UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For
the quarterly period ended
OR
For the transition period from __________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
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| incorporation or organization) | Identification Number) |
| (Address of principal executive offices) | (Zip code) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
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As of August 8, 2023, the registrant had shares of common stock, $.00001 par value, outstanding. Shares outstanding inclusive of shares committed to be issued but not yet issued as of this date are 44,279,341.
Table of Contents
i
Part I - Financial Information
Item 1 - Financial Statements.
LUXURBAN HOTELS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Treasury Bills | ||||||||
| Processor Retained Funds | ||||||||
| Channel Retained Funds and Receivables from On-Line Travel Agents (“OTAs”) | ||||||||
| Prepaid Expenses and Other Current Assets | ||||||||
| Security Deposits - Current | ||||||||
| Total Current Assets | ||||||||
| Other Assets | ||||||||
| Furniture, Equipment and Leasehold Improvements, Net | ||||||||
| Restricted Cash | ||||||||
| Security Deposits - Noncurrent | ||||||||
| Prepaid Expenses and Other Noncurrent Assets | ||||||||
| Operating Lease Right-Of-Use Assets, Net | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable and Accrued Expenses | $ | $ | ||||||
| Rents Received in Advance | ||||||||
| Short Term Business Financing | ||||||||
| Loans Payable - Current | ||||||||
| Operating Lease Liabilities - Current | ||||||||
| Accrued Income Taxes | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Loans Payable - Noncurrent | ||||||||
| Security Deposit Letter of Credit | ||||||||
| Operating Lease Liabilities - Noncurrent | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity (Deficit) | ||||||||
| Common Stock (shares authorized, issued and outstanding - and , respectively) | ||||||||
| Additional Paid In Capital | ||||||||
| Accumulated Deficit | ( |
) | ( |
) | ||||
| Total Stockholders’ Equity (Deficit) | ( |
) | ||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
1
LUXURBAN HOTELS INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
| For The Three Months Ended June 30, |
For The Six Months Ended June 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net Rental Revenue | $ | $ | $ | $ | ||||||||||||
| Rent Expense | ||||||||||||||||
| Non-Cash Rent Expense Amortization | ||||||||||||||||
| Other Expenses | ||||||||||||||||
| Total Cost of Revenue | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| General and Administrative Expenses | ||||||||||||||||
| Non-Cash Issuance of Common Stock for Operating Expenses | ||||||||||||||||
| Non-Cash Stock Compensation Expense | ||||||||||||||||
| Non-Cash Stock Option Expense | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income from Operations | ||||||||||||||||
| Other Income (Expense) | ||||||||||||||||
| Other Income | ||||||||||||||||
| Cash Interest and Financing Costs | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Non-Cash Financing Costs | ( |
) | ( |
) | ||||||||||||
| Total Other Expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| (Loss) Income Before Provision for Income Taxes | ( |
) | ( |
) | ||||||||||||
| Provision for Income Taxes | ||||||||||||||||
| Net (Loss) Income | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Basic and Diluted (Loss) Earnings Per Common Share | $ | ) | $ | $ | ) | $ | ||||||||||
| Basic and Diluted Weighted Average Number of Common Shares Outstanding | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
LUXURBAN HOTELS INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
(UNAUDITED)
| Common Stock | Members’ Deficit |
Additional Paid in Capital |
Accumulated Deficit |
Stockholders’ Equity (Deficit) |
||||||||||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
| Net Loss | - | ( |
) | ( |
) | |||||||||||||||||||
| Non-Cash Stock Compensation Expense | ||||||||||||||||||||||||
| Non-Cash Option Compensation Expense | - | |||||||||||||||||||||||
| Issuance of Shares for Operating Expenses | ||||||||||||||||||||||||
| Conversion of Loans | ||||||||||||||||||||||||
| Warrant Exercise | ||||||||||||||||||||||||
| Loss on Debt Extinguishment | - | |||||||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
| Net Loss | - | ( |
) | ( |
) | |||||||||||||||||||
| Non-Cash Stock Option Expense | - | |||||||||||||||||||||||
| Conversion of Loans | ||||||||||||||||||||||||
| Issuance of Shares for Operating Expenses | ||||||||||||||||||||||||
| Warrant Exercise | ||||||||||||||||||||||||
| Issuance of Shares to Satisfy Loans | ||||||||||||||||||||||||
| Issuance of Shares for Deferred Compensation | ||||||||||||||||||||||||
| Issuance of Shares for Revenue Share Agreements | ||||||||||||||||||||||||
| Termination of Revenue Share Agreement Adjustment | - | |||||||||||||||||||||||
| Modification of Warrants | - | |||||||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Balance - December 31, 2021 | $ | $ | ( |
) | $ | $ | $ | ( |
) | |||||||||||||||
| Cumulative effect changes in accounting principle | - | ( |
) | ( |
) | |||||||||||||||||||
| Conversion to C Corp | ( |
) | ||||||||||||||||||||||
| Net Income | - | |||||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
| Net Income | - | |||||||||||||||||||||||
| Balance - June 30, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
LUXURBAN HOTELS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND JUNE 30, 2022
(UNAUDITED)
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Net (Loss) Income | $ | ( |
) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Non-cash stock compensation expense | ||||||||
| Non-cash stock option expense | ||||||||
| Depreciation expense | ||||||||
| Shares issued for operating expenses | ||||||||
| Non-cash lease expense | ||||||||
| Gain on sale of Treasury Bills | ( |
) | ||||||
| Issuance of Shares for Revenue Share Agreement | ||||||||
| Termination of Revenue Share Agreement | ||||||||
| Modification of Warrants | ||||||||
| Non-cash Financing Changes Associated with Short Term Business Financing | ||||||||
| Loss on Debt Extinguishment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) Decrease in: | ||||||||
| Processor retained funds | ( |
) | ( |
) | ||||
| Channel retained funds and receivables from OTAs | ( |
) | ||||||
| Prepaid expense and other assets | ( |
) | ( |
) | ||||
| Security deposits | ( |
) | ( |
) | ||||
| (Decrease) Increase in: | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Operating lease liabilities | ( |
) | ( |
) | ||||
| Rents received in advance | ||||||||
| Accrued Income Taxes | ||||||||
| Net cash used in operating activities | $ | ( |
) | $ | ( |
) | ||
| Cash Flows from Investing Activities | ||||||||
| Purchase of Furniture and Equipment and Leaseholds | ( |
) | ||||||
| Proceeds from the sale of Treasury Bills | ||||||||
| Net cash provided by investing activities | $ | $ | ||||||
| Cash Flows from Financing Activities | ||||||||
| Deferred offering costs - net | ( |
) | ||||||
| Repayments of short term business financing - net | ( |
) | ( |
) | ||||
| Warrant Exercises | ||||||||
| (Repayments of) proceeds from loans payable - net | ( |
) | ||||||
| Net cash provided by financing activities | $ | $ | ||||||
| Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash | ( |
) | ||||||
| Cash and Cash Equivalents and Restricted Cash - beginning of the period | ||||||||
| Cash and Cash Equivalents and Restricted Cash - end of the period | $ | $ | ||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Restricted Cash | $ | |||||||
| Total Cash and Cash Equivalents and Restricted Cash | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| Noncash operating activities: | ||||||||
| Acquisition of New Operating Lease Right-of-Use Assets | $ | $ | ||||||
| Noncash financing activities: | ||||||||
| Conversion of debt to common stock and additional paid-in capital | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
4
NOTES
TO CONSDENSED CONSOLIDATED FINANCIAL STATEMENTS
LUXURBAN HOTELS INC.
June 30, 2023
1 - DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
LuxUrban Hotels Inc. (“LUXH” or the “Company”) utilizes an asset light business model to lease entire hotels on a long-term basis and rent out hotel rooms in the properties it leases. The Company currently manages a portfolio of hotel rooms in New York, Washington D.C., Miami Beach, New Orleans and Los Angeles.
In late 2021, LUXH commenced the process of winding down its legacy business of leasing and re-leasing multifamily residential units, as it pivoted toward its new strategy of leasing hotels.
The consolidated financial statements include the accounts of LuxUrban Hotels Inc. (“LuxUrban”) and its wholly owned subsidiary SoBeNY Partners LLC (“SoBeNY”). On November 2, 2022, CorpHousing Group Inc. (“CorpHousing”) changed its name to LuxUrban Hotels Inc. In June 2021, the members of SoBeNY exchanged all of their membership interests for additional membership interests in Corphousing LLC, with SoBeNY becoming a wholly owned subsidiary of Corphousing LLC. Both entities were under common control at the time of the transaction. Since there was no change in control over the net assets, there is no change in basis in the net assets.
In January 2022, Corphousing LLC and its wholly owned subsidiary, SoBeNY, converted into C corporations, with the then current members of Corphousing LLC becoming the stockholders of the newly formed C corporation, CorpHousing Group Inc. The conversion has no effect on our business or operations and was undertaken to convert the forms of these legal entities into corporations for purposes of operating as a public company. All properties, rights, businesses, operations, duties, obligations and liabilities of the predecessor limited liability companies remain those of CorpHousing Group Inc. and SoBeNY Partners Inc.
All significant intercompany accounts and transactions have been eliminated in consolidation.
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| a. | Basis of Presentation — The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These condensed consolidated financial statements should be read in conjunction with the financial statements and additional information as contained in our Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 31, 2023. Results of operations for the three months and six months ended June 30, 2023 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2023. The consolidated balance sheet at June 30, 2023 was derived from the audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The other information in these condensed consolidated financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. |
| b. | Revenue Recognition — The Company’s revenue is derived primarily from the rental of units to its guests. The Company recognizes revenue when obligations under the terms of a contract are satisfied and control over the promised goods and services is transferred to the guest. For the majority of revenue, this occurs when the guest occupies the unit for the agreed upon length of time and receives any services that may be included with their stay. Revenue is measured as the amount of consideration it expects to receive in exchange for the promised goods and services. The Company recognizes any refunds and allowances as a reduction of rental income in the consolidated statements of operations. |
The Company accounts for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606 which was adopted at the beginning of fiscal year 2018 using the modified retrospective method. The Company did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the effect was immaterial.
Payment
received for the future use of a rental unit is recognized as a liability and reported as rents received in advance on the balance sheets.
Rents received in advance are recognized as revenue after the rental unit is occupied by the customer for the agreed upon length of time.
The rents received in advance balance as of June 30, 2023 and December 31, 2022, was $
5
| c. | Use of Estimates — The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. |
| d. | Cash
and Cash Equivalents — The Company considers all highly liquid investments with original maturities of three months
or less when purchased to be cash equivalents. As of June 30, 2023, the Company had cash and cash equivalents of $ |
| e. | Fair Value of Financial Instruments — The carrying amount of cash and cash equivalents, processor retained funds, security deposits, accounts payable and accrued expenses, rents received in advance, channel retained funds and receivables from OTAs, and short-term business financing advances approximate their fair values as of June 30, 2023 and December 31, 2022 because of their short term natures. |
| f. | Commissions
— The Company pays commissions to third-party sales channels to handle the marketing, reservations, collections, and
other rental processes for most of the units. For the three months and six months ended June 30, 2023, commissions were $ |
| g. | Income Taxes — In accordance with GAAP, the Company follows the guidance in FASB ASC Topic 740, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition and measurement of a tax position taken or expected to be taken in a tax return. |
The Company is subject to income taxes in the jurisdictions in which it operates. The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carry-forwards. A valuation allowance is recorded for deferred tax assets if it is more likely than not that the deferred tax assets will not be realized.
