UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Amendment No. 1)
For the quarterly period ended
OR
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
| (Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| Stock Market LLC | ||||
| Stock Market LLC |
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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of August 20, 2024, the registrant had shares of common stock, $.00001 par value, outstanding.
Explanatory Note
LuxUrban Hotels Inc. (the “Company”) is filing this Amendment No.1 on Form 10-Q/A for the quarter ended March 31, 2024 (this “Form 10-Q/A”).
This Form 10-Q/A amends the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024, as filed with the Securities and Exchange Commission (“SEC”) on May 13, 2024 (the “Original Filing”). This Form 10-Q/A is being filed to restate the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2024. The restatement reflects applying charges allocated by the Channel Retained Funds of the security, deposited by the Company and expensing them to other expenses category in cost of goods sold. The restatement provides a reserve for bad debt expense for Processor Retained Funds, Receivable from On-Line Travel Agencies and the Receivable from the City of New York and Landlords reducing those assets and increasing bad debt expense in General and Administrative Expenses. The restatement reflects the adjustment for the proposed settlement with the landlord for the receivable due from the City of New York. The restatement reflects the amortization of prepaid real estate taxes which reduced Prepaid Expenses and Other Current Assets and increased real estate taxes included in Other Expenses, Cost of Revenue. The restatement reflects the increase in liability of the Bookings Received in Advance and reduces the Net Rental Revenue. The restatement also adjusts for the cancelation of reservations by a merchant service provider reducing Net Rental Revenue and decreasing receivables from On-Line Travel Agencies and increasing accrued expenses liability for the amount due the guests. The restatement reflects the reversal of revenue for the three months ended March 31, 2024, caused by the transfer from one merchant service provider to another merchant service provider. These adjustments were evaluated by management in accordance with SEC Staff Accounting Bulletin Topic 1M, “Materiality” and management determined the effects of the restatement to be material. See Note 2 to the unaudited condensed consolidated financial statements included in this Form 10-Q/A for further information regarding the restatement.
The Company is filing this Form 10-Q/A to amend and restate the Original Filing with modification as necessary to reflect the restatement. The following items have been amended to reflect the restatement:
Part I, Item 1:
Part I, Item 2:
Part II, Item 1A:
In addition, the Company’s Chief Executive Officer and Chief Financial Officer have provided new certifications dated as of the date of this Form 10-Q/A (Exhibits 31.1, 31.2, 32.1 and 32.2).
Except as otherwise described above and as otherwise set forth in this Form 10-Q/A, this Form 10-Q/A does not amend, modify or update any other information contained in the Original Filing. This Form 10-Q/A does not purport to reflect any information or events subsequent to the Original Filing, except as expressly described herein. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing. Among other things, forward-looking statements and risk factor disclosure in the Original 10-Q have not been revised to reflect events that occurred or facts that became known to the Company after the filing of the Original Filing, and such forward-looking statements and risk factors should be read in their historical context.
Table of Contents
i
Part I - Financial Information
Item 1 - Financial Statements.
LUXURBAN HOTELS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| March 31, | ||||||||
| 2024, as restated |
December 31, 2023 |
|||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Accounts Receivable, Net | ||||||||
| Channel Retained Funds, Net | ||||||||
| Processor Retained Funds, Net | ||||||||
| Receivables from On-Line Travel Agencies, Net | ||||||||
| Receivables from City of New York and Landlords, Net | ||||||||
| Prepaid Expenses and Other Current Assets | ||||||||
| Prepaid Guarantee Trust - Related Party | ||||||||
| Total Current Assets | ||||||||
| Other Assets | ||||||||
| Furniture, Equipment and Leasehold Improvements, Net | ||||||||
| 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 | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable and Accrued Expenses | $ | $ | ||||||
| Bookings Received in Advance | ||||||||
| Short Term Business Financing, Net | ||||||||
| Loans Payable - Current | ||||||||
| Initial Direct Costs Leases - Current | ||||||||
| Operating Lease Liabilities - Current | ||||||||
| Development Incentive Advances - Current | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Loans Payable | ||||||||
| Development Incentive Advances - Noncurrent | ||||||||
| Initial Direct Costs Leases - Noncurrent | ||||||||
| Operating Lease Liabilities - Noncurrent | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Mezzanine equity | ||||||||
| 13% Redeemable Preferred Stock; Liquidation Preference $ per Share; Shares Authorized; shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Deficit | ||||||||
| Common Stock (shares authorized, issued, outstanding - , and , shares outstanding as of March 31, 2024 and December 31, 2023, respectively) | ||||||||
| Additional Paid In Capital | ||||||||
| Accumulated Deficit | ( |
) | ( |
) | ||||
| Total Stockholders’ Deficit | ( |
) | ( |
) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
1
LUXURBAN HOTELS INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
| For The | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024, as restated |
2023 | |||||||
| Net Rental Revenue | $ | $ | ||||||
| Rent Expense | ||||||||
| Non-Cash Rent Expense Amortization | ||||||||
| Surrender of Deposits | ||||||||
| Other Expenses | ||||||||
| Total Cost of Revenue | ||||||||
| Gross (Loss) Profit | ( |
) | ||||||
