Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

The Company consolidates variable interest entities (“VIEs”) as defined under the Consolidation Topic (“Topic 810”) of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) when it has the power to direct the activities that most significantly impact the VIE’s performance and the obligation to absorb losses or the right to receive benefits from the VIE that could be significant. At September 30, 2020, the assets of our VIEs were $68,098,931, and consist primarily of land, building, furniture, fixtures, and equipment and are available to satisfy our VIEs’ obligations. The liabilities of our VIEs were $44,551,344 at September 30, 2020 and consist primarily of long-term debt. The Company has guaranteed certain obligations of its VIEs.

The Company has no foreign operations or assets and its operating structure includes only one segment.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assumptions and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments

Under GAAP, the Company is required to disclose the fair value of certain financial instruments on a recurring basis. The accompanying condensed consolidated balance sheets include the following financial instruments: cash, restricted cash, accounts receivable, accounts payable, mortgage notes payable and other debt.

The Company considers the carrying value of cash, restricted cash, accounts receivable and accounts payable to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value is as follows:

Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

As of September 30, 2020, the estimated fair value of the mortgage notes payable was $54,887,422 compared to the carrying value of $56,990,458. These financial instruments are valued using Level 3 inputs through a discounted cash flow analysis of the contractual cash flows of the notes payable discounted at a market rate.

Revenue Recognition

Revenue is generally recognized as services are performed. Revenue represents primarily rooms, food and beverage, and other fees. The Company collects sales tax from all nonexempt customers and remits the entire amount to the appropriate states upon collection from the customer. The Company’s accounting policy is to exclude the tax collected and remitted to the state from revenue and expense.

Cash and Cash Equivalents

Cash and cash equivalents represent cash on hand or held in banks and highly liquid investments with original maturities of three months or less.

Restricted Cash

The Company maintains reserves for property taxes and capital improvements as required by the debt agreements. At September 30, 2020 and 2019, reserves for property taxes were $548,713 and $542,864, respectively, and reserves for capital improvements were $2,286,588 and $1,226,962, respectively. The Company also included $36,140 and $19,005 of guest advance deposits as restricted cash at September 30, 2020 and 2019, respectively.

Organization and Offering Costs

Organization and offering costs include selling commissions, dealer manager fees, stockholder servicing fees and any other elements of underwriting compensation, legal, accounting, printing, mailing and filing fees and expenses, due diligence expenses of participating broker-dealers supported by detailed and itemized invoices, costs in connection with preparing sales materials, design and website expenses, fees and expenses of the Company’s transfer agent, fees to attend retail seminars sponsored by participating broker-dealers and reimbursements for customary travel, lodging, and meals. The Company charges organization and offering costs against additional paid in capital on the condensed consolidated balance sheet as it raises proceeds in its continuous Public Offering.

Income Taxes

The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and has operated as a REIT, commencing with the taxable year ended December 31, 2018. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income to its stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to U.S. federal income tax to the extent it distributes qualifying dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year following the year it initially elects to be taxed as a REIT, it will be subject to U.S. federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to its stockholders.

Because the Company is prohibited from operating hotel properties pursuant to certain tax laws relating to its qualification as a REIT, the entities through which the Company owns hotel properties will lease the hotel properties to one or more taxable REIT subsidiaries (“TRSs”). A TRS is a corporate subsidiary of a REIT that jointly elects, with the REIT, to be treated as a TRS of the REIT, and that pays U.S. federal income tax at regular corporate rates on its taxable income.

The Company accounts for income taxes of its TRSs using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period prior to when the new rates become effective. The Company records a valuation allowance for net deferred tax assets that are not expected to be realized.

The Company has reviewed tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. At September 30, 2020, the Company had no material uncertain tax positions.

The preparation of the Company’s various tax returns requires the use of estimates for federal and state income tax purposes. These estimates may be subjected to review by the respective taxing authorities. A revision to an estimate may result in an assessment of additional taxes, penalties and interest. At this time, a range in which the Company’s estimates may change is not expected to be material. The Company will account for interest and penalties relating to uncertain tax positions in the current period results of operations, if necessary. The Company has tax years 2016 through 2019 remaining subject to examination by federal and various state tax jurisdictions.

Noncontrolling Interest

Noncontrolling interest represents the portion of equity of Procaccianti Convertible Fund, LLC ("PCF") held by owners other than the Company. Noncontrolling interest is reported in the condensed consolidated balance sheets within equity, separately from stockholders’ equity. Revenue, expenses, and net income attributable to both the Company and the noncontrolling interest are reported in the condensed consolidated statement of operations.