For
the three and six months ended June 30, 2023, the Company recorded a tax provision of $
| h. | Sales
Tax — The majority of sales tax is collected from customers by our third-party sales channels and remitted to governmental
authorities by these third-party sales channels. For any sales tax that is the Company’s responsibility to remit, the Company
records the amounts collected as accrued expenses and relieves such liability upon remittance to the taxing authority. Rental income
is presented net of any sales tax collected. As of June 30, 2023 and December 31, 2022, the Company accrued sales tax payable
of $ |
| i. | Paycheck Protection Program Loan (“PPP”) — As disclosed in Note 3, the Company has chosen to account for the loan under FASB ASC 470, Debt. Repayment amounts due within one year are recorded as current liabilities, and the remaining amounts due in more than one year, if any, as other liabilities. In accordance with ASC 835, Interest, no imputed interest is recorded as the below market interest rate applied to this loan is governmentally prescribed. If the Company is successful in receiving forgiveness for those portions of the loan used for qualifying expenses, those amounts will be recorded as a gain upon extinguishment as noted in ASC 405, Liabilities. |
| j. | Earnings Per Share (“EPS”) — Basic net loss per share is the same as diluted net loss per share for the three and six months ended June 30, 2023 because the inclusion of potential shares of common stock would have been anti-dilutive for the periods presented. For the three months and six months ended June 30, 2022, the Company had no common stock equivalents and as a result, basic and diluted shares are the same. |
6
| k. | Liquidity — The
accompanying financial statements have been prepared in conformity with GAAP, which contemplates continuation as a going
concern. As reflected in the accompanying statement of operations, for the three months and six months ended June 30, 2023, the
Company had a net loss of $ |
3 - LEASES
In February 2017, the FASB issued ASU No. 2016-02, Leases (“Topic 842”), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about lease arrangements, specifically differentiating between different types of leases. The Company adopted Topic 842, with an effective date of January 1, 2022. The consolidated financial statements from this date are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy. This standard requires all lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments.
Under Topic 842, the Company applied a dual approach to all leases whereby the Company is a lessee and classifies leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the Company. Lease classification is evaluated at the inception of the lease agreement. Regardless of classification, the Company records a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Operating lease expense is recognized on a straight-line basis over the term of the lease.
Operating right of use (“ROU”) assets and operating lease liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating right of use assets represent our right to use an underlying asset and is based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases.
The
adoption of the new lease standard had a significant impact on the Consolidated Balance Sheets, resulting in the recognition on January 1, 2022
a right-of-use asset of $
The components of the right-of-use assets and lease liabilities as of June 30, 2023 and December 31, 2022 were as follows:
At June 30, 2023 and December 31, 2022, supplemental balance sheet information related to leases were as follows:
| June 30, 2023 |
December 31, 2022 |
|||||||
| Operating lease right of use assets, net | $ | $ | ||||||
| Operating lease liabilities, current portion | $ | $ | ||||||
| Operating lease liabilities, net of current portion | $ | $ | ||||||
7
At June 30 2023, future minimum lease payments under the non-cancelable operating leases are as follows:
| Twelve Months Ending June 30, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total lease payment | $ | |||
| Less interest | ( |
) | ||
| Present value obligation | ||||
| Short-term liability | ||||
| Long-term liability | ||||
The following summarizes other supplemental information about the Company’s operating lease:
| June 30, | ||||
| 2023 | ||||
| Weighted average discount rate | % | |||
| Weighted average remaining lease term (years) | ||||
Three
Months Ended 2023 |
Six Months Ended June 30, 2023 |
|||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | $ | $ | ||||||
| Total lease cost | $ | $ | ||||||
4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued expenses totaled $
8
5 - LOANS PAYABLE — SBA — PPP LOAN
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to provide emergency
assistance for individuals, families, and organizations affected by the coronavirus pandemic. The PPP, created through the CARES Act,
provides qualified organizations with loans of up to $
In
April and May 2020, SoBeNY and CorpHousing obtained funding of $
Accrued
interest at June 30, 2023 and December 31, 2022, was $
Future minimum principal repayments of the SBA — PPP loans payable are as follows:
| For the Twelve Months Ending June 30, | ||||
| 2024 | $ | |||
6 - LOANS PAYABLE — SBA — EIDL LOAN
During
2020, the Company received three SBA Economic Injury Disaster Loans (“EIDL”) in response to the COVID-19 pandemic.
These are
On
April 21, 2020, SoBeNY received an EIDL loan in the amount of $
The
outstanding balance at June 30, 2023 and December 31, 2022, was $
Accrued
interest at June 30, 2023 was $
Future minimum principal repayments of the SBA — EIDL loans payable are as follows:
| For the Twelve Months Ending June 30, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
9
7 - SHORT-TERM BUSINESS FINANCING
The
Company entered into multiple short-term factoring agreements related to future credit card receipts to fund operations. The Company
is required to repay this financing in fixed daily payments until the balance is repaid. Fees associated with this financing have been
recognized in interest expense in the accompanying consolidated statement of operations. As of June 30, 2023 and December 31,
2022, the outstanding balance on these merchant cash advances net of unamortized costs was $
8 - LOANS PAYABLE
Loans payable consist of the following as of:
June 30, 2023 |
December 31, 2022 |
|||||||
| Original borrowings of
$ |
||||||||
| Original payable of $ |
||||||||
| Original payable of $ |
||||||||
| Original payable of $ |
||||||||
| Borrowings of $ |
||||||||
| Original borrowings of $ |
||||||||
| Original amounts due of $ |
||||||||
| Original borrowing of $ |
||||||||
| Other borrowing | ||||||||
| Less: Current maturities | ||||||||
| $ | $ | |||||||
Future minimum principal repayments of the loans payable are as follows:
| For the Twelve Months Ending June 30, | ||||
| 2024 | $ | |||
| 2025 | ||||
| Loans payable | $ | |||
10
9 - LOANS PAYABLE — RELATED PARTIES
Loans payable — related parties consists of the following:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Original borrowings of
$ |
$ | $ | ||||||
| Less: Current maturities | ||||||||
| $ | $ | |||||||
In
May of 2023, the company issued
10 - CONVERTIBLE NOTES
On
February 17, 2023, we entered into an exchange agreement with investors pursuant to which all principal, interest and prepayment
premium outstanding under a nonconvertible 15% original issue discount (“OID”) note with private investors, which was exchanged for a convertible note in the principal amount of $
11 - LINE OF CREDIT
In
February 2019, the Company entered into a line of credit agreement in the amount of $
12 - SECURITY DEPOSIT LETTER OF CREDIT
In
November of 2022, the Company entered into a standby letter of credit agreement in the amount of $
13 - RELATED PARTY TRANSACTIONS
Consulting
services related to the management of the Company, including overseeing the leasing of additional units and revenue management, were
provided to the Company through a consulting agreement with SuperLuxMia LLC, a consulting firm owned by the Chief
Executive Officer and Chairman of the
Company. For the three and six months ended June 30, 2023, these consulting fees of the Company were zero.
For the three and six months ended June 30, 2022, these consulting fees of the Company were zero and $
On December 20, 2022, the Company, and our chairman and chief executive officer, Brian Ferdinand (“Ferdinand”), entered into a Note Extension and Conversion Agreement with Greenle Partners LLC Series Alpha PS (“Greenle Alpha”) and Greenle Partners LLC Series Beta P.S., a Delaware limited liability company (“Greenle Beta” and, together with Greenle Alpha, “Greenle”). Greenle was the purchaser of 15% OID senior secured notes (the “Notes”) and warrants to purchase our common stock (“Warrants”) under certain securities purchase agreements and loan agreements between us and Greenle, including the Securities Purchase Agreement dated as of September 30, 2022, as amended by the letter agreement dated October 20, 2022, and the Loan Agreement dated as of November 23, 2022.
11
Under
the terms of the Note Extension and Conversion Agreement, Greenle has agreed to convert from time to time up to $
14 - RISKS AND UNCERTAINTIES
The
Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash. The Company places
its cash with high quality credit institutions. At times, balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”)
insurance limits. All accounts at an insured depository institution are insured by the FDIC up to the standard maximum deposit insurance
of $
15 - MAJOR SALES CHANNELS
The
Company uses third-party sales channels to handle the reservations, collections, and other rental processes for most of the units. These
sales channels represented over
Options
During the six months ended June 30, 2023, the Company granted options to purchase an aggregate of shares of common stock under the Company’s 2022 performance equity plan with a weighted average exercise price of $.
The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model using the assumptions noted as follows: expected volatility was based on the historical volatility of a peer group of companies; the expected term of options granted was determined using the simplified method under SAB 107, which represents the mid-point between the vesting term and the contractual term; and the risk-free rate is calculated using the U.S. Treasury yield curve and is based on the expected term of the option.
The Black-Scholes option pricing model was used with the following weighted assumptions for options granted during the period:
Schedule of Black-Scholes option pricing model was used with the following weighted assumptions for options granted
| June 30, 2023 |
|||
| Risk-free interest rate | – | ||
| Expected option life | months – months | ||
| Expected volatility | – | ||
| Expected dividend yield | % | ||
| Exercise price | $ – |
12
The following table summarizes stock option activity for the three months ended June 30, 2023:
Schedule of stock option activity
| Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( |
) | ||||||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2023 | $ | $ | ||||||||||||||
The Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized stock option expense of $ for the three months ended June 30, 2023 and $ for the six months ended June 30, 2023. No stock compensation expense was recorded during the three and six months ended June 30, 2022. Unamortized option expense as of June 30, 2023, for all options outstanding amounted to $. These costs are expected to be recognized over a weighted average period of years.
A summary of the status of the Company’s nonvested options as of June 30, 2023, is presented below:
Nonvested options
| Number of Nonvested Options |
Weighted Average Grant Date Fair Value |
|||||||
| Nonvested options at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Forfeited | ( |
) | ||||||
| Vested | ||||||||
| Nonvested options at June 30, 2023 | ||||||||
Warrants
In
connection with certain private placements funded by certain of our officers and directors prior to our initial public offering, we issued
notes and warrants. The warrants were contingent upon, and became effective only upon, consummation of our initial public offering on
August 11, 2022. In total,
Also,
in conjunction with the initial public offering, the Company issued
13
Also,
in connection with certain private placements with a third-party investor, the Company issued
On
September 16, September 30, and October 20, 2022 in conjunction with a financing with the same third-party investor, we
issued
On
February 15, 2023 in conjunction with an advisory agreement, we issued
On
April 16, 2023
The following table summarizes warrant activity for the six months ended June 30, 2023:
| Number of Shares Issuable Upon Exercise of Warrants |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Issued | ||||||||||||||||
| Exercised | ( |
) | - | |||||||||||||
| Expired | - | |||||||||||||||
| Outstanding at June 30, 2023 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2023 | $ | $ | ||||||||||||||
During
the six months ended June 30, 2023,
Under the terms of agreements entered into with Greenle, we were obligated to make quarterly payments (each a “Revenue Share”) to Greenle based on certain percentages of the revenues generated by certain of our leased properties during the term of the applicable leases (including any extensions thereof).