| General and Administrative Expenses | ||||||||
| Non-Cash Issuance of Common Stock for Operating Expenses | ||||||||
| Non-Cash Stock Compensation Expense | ||||||||
| Non-Cash Stock Option Expense | ||||||||
| Partnership Considerations | ||||||||
| Total Operating Expenses | ||||||||
| (Loss) Income from Operations | ( |
) | ||||||
| Other Income (Expense) | ||||||||
| Other Income | ||||||||
| Cash Interest and Financing Costs | ( |
) | ( |
) | ||||
| Non-Cash Financing Costs | ( |
) | ( |
) | ||||
| Total Other Expense | ( |
) | ( |
) | ||||
| Loss Before Provision for Income Taxes | ( |
) | ( |
) | ||||
| Provision for Income Taxes | ||||||||
| Net Loss | ( |
) | ( |
) | ||||
| Preferred Stock Dividend | ( |
) | ||||||
| Net Loss Attributable to Common Stockholders | $ | ( |
) | $ | ( |
) | ||
| Basic Loss Per Common Share | $ | ( |
) | $ | ( |
) | ||
| Diluted Loss 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
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND MARCH 31, 2023
(UNAUDTIED)
| Common Stock | Additional Paid in |
Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Value | Capital | Deficit | (Deficit) | ||||||||||||||||
| Balance - December 31, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
| Net Loss | - | ( |
) | ( |
) | |||||||||||||||
| Non-Cash Stock Compensation Expense | ||||||||||||||||||||
| Non-Cash Option Compensation Expense | - | |||||||||||||||||||
| Issuance of Shares for Operating Expenses | ||||||||||||||||||||
| Modification of Warrants | - | |||||||||||||||||||
| Warrant Exercise | ||||||||||||||||||||
| Issuance of Shares to Satisfy Loans | ||||||||||||||||||||
| Issuance of Shares for Revenue Share Agreements | ( |
) | ||||||||||||||||||
| Preferred Dividends | - | ( |
) | ( |
) | |||||||||||||||
| Balance - March 31, 2024, as restated | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
| Net Loss | - | ( |
) | ( |
) | |||||||||||||||
| Non-Cash Stock Compensation Expense | ||||||||||||||||||||
| Non-Cash Stock Option Expense | - | |||||||||||||||||||
| Issuance of Shares for Operating Expenses | ||||||||||||||||||||
| Conversion of Loans | ||||||||||||||||||||
| Warrant Exercise | ||||||||||||||||||||
| Loss on Debt Extinguishment | - | |||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||||||
See accompanying notes to consolidated financial statements.
3
LUXURBAN HOTELS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND MARCH 31, 2023
(UNAUDITED)
| March 31, | ||||||||
| 2024, as restated |
2023 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Writeoff of bad debts | ||||||||
| Writeoff of channel retained funds security deposit | ||||||||
| Writeoff of security deposits | ||||||||
| Writeoff of vendor overpayment | ||||||||
| Non-cash stock compensation expense | ||||||||
| Non-cash stock director expense | ||||||||
| Non-cash stock option expense | ||||||||
| Depreciation expense | ||||||||
| Shares issued for operating expenses | ||||||||
| Modification of Warrants | ||||||||
| Non-cash lease expense | ||||||||
| Gain on lease exit | ( |
) | ||||||
| Non-cash forgiveness of Development Incentive Advances | ( |
) | ||||||
| Gain on sale of Treasury Bills | ( |
) | ||||||
| Non-cash Financing Charges Associated with Short Term Business Financing | ||||||||
| Loss on Debt Extinguishment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) Decrease in: | ||||||||
| Accounts Receivable, Net | ( |
) | ||||||
| Processor retained funds | ( |
) | ||||||
| Receivables from On-Line Travel Agencies, Net | ||||||||
| Receivables from City of New York and Landlords, Net | ||||||||
| Prepaid expense and other assets | ( |
) | ||||||
| Prepaid Guarantee Trust - Related Party | ||||||||
| Security deposits | ( |
) | ( |
) | ||||
| (Decrease) Increase in: | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Operating lease liabilities | ( |
) | ( |
) | ||||
| Rents received in advance | ||||||||
| Accrued Income Taxes | ||||||||
| Net cash (used in) provided by operating activities | ( |
) | ||||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of Furniture and Equipment | ( |
) | ||||||
| Proceeds from the sale of Treasury Bills | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash Flows from Financing Activities | ||||||||
| Deferred offering costs - net | ||||||||
| Proceeds from (Repayments of) short term business financing - net | ( |
) | ||||||
| Warrant Exercises | ||||||||
| Proceeds from Development Incentive Advances | ||||||||
| Proceeds from (Repayments of) loans payable - net | ( |
) | ||||||
| Repayments of financed initial direct costs | ( |
) | ||||||
| Preferred shareholder dividends paid | ( |
) | ||||||
| Net cash provided by (used in) financing activities | ( |
) | ||||||
| Net Increase 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 | ||||||||
| Taxes | $ | $ | ||||||
| Interest | $ | $ | ||||||
| Noncash operating activities: | ||||||||
| Acquisition of New Operating Lease Right-of-Use Assets | $ | $ | ||||||
| Noncash financing activities: | ||||||||
| Financed Initial Direct Costs for leases paid with common stock | $ | $ | ||||||
| Conversion of debt to common stock and additional paid-in capital | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
4
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
LUXURBAN HOTELS INC. (AS RESTATED)
March 31, 2024
1 - DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
LuxUrban Hotels Inc. (LUXH) leases entire existing hotels on a long-term basis and rents out hotel rooms in the properties it leases. It currently has a portfolio of hotel rooms in New York, Miami Beach, New Orleans, and Los Angeles through long-term lease agreements and manages these hotels directly. Its revenues are generated through the rental of rooms to guests and through ancillary services such as cancellable room rate fees, resort fees, late and early check-in and check-out fees, baggage fees, parking fees, grab and go food service fees, and upgrade fees.
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. This wind-down was substantially completed by the end of 2022. This legacy business was conducted under the names SoBeNY Partners LLC (“SoBeNY”) and CorpHousing Group Inc. (“CorpHousing”).
