Liquidity

The following disclosure and analysis is pursuant to ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires the Company to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued. To satisfy the requirements of the new standard, the Company’s evaluation considered a 13 month period beginning June 30, 2015.

The Company performs a liquidity analysis to determine if expected hotel operating cash flow is sufficient to cover all of the Company’s obligations as they become due, in this case, beginning on June 30, 2015 and ending on July 31, 2016. Our initial analysis considered only available cash and operating cash inflows without consideration of cash inflows from transactions that are in process, but were not yet finalized, such as proceeds on asset dispositions that are not yet closed or proceeds from financing transactions.

The Company believes the cash and available revolver of $4.1 million and $4.8 million, respectively, at June 30, 2015, cash generated from the operations of the hotels as well as the approximate $10.6 million of net cash proceeds from the sale of three hotels in July of 2015 will be sufficient to cover $5.7 million of corporate overhead, $0.6 million of recurring monthly debt service, $5.2 million of anticipated capital improvements, as well as the $13.9 million of remaining loans maturing in 2015 (there are no loans maturing in 2016).

Although, as noted above, the funds are available to satisfy the maturing debt, management plans to use the available cash after operational needs to provide the equity to transition to upper midscale, upscale and upper upscale hotels and to satisfy the loan obligations through refinancing and the use of a portion of the excess proceeds from asset sales. The Company has entered into agreements to purchase three hotels for $42.5 million and plans to pursue other acquisitions funded with excess proceeds from future hotel sales and other funding sources. The execution of the Company’s long term plan is dependent upon future hotel sales and the availability to refinance existing maturing debt which cannot be assured.

We are disposing of assets that are not generating yields consistent with our investment objectives or reinvestment alternatives and we are targeting acquisitions that we believe will be accretive. In the second quarter of 2015 we accelerated our divestiture program and added 11 hotels to our held for sale listing and we entered into three hotel purchase agreements in furtherance of our long term plan to transition to upper midscale, upscale and upper upscale hotels.

Maturing debt

At December 31, 2014 we had $46.9 million of debt maturing in 2015 (no debt matures in 2016). As of June 30, 2015, we have reduced that obligation to $15.2 million through refinancing, amortization and repayment using the proceeds from hotel sales. Since the end of the second quarter of 2015 through the date of our filing the obligation was further reduced to $13.9 million; the company applied an additional $1.3 million to debt using a portion of the proceeds from the sale of one of our GE encumbered hotel assets. The $13.9 million of maturing debt consists of the following:

a $2.2 million balance on a mortgage loan with GE Capital Franchise Finance LLC (“GE”) maturing December 15, 2015; and

an $11.7 million balance on a mortgage loan with Citigroup Global Markets Realty Corp. maturing November 11, 2015.

The Company anticipates that the net proceeds on the sale of GE encumbered assets classified as Held for Sale will be sufficient to repay the maturing GE loan. The Company plans to meet the obligations at maturity on the Citigroup Global Markets Realty Corp. mortgage loan by using a combination of refinancing and the proceeds from dispositions of one hotel held for sale. Over the past two years the lending market has experienced increased liquidity and a relaxing of underwriting standards and as such, we believe we will be able to refinance on similar or perhaps more favorable terms. However, notwithstanding our perception that the lending market has improved somewhat, we may not be successful in our efforts to refinance or repay our maturing debt. As of June 30, 2015 we are not in default under the terms of any of our loans. However on November 12, 2014, the Company received a waiver from Great Western Bank for non-compliance with respect to the consolidated leverage ratio, and on November 20, 2014 the credit facilities were amended to modify the consolidated leverage ratio. The Company believes that we will be compliant under the terms of all of our loans in 2015.

Disposition plan

Our ability to dispose of assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. At June 30, 2015, we have 18 hotels held for sale, in July 2015 we sold three of these hotels generating an estimated $10.6 million of cash, leaving 15 held for sale hotels which, if sold, we believe will generate $12.4 million in net proceeds after debt repayment available for reinvestment. Over the last five years, we have sold 64 hotels. However, with respect to future hotel sales, we cannot predict:

whether we will be able to find buyers for identified assets at prices and /or other terms acceptable to us:

whether potential buyers will be able to secure financings: and

the length of time needed to find a buyer and to close the sale of a property.

The Company has an obligation to Real Estate Strategies, L.P. (“RES”) to use $25 million of the proceeds from its capital infusion in 2012 to pursue hotel acquisitions. In February 2012, the Company issued 3.0 million shares of Series C convertible preferred stock to Real Estate Strategies, L.P. which provided $28.6 million of net proceeds. As of June 30, 2015, we have used $9.1 million for debt repayment and $3.6 million for operational funds from the proceeds committed to hospitality acquisitions. There are no contractual restrictions or penalties related to the use of these funds for purposes other than acquisitions. The Company is obligated to replace these funds promptly as it has the ability to do so. The Company is exploring opportunities to satisfy its long term capital needs as well as replenish the acquisition fund. There can be no assurance that the Company will be able to obtain the funding to replace these funds; however, the Company believes the growth of the Company is in the best interest of all shareholders.

The Company did not declare a common stock dividend during the first two quarters of 2015 or the years 2014, 2013 or 2012. In December 2013, the Company announced the suspension of the regular dividends on its outstanding preferred stock to preserve capital and improve liquidity. The Company will monitor requirements to maintain its REIT status and will routinely evaluate the dividend policy.

Possible sources of liquidity to fund the longer-term liquidity needs, pay the preferred dividends, and satisfy the commitment to RES, include additional secured or unsecured debt financings, and /or proceeds from public or private issuances of debt or equity securities.

The Company has had recurring losses from operations and had a substantial amount of debt maturing in 2015 for which the Company did not have committed funding sources. Significant progress has been made bringing the total obligation down from $46.9 million at December 31, 2014 to $13.9 million as of July 30, 2015. In addition the Company liquidity has improved significantly. The execution of the Company’s long term plan, as described above, is dependent upon future hotel sales and the ability to refinance existing maturing debt which cannot be assured.

Our ability to continue as a going concern is dependent on many factors, including among other things, improvements in our operations results, our ability to sell properties and our ability to refinance maturing debt. While, as described above, the Company has plans to address these liquidity needs, there can be no assurance that the Company will be successful in those efforts. Consequently, these conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements have been issued.