As previously reported, on February 13, 2023, the Company and Greenle entered into an agreement pursuant to which certain Revenue Share payments for 2023 were converted into an obligation to issue shares of our common stock to Greenle in the amounts prescribed therein (the “February 2023 Revenue Share Agreement”), with all future Revenue Share obligations accruing on and after January 1, 2024 remaining in place.
On May 21, 2023, we entered into a further agreement with Greenle (the “May 2023 Revenue Share Exchange Agreement”) pursuant to which the right to receive any and all Revenue Share with respect to any property or operations of the Company has been terminated in its entirety for 2024 and forever thereafter, and Greenle shall not be entitled to receive any payment therefor (other than the remaining periodic share issuances and cash payments under the February 2023 Revenue Share Agreement, all of which shall be completed by January 1, 2024).
In
consideration for the termination of the Revenue Share for 2024 and thereafter, we agreed to issue to Greenle, from time to time, in
each case, at Greenle’s election upon 61 days’ prior written notice delivered to us on and after September 1, 2023 and before
August 31, 2028, up to an aggregate of 6,740,000 shares of our common stock (the “Agreement Shares”). As a result of this transaction, we recorded interest expense of $
18 - SUBSEQUENT EVENTS
Warrant Exercises
On
July 5, 2023 and July 11, 2023, Greenle exercised its right to purchase an aggregate of and shares, respectively, of the Company’s
common stock at an exercise price of $
14
Wyndham Transaction
On August 2, 2023, the Company entered into several agreements, including seventeen franchise agreements (each, a “Franchise Agreement”), with certain affiliates of Wyndham Hotels & Resorts, Inc. (collectively, “Wyndham”) pursuant to which the following hotels operated by the Company (the “Initial Properties”) will become part of the Trademark Collection® by Wyndham and Travelodge by Wyndham brands while staying under the operational control of the Company:
| Hotel Name | Location | Number of Rooms | ||
The Company expects rebranding of the Initial Properties, including the Initial Properties’ use of Wyndham booking channels, to be completed by December 2023.
The Franchise Agreements have initial terms of 15 to 20 years and require Wyndham to provide financial, sales and operational-related support with respect to the Initial Properties. The Franchise Agreements contain customary representations, warranties, covenants, indemnification, liquidated damages and other terms for transactions of a similar nature, including customary membership and marketing fees in an initial aggregate amount of 6.0% of gross room revenue, increasing to 6.5% of gross room revenue over the term of the Franchise Agreements.
Pursuant to the Franchise Agreements, the Company agreed to make certain property improvements, modifications and maintenance items (collectively, “Capital Improvements”), which the Company expects to complete over the next twelve months. In exchange for these Capital Improvements, Wyndham will provide capital through development advance notes (“Key Money”) to the Company for these Capital Improvements, which the Company expects will provide significant working or growth capital to the Company. Consistent with market practice, such Key Money will be evidenced by certain promissory notes with customary amortization and repayment terms. In conjunction with the Company’s entry into the Franchise Agreements, the Company paid a one-time, initial, nonrefundable franchise fee to Wyndham.
As a result of entering into the Franchise Agreements, the Company expects to be subject to significantly reduced booking fees, inclusive of franchise and other fees, as a result of using the Wyndham booking platform. Conversely, to the extent that the Company continues to use third party online travel agencies for bookings, the Company expects to benefit from Wyndham’s lower online travel agency commission rates, while paying franchise fees and other fees on such booking activity, as a result of the Company’s entry into the Franchise Agreements. The Company expects that the net impact of the Franchise Agreements will be a material reduction to such fees in comparison to the Company’s previous operations.
In addition to the Initial Properties, the Company and Wyndham are in the process of reviewing a pipeline of properties currently under letter of intent, already executed lease, or subject to an executed lease with the Company (such properties, “Pipeline Properties”). To the extent that the Company ultimately enters into master leasing agreements with respect to any such Pipeline Properties, the Company has set up a general framework to bring new LuxUrban properties onto the Wyndham platform and expects to add such Pipeline Properties to both the Company’s and Wyndham’s booking platforms. The Franchise Agreements provide for future commitments to Wyndham, and in return Wyndham has agreed to fund capital to the Company via Key Money on a property-by-property basis, which the Company expects will provide significant working or growth capital to the Company. The Company expects that any such working or growth capital provided by Wyndham will offset a percentage of the deposit money required. Wyndham has the ability to accept or reject properties to the platform on a property by property basis, subject to certain conditions, with a three-year right of first refusal.
In conjunction with the Company’s entry into the Franchise Agreements and the positive impact such Franchise Agreements are expected to have on the Company, including the reduced costs mentioned above, the Company agreed to terms that incentivize Brian Ferdinand, the Company’s Chairman and Chief Executive Officer, to remain with the Company for an extended period of time, including the requirement of Brian Ferdinand to personally guaranty (the “Key Man Terms”) the Company’s obligations under the Franchise Agreements and Key Money during the term of the Franchise Agreements, with the ability of the Company to remove the Key Man Terms after five years.
15
Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When we refer to “we,” “us,” “our,” “LUXH,” or “the Company,” we mean LuxUrban Hotels Inc. and its consolidated subsidiaries. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this quarterly report on Form 10-Q (“Quarterly Report”). Some of the comments we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section below entitled “Special Note Regarding Forward-Looking Statements.” Certain factors that could cause actual results or events to differ materially from those the Company anticipates or projects are described in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“Annual Report”).
Special Note Regarding Forward-Looking Statements
This Quarterly Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The statements contained in this Quarterly Report that are not purely historical are forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this Quarterly Report may include, for example, statements about:
| ● | our financial performance, including our ability to generate revenue; |
| ● | the outbreak of the novel coronavirus (“COVID-19”), including the measures to reduce its spread, and the impact on the economy and demand for our services, which may precipitate or exacerbate other risks and uncertainties in our financial performance, including our ability to generate revenue; |
| ● | potential effects of a challenging economy, for example, on the demand for vacation travel accommodations and the effect thereof on our business and financial condition; |
| ● | the ability of our short stay accommodation offerings to achieve market acceptance and to build our portfolio of accommodation offerings in multiple cities throughout the United States and internationally; |
| ● | the impact of increased competition; |
| ● | our success in retaining or recruiting officers, key employees and directors; |
| ● | our ability to service our existing indebtedness and obtain additional financing when and if needed; |
| ● | our ability to protect our intellectual property; |
| ● | our ability to complete strategic acquisitions, including joint ventures; |
| ● | our ability to manage growth and integrate operations from properties that we lease; |
| ● | uninterrupted service by the third-party service providers we rely on for material parts of our operations, including payment processing, data collection and security, online reservations and booking and other technology services; |
| ● | the liquidity and trading of our securities; |
| ● | regulatory and operational risks; |
16
| ● | our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; and |
| ● | the time during which we will be an Emerging Growth Company under the Jumpstart Our Business Startups Act of 2012, or JOBS Act. |
The forward-looking statements contained in this Quarterly Report are based on current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those risk factors described in “Item 1A. Risk Factors” of our Annual Report, elsewhere in this Form 10-Q and any updates to those factors as set forth in this and subsequent Quarterly Reports on Form 10-Q or other public filings with the SEC. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.
See Item 1A. “Risk Factors” within our Annual Report for further discussion of these risks, as well as additional risks and uncertainties that could cause actual results or events to differ materially from those described in the Company’s forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Quarterly Report.
Overview
We utilize an asset light business model to lease entire hotels on a long-term basis and rent out hotel rooms in the properties we lease. We currently manage a portfolio of hotel rooms in New York, Washington D.C., Miami Beach, New Orleans and Los Angeles. With recent hotel rooms becoming available, as of August 8, 2023, we have approximately 1,625 units under lease. We believe the pandemic created, and current economic conditions present, a historic opportunity for us to lease dislocated and underutilized hotels at favorable economics for our company.
We have plans to expand both domestically and internationally. At this time, London is the next city targeted for expansion.
We strive to improve operational efficiencies by leveraging proprietary technology to identify, lease, manage, and market globally the hotel space we lease to business and vacation travelers through our online portal and third-party sales and distribution channels. Our top three sales channels represented over 90% of revenue during the three months ended June 30, 2023.
Business
We are building a portfolio of hotels that provide short-term accommodations for guests at average nightly and occupancy rates that exceed our total cost and expenses. We are growing this portfolio by capitalizing on the dislocation in the hotel industry created by the pandemic and subsequent rising interest rate environment. We target business and vacation travelers under our consumer brand LuxUrban and we market our hotel properties through our proprietary sales portal as well as several worldwide online travel agency (“OTA”) channels.
We believe that as a result of pandemic-induced hotel closures, changing financial requirements for hotel owners, as well as a significantly higher interest rate and refinancing environment, LuxUrban has a multi-year pipeline of potential properties to lease at favorable economics to our Company.
Many of the hotels that we lease have been hotels that were shuttered or underutilized as a result of the global pandemic. Other properties that we lease were either poorly managed properties where the landlord was looking for a more stable tenant, or a refinancing opportunity where LuxUrban provided a landlord a more desirable lender-friendly, long-term lease agreement.
Based on the market dislocation mentioned above, we believe our pipeline of high-quality opportunities will provide multiple leasing opportunities in upcoming years. Currently, we are focused on turnkey properties that require limited amounts of incremental capital to make the property guest-ready. We expect over time that we may need to invest additional capital as the best opportunities in our pipeline become leased. Even if we need to increase the capital we invest to make ready a property, we believe there are many attractive opportunities for properties where the economics will still be favorable based on the above mentioned market dislocation. In addition, we may be able to obtain greater concessions from landlords as a result of the capital required.