The consolidated financial statements presented herein include the accounts of LuxUrban Hotels Inc. (“LuxUrban”) and its wholly owned subsidiary SoBeNY. On November 2, 2022, 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.
In August 2023, the Company entered into franchise agreements with Wyndham Hotels & Resorts, Inc. pursuant to which the hotels operated by the Company were to become part of the Trademark Collection® by Wyndham and Travelodge by Wyndham brands while staying under the operational control of the Company.
In May 2024, in light of discussions between our Company and Wyndham on the initial and projected future performance of our properties within the franchise relationships, we commenced the return of all property listings to our control, terminating our franchise relationship with Wyndham. The Company is currently in the process of de-platforming these properties from Wyndham’s systems and moving each hotel listing back under the Company’s control. The Company expects that this process will be completed by the end of May 2024 with minimal operational disruption, although unforeseen risks could cause delays. As part of the Company’s previously announced imitative to add industry depth and breadth to its board of directors and management to help evolve operations, the Company’s enhanced board and executive teams have reviewed all existing operational relationships. Given the Company’s operating model, it was concluded that over the long term the Company would be better served operationally and financially by operating the hotels as an independent operator.
All significant intercompany accounts and transactions have been eliminated in consolidation.
5
2 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
On August 9, 2024, the Company in concurrence with the Company’s audit committee, concluded that our 2024 unaudited condensed consolidated financial statements as of the first quarterly period in 2024 included in our Quarterly Report on Form 10-Q for the respective period, (the “Prior Period Financial Statements”) should no longer be relied upon due to misstatements that are described below, and that we would restate such financial statements to make the necessary accounting corrections. Details of the restated condensed consolidated financial statements for the three months ended March 31, 2024, are provided below (“Restatement Items”).
The Restatement Items reflect adjustments to correct errors in the March 31, 2024, condensed consolidated financial statement areas including Channel Retained Funds, Other Expenses, Bookings Received in Advance and Net Rental Revenue. The nature and impact of these adjustments are described below and also detailed in the tables below.
Restatement Items
Channel Retained Funds and Other Expenses – The Company did not correctly apply the charges allocated to the Channel Retained Funds by the vendor. The corrections resulted in a decrease in Channel Retained Funds in the amount of $1,500,000 and resulted in an increase in Other Expenses, Cost of Revenue in the amount of $1,500,000. Refer to reference “a” below.
Processor
Retained Funds, Receivables from On-Line Travel Agencies, Receivables from City of New York and Landlords, Accounts Payable and
Accrued Expenses and Net Rental Revenue – The Company did not properly reserve for bad debt expense of $
Receivable
from City of New York, Accounts Payable and Accrued Expenses and Net Rental Revenue – The Company did not reflect the net
receivable due from the City of New York. The corrections reflect the net amount due from the City of New York in conjunction with
the landlord. The receivable has been reduced by $
Prepaid
Expenses and Other Current Assets and Other Expenses – The Company did not properly amortize the prepaid real estate taxes
in the first quarter of 2024. The correction resulted in a decrease in Prepaid Expenses and Other Current Assets and an increase in Other
Expenses, Cost of Revenue in the amount of $
Bookings Received in Advance and Net Rental Revenue – The Company incorrectly recognized revenue in the first quarter of 2024 for reservations that were booked and paid for, but the guest had not yet stayed at the property. The corrections resulted in an increase in Bookings Received in Advance in the amount of $
6
The following tables present the effect of the Restatement Items on the Company’s condensed consolidated balance sheet for the period indicated:
| As of March 31, 2024 (unaudited) |
|||||||||||||||
| As Previously Reported |
Restatement Adjustments |
As Restated |
Restatement References |
||||||||||||
| ASSETS | |||||||||||||||
| Current Assets | |||||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | ||||||||||||
| Accounts Receivable, Net | |||||||||||||||
| Channel Retained Funds, Net | ( |
) | a | ||||||||||||
| Processor Retained Funds, Net | ( |
) | b | ||||||||||||
| Receivables from On-Line Travel Agencies, Net | ( |
) | b | ||||||||||||
| (984,744 | ) | b | |||||||||||||
| Receivables from City of New York and Landlords, Net | ( |
) | c | ||||||||||||
| Prepaid Expenses and Other Current Assets | ( |
) | d | ||||||||||||
| Prepaid Guarantee Trust - Related Party | |||||||||||||||
| Total Current Assets | ( |
) | |||||||||||||
| Other Assets | |||||||||||||||
| Furniture, Equipment and Leasehold Improvements, Net | |||||||||||||||
| 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 | |||||||||||||||
| Current Liabilities | |||||||||||||||
| $ | 3,738,225 | b | |||||||||||||
| Accounts Payable and Accrued Expenses | $ | ( |
) | $ | c | ||||||||||
| Bookings Received in Advance | e | ||||||||||||||
| Short Term Business Financing, Net | |||||||||||||||
| Loans Payable - Current | |||||||||||||||
| Initial Direct Costs Leases - Current | |||||||||||||||
| Operating Lease Liabilies - Current | |||||||||||||||
| Development Incentive Advances - Current | |||||||||||||||
| Total Current Liabilities | |||||||||||||||
| Long-Term Liabilities | |||||||||||||||
| Loans Payable | |||||||||||||||
| Development Incentive Advances - Noncurrent | |||||||||||||||
| Initial Direct Costs Leases - Noncurrent | |||||||||||||||
| Operating Lease Liabilities - Noncurrent | |||||||||||||||
| Total Long-Term Liabilities | |||||||||||||||
| Total Liabilities | |||||||||||||||
| Mezzanine equity | |||||||||||||||
| 13% Redeemable Preferred Stock; Liquidation Perference $25 per Share; 10,000,000 Shares Authorized; 294,144 shares issued and outstanding as of March 31, 2024 | |||||||||||||||
| Commitments and Contingencies | |||||||||||||||
| Stockholders’ Deficit | |||||||||||||||
| Common Stock (90,000,000 shares authorized, issued, outstanding - 41,839,361) | |||||||||||||||
| Additional Paid In Capital | |||||||||||||||
| Accumulated Deficit | ( |
) | ( |
) | ( |
) | a, b, c, d, e | ||||||||
| Total Stockholders’ Deficit | ( |
) | ( |
) | ( |
) | |||||||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ( |
) | $ | ||||||||||
See accompanying notes to condensed consolidated financial statements.
