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 accompanying condensed consolidated financial statements of the Company are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair and consistent presentation, have been included in these condensed consolidated financial statements. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.

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, 2022, the assets of our VIEs were $66,056,747, and consist primarily of land, building, furniture, fixtures, and equipment and are available to satisfy our VIEs’ obligations. The liabilities of our VIEs were $43,527,976 at September 30, 2022 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.

The preparation of condensed consolidated financial statements in conformity with 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.

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, accounts payable and other debt 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:

As of September 30, 2022, the estimated fair value of the mortgage notes payable was $60,167,152 compared to the carrying value of $65,286,393. 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 room rentals, food and beverage sales, 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 expenses. Included in other operating revenues for the three and nine months ended September 30, 2022, is $0 and $846,828, respectively, of business recovery grants awarded to the Springhill Suites Wilmington, Hotel Indigo Traverse City and the Hilton Garden Inn Providence hotels.

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 its debt agreements. At September 30, 2022 and 2021, reserves for property taxes were $477,530 and $632,155, respectively, reserves for capital improvements were $2,741,033 and $2,642,088, respectively and reserves for insurance were

$42,249 and $0, respectively. The Company also included $143,984 and $123,140 of guest advance deposits as restricted cash at September 30, 2022 and 2021, respectively.

Organization and Offering Costs

Organization and offering costs (“O&O 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 charged O&O Costs against additional paid in capital on the condensed consolidated balance sheet as it raised proceeds in its Public Offering, which terminated on August 13, 2021.

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, 2022, 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 2018 through 2021 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 a group of 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 Agreement of Limited Partnership of Procaccianti Hotel REIT, L.P. (the “Amended and Restated Operating Partnership Agreement”). 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. As of September 30, 2022, 3,750 restricted K Shares 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, 2022 and 2021, were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income attributable to common stockholders	$	2,768,103	$	2,534,766	$	4,775,896	$	2,476,167
Less: Class K Common Stock dividends declared and accumulated		690,893		691,713		2,057,627		1,976,596
Less: Class K-I Common Stock dividends declared and accumulated		235,453		217,307		694,511		525,719
Less: Class K-T Common Stock dividends declared and accumulated		10,594		10,526		32,604		27,731
Less: Class A Common Stock dividends declared and accumulated		102,583		102,583		304,404		302,885
Undistributed net income (loss)	$	1,728,580	$	1,512,637	$	1,686,750	$	(356,764)
Class K Common Stock:
Undistributed net income (loss)	$	1,124,989	$	1,002,035	$	1,100,207	$	(243,306)
Class K Common Stock dividends declared and accumulated		690,893		691,713		2,057,627		1,976,596
Net income	$	1,815,882	$	1,693,748	$	3,157,834	$	1,733,290
Net income per common share, basic and diluted	$	0.46	$	0.43	$	0.80	$	0.46
Weighted average number of common shares outstanding, basic and diluted		3,915,774		3,920,423		3,930,059		3,775,288
Class K-I Common Stock:
Undistributed net income (loss)	$	383,391	$	314,797	$	371,353	$	(64,713)
Class K-I Common Stock dividends declared and accumulated		235,453		217,307		694,511		525,719
Net income	$	618,844	$	532,104	$	1,065,864	$	461,006
Net income per common share, basic and diluted	$	0.46	$	0.43	$	0.80	$	0.46
Weighted average number of common shares outstanding, basic and diluted		1,334,480		1,231,632		1,326,513		1,004,120
Class K-T Common Stock:
Undistributed net income (loss)	$	17,251	$	15,251	$	17,433	$	(3,415)
Class K-T Common Stock dividends declared and accumulated		10,594		10,526		32,604		27,731
Net income	$	27,845	$	25,777	$	50,037	$	24,316
Net income per common share, basic and diluted	$	0.46	$	0.43	$	0.80	$	0.46
Weighted average number of common shares outstanding, basic and diluted		60,046		59,670		62,274		52,969
Class A Common Stock:
Undistributed net income (loss)	$	167,037	$	148,605	$	162,764	$	(37,274)
Class A Common Stock dividends declared and accumulated		102,583		102,583		304,404		302,885
Net income	$	269,620	$	251,188	$	467,168	$	265,611
Net income per common share, basic and diluted	$	0.46	$	0.43	$	0.80	$	0.46
Weighted average number of common shares outstanding, basic and diluted		581,410		581,410		581,410		578,347
Class B Common Stock:
Undistributed net income (loss)	$	35,912	$	31,949	$	34,993	$	(8,056)
Net income (loss) per common share, basic and diluted	$	0.29	$	0.26	$	0.28	$	(0.06)
Weighted average number of common shares outstanding, basic and diluted		125,000		125,000		125,000		125,000