17
Property Summary
We enter into triple net leases in which we are responsible for all of the costs on the property outside of exterior structural maintenance. As of June 30, 2023, we leased 12 properties with 1,086 units available for rent. As of August 8, 2023, we leased 15 properties with 1,411 units available for rent. As of August 8, 2023, including properties under lease but not yet available for rent we leased 17 properties with 1,625 units. Our portfolio of properties as of August 8, 2023, was as follows:
| Property | # of Units |
Property Type |
Lease Term |
Lease Remaining at June 30, 2023 (years) |
Extension Option |
Annual Escalation |
Date Commenced |
Security Deposit or Letter of Credit |
|||||||||||
| 1200 O: 1200 Ocean Dr, Miami Beach, FL 33139 | 24 | Entire building, licensed for hotel like Rentals | 10-year | 3.5 | None | 3% | 12/31/2016 | $ | 485,000 | ||||||||||
| Blakely: 136 W 55th St, New York, NY 10105(1) | 117 | Licensed hotel | 15-year | 13.3 | 10-year | 3% | 11/1/2021 | $ | 1,000,000 | ||||||||||
| Herald: 71 W 35th St, New York, NY 10001 | 168 | Licensed hotel | 15-year | 13.9 | None | 3% | 6/2/2022 | $ | 1,500,000 | ||||||||||
| Variety: 1700 Alton Rd, Miami Beach, FL 33139 | 68 | Licensed hotel | 5.5-year | 3.3 | None | 3% | 3/26/2021 | $ | 550,000 | ||||||||||
| Impala / Flora: 1228 Collins Ave, Miami Beach, FL 33139 | 48 | Licensed hotel | 5-year | 3.3 | 10-year | 3% | 10/1/2021 | $ | 515,000 | ||||||||||
| Astor: 956 Washington Ave, Miami Beach, FL 33139 | 42 | Licensed hotel | 5-year | 3.8 | 5-year | 4% | 4 /15//2022 | $ | 350,000 | ||||||||||
| Georgetown: 1000 29th St NW, Washington, DC 20007 | 79 | Licensed hotel | 10-year | 9.1 | 10-year | 3% | 8/1/2022 | $ | 500,000 | ||||||||||
| Lafayette: 600 St Charles Ave, New Orleans, LA 70130 | 60 | Licensed hotel | 19.4-year | 18.8 | None | 2% | 11/1/2022 | $ | 300,000 | ||||||||||
| O Hotel: 819 South Flower Street, Los Angeles, CA 90017 | 68 | Licensed hotel | 15-year | 14.8 | 5-year | 3% | 4/1/2023 | $ | 103,000 | ||||||||||
| Washington: 8 Albany Street, New York, NY 10006 | 217 | Licensed hotel | 15.2-year | 14.7 | None | 2% | 9/20/2022 | $ | 6,101,341 | ||||||||||
18
| Property | # of Units |
Property Type |
Lease Term |
Lease Remaining at June 30, 2023 (years) |
Extension Option |
Annual Escalation |
Date Commenced |
Security Deposit or Letter of Credit |
|||||||||||
| Townhouse: 150 20th Street, Miami Beach, FL 33139 | 70 | Licensed hotel | 11.2-year | 10.9 | 10-year | 3% | 3/1/2023 | $ | 1,250,000 | ||||||||||
| Tuscany: 120 E 39th Street, New York, NY 10016 | 125 | Licensed hotel | 15.0-year | 14.5 | 10-year | 2% | 1/1/2023 | $ | 2,250,000 | ||||||||||
| Weighted Avg(2) | Weighted Avg(2) | Weighted Avg(2) | |||||||||||||||||
| As of June 30, 2023 | |||||||||||||||||||
| Subtotal Operating Units(2) | 1,086 | 12.1 | 16.6 | 2.7% | $ | 14,904,341 | |||||||||||||
| Properties operating subsequent to 6/30/2023 (deposits made prior to 6/30/23) | |||||||||||||||||||
| Bogart: 101 Bogart Street, Brooklyn, NY 11206 | 65 | Licensed hotel | $ | 750,000 | |||||||||||||||
| Be Home: 741 8th Avenue, New York, NY 10036 | 44 | Licensed hotel | $ | 100,000 | |||||||||||||||
| Hotel 57: 130 E 57th St, New York, NY 10022 | 216 | Licensed hotel | $ | 2,500,000 | |||||||||||||||
| As of August 8, 2023 | |||||||||||||||||||
| Subtotal Operating Units(2) | 1,411 | $ | 18,254,341 | ||||||||||||||||
| Other Deposits | $ | 2,324,079 | |||||||||||||||||
| Total Deposits (current $112,290, restricted cash $1,100,000 and non-current $19,366,130) | $ | 20,578,420 | |||||||||||||||||
| Properties under lease, not operating | |||||||||||||||||||
| Trinity: 741 8th 851 South Grand Avenue, Los Angeles, CA 90017 | 179 | ||||||||||||||||||
| Condor: 56 Franklin Ave, Brooklyn, NY 11205 | 35 | ||||||||||||||||||
| Under lease | 1,625 | ||||||||||||||||||
| (1) | Recorded as restricted cash as posted by a letter of credit. |
| (2) | Averages are weighted by unit count |
19
Our Business Strategy
When we lease properties, we typically do so with either a refundable security deposit, refundable letter of credit or both. In most cases we get a period of “free rent” in which we make ready the property. Make ready could include but is not limited to: minor repairs or property updates, hiring appropriate property level staff, getting utilities / Wi-Fi / cable installed, or listing the property on the OTA channels we utilize.
We lease entire properties, which could include food service, gyms, or store fronts. We do and plan to in most cases, sublease the food service or store fronts to generate additional income. We believe these items are non-core to our operations.
Our average deposits / letter of credit by city as of June 30, 2023, were as follows:
| Location | Miami Beach | New York | NOLA | DC | LA | Total | ||||||||||||||||||
| Units | 252 | 627 | 60 | 79 | 68 | 1,086 | ||||||||||||||||||
| Deposit / Letter of Credit | $ | 3,150,000 | $ | 10,851,341 | $ | 300,000 | $ | 500,000 | $ | 103,000 | $ | 14,904,341 | ||||||||||||
| Per Unit | $ | 12,500 | $ | 17,307 | $ | 5,000 | $ | 6,329 | $ | 1,515 | $ | 13,554 | ||||||||||||
| Properties at June 30, 2023 | 5 | 4 | 1 | 1 | 1 | 12 | ||||||||||||||||||
| Properties added after June 30, 2023 | ||||||||||||||||||||||||
| Units | - | 325 | - | - | - | 325 | ||||||||||||||||||
| Properties | - | 3 | - | - | - | 3 | ||||||||||||||||||
| Total | ||||||||||||||||||||||||
| Units | 252 | 952 | 60 | 95 | 247 | 1,625 | ||||||||||||||||||
| Properties | 5 | 8 | 1 | 2 | 2 | 15 | ||||||||||||||||||
Revenue Management
We use our proprietary data science and algorithms to manage revenue and create dynamic pricing for our accommodation units. Pricing changes can occur multiple times a day based on revenue momentum or lack thereof. We utilize our technology to both maximize occupancy rates through attractive pricing and increase cash flow in advance of potential guest stays. We initially developed and further improved our revenue management algorithms in our legacy apartment rental business and have now applied it to our hotel operations.
Property Operations
When we lease a new property, we typically streamline operations versus how its operations were managed by the prior operator that includes, but is not limited to:
| ● | Reduction of staffing. Over time and as a result of technology changes, legacy properties we lease typically have staffing at levels higher than we typically operate our properties. In addition, we eliminate staffing for areas we do not plan to operate or operate initially, including restaurants, bars, and workout facilities. |
| ● | Hiring quality general manager (or GM). We believe that our operational success is partially related to empowering on-the-ground employees to make decisions and solve guest concerns. This begins with a quality and experienced GM with a background in hospitality. |
| ● | Continual cost benefit analysis. Our lead operational staff have been trained to continuously calculate cost benefit in our operations. Specifically, we are constantly reviewing the return on requested investment capital and the related payback. We do this both at the corporate level as well as the operational level. For example, during lower periods of occupancy we may delay certain maintenance items as during these periods we can remove these units from inventory for a more prolonged period without experiencing any impact to revenues. |
20
Unit Economics
We believe we have one of the lowest per night property-level break-even costs in our markets as a result of leasing our properties at a generational low point. We estimate that the property-level break-even rate for revenue per available room (or “RevPAR”) for our portfolio as of June 30, 2023, was between $150 to $160 a night. We believe RevPAR provides an informative reflection of our business as it combines ADRs (average daily rates) along with occupancy rates. RevPAR for the six months ended June 30, 2023 was $291, well above the property-level break-even level.
The following table shows historical occupancy and RevPAR at our leased properties:
| Year | Occupancy | RevPAR | ||||||
| 2018 | 86 | % | $ | 160 | ||||
| 2019 | 84 | % | $ | 157 | ||||
| 2020 | 61 | % | $ | 103 | ||||
| 2021 | 72 | % | $ | 122 | ||||
| 2022 | 77 | % | $ | 247 | ||||
| 2023 YTD | 80 | % | $ | 291 | ||||
In late 2021, we began to transition our business to focus on leasing hotel properties in commercially-zoned areas, and we have substantially completed this transition as of the date of the this Quarterly Report. As a result, we believe that our historical financial and operating results, including operating metrics such as occupancy and RevPAR, are not indicative of our future operations and are not comparable to our current strategy. However, we believe that the above table is useful in illustrating the higher RevPAR and improved results that we believe that we will achieve as a result of our transition in business strategy
Regulations Governing Short-Term Rentals
We launched our New York City operations in late 2019. Cities, such as New York City, have been diligent in the implementation and enforcement of short-stay rental regulations to ensure the safety of its communities and housing availability and affordability. Typically these regulations prohibit rentals having durations of less than 30 days. As the COVID-19 global pandemic, and related travel restrictions and shutdowns, emerged, New York City implemented unprecedented eviction moratoriums. As a result of our operations and the pandemic, we historically experienced violations of short-term rental regulations in some of our units located in residentially zoned areas, including those caused by subtenants who illegally occupy some of our units beyond their rental term (i.e., “squatters”), and, in some cases, illegally “sublet” our units to others. In these circumstances, we took legal measures to reclaim our units, including filing lawsuits seeking orders of removal, and notifying the applicable authorities. Given existing state and local government policy, as well as pandemic-affected resource limitations within the courts, we received limited relief. As part of our going-forward strategy, we have divested ourselves of all leases of residentially zoned properties and only operate properties that are not subject to these short-stay regulations. In conjunction with this divestiture, we have worked with New York City’s Department of Buildings and Office of Special Enforcement to settle any past short-term stay violations, with any settlement expected by management to be nonmaterial.
As our business has grown, we have implemented additional measures to avoid or minimize the incurrence of such violations in all of our operating cities. These measures include our strategy to build our growing portfolio of accommodation units with the execution of long-term leases for hotels that are commercially zoned and not subject to the regulations applicable to residentially zoned areas. We also continuously refine our booking platforms and related software and data to properly identity each type of unit being marketed on our platforms and to systematically prohibit rental lengths that do not comply with existing regulations in the municipalities in which such units are located.
Given the complexity of short-stay regulations in the cities in which we operate, we generally wound-down the majority of our residential area-located apartment inventory by the end of 2022 as part of the transition of our business strategy. As of June 30, 2023, our accommodation units portfolio is comprised of over 98% hotel units that are not subject to short-stay length regulations or contractual provisions and the balance is comprised of apartment units that are subject to such restrictions. Our portfolio growth strategy involves adding exclusively commercially zoned properties that are not subject to short-stay length regulations and divesting our remaining leases for residential-area properties. As a result, the need to comply with local or contractual short-stay length regulations or requirements, and the costs related thereto, have become increasingly less important to our operations.