7
The following tables present the effect of the Restatement Items on the Company’s condensed consolidated statement of operations for the period indicated:
| As of March 31, 2024 (unaudited) |
|||||||||||||||
| As Previously Reported |
Restatement Adjustments |
As Restated |
Restatement References |
||||||||||||
| Net Rental Revenue | $ | $ | ( |
) | $ | b, c, e | |||||||||
| Rent Expense | |||||||||||||||
| Non-Cash Rent Expense Amortization | |||||||||||||||
| Surrender of Deposits | |||||||||||||||
| Other Expenses | a, d | ||||||||||||||
| Total Cost of Revenue | |||||||||||||||
| Gross (Loss) Profit | ( |
) | ( |
) | ( |
) | |||||||||
| General and Administrative Expenses | b | ||||||||||||||
| Non-Cash Issuance of Common Stock for Operating Expenses | |||||||||||||||
| Non-Cash Stock Compensation Expense | |||||||||||||||
| Non-Cash Stock Option Expense | |||||||||||||||
| Partnership Considerations | |||||||||||||||
| Total Operating Expenses | |||||||||||||||
| (Loss) Income from Operations | ( |
) | ( |
) | ( |
) | |||||||||
| Other Income (Expense) | |||||||||||||||
| Other Income | |||||||||||||||
| Cash Interest and Financing Costs | ( |
) | ( |
) | |||||||||||
| Non-Cash Financing Costs | ( |
) | ( |
) | |||||||||||
| Total Other Expense | ( |
) | ( |
) | |||||||||||
| Loss Before Provision for Income Taxes | ( |
) | ( |
) | ( |
) | |||||||||
| Provision for Income Taxes | |||||||||||||||
| Net Loss | ( |
) | ( |
) | ( |
) | |||||||||
| Preferred Stock Dividend | ( |
) | ( |
) | |||||||||||
| Net Loss Attributable to Common Stockholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Basic Loss Per Common Share | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Diluted Loss Per Common Share | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
| Basic and Diluted Weighted Average Number of Common Shares Outstanding | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
8
The following tables present the effect of the Restatement Items on the Company’s condensed consolidated statement of changes in stockholders’ deficit for the period indicated:
| Common Stock | Additional Paid in |
Accumulated | Stockholders’ | Restatement | |||||||||||||||||||
| Shares | Value | Capital | Deficit | (Deficit) | References | ||||||||||||||||||
| Balance - December 31, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
| Net Loss | - | ( |
) | ( |
) | ||||||||||||||||||
| Non-Cash Stock Compensation Expense | |||||||||||||||||||||||
| Non-Cash Option Compensation Expense | - | ||||||||||||||||||||||
| Issuance of Shares for Operating Expenses | |||||||||||||||||||||||
| Modification of Warrants | - | ||||||||||||||||||||||
| Warrant Exercise | |||||||||||||||||||||||
| Issuance of Shares to Satisfy Loans | |||||||||||||||||||||||
| Issuance of Shares for Revenue Share | |||||||||||||||||||||||
| Agreement | ( |
) | |||||||||||||||||||||
| Preferred Dividends | - | ( |
) | ( |
) | ||||||||||||||||||
| Restatement Items | ( |
) | ( |
) | a, b, c, d, e | ||||||||||||||||||
| Balance - March 31, 2024 | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
| 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 | - | ||||||||||||||||||||||
| Restatement Items | - | ||||||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
9
The following tables present the effect of the Restatement Items on the Company’s condensed consolidated statement of cash flows for the period indicated:
| As of March 31, 2024 (unaudited) |
|||||||||||||||
| As Previously | Restatement | As | Restatement | ||||||||||||
| Reported | Adjustments | Restated | References | ||||||||||||
| Cash Flows from Operating Activities | |||||||||||||||
| Net (Loss) | $ | ( |
) | $ | ( |
) | $ | ( |
) | a, b, c, d, e | |||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||||||
| Writeoff of bad debts | b | ||||||||||||||
| Writeoff of channel retained funds security deposit | a | ||||||||||||||
| Writeoff of security deposits | |||||||||||||||
| Writeoff of vendor overpayment | |||||||||||||||
| Non-cash stock compensation expense | |||||||||||||||
| Non-cash stock director expense | |||||||||||||||
| Non-cash stock option expense | |||||||||||||||
| Depreciation expense | |||||||||||||||
| Shares issued for operating expenses | |||||||||||||||
| Modification of Warrants | |||||||||||||||
| Non-cash lease expense | |||||||||||||||
| Gain on lease exit | ( |
) | ( |
) | |||||||||||
| Non-cash foregiveness of Development Incentive Advances | ( |
) | ( |
) | |||||||||||
| Gain on sale of Treasury Bills | |||||||||||||||
| Non-cash Financing Charges Associated with Short Term Business Financing | |||||||||||||||
| Loss on Debt Extinguishment | |||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||
| (Increase) Decrease in: | |||||||||||||||
| Accounts Receivable, Net | ( |
) | ( |
) | |||||||||||
| Receivables from On-Line Travel Agencies, Net | b | ||||||||||||||
| Receivables from City of New York and Landlords, Net | ( |
) | c | ||||||||||||
| Prepaid expense and other assets | ( |
) | ( |
) | d | ||||||||||
| Prepaid Guarantee Trust - Related Party | |||||||||||||||
