 2018 consisted of the sale of the Yuma Hotel property. On July 31, 2018, IHT entered into a purchase and sale agreement to sell its Innsuites Yuma Hotel and Suites Best Western (Yuma), together with certain furniture, fixtures, equipment, operating supplies and other ancillary items pertaining to the daily operations to a third party. The sale was completed on October 24, 2018. The sales price, as revised, was approximately $16.05 million, of which the net proceeds (net of mortgage payoff, commissions and closing costs) received by the IHT was approximately $9.93 million.

The Trust recorded a gain on sale of approximately $11,080,000, net of estimated tax of approximately $381,000. The gain was determined by the sale price less the estimated book value other assets sold of approximately $4,589,000. In connection with the sale of the Yuma property the related mortgage note payable in the amount of approximately $5,560,000 at the time of the sale was paid in full.

The following tables list the assets and liabilities of discontinued operations at October 31, 2018 and January 31, 2018 and the discontinued operations for IBC and Yuma for the three and nine months period ended October 31, 2018 and IBC, Yuma and Ontario for the and three and nine months period October 31, 2017

DISCONTINUED OPERATIONS

		OCTOBER 31, 2018
			Yuma
ASSETS
Current Assets:
Cash and Cash Equivalents		$	9,985,750
Accounts Receivable			201,667
Prepaid Expenses and Other Current Assets			13,680
Total Current Assets of Discontinued Operations			10,201,097
Property, Plant and Equipment, net			-
TOTAL ASSETS OF DISCONTINUED OPERATIONS AND HELD FOR SALE		$	10,201,097

LIABILITIES

LIABILITIES
Current Liabilities:
Accounts Payable and Accrued Expenses		$	651,951
Current Portion of Mortgage Notes Payable			-
Current Portion of Notes Payable to Banks			-
Current Portion of Other Notes Payable			-
Total Current Liabilities of Discontinued Operations			651,951

Mortgage Notes Payable			-
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS AND HELD FOR SALE		$	651,951

DISCONTINUED OPERATIONS

		JANUARY 31, 2018
		Total				Yuma				IBC				Ontario
ASSETS
Current Assets:
Cash and Cash Equivalents		$	200,705				178,317				22,388				-
Accounts Receivable			265,377				70,139				195,238				-
Prepaid Expenses and Other Current Assets			25,447				10,803				14,644				-
Total Current Assets of Discontinued Operations			491,529				259,259				232,270				-
Property, Plant and Equipment, net			5,240,535				4,815,664				424,871				-
TOTAL ASSETS OF DISCONTINUED OPERATIONS AND HELD FOR SALE		$	5,732,064				5,074,922				657,141				-

LIABILITIES

LIABILITIES
Current Liabilities:
Accounts Payable and Accrued Expenses		$	607,941				269,242				251,723				86,976
Current Portion of Mortgage Notes Payable			-
Current Portion of Notes Payable to Banks			165,239				165,239
Current Portion of Other Notes Payable			123,859								123,859				-
Total Current Liabilities of Discontinued Operations			897,039				434,481				375,582				86,976

Mortgage Notes Payable and Notes to Bank			5,490,374				5,490,374				-				-
TOTAL LIABILITIES OF DISCONTINUED OPERATIONS AND HELD FOR SALE		$	6,387,413				5,924,855				375,582				86,976

		FOR THE THREE MONTHS ENDED
		OCTOBER 31,
		2018				2018
						IBC				Yuma
REVENUE
Room		$	971,476							$	971,476
Food and Beverage			5,920								5,920
Reservation and Convention			0
Other			5,996								5,996
TOTAL REVENUE			983,392				-				983,392

OPERATING EXPENSES
Room			725,776								725,776
Food and Beverage			5,205								5,205
Telecommunications			5,421								5,421
General and Administrative			390,236				86,530				303,706
Sales and Marketing			121,928				36,428				85,500
Reservation Acquisition Costs			-
Repairs and Maintenance			63,031								63,031
Hospitality			50,007								50,007
Utilities			51,958								51,958
Depreciation			114,314								114,314
Intangible Amortization			-
Real Estate and Personal Property Taxes, Insurance and Ground Rent			46,279								46,279
Other			-
TOTAL OPERATING EXPENSES			1,574,154				122,958				1,451,195
OPERATING LOSS			(590,761	)			(122,958	)			(467,803	)
Interest Income			-
TOTAL OTHER INCOME			-				-				-
Interest on Mortgage Notes Payable			72,420								72,420
Interest on Notes Payable to Banks			12,075								12,075
Interest on Other Notes Payable			-
TOTAL INTEREST EXPENSE			84,496				-				84,496
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS		$	(675,257	)		$	(122,958	)		$	(552,299	)