Noncontrolling Interest of the Operating Partnership

Noncontrolling interest of the Operating Partnership represents the value of the 128,124 Class K OP Units that were issued to affiliate sellers in connection with the acquisition of the Hilton Garden Inn Providence. Noncontrolling interest of the Operating Partnership is reported in the mezzanine section of the condensed consolidated balance sheet, as the units are redeemable at the request of the holder for cash equal to the fair market value of a K Share as defined in the Amended and Restated Operating Partnership Agreement (as defined herein). The Company may elect to acquire any such unit presented for redemption for one K Share or cash. Revenue, expenses, and net income attributable to both the Company and the noncontrolling interest of the Operating Partnership are reported in the condensed consolidated statement of operations.

Per Share Data

The Company calculates its basic and diluted earnings per common share (“EPS”) utilizing the two-class method. Under the two-class method both basic and diluted EPS are calculated for each class of common stock considering distributions declared and accumulated, and the rights of common shares and participating securities in any undistributed earnings. Undistributed earnings are allocated to all outstanding common shares based on the relative percentage of each class of shares to the total number of outstanding shares. Non-vested shares of restricted Class K common stock totaling 2,250 K Shares as of September 30, 2020 held by the Company’s independent directors are included in the calculation of basic EPS because such shares have been issued and participate in distributions.

The Company’s calculated earnings per share for the three and nine months ended September 30, 2020 and 2019, were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income (loss)	$	753,582	$	970,167	$	(2,646,339)	$	308,361
Less: Class K Common Stock dividends declared and accumulated		584,848		331,039		1,610,617		828,495
Less: Class K-I Common Stock dividends declared and accumulated		111,991		50,849		305,563		78,107
Less: Class K-T Common Stock dividends declared and accumulated		8,444		1,857		23,826		2,475
Less: Class A Common Stock dividends declared and accumulated		94,561		81,274		268,264		223,024
Undistributed net income (loss)	$	(46,262)	$	505,148	$	(4,854,609)	$	(823,740)
Class K Common Stock:
Undistributed net income (loss)	$	(32,922)	$	345,553	$	(3,442,620)	$	(574,376)
Class K Common Stock dividends declared and accumulated		584,848		331,039		1,610,617		828,495
Net income (loss)	$	551,926	$	676,592	$	(1,832,003)	$	254,119
Net income (loss) per common share, basic and diluted	$	0.17	$	0.31	$	(0.57)	$	0.14
Weighted average number of common shares outstanding, basic and diluted		3,323,827		2,188,750		3,217,836		1,846,052
Class K-I Common Stock:
Undistributed net income (loss)	$	(6,304)	$	53,076	$	(652,273)	$	(54,138)
Class K-I Common Stock dividends declared and accumulated		111,991		50,849		305,563		78,107
Net income (loss)	$	105,687	$	103,925	$	(346,710)	$	23,969
Net income (loss) per common share, basic and diluted	$	0.17	$	0.31	$	(0.57)	$	0.14
Weighted average number of common shares outstanding, basic and diluted		636,468		336,183		609,683		174,002
Class K-T Common Stock:
Undistributed net income (loss)	$	(475)	$	1,939	$	(51,033)	$	(1,708)
Class K-T Common Stock dividends declared and accumulated		8,444		1,857		23,826		2,475
Net income (loss)	$	7,969	$	3,796	$	(27,207)	$	767
Net income (loss) per common share, basic and diluted	$	0.17	$	0.31	$	(0.57)	$	0.14
Weighted average number of common shares outstanding, basic and diluted		47,989		12,280		47,700		5,489
Class A Common Stock:
Undistributed net income (loss)	$	(5,323)	$	84,845	$	(574,951)	$	(154,626)
Class A Common Stock dividends declared and accumulated		94,561		81,274		268,264		223,024
Net income (loss)	$	89,238	$	166,119	$	(306,687)	$	68,398
Net income (loss) per common share, basic and diluted	$	0.17	$	0.31	$	(0.57)	$	0.14
Weighted average number of common shares outstanding, basic and diluted		537,410		537,410		537,410		496,970
Class B Common Stock:
Undistributed net income (loss)	$	(1,238)	$	19,735	$	(133,732)	$	(38,892)
Net income (loss) per common share, basic and diluted	$	(0.01)	$	0.16	$	(1.07)	$	(0.31)
Weighted average number of common shares outstanding, basic and diluted		125,000		125,000		125,000		125,000

New Accounting Standards

In June 2016, the FASB issued Accounting Standards Updates (" ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 325): Measurement of Credit Losses on Financial Instruments ("ASU No. 2016-13"), which requires that entities use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU No. 2016-13 using the modified retrospective approach and the adoption did not have a material impact on the Company's condensed consolidated financial statements.