| Security deposits | ( |
) | ( |
) | |||||||||||
| (Decrease) Increase in: | - | ||||||||||||||
| Accounts payable and accrued expenses | b, c | ||||||||||||||
| Operating lease liabilities | ( |
) | ( |
) | |||||||||||
| Rents received in advance | e | ||||||||||||||
| Accrued Income Taxes | |||||||||||||||
| Net cash provided by operating activities | ( |
) | ( |
) | |||||||||||
| Cash Flows from Investing Activities | |||||||||||||||
| Purchase of Furniture and Equipment | |||||||||||||||
| Proceeds from the sale of Treasury Bills | |||||||||||||||
| Net cash provided by investing activities | |||||||||||||||
| Cash Flows from Financing Activities | |||||||||||||||
| Deferred offering costs - net | |||||||||||||||
| Proceeds from (Repayments of) short term business financing - net | |||||||||||||||
| Warrant Exercises | |||||||||||||||
| Proceeds from Development Incentive Advances | |||||||||||||||
| Proceds from (Repayments of) loans payable - net | |||||||||||||||
| Repayments of loans payable - net | ( |
) | ( |
) | |||||||||||
| Preferred shareholder dividends paid | ( |
) | ( |
) | |||||||||||
| Net cash used in financing activities | |||||||||||||||
| Net Increase 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 | |||||||||||||||
| Taxes | $ | $ | $ | ||||||||||||
| Interest | $ | $ | $ | ||||||||||||
| Noncash operating activities: | |||||||||||||||
| Acquisition of New Operating Lease Right-of-Use Assets | $ | $ | $ | ||||||||||||
| Noncash financing activities: | |||||||||||||||
| Financed Initial Direct Costs for leases paid with common stock | $ | $ | $ | ||||||||||||
| Conversion of debt to common stock and additional paid-in capital | $ | $ | $ | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
10
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, AS RESTATED
| 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”). |
| b. |
Revenue Recognition — The Company’s revenue is derived primarily from the rental of units to its guests. The Company accounts for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606. 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. |
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 March 31, 2024, and December 31, 2023, was $
|
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 |
Going
Concern — The accompanying financial statements have been prepared in conformity with U.S. GAAP, which contemplates
continuation as a going concern. As reflected in the accompanying statement of operations, for the year ended December 31,
2023, and the three-month ended March 31, 2024, the Company had a net loss of $ |
|
e. |
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 March 31, 2024, the Company had cash and cash equivalents of $ |
| f. | Accounts Receivable, Channel Retained Funds, and Processor
Retained Funds — The Company’s accounts receivable consists of amounts due from landlords, amounts due
from the City of New York, and receivables from Online Travel Agents (“OTAs”) and other sales channels. The amounts due
from landlords are related to common area expenses we incur for the benefit of all tenants and ultimately can be netted to amounts
owed to the landlord, not requiring an allowance as the amounts owed to the landlord are far greater than amounts owed to us. Regarding
the receivable with the City of New York, we have cancelled our contract with the City of New York and do not expect the need for
an allowance of credit losses on the remaining balanced owed to us. During the year ended December 31, 2023, we wrote off $ |
11
| g. | 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, receivables from OTAs, development incentive advances, and short-term business financing advances approximate their fair values as of March 31, 2024 and December 31, 2023 because of their short term natures. |
| h. | 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 ended March 31, 2024, commissions were $ |
| i. | 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 months ended March 31, 2024, the Company did
| j. | 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 March 31, 2024 and December 31, 2023, the Company accrued sales tax payable of $ |
| k. | 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. |
12
| l. | Earnings Per Share (“EPS”) — Basic net loss per share is the same as diluted net loss per share for the three months ended March 31, 2024 because the inclusion of potentially issuable shares of common stock would have been anti-dilutive for the periods presented. For the three months ended March 31, 2023, basic net loss per share is the same as diluted net loss per share because the inclusion of potentially issuable shares of common stock would have been anti-dilutive for the periods presented. |
| m. | Preferred Stock — The Company accounts for its preferred stock in accordance with ASC Topic 480, Distinguishing Liabilities from Equity. Conditionally redeemable preferred stock is classified as mezzanine equity within the Company’s consolidated balance sheet. |
4 - LEASES
Under ASC 842, the Company applies 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.