21
Results of Operations
| For
The Three Months Ended June 30, |
||||||||||||
| 2023 | 2022 | % ∆ YoY | ||||||||||
| Net Rental Revenue | $ | 31,861,098 | $ | 10,201,338 | 212 | % | ||||||
| Rent Expense | 4,844,114 | 2,133,569 | ||||||||||
| Non-Cash Rent Expense Amortization | 2,583,272 | 1,115,180 | ||||||||||
| Other Expenses | 14,254,698 | 4,095,971 | ||||||||||
| Total Cost of Revenue | 21,682,084 | 7,344,720 | 195 | % | ||||||||
| Gross Profit | 10,179,014 | 2,856,618 | 256 | % | ||||||||
| General and Administrative Expenses | 4,417,237 | 885,621 | ||||||||||
| Non-Cash Expenses | 989,128 | - | ||||||||||
| Total Operating Expenses | 5,406,365 | 885,621 | 510 | % | ||||||||
| Income from Operations | 4,772,649 | 1,970,997 | 142 | % | ||||||||
| Other Income (Expense) | ||||||||||||
| Other Income | 58,370 | 137,154 | ||||||||||
| Cash Interest and Financing Costs | (1,189,901 | ) | (595,742 | ) | ||||||||
| Non-Cash Financing Costs | (28,522,740 | ) | - | |||||||||
| Total Other Expense | (29,654,271 | ) | (458,588 | ) | 6,366 | % | ||||||
| (Loss) Income Before Provision for Income Taxes | (24,881,622 | ) | 1,512,409 | (1,745 | )% | |||||||
| Provision for Income Taxes | 1,893,039 | 750,000 | ||||||||||
| Net (Loss) Income | $ | (26,774,661 | ) | $ | 762,409 | (3,612 | )% | |||||
Three Months Ended June 30, 2023 as compared to Three Months Ended June 30, 2022
Net Rental Revenue
The increase in net rental revenue of 212% for the three months ended June 30, 2023 to $31.9 million as compared to $10.2 million for the three months ended June 30, 2022 was a result of the increase in average units available to rent from 565 for the three months ended June 30, 2022 to 1,086 for the three months ended June 30, 2023 as well as better RevPAR, or revenue per available room, from $198 for the three months ended June 30, 2022 to $322 for the three months ended June 30, 2023. RevPAR includes both average daily rate, or ADR, and occupancy.
Cost of Revenue
For the three months ended June 30, 2023, the principal component responsible for the increase in our cost of revenue was expenses for our units available to rent, which increased by $14.3 million, or 195%, from $7.3 million in the three months ended June 30, 2022, to $21.7 million in the three months ended June 30, 2023, as a result of the increased number of units as well as related increases in property-related costs such as utilities, labor, cable / WIFI costs and cost related to greater revenues such as credit card processing fees and commissions.
Gross Profit
The increase in our gross profit of $7.3 million, or approximately 256%, to $10.2 million for the three months ended June 30, 2023, as compared to $2.9 million for the three months ended June 30, 2022, is primarily attributable to the greater number of units and better RevPAR over these periods.
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Total Operating Expenses
Total operating expenses incurred for the three months ended June 30, 2023, increased by approximately $4.5 million from the three months ended June 30, 2022. Of this increase, general and administrative expenses increased 399% to $4.4 million as compared to $0.9 million. This increase is primarily related to an increase in payroll, legal and accounting, software costs and supplies in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. Non-cash expenses of $1.0 million were included in the three months ended June 30, 2023, that were not included in the three months ended June 30, 2022.
Other Income (Expense)
Total other expense for the three months ended June 30, 2023 was $29.7 million as compared to $0.5 million for the three months ended June 30, 2022. This increase is primarily due to (a) interest and financing costs related to borrowings for working capital that increased from $0.6 million during the three months ended June 30, 2022 to approximately $1.2 million during the three months ended June 30, 2023, (b) offset by a marginal decrease in other income, and (c) non-cash financing costs of $28.5 million included in the three months ended June 30, 2023, that were not included in the three months ended June 30, 2022.
| For The Six Months Ended June 30, |
||||||||||||
| 2023 | 2022 | % ∆ YoY | ||||||||||
| Net Rental Revenue | $ | 54,675,273 | $ | 19,300,763 | 183 | % | ||||||
| Rent Expense | 10,265,981 | 4,584,547 | ||||||||||
| Non-Cash Rent Expense Amortization | 4,234,941 | 1,202,902 | ||||||||||
| Other Expenses | 24,633,463 | 8,143,433 | ||||||||||
| Total Cost of Revenue | 39,134,385 | 13,930,882 | 181 | % | ||||||||
| Gross Profit | 15,540,888 | 5,369,881 | 189 | % | ||||||||
| General and Administrative Expenses | 7,159,823 | 1,865,227 | ||||||||||
| Non-Cash Expenses | 2,471,513 | - | ||||||||||
| Total Operating Expenses | 9,631,336 | 1,865,227 | 416 | % | ||||||||
| Income from Operations | 5,909,552 | 3,504,654 | 69 | % | ||||||||
| Other Income (Expense) | ||||||||||||
| Other Income | 98,248 | 587,067 | ||||||||||
| Cash Interest and Financing Costs | (3,320,506 | ) | (1,159,879 | ) | ||||||||
| Non-Cash Financing Costs | (30,227,289 | ) | - | |||||||||
| Total Other Expense | (33,449,547 | ) | (572,812 | ) | 5,739 | % | ||||||
| (Loss) Income Before Provision for Income Taxes | (27,539,995 | ) | 2,931,842 | (1,039 | )% | |||||||
| Provision for Income Taxes | 2,015,200 | 750,000 | ||||||||||
| Net (Loss) Income | $ | (29,555,195 | ) | $ | 2,181,842 | (1,455 | )% | |||||
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Six Months Ended June 30, 2023 as compared to Six Months Ended June 30, 2022
Net Rental Revenue
The increase in net rental revenue of 183% for the six months ended June 30, 2023 to $54.7 million as compared to $19.3 million for the six months ended June 30, 2022 was a result of the increase in average units available to rent from 584 for the six months ended June 30, 2022 to 1,037 units for the six months ended June 30, 2023 as well as better RevPAR, or revenue per available room, from $138 for the six months ended June 30, 2022 to $291 for the six months ended June 30, 2023. RevPAR includes both average daily rate, or ADR, and occupancy.
Cost of Revenue
For the six months ended June 30, 2023, the principal component responsible for the increase in our cost of revenue was expenses for our units available to rent, which increased by $25.2 million, or 181%, from $13.9 million in the six months ended June 30, 2022, to $39.1 million in the six months ended June 30, 2023, as a result of an increased number of units as well as related increases in property-related costs such as utilities, labor, cable / WIFI costs and cost related to greater revenues such as credit card processing fees and commissions.
Gross Profit
The increase in our gross profit of $10.2 million, or approximately 189%, to $15.5 million for the six months ended June 30, 2023, as compared to $5.4 million for the six months ended June 30, 2022, is primarily attributable to the greater number of units and better RevPAR over these periods.
Total Operating Expenses
Total operating expenses incurred for the six months ended June 30, 2023, increased by approximately $7.8 million from the six months ended June 30, 2022. Of this increase, general and administrative expenses increased 284% to $7.2 million as compared to $1.9 million. This increase is primarily related to an increase in payroll, legal and accounting, software costs and supplies in the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. Non-cash expenses of $2.5 million were included in the six months ended June 30, 2023, that were not included in the six months ended June 30, 2022.
Other Income (Expense)
Total other expense for the six months ended June 30, 2023 was $33.5 million as compared to $0.6 million for the six months ended June 30, 2022. This increase is primarily due to (a) interest and financing costs related to borrowings for working capital that increased from $1.2 million during the six months ended June 30, 2022 to approximately $3.3 million during the six months ended June 30, 2023, (b) offset by a decrease in other income from $0.6 million during the six months ended June 30, 2022 to approximately $0.1 million during the six months ended June 30, 2023, and (c) non-cash financing costs of $30.2 million included in the six months ended June 30, 2023, that were not included in the six months ended June 30, 2022.
Liquidity and Capital Resources
The following table provides information about our liquidity and capital resources as of June 30, 2023 and December 31, 2022:
| As of June 30, 2023 |
As of December 31, 2022 |
|||||||
| Cash and Cash Equivalents | $ | 3,777,678 | $ | 1,076,402 | ||||
| Other Current Assets | $ | 14,733,816 | $ | 10,471,192 | ||||
| Total Current Assets | $ | 18,511,494 | $ | 11,547,594 | ||||
| Total Current Liabilities | $ | 20,873,103 | $ | 25,439,614 | ||||
| Working Capital (Deficit) | $ | (2,361,609 | ) | $ | (13,892,020 | ) | ||
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As of June 30, 2023, our cash and cash equivalents balance was $3,777,678 as compared to $1,076,402 at December 31, 2022, and total current assets were $18,511,494 at June 30, 2023, as compared to $11,547,594 at December 31, 2022.
As of June 30, 2023, our company had total current liabilities of $20,873,103 as compared to $25,439,614 at December 31, 2022. Total current liabilities at June 30, 2023 consisted of: accounts payable and accrued expenses of $6,581,745 as compared to $6,252,491 at December 31, 2022; rents received in advance of $3,092,972 at June 30, 2023, as compared to $2,566,504 at December 31, 2022; short-term business loans of $1,706,836 at June 30, 2023, as compared to $2,003,015 at December 31, 2022; loans payable of $1,456,187 at June 30, 2023, as compared to $10,324,519 at December 31, 2022; and operating lease liability of $6,020,163 at June 30,2023, as compared to $4,293,085 at December 31, 2022.
As of June 30, 2023, our company had a working capital deficit of $2,361,609 as compared to $13,892,020 at December 31, 2022. Excluding the current portion of loans payable, our working capital was $3,658,554 as of June 30, 2023 as compared to deficit of $9,598,935 as of December 31, 2022.
We have obtained funding through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loans (“EIDL”) totaling $814,244 and $800,000, respectively. We have used these funds for our ongoing operations. We have received forgiveness of $516,225 of the PPP loans, and for the balance of these funds we intend to repay them in accordance with the terms of the respective loan agreements or seek forgiveness, as permitted.
We record cash collected prior to stays as “rents received in advance” on our balance sheet as a liability. These collections are then recognized as revenue when guests stay at our properties. In the event that there is a refund in accordance with our refund policy, revenue is not recognized.
We recorded a $28,522,740 charge for the elimination of our revenue share agreements via the issuance of stock. The charge is non-cash, and as a result of the elimination of these agreements, the Company believes this will improve future financial results and cash flows.
We expect that cash on hand, cash flow from operations and cash available from our third-party investor financings will be sufficient to fund our operations during the next 12 months from the date of this Quarterly Report and beyond.
Inflation
Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, particularly those related to wages and increases in interest rates could have an adverse impact on our business, financial condition and results of operations.