		FOR THE THREE MONTHS ENDED
		OCTOBER 31,
		2017				2017
						IBC				Yuma				Ontario
REVENUE
Room		$	1,033,218							$	1,033,218
Food and Beverage			10,839								10,839
Reservation and Convention			365,749				365,749
Other			5,346								5,346
TOTAL REVENUE			1,415,152				365,749				1,049,403				-

OPERATING EXPENSES
Room			224,201								224,201
Food and Beverage			15,563								15,563
Telecommunications			5,689								5,689
General and Administrative			477,627				363,303				92,623				21,701
Sales and Marketing			564,472				483,289				81,183
Reservation Acquisition Costs			-
Repairs and Maintenance			86,296								86,296
Hospitality			54,643								54,643
Utilities			64,160								64,160
Depreciation			146,984				26,541				120,443
Intangible Amortization			16,750				16,750
Real Estate and Personal Property Taxes, Insurance and Ground Rent			21,284								21,284
Other			150								150
TOTAL OPERATING EXPENSES			1,677,819				889,883				766,235				21,701
OPERATING LOSS			(262,667	)			(524,134	)			283,168				(21,701	)
Interest Income			-
TOTAL OTHER INCOME			-				-				-				-
Interest on Mortgage Notes Payable			83,178								83,178
Interest on Notes Payable to Banks			4,767				4,767
Interest on Other Notes Payable			26								26
TOTAL INTEREST EXPENSE			87,970				4,767				83,203				-
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS		$	(350,637	)		$	(528,901	)		$	199,965			$	(21,701	)

		FOR THE NINE MONTHS ENDED
		OCTOBER 31,
		2018				2018
						IBC				Yuma
REVENUE
Room		$	3,225,783								3,225,783
Food and Beverage			27,569								27,569
Reservation and Convention			265,281				265,281
Other			41,057								41,057
TOTAL REVENUE			3,559,691				265,281				3,294,410

OPERATING EXPENSES
Room			1,243,699								1,243,699
Food and Beverage			34,136								34,136
Telecommunications			21,803								21,803
General and Administrative			1,041,658				493,451				548,206
Sales and Marketing			636,119				384,038				252,082
Reservation Acquisition Costs			142,842				142,842
Repairs and Maintenance			180,112								180,112
Hospitality			167,095								167,095
Utilities			149,635								149,635
Depreciation			396,642				51,008				345,634
Intangible Amortization			-
Real Estate and Personal Property Taxes, Insurance and Ground Rent			88,344								88,344
Other			5,486								5,486
TOTAL OPERATING EXPENSES			4,107,570				1,071,340				3,036,231
OPERATING LOSS			(547,880	)			(806,059	)			258,179
Interest Income			-
TOTAL OTHER INCOME			-				-				-
Interest on Mortgage Notes Payable			212,573								212,573
Interest on Notes Payable to Banks			-
Interest on Other Notes Payable			41,543				3,725				37,819
TOTAL INTEREST EXPENSE			254,116				3,725				250,391
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS		$	(801,996	)		$	(809,784	)		$	7,788

		FOR THE NINE MONTHS ENDED
		OCTOBER 31,
		2017				2017
							IBC				Yuma				Ontario
REVENUE
Room		$	4,405,046								3,007,722				1,397,324
Food and Beverage			95,511								30,535				64,976
Reservation and Convention			887,274				887,274
Other			24,987								16,544				8,443
TOTAL REVENUE			5,412,819				887,274				3,054,802				1,470,743

OPERATING EXPENSES
Room			1,648,772								708,874				939,898
Food and Beverage			110,663								44,511				66,152
Telecommunications			24,116								24,116				-
General and Administrative			1,504,218				952,710				272,692				278,815
Sales and Marketing			1,353,825				1,008,029				222,496				123,300
Reservation Acquisition Costs			-
Repairs and Maintenance			319,309								219,160				100,149
Hospitality			278,896								156,669				122,227
Utilities			239,965								165,325				74,640
Depreciation			604,610				75,083				351,703				177,824
Intangible Amortization			50,250				50,250
Real Estate and Personal Property Taxes, Insurance and Ground Rent			127,484								71,469				56,015
Other			1,457								(2,111	)			3,568
TOTAL OPERATING EXPENSES			6,263,564				2,086,073				2,234,904				1,942,588
OPERATING LOSS			(850,745	)			(1,198,799	)			819,899				(471,845	)
Interest Income			961												961
TOTAL OTHER INCOME			961				-				-				961
Interest on Mortgage Notes Payable			352,203								224,416				127,787
Interest on Notes Payable to Banks			16,666				16,666
Interest on Other Notes Payable			454								26				428
TOTAL INTEREST EXPENSE			369,322				16,666				224,441				128,215
CONSOLIDATED NET LOSS OF DISCONTINUED OPERATIONS		$	(1,219,106	)		$	(1,215,465	)		$	595,457			$	(599,099	)