13
The components of the right-of-use assets and lease liabilities as of March 31, 2024 and December 31, 2023 were as follows:
At March 31, 2024 and December 31, 2023, supplemental balance sheet information related to leases were as follows:
| March 31, 2024 |
December 31, 2023 |
|||||||
| Operating lease right of use assets, net | $ | $ | ||||||
| Operating lease liabilities, current portion | $ | $ | ||||||
| Operating lease liabilities, net of current portion | $ | $ | ||||||
At March 31, 2024, future minimum lease payments under the non-cancelable operating leases are as follows:
Schedule of future minimum lease payments under the non-cancelable operating leases
| Twelve Months Ending March 31, | ||||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| 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:
| March 31, 2024 |
March 31, 2023 |
|||||||
| Weighted average discount rate | % | % | ||||||
| Weighted average remaining lease term (years) | ||||||||
|
Three Months Ended 2024 |
Three Months Ended March 31, 2023 | |||||||
| Operating lease cost | $ | $ | ||||||
| Short-term lease cost | $ | $ | ||||||
| Total lease cost | $ | $ | ||||||
14
5 - ACCOUNTS RECEIVABLES, PROCESSOR AND CHANNEL RETAINED FUNDS, AS RESTATED
As of
March 31, 2024 we had $
6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, AS RESTATED
Accounts payable and accrued expenses totaled $
As of March 31, 2024, the balance consisted of approximately $
As of December 31, 2023, the balance consisted of approximately $
Of the legal amounts accrued, the company believes the accrual best estimates the most likely outcomes of these matters however the range of outcomes could be between $5 million and $8.5 million.
7 - 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 March 31, 2024 and December 31, 2023, was $
Future minimum principal repayments of the SBA - PPP loans payable are as follows:
| For the Twelve Months Ending March 31, | ||||
| 2025 | $ | |||
15
8 - LOANS PAYABLE – SBA – EIDL LOAN
During 2020, the Company received three
On April 21, 2020, SoBeNY received an EIDL loan in the amount of $
The outstanding balance at March 31, 2024 and December 31, 2023, was $
Accrued interest at March 31, 2024 and December 31, 2023 was $
Future minimum principal repayments of the SBA - EIDL loans payable are as follows:
Schedule of future minimum principal repayments of the SBA,EIDL loans payable
| For the Twelve Months Ending March 31, | ||||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| Total | $ | |||
9 - 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 March 31, 2024 and December 31, 2023, the outstanding balance on these merchant cash advances net of unamortized costs was $
16
10 - LOANS PAYABLE
Loans payable consist of the following as of:
| March 31, 2024 |
December 31, 2023 |
|||||||
| Original payable of $ |
||||||||
| Original payable of $ |
||||||||
| Original payable of $ |
||||||||
| Original amounts due of $ |
||||||||
| Other borrowing | ||||||||
| Less: Current maturities | ||||||||
| $ | $ | |||||||
Future minimum principal repayments of the loans payable are as follows:
| For the Twelve Months Ending March 31, | ||||
| 2024 | $ | |||
| 2025 | ||||
| Loans payable | $ | |||
11 - LINE OF CREDIT
In February 2019, the Company entered into a line of credit agreement in the amount of $
12 - RELATED PARTY TRANSACTIONS
On December 20, 2022, the Company, and our former 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 March 31, 2023, as amended by the letter agreement dated October 20, 2022, and the Loan Agreement dated as of November 23, 2022.
17
Under the terms of the Note Extension and Conversion Agreement, Greenle agreed to convert from time to time up to $
On November 17, 2023, the Company entered into a financing agreement with THA Holdings LLC (the “Lender”), an entity controlled and operated by Mr. Ferdinand, pursuant to which the Company agreed to issue to the Lender an unsecured, advancing term promissory note (the “Note”). Under the Note, the Company is able to borrow, and the Lender has committed to lend to the Company up to an aggregate principal amount of $10,000,000 (the “Initial Principal Amount”) to be funded in increments of $1,000,000 upon the Company’s request by the sale, from time to time, of shares of the Company’s common stock, owned by the Lender. On December 3, 2023, the Company and Mr. Ferdinand mutually agreed to cancel the Note. The amount of proceeds, less taxes, resulting from sales of common stock prior to the cancelation in the amount of $311,234 was contributed to the Company by Mr. Ferdinand. This was recorded as a contribution by founder in the accompanying consolidated statement of changes in equity.
In December of 2023 and during
the three months ended March 31, 2024, we paid $
13 - 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 $
14 - 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
18
Options
During the three months ended March 31, 2024, the Company did not grant any options to purchase shares of common stock under the Company’s 2022 performance equity plan.
The following table summarizes stock option activity for the three months ended March 31, 2024:
| Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (Years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( |
) | ||||||||||||||
| Outstanding at March 31, 2024 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2024 | $ | $ | ||||||||||||||
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 March 31, 2024. The Company recognized stock option expense of $ for the three months ended March 31, 2023. Unamortized option expense as of March 31, 2024, 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 March 31, 2024, is presented below:
| Number of Nonvested Options |
Weighted Average Grant Date Fair Value |
|||||||
| Nonvested options at December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Forfeited | ||||||||
| Vested | ( |
) | $ | |||||
| Nonvested options at March 31, 2024 | $ | |||||||
19
Restricted Stock Units
In March 2024, the Company granted restricted shares to certain employees under the Company’s 2022 performance equity plan. The restricted shares were vested either immediately or over 3.00 years. The aggregated grant date fair value of all these restricted shares was $.
As of March 31, 2024, there was $ of unrecognized compensation cost related to unvested restricted shares.
Warrants
In connection with certain private placements funded by certain of the Company’s officers and directors prior to the Company’s initial public offering, the Company issued promissory notes and warrants. The warrants were contingent upon, and became effective upon, consummation of the Company’s initial public offering on August 11, 2022. In total, warrants to purchase up to
Also, in conjunction with the initial public offering, the Company issued warrants to purchase up to
Also, in connection with certain private placements with Greenle, the Company issued warrants to purchase up to
On September 16, 2022, September 30, 2022, and October 30, 2022 in conjunction with a financing with the same third-party investor, the Company issued warrants to purchase up to
On February 15, 2023, in conjunction with an advisory agreement, the Company issued warrants to purchase up to 250,000 shares of our common stock with an exercise price of $4.00 per share. These warrants have a term of five years and expire in February 2028. As a result of these transaction, the Company recorded $
On November 6, 2023, in conjunction with an agreement with certain shareholders to amend agreements to waive registration rights for any currently issued common stock for a period of 12 months and any future issuances for a rolling 12-month period from the date such of issuance of such common stock. As consideration for this waiver, the Company issued warrants of common stock at an exercise price of $ a share. As a result of these transactions, the Company recorded $ in warrant expense.