Cash Flows from Operating Activities
During the six months ended June 30, 2023, we used $4,200,924 of cash in operating activities that was primarily related to an increase in security deposits of $8,132,745, an increase in channel retained funds and receivables from OTAs of $5,863,561 and an increase in operating lease liabilities of $9,494,760 offset by non-cash amount of lease expense of $13,752,266, stock compensation expense of $897,212, stock option expense of $372,387, changes in accounts payable and accrued expenses of $329,254, accrued income taxes of $2,015,200, and shares used for operating expense of $1,669,130. During the six months ended June 30, 2022, we recognized a net income of $2,181,842 that was primarily decreased by processor retained funds of $4,559,391, operating lease liabilities of $5,535,782 and security deposits of $2,731,000 and increased by rents received in advance of $2,251,152, accounts payable and accrued expenses of $1,091,687 and non-cash amount of lease expense of $5,787,499.
Cash Flow from Investing Activities
During the six months ended June 30, 2023, cash used for the purchase of property and equipment and leaseholds totaled $398,771, and cash generated from the sale of Treasury Bills was $2,692,396.
Cash Flow from Financing Activities
During the six months ended June 30, 2023, net cash provided by financing activities of $4,608,575 included warrant exercises of $5,312,502 offset by net repayments of short-term business loans and debt totaling $703,927. During the six months ended June 30, 2022, net cash provided by financing activities of $1,101,267 included net proceeds from loans $2,374,332, offset by deferred offering costs of $462,546 as well as by net repayments of short-term business loans of $810,519.
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Financing Activities
Letter Agreement
On April 16, 2023 we entered into an agreement (the “April 2023 Letter Agreement”) with the holders of our senior secured convertible notes (“Existing Convertible Notes”) totaling approximately $5,000,000 that provides for a two-year extension on maturity of the Existing Convertible Notes to April 15, 2025. In connection with this agreement, we issued to the holders of the Existing Convertible Notes a new warrant to purchase 1,000,000 shares of common stock at an exercise price of $3.00 per share and a new warrant to purchase 250,000 shares at an exercise price of $4.00 per share (the “New Warrants”).
In addition to the issuance of New Warrants, the holders’ of the Existing Convertible Notes agreed to a modification of the terms of the Existing Convertible Notes and existing warrants (the “Existing Warrants”) that it holds, the resales of which are registered, that has the effect of increasing the equity capital of the Company through a mandatory conversion feature. Subject to the satisfaction of certain conditions, the Existing Convertible Notes and the Existing Warrants are subject to a mandatory conversion into common stock if the volume-weighted average price of common shares for each of the three trading days prior to the forced conversion is at least equal to the trigger price, as defined in the April 2023 Letter Agreement (the “Trigger Price”). For Existing Warrants and Existing Convertible Notes issued at $2.00 per share, the Trigger Price is $3.00 per share; for Existing Warrants and Existing Convertible Notes issued at $3.00 per share, the Trigger Price is $4.00 per share, and for Existing Warrants and Existing Convertible Notes issued at $4.00 per share, the Trigger Price is $5.50 per share. Among the conditions that must be met prior to a mandatory conversion, in addition to the Trigger Price condition, (i) the resales of the shares underlying the Existing Convertible Notes or Existing Warrants must be registered with the SEC; (ii) the aggregate dollar volume of the common stock sold on the principal trading market over the 10 consecutive days prior to conversion must be at least $3.75 million; and (iii) no mandatory conversion would cause the holder of the Convertible Notes to beneficially own more than 9.9% of our common stock.
Warrant Exercises
On April 27, 2023, Greenle Partners LLC Series Alpha P.S. (“Greenle Alpha”) and Greenle Partners LLC Series Beta P.S. (“Greenle Beta”, and together with Greenle Alpha, “Greenle”) exercised their rights to purchase an aggregate of 1,000,000 shares of the Company’s common stock at an exercise price of $2.00 per share pursuant to rights underlying certain of its warrants that were issued in connection with prior financings. In connection with such exercise, the Company received aggregate gross proceeds of $2.0 million.
On May 2, 2023, Greenle exercised its right to purchase an aggregate of 856,000 shares of the Company’s common stock at an exercise price of $2.00 per share pursuant to rights underlying certain of its warrants that were issued in connection with prior financings. In connection with such exercise, the Company received aggregate gross proceeds of $1.7 million.
On June 30, 2023, Greenle exercised its right to purchase an aggregate of 400,000 shares of the Company’s common stock at an exercise price of $2.50 per share pursuant to rights underlying certain of its warrants that were issued pursuant to the April 2023 Letter Agreement. In connection with such exercise, the Company received aggregate gross proceeds of $1.0 million.
EBOL Shares
On April 28, 2023, the Company entered into a Release Agreement, by and between the Company, on the one hand, and Edward Rogers and EBOL Holdings LLC (collectively, the “Investor”), on the other hand (the “Release Agreement”), whereby the Company agreed to issue to the Investor 254,000 shares (the “EBOL Shares”) of the Company’s common stock as consideration for all prior investments and agreements between the Investor and the Company, including, but not limited to, warrants to purchase up to 125,000 shares of the Company’s common stock issued to EBOL Holdings LLC on December 28, 2021, and the Investor agreed to release the Company from any and all liabilities and claims of any nature, which Investor ever had, now has or hereafter may have against the Company.
Convertible Note Conversions
On April 19, 2023, in connection with Greenle Alpha’s conversion of a portion of its outstanding convertible notes, the Company issued 100,000 shares of the Company’s common stock to Greenle Alpha.
On June 19, 2023 the Company entered into a letter agreement with Greenle (the “June 2023 Letter Agreement”). Pursuant to the June 2023 Letter Agreement, Greenle agreed to convert, within two trading days, the principal amount of each outstanding convertible note owned by Greenle Alpha and Greenle Beta and all accrued interest thereon and any other amounts payable thereunder, totaling approximately $2.6 million, into 1,528,975 shares of our common stock. At June 30, 2023, all of these notes have converted into equity. Pursuant to the June 2023 Letter Agreement, the Company agreed to register the re-sales of the common stock underlying the New Warrants and reduce the exercise price of the New Warrants to $2.50 per share of common stock.
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Revenue Share Exchange Agreements
Under the terms of agreements entered into with Greenle, we were obligated to make quarterly payments (each a “Revenue Share”) to Greenle based on certain percentages of the revenues generated by certain of our leased properties during the term of the applicable leases (including any extensions thereof).
As previously reported, on February 13, 2023, the Company and Greenle entered into an agreement pursuant to which certain Revenue Share payments for 2023 were converted into an obligation to issue shares of our common stock to Greenle in the amounts prescribed therein (the “February 2023 Revenue Share Agreement”), with all future Revenue Share obligations accruing on and after January 1, 2024 remaining in place.
On May 21, 2023, we entered into a further agreement with Greenle (the “May 2023 Revenue Share Exchange Agreement”) pursuant to which the right to receive any and all Revenue Share with respect to any property or operations of the Company has been terminated in its entirety for 2024 and forever thereafter, and Greenle shall not be entitled to receive any payment therefor (other than the remaining periodic share issuances and cash payments under the February 2023 Revenue Share Agreement, all of which shall be completed by January 1, 2024).
In consideration for the termination of the Revenue Share for 2024 and thereafter, we agreed to issue to Greenle, from time to time, in each case, at Greenle’s election upon 61 days’ prior written notice delivered to us on and after September 1, 2023 and before August 31, 2028, up to an aggregate of 6,740,000 shares of our common stock (the “Agreement Shares”). As a result of this transaction, we recorded interest expense of $28,174,148 in the period.
Acorn Shares
On June 2, 2023, the Company issued 15,040 shares of the Company’s common stock to Acorn Management Partners in connection with the Company’s advisory and investment communications services.
Subsequent Events
Warrant Exercises
On July 5, 2023 and July 11, 2023, Greenle exercised its right to purchase an aggregate of 160,000 and 400,000 shares, respectively, of the Company’s common stock at an exercise price of $2.50 per share pursuant to rights underlying the New Warrants that were issued pursuant to the April 2023 Letter Agreement. In connection with such exercise, the Company received aggregate gross proceeds of $1,400,000.
Wyndham Transaction
On August 2, 2023, the Company entered into several agreements, including seventeen franchise agreements (each, a “Franchise Agreement”), with certain affiliates of Wyndham Hotels & Resorts, Inc. (collectively, “Wyndham”) pursuant to which the following hotels operated by the Company (the “Initial Properties”) will become part of the Trademark Collection® by Wyndham and Travelodge by Wyndham brands while staying under the operational control of the Company:
| Hotel Name | Location | Number of Rooms | ||
| The Blakely Hotel | New York City | 117 | ||
| The Herald Hotel | New York City | 167 | ||
| The Washington | New York City | 217 | ||
| The Astor | Miami | 42 | ||
| The Impala Hotel | Miami | 17 | ||
| La Flora | Miami | 31 | ||
| BeHome | New York City | 44 | ||
| The Bogart Hotel | New York City | 65 | ||
| The Lafayette | New Orleans | 60 | ||
| Georgetown Residences | Washington, DC | 80 | ||
| The Variety | Miami | 68 | ||
| 12th and Ocean Apartments | Miami | 24 | ||
| Townhouse Hotel Miami Beach | Miami | 70 | ||
| O Hotel | Los Angeles | 68 | ||
| Hotel 57 | New York City | 216 | ||
| Condor Hotel | New York City | 35 | ||
| Tuscany | New York City | 125 |
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The Company expects rebranding of the Initial Properties, including the Initial Properties’ use of Wyndham booking channels, to be completed by December 2023.
The Franchise Agreements have initial terms of 15 to 20 years and require Wyndham to provide financial, sales and operational-related support with respect to the Initial Properties. The Franchise Agreements contain customary representations, warranties, covenants, indemnification, liquidated damages and other terms for transactions of a similar nature, including customary membership and marketing fees in an initial aggregate amount of 6.0% of gross room revenue, increasing to 6.5% of gross room revenue over the term of the Franchise Agreements.
Pursuant to the Franchise Agreements, the Company agreed to make certain property improvements, modifications and maintenance items (collectively, “Capital Improvements”), which the Company expects to complete over the next twelve months. In exchange for these Capital Improvements, Wyndham will provide capital through development advance notes (“Key Money”) to the Company for these Capital Improvements, which the Company expects will provide significant working or growth capital to the Company. Consistent with market practice, such Key Money will be evidenced by certain promissory notes with customary amortization and repayment terms. In conjunction with the Company’s entry into the Franchise Agreements, the Company paid a one-time, initial, nonrefundable franchise fee to Wyndham.
As a result of entering into the Franchise Agreements, the Company expects to be subject to significantly reduced booking fees, inclusive of franchise and other fees, as a result of using the Wyndham booking platform. Conversely, to the extent that the Company continues to use third-party online travel agencies for bookings, the Company expects to benefit from Wyndham’s lower online travel agency commission rates, while paying franchise fees and other fees on such booking activity, as a result of the Company’s entry into the Franchise Agreements. The Company expects that the net impact of the Franchise Agreements will be a material reduction to such fees in comparison to the Company’s previous operations.