On December 17, 2023, the Company and certain existing warrant holders entered into an agreement pursuant to which these warrant holders exercised a portion of their existing warrants to purchase an aggregate of
20
On December 27, 2023, the Company and certain existing warrant holders entered into an agreement pursuant to which these warrant holders exercised a portion of their existing warrants to purchase an aggregate of
On February 16, 2024, LuxUrban Hotels Inc. (“Company”) entered into a letter agreement with Greenle Partners LLC Series Alpha P.S., a Delaware limited liability company (“Greenle Alpha”), and Greenle Partners LLC Series Beta P.S., a Delaware limited liability company (“Greenle Beta” and together with Greenle Alpha, “Greenle”) holders of certain warrants to purchase the Company’s common stock (“Warrants”), which were issued in private placements from time to time as previously reported by the Company. Under the terms of the letter agreement, in consideration of the agreement of Greenle to exercise 50% of the Warrants originally issued by the Company on November 6, 2023 (the “November Warrants”) within three (3) business days of the date of the letter agreement and 50% of the November Warrants on or prior to February 23, 2024, the exercise price of the November Warrants has been reduced from $4.00 to $2.00 and the exercise price of all of the other Warrants held by Greenle has been reduced from $5.00 and $5.50, as applicable, to $2.50. Except as described above, the Warrants remain unchanged.
The following table summarizes warrant activity for the three months ended March 31, 2024:
| Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (Years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( |
) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at March 31, 2024 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2024 | $ | $ | ||||||||||||||
During the three months ended March 31, 2024, 1,450,000 shares were issued from the exercise of warrants.
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).
21
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 $
On February 12, 2024, the Company issued shares of the Company’s common stock and shares of the Company’s common stock to Greenle Beta and Greenle Alpha, respectively, in connection with the February 2023 Revenue Share Agreement.
17 - WYNDHAM AGREEMENTS
In May 2024, in light of discussions between our Company and Wyndham on the initial and projected future performance of our properties within the franchise relationships, we commenced the return of all property listings to our control, terminating our franchise relationship with Wyndham. The Company is currently in the process of de-platforming these properties from Wyndham’s systems and moving each hotel listing back under the Company’s control. The Company expects that this process will be completed by the end of May 2024 with minimal operational disruption, although unforeseen risks could cause delays. As part of the Company’s previously announced imitative to add industry depth and breadth to its board of directors and management to help evolve operations, the Company’s enhanced board and executive teams have reviewed all existing operational relationships. Given the Company’s operating model, it was concluded that over the long term the Company would be better served operationally and financially by operating the hotels as an independent operator.
As of March 31, 2024, we recorded the Development Incentive Advances as a current liability on our Condensed Consolidated Balance Sheets and recorded an additional charge of $
Prior to the termination discussed above, on August 2, 2023, the Company entered into franchise agreements with Wyndham Hotels & Resorts, Inc. pursuant to which the hotels operated by the Company were to become part of the Trademark Collection® by Wyndham and Travelodge by Wyndham brands while staying under the operational control of the Company.
The Franchise Agreements had initial terms of
Pursuant to the Franchise Agreements, Wyndham was to provide capital through development advance notes (“Development Incentive Advances”) to the Company. Consistent with market practice, such Development Incentive Advances were to be evidenced by certain promissory notes with customary amortization and repayment terms. The Development Incentive Advances were not repayable if the terms of the agreement were met, including but not limited to the length of the agreement. In conjunction with the Company’s entry into the Franchise Agreements, the Company also paid a one-time, initial, nonrefundable franchise fee to Wyndham.
18 - REDEEMABLE PREFERRED STOCK
On October 26, 2023, the Company issued shares of
As part of the terms of the Series A Preferred Stock offering, if a change of control or delisting event occurs prior to October 26, 2024, the Company will be required to redeem the Series A Preferred Stock plus an amount equal to any accrued and unpaid interest. Under FASB Topic D-98, this redemption provision requires the classification of this security outside of permanent equity. The Company has classified this security as Mezzanine Equity on its March 31, 2024 Balance Sheet and expects to do so until October 26, 2024.
During the three months ended March 31, 2024, the Company paid $
22
19 - EQUITY TRANSACTIONS
The tables below outline equity issuances not related to the conversion from an LLC to C Corp, the initial public offering the exercise of Options or Warrants, the conversion of debt into equity or the issuance of shares pursuant to revenue share agreements.