In addition to the Initial Properties, the Company and Wyndham are in the process of reviewing a pipeline of properties currently under letter of intent, subject to an already executed lease, or subject to an executed lease with the Company (such properties, “Pipeline Properties”). To the extent that the Company ultimately enters into master leasing agreements with respect to any such Pipeline Properties, the Company has set up a general framework to bring new LuxUrban properties onto the Wyndham platform and expects to add such Pipeline Properties to both the Company’s and Wyndham’s booking platforms. The Franchise Agreements provide for future commitments to Wyndham, and in return Wyndham has agreed to fund capital to the Company via Key Money on a property-by-property basis, which the Company expects will provide significant working or growth capital to the Company. The Company expects that any such working or growth capital provided by Wyndham will offset a percentage of the deposit money required. Wyndham has the ability to accept or reject properties to the platform on a property-by-property basis, subject to certain conditions, with a three-year right of first refusal.
In conjunction with the Company’s entry into the Franchise Agreements and the positive impact such Franchise Agreements are expected to have on the Company, including the reduced costs mentioned above, the Company agreed to terms that incentivize Brian Ferdinand, the Company’s Chairman and Chief Executive Officer, to remain with the Company for an extended period of time, including the requirement of Brian Ferdinand to personally guarantee (the “Key Man Terms”) the Company’s obligations under the Franchise Agreements and Key Money during the term of the Franchise Agreements, with the ability of the Company to remove the Key Man Terms after five years.
The foregoing description of the Franchise Agreements is not complete and is qualified in its entirety by reference to the text of the form of Franchise Agreement filed as Exhibit 10.4 to this Quarterly Report.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements.
Material Cash Requirements
There have been no material changes to the information in our material cash requirements related to commitments or contractual obligations from those reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on March 31, 2023.
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Third-Party Payment Processors
We utilize third-party payment processors to process guest transactions via credit card. Over 95% of our reservations are processed through credit card transactions in which we pay a processing fee. As noted in our financial statements, we maintain cash under “Processor retained funds” on our balance sheet as of June 30, 2023. These reserved funds are cash reserves held back by our processors to offset chargebacks and refunds due to guests. These reserves are intended to provide protection for both our guests and credit card processor with respect to cancellations and refunds. As part of our growth strategy, the large majority of our accommodation units are now rented on a nonrefundable basis, in order to minimize cancellation and refund exposures.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our financial statements included elsewhere in this Quarterly Report, we believe that the following accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
Our revenue is derived primarily from the rental of units to our guests. We recognize revenue when obligations under the terms of a contract are satisfied and control over the promised services is transferred to the guest. For the majority of sales, this occurs when the guest occupies the unit for the agreed upon length of time and receives any services that may be included with their stay. Revenue is measured as the amount of consideration we expect to receive in exchange for the promised goods and services.
Current and future reservations for most of our accommodation units require prepayment upfront. A majority of our reservations require full prepayment at the time the reservation is placed, with the remaining charged at check-in. Payments are processed through third-party credit card processors and marketing and reservation channels. We typically offer both a refundable and nonrefundable rate on each accommodation unit, with approximately half of our bookings, on average, choosing the nonrefundable rate. As we are required to reserve only 10% of prepayments under our third-party processor agreements, nonrefundable booking prepayments provide us with operating cash flow. Any advanced reservation, irrespective of when charged, is taken as revenue in the period in which the stay happens; if the stay is to occur in a future period, then the reservation is reflected in deferred revenue, and if the reservation is cancelled it is not ultimately realized as revenue.
Refunds are treated as a reduction of our net revenue and are taken in the period during which the cancelation or refund occurred. We have multiple refund policies in place across different sales channels, which vary by price. Some require a deposit at the time of booking, which would be forfeited in part or whole in the event of cancelation through varying periods of time prior to check-in. Some of our policies require full prepayment at time of booking (but allow for a full refund if booking is cancelled within required parameters). Some of our bookings are on a nonrefundable basis, in which cancellations results in forfeiture of the entire amount. In connection with some of our bookings, the third-party sales channel handles payments, cancelations, and the refunds to guests. As of the second half of 2022, we have moved most of our larger units’ offerings to non-refundable cancelation policies.
With respect to bookings for our accommodation units made through third-party booking platforms, in the event a refund is required to be made to a customer, under the terms of our agreements with such third-party platforms, we are required to make the refund to the customer (to the extent we have received the proceeds through the platform). If we fail to make any required refund, the customer’s recourse is against the third-party booking platform, and in turn, we are required to reimburse the booking platform. Within this structure, the (a) customer is protected, and (b) the booking party bears the credit risk with respect to the customer.
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We account for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606 which was adopted at the beginning of fiscal year 2018 using the modified retrospective method. We did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the effect was immaterial.
Payment received for the future use of a rental unit is recognized as a liability and reported as rents received in advance on the balance sheets. Rents received in advance are recognized as revenue after the rental unit is occupied by the customer for the agreed upon length of time. The rents received in advance balance as of December 31, 2022 and June 30, 2023, was $2,566,504 and $3,092,972 respectively, and is expected to be recognized as revenue within a one-year period.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of cash, prepaid expenses and other assets, accounts payable and accrued expenses, and rents received in advance approximate their fair values as of the respective balance sheet dates because of their short-term natures.
Advertising
Advertising and marketing costs are expensed as incurred and are included in General and Administrative Expenses in the accompanying Consolidated Statements of Operations.
Commissions
We pay commissions to third-party sales channels to handle the marketing, reservations, collections, and other rental processes for most of our units, which are included in cost of sales on the Consolidated Statements of Operations.
Income Taxes
In accordance with GAAP, we follow the guidance in FASB ASC Topic 740, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in our financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition and measurement of a tax position taken or expected to be taken in a tax return.
We did not have unrecognized tax benefits as of June 30, 2023 and do not expect this to change significantly over the next 12 months. We will recognize interest and penalties accrued on any unrecognized tax benefits as a component of provision for income taxes.
In January 2022, we converted into a C corporation.
Sales Tax
The majority of sales tax is collected from customers by our third-party sales channels and remitted to governmental authorities by these third-party sales channels. For any sales tax that is our responsibility to remit, we record the amounts collected as a current liability and relieve such liability upon remittance to the taxing authority.
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Paycheck Protection Program Loan (“PPP”)
As disclosed in the Notes to our financial statements, we have chosen to account for the PPP loan under FASB ASC 470, Debt. Repayment amounts due within one year are recorded as current liabilities, and the remaining amounts due in more than one year, if any, as long-term liabilities. In accordance with ASC 835, Interest, no imputed interest is recorded as the below market interest rate applied to this loan is governmentally prescribed. If we are successful in receiving forgiveness for those portions of the loan used for qualifying expenses, those amounts will be recorded as a gain upon extinguishment as noted in ASC 405, Liabilities.
Income Taxes
We are subject to income taxes in the jurisdictions in which we operate. We account for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and attributable to operating loss and tax credit carry-forwards. A valuation allowance is recorded for deferred tax assets if it is more likely than not that the deferred tax assets will not be realized.
Stock-Based Compensation
Stock-based compensation expense attributable to equity awards granted to employees will be measured at the grant date based on the fair value of the award.
The expense is recognized on a straight-line basis over the requisite service period for awards that vest, which is generally the period from the grant date to the end of the vesting period.
We estimate the fair value of stock option awards granted using the Black-Scholes option pricing model.
This model requires various significant judgmental assumptions in order to derive a fair value determination for each type of award, including the fair value of our common stock, the expected term, expected volatility, expected dividend yield, and risk-free interest rate.
These assumptions used in the Black-Scholes option-pricing model are as follows:
| ● | Expected term. We estimate the expected term based on the simplified method, which defines the expected term as the average of the contractual term and the vesting period. |
| ● | Risk-free interest rate. The risk-free interest rate is based on the yield curve of a zero coupon U.S. Treasury bond on the date the stock option award was granted with a maturity equal to the expected term of the stock option award. |
| ● | Expected volatility. We estimate the volatility of common stock on the date of grant based on the average historical stock price volatility of comparable publicly-traded companies due to the lack of sufficient historical data for our common stock price. |
| ● | Expected dividend yield. Expected dividend yield is zero, as we have not paid and do not anticipate paying dividends on its common stock. |
| ● | All grants of stock options will have an exercise price equal to or greater than the fair value of our common stock on the date of grant. We will account for forfeitures as they occur. |
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Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, and subsequent related updates to lease accounting (collectively “Topic 842”), which requires lessees to recognize right-of-use assets, representing their right to use the underlying asset for the lease term, and lease liabilities on the balance sheet for all leases with terms greater than 12 months. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases by lessors. Additionally, the guidance requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases.
Topic 842 is effective and was implemented for our company beginning January 1, 2022. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply.
Management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined in Rule 12b-2 under the Securities Exchange Act of 1934. As a result, pursuant to Item 305(e) of Regulation S-K, we are not required to provide the information required by this Item.
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Under standards established by the Public Company Accounting Oversight Board, or PCAOB, a deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or personnel, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. The PCAOB defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented, or detected and corrected, on a timely basis.
Prior to our initial public offering (“IPO”), consummated on August 11, 2022, we operated as a private, closely held company that was funded by our principals with no third-party investment. As a private company we did not undertake annual audits of our financial statements in the ordinary course, and were not subject to the rules and regulations that now apply to us following our IPO, including those relating to internal controls and periodic reporting. In connection with our recent audits of our financial statements, we have identified material weaknesses in our internal control over financial reporting with respect to our periodic and annual financial close processes. As historically constituted, our human resources, processes and systems did not enable us to produce accurate financial statements on a timely basis.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, prior to filing this Quarterly Report on Form 10-Q. Based on this evaluation, and as a result of the material weakness in our internal control over financial reporting described above and as described in our Annual Report, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective at the reasonable assurance level.
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(b) Remediation Plan
We commenced a remediation plan which includes the hiring of additional, qualified financial and accounting personnel, and engagement of specialized external resources, including the outsourcing of a portion of our accounting department functions to a qualified accounting firm. We also have formed an audit committee of independent directors. As part of our remediation plan, we also are in the process of adopting other entity-level controls, which includes properly segregating duties among appropriate personnel, education and training of applicable management and financial personnel, and improvements in the process and system used to monitor and track the effectiveness of underlying business process controls.
We continue to execute on our plan to remedy the material weakness, as described above, including (i) initiating a full internal review and evaluation of key processes, procedures and documentation and related control procedures, and the subsequent testing of those controls and (ii) implementing policies and procedures focusing on enhancing the review and approval of all relevant data to support our assumptions and judgments in non-routine and complex transactions appropriately and timely and documenting such review and approval. We are early in the process of this remediation. We also have made organizational changes and trained our employees in order to strengthen and improve our internal controls over financial reporting. Full implementation of this plan will require time and the devotion of material resources.
Management believes that these measures will remediate the identified material weakness. While we have completed our initial testing of these new controls and have concluded they are in place and operating as designed, we are monitoring their ongoing effectiveness, and will consider the material weakness remediated after the applicable remedial controls operate effectively for an additional period of time.
(c) Changes in Internal Control Over Financial Reporting
During the three months ended June 30, 2023, other than the changes described above in “Remediation Plan,” there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(d) Inherent Limitations on Effectiveness of Controls
In designing and evaluating disclosure controls and procedures, our management recognizes that any system of controls, however well designed and operated, can provide only reasonable assurance, and not absolute assurance, that the desired control objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals in all future circumstances. Accordingly, our disclosure controls and procedures are designed to provide reasonable, but not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and our principal financial officer have concluded, based on their evaluation as of the end of the period covered by this quarterly report, that our disclosure controls and procedures were not effective to provide reasonable assurance that the objectives of our disclosure control system were met.
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Part II - Other Information
Item 1 - Legal Proceedings
From time to time, the Company may be a party to certain legal proceedings, incidental to the normal course of our business. We are not currently a party to any pending or threatened legal proceedings that we believe could have a material adverse effect on our business or financial condition.
Although the Company does not expect, based on currently available information, that the outcome in any pending matters, individually or collectively, will have a material adverse effect on its financial position or results of operations, the ultimate outcome is inherently unpredictable. The Company regularly assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable and estimable. In this regard, the Company establishes accrual estimates for its various lawsuits, claims, investigations and proceedings when it is probable that an asset has been impaired or a liability incurred at the date of the financial statements and the loss can be reasonably estimated. As of June 30, 2023, we have $975,000 accrued for legal matters. The company believes the accrual best estimates the most likely outcomes of these matters, however the range of outcomes could be between $900,000–$1,500,000.
Item 1A - Risk Factors
Other than the risks described below, as of June 30, 2023, there have been no material changes in our risk factors from those set forth under the heading Part I, “Item 1A. Risk Factors” in our Annual Report. The risks described in the Annual Report are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company.
Our Chairman and Chief Executive Officer, Brian Ferdinand, has provided a personal guarantee with respect to the Company’s obligations under the Franchise Agreements and Key Money during the term of the Franchise Agreements. A default under the Franchise Agreements or Key Money obligations could result in the sale of Mr. Ferdinand’s property, including his equity interest in the Company. A sale of such equity interest would likely cause a significant drop in the price of our common stock. Moreover, Mr. Ferdinand, who could thereafter have a substantially smaller or no equity interest in our company, could have substantially less or no personal stake or interest in the commercial success of our Company.
On August 2, 2023, the Company entered into several agreements, including seventeen franchise agreements (each, a “Franchise Agreement”), with certain affiliates of Wyndham Hotels & Resorts, Inc. (collectively, “Wyndham”) pursuant to which certain hotels operated by the Company will become part of the Trademark Collection® by Wyndham and Travelodge by Wyndham brands while staying under the operational control of the Company. In conjunction with the Company’s entry into the Franchise Agreements and the positive impact such Franchise Agreements are expected to have on the Company, the Company agreed to terms that incentivize Mr. Ferdinand, the Company’s Chairman and Chief Executive Officer, to remain with the Company for an extended period of time, including the requirement of Mr. Ferdinand to personally guarantee (the “Key Man Terms”) the Company’s obligations under the Franchise Agreements and Key Money during the term of the Franchise Agreements, with the ability of the Company to remove the Key Man Terms after five years.
If the Key Man Terms are enforced against Mr. Ferdinand, he could be obliged to use his personal property, including the equity interest in our company, to fulfill his obligations under the Franchise Agreements. Mr. Ferdinand owes a fiduciary duty of loyalty to us. However, there is potential for conflicts of interest between his personal interests and ours whether his personal guaranty is called upon or not. No assurance can be given that material conflicts will not arise that could be detrimental to our operations and financial prospects.
Further, a sale of a portion or all of Mr. Ferdinand’s equity interest in the Company would likely cause a significant drop in the price of our common stock and could adversely affect our business operations, our business relationships and the marketability of our common stock and substantially reduce Mr. Ferdinand’s beneficial ownership interest in the Company. If Mr. Ferdinand’s beneficial ownership of the Company is substantially reduced or eliminated, he would have little or no stake or interest in the business operations of the Company, and he could potentially leave the Company or not perform his duties as diligently as he otherwise might have.
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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Sales of unregistered securities during the six months ended June 30, 2023 included:
Warrant Exercises
For a discussion of the Warrant Exercises, refer to the discussion under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financing Activities,” and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Subsequent Events” which is incorporated by reference into this Item 2.
EBOL Shares
For a discussion of the EBOL Shares, refer to the discussion under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations— Financing Activities,” which is incorporated by reference into this Item 2.
Acorn Shares
For a discussion of the Acorn Shares, refer to the discussion under “Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations— Financing Activities,” which is incorporated by reference into this Item 2.
Convertible Note Conversion
For a discussion of the Convertible Note Conversion, refer to the discussion under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations— Financing Activities,” which is incorporated by reference into this Item 2.
Agreement Shares
For a discussion of the Agreement Shares, refer to the discussion under “Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations— Financing Activities,” which is incorporated by reference into this Item 2.
Use of Proceeds
The proceeds from the offer, sale, and issuance of shares of common stock described in the preceding paragraphs have been or will be used to fund letter-of-credit based security deposits for our newly leased properties.
Exemptions from Registration
The offer, sale, and issuance of the shares of common stock described in the preceding paragraphs were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D promulgated thereunder, as a transaction by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was either an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act or had adequate access, through employment, business, or other relationships, to information about the Company.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Mine Safety Disclosures
Not applicable.
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Item 5 - Other Information
Employment Agreements
The Company entered into new employment agreements, dated August 7, 2023 and effective as of October 1, 2023 (each, an “Employment Agreement”) with each of Mr. Brian Ferdinand, the Company’s Chief Executive Officer and Chairman of the Board of Directors, Mr. Shanoop Kothari, the Company’s President, Chief Financial Officer and Secretary, and Mr. Jimmie Chatmon, the Company’s Chief Operating Officer.
Mr. Ferdinand’s Employment Agreement (the “Ferdinand Agreement”) provides for Mr. Ferdinand to continue serving as the Company’s Chief Executive Officer and Chairman of the Board for an initial three-year term, provided that the Ferdinand Agreement automatically renews for additional one-year terms thereafter in the event neither party provides the other at least 90 days’ prior notice of their intention not to renew the terms of the agreement. The Ferdinand Agreement provides for Mr. Ferdinand to receive an annual base salary of $900,000 per year. Pursuant to the Ferdinand Agreement, Mr. Ferdinand will also be eligible to receive a performance-based cash bonus pursuant to the Company’s annual bonus plan as then in effect, with a target of 100% of Mr. Ferdinand’s base salary, with a maximum bonus of 250% which for calendar year 2023 shall be measured against performance criteria set forth in the Ferdinand Agreement. The performance criteria will be updated on an annual basis by the Board of Directors or the Compensation Committee. Pursuant to the Ferdinand Agreement, Mr. Ferdinand will also be eligible to receive an annual equity award with a grant date fair value approximately equal to 450% of the his base salary, subject to the terms and conditions set forth in the applicable incentive plan or award agreement. In order to compensate Mr. Ferdinand for the personal risk associated with the Key Man Terms, and in recognition of the efforts of the Company’s executive officers in consummating the transactions contemplated by the Franchise Agreements, the Company will provide Mr. Ferdinand with a lump sum annual $1,200,000 cash contribution to a secular trust, with payment front loaded on the effective date of the Ferdinand Agreement and each anniversary of the effective date of the Ferdinand Agreement until the expiration of the Key Man Terms. In addition to the foregoing, Mr. Ferdinand will be entitled to certain compensation and benefits upon termination of his employment under specified circumstances.
Mr. Kothari’s Employment Agreement (the “Kothari Agreement”) provides for Mr. Kothari to continue serving as the Company’s President, Chief Financial Officer and Secretary for an initial three-year term, provided that the Kothari Agreement automatically renews for additional one-year terms thereafter in the event neither party provides the other at least 90 days’ prior notice of their intention not to renew the terms of the agreement. The Kothari Agreement provides for Mr. Kothari to receive an annual base salary of $600,000 per year. Pursuant to the Kothari Agreement, Mr. Kothari will also be eligible to receive a performance-based cash bonus pursuant to the Company’s annual bonus plan as then in effect, with a target of 75% of Mr. Kothari’s base salary, with a maximum bonus of 150% which for calendar year 2023 shall be measured against performance criteria set forth in the Kothari Agreement. The performance criteria will be updated on an annual basis by the Board of Directors or the Compensation Committee. Pursuant to the Kothari Agreement, Mr. Kothari will also be eligible to receive an annual equity award with a grant date fair value approximately equal to 300% of the his base salary, subject to the terms and conditions set forth in the applicable incentive plan or award agreement. In addition to the foregoing, Mr. Kothari will be entitled to certain compensation and benefits upon termination of his employment under specified circumstances.
Mr. Chatmon’s Employment Agreement (the “Chatmon Agreement”) provides for Mr. Chatmon to continue serving as the Company’s Chief Operating Officer for an initial three-year term, provided that the Chatmon Agreement automatically renews for additional one-year terms thereafter in the event neither party provides the other at least 90 days’ prior notice of their intention not to renew the terms of the agreement. The Chatmon Agreement provides for Mr. Chatmon to receive an annual base salary of $425,000 per year. Pursuant to the Chatmon Agreement, Mr. Chatmon will also be eligible to receive a performance-based cash bonus pursuant to the Company’s annual bonus plan as then in effect, with a target of 50% of Mr. Chatmon’s base salary, with a maximum bonus of 150% which for calendar year 2023 shall be measured against performance criteria set forth in the Chatmon Agreement. The performance criteria will be updated on an annual basis by the Board of Directors or the Compensation Committee. Pursuant to the Chatmon Agreement, Mr. Chatmon will also be eligible to receive an annual equity award with a grant date fair value approximately equal to 300% of the his base salary, subject to the terms and conditions set forth in the applicable incentive plan or award agreement. In addition to the foregoing, Mr. Chatmon will be entitled to certain compensation and benefits upon termination of his employment under specified circumstances.
The foregoing descriptions of the Ferdinand Agreement, the Kothari Agreement and Chatmon Agreement are not complete and are qualified in their entirety by reference to the text of the Ferdinand Agreement, the Kothari Agreement and Chatmon Agreement filed as Exhibits 10.5, 10.6 and 10.7, respectively, to this Quarterly Report.
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Item 6 - Exhibits
| * | Filed herewith |
** |
Furnished herewith |
| † | Management contract or compensatory plan. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LUXURBAN HOTELS INC. | ||
| Dated: August 8, 2023 | By: | /s/ Brian Ferdinand |
| Brian Ferdinand | ||
| Chief Executive Officer and Chairman of the Board | ||
| (Principal Executive Officer) | ||
| Dated: August 8, 2023 | By: | /s/ Shanoop Kothari |
| Shanoop Kothari | ||
| President, Chief Financial Officer and Secretary | ||
| (Principal Financial Officer) | ||
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