For the three months ended March 31, 2024
| Description | General Ledger Account | Date | Shares | Price | Value | ||||||||||||
| Non-employee loan payment | Loan payable | 1/25/2024 | $ | $ | |||||||||||||
| Non-employee commission expense | Commission Expense | 1/25/2024 | $ | $ | |||||||||||||
| Non-employee investor relations expense | Investor Relations Expense | 1/30/2024 | $ | $ | |||||||||||||
| Non-employee director compensation | Non-Cash Issuance of Common Stock for Director Compensation Expenses | 2/8/2024 | $ | $ | |||||||||||||
| Employee Compensation | Non-Cash Issuance of Common Stock for Compensation Expenses | 3/15/2024 | $ | $ | |||||||||||||
| Subtotal | $ | ||||||||||||||||
For the three months ended March 31, 2023
| Description | General Ledger Account | Date | Shares | Price | Value | ||||||||||||
| Non-employee Board members pursuant to related comp. policy | Non-Cash Stock Compensation Expense | 3/1/2023 | $ | $ | |||||||||||||
| In connection with certain property finders’ fee arrangements | Non-Cash Issuance of Common Stock for Operating Expenses | 3/17/2023 | $ | $ | |||||||||||||
| In connection with a consulting agreement | Non-Cash Issuance of Common Stock for Operating Expenses | 2/10/2023 | $ | $ | |||||||||||||
| In connection with a marketing agreement | Non-Cash Issuance of Common Stock for Operating Expenses | 2/10/2023 | $ | $ | |||||||||||||
| Subtotal | $ | ||||||||||||||||
20 - SUBSEQUENT EVENTS
Management Transitions
The Company has been engaged in a dedicated effort to enhance its management and operations teams through the recruitment of talented directors and officers who possess meaningful and broad experience in the hotel and online travel services industries, as well as business development expertise. As part of these efforts, effective April 22, 2024, the Company implemented the following:
| ● |
Elan Blutinger, a hotel and travel technology veteran and a member of the Company’s board of directors, was named its Nonexecutive Chairman of the Board; |
| ● |
Shanoop Kothari, the Company’s Co-Chief Executive Officer and acting Chief Financial Officer, was named its sole Chief Executive Officer; |
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| ● | Brian Ferdinand, the Company’s founder, stepped down as Chairman of the Board and Co-Chief Executive Officer and became a consultant to the Company, in which role he will oversee the management and expansion of the Company’s hotel properties portfolio and assist Mr. Kothari in his transition to sole Chief Executive Officer; and stepped down as Chief Executive Officer and Chief Financial Officer in June 2024. |
| ● | Andrew Schwartz, a respected financial industry veteran and credit, debt and equity financing expert, was elected as a member of the Company’s board of directors. Mr. Schwartz stepped down in June 2024. | |
| ● | Robert Arigo, a respected hotelier was appointed as Chief Executive Officer of the Company in June 2024. | |
| ● | Michael James, a respected financial industry veteran was appointed as Chief Financial Officer in June 2024. |
Capital Raises
On
May 23, 2024, the Company sold common shares for $
On
June 27, 2024, the Company sold common shares and
On
July 18, 2024, the Company sold common shares for $
On
July 31, 2024, the Company sold common shares for $
In
August 2024, the Company has raised through the sale of convertible debt $
As part of the foregoing transitions, the Company entered into a Nonexecutive Chairman of the Board Agreement with Mr. Blutinger for a term of three years and will pay him an annual fee of $
As part of the foregoing transitions, the Company entered into a Consulting Agreement with Mr. Ferdinand for a term of three years and will pay him a monthly consulting fee of $
Amended and Restated Claw Back Policy
In November 2023, the Company adopted a claw back policy that provides for the recovery, or “claw back”, of erroneously awarded incentive-based executive compensation, as required by Rule 10D-1 under the Securities Exchange Act of 1934 (“Rule 10D-1”) and the Nasdaq listing requirements. In April 2024, the Company adopted a restated and amended version of that policy to add immaterial but clarifying provisions.
Sale Restriction Waiver
In April 2024, the
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Termination of Partnership Agreement
In May 2024, in light of discussions between our Company and Wyndham on the initial and projected future performance of our properties within the franchise relationships, we commenced the return of all property listings to our control, terminating our franchise relationship with Wyndham. The Company is currently in the process of de-platforming these properties from Wyndham’s systems and moving each hotel listing back under the Company’s control. The Company expects that this process will be completed by the end of May 2024 with minimal operational disruption, although unforeseen risks could cause delays. As part of the Company’s previously announced imitative to add industry depth and breadth to its board of directors and management to help evolve operations, the Company’s enhanced board and executive teams have reviewed all existing operational relationships. Given the Company’s operating model, it was concluded that over the long term the Company would be better served operationally and financially by operating the hotels as an independent operator.
At this time, we have recorded the Development Incentive Advances as a current liability from long-term on our Condensed Consolidated Balance Sheets as well as included an additional $
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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, 2023 (“Annual Report”).
Special Note Regarding Forward-Looking Statements [to be review by counsel]
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 ability to secure equity or debt capital resources as needed to stabilize our business and continue our expansion; |
| ● | the potential effects on our business from pandemics, such as those experienced during the COVID-19; |
| ● | the potential effects of a challenging economy, for example, on the demand for vacation travel accommodations such as ours; |
| ● | the ability of our short-stay accommodation offerings to achieve and sustain market acceptance across multiple cities throughout the United States and internationally; |
| ● | the impact of increased competition; |
| ● | the need to geographically centralize principal operations. |
| ● | our efforts to identify, recruit and retain qualified officers, key employees, and directors possessing experience in the hotel and online travel services industries; |
| ● | our ability to service our existing indebtedness and Series A Preferred Stock dividend and to obtain additional financing, including through the issuance of equity and debt, when and as needed on commercially reasonable terms; |
| ● | our ability to protect our intellectual property; |
| ● | our ability to complete strategic acquisitions, including joint ventures; |
| ● | the need to obtain uninterrupted service from the third-party service providers we rely on for material aspects of our operations, including payment processing, data collection and security, online reservations, and booking and other technology services; |
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| ● | the effects of employment, labor union, and customer related litigations and disputes that may arise from time to time in the course of our operations and our efforts to minimize and resolve same; |
| ● | the liquidity and trading of our securities; |
| ● | regulatory and operational risks; |
| ● | 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 (“EGC”) 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 lease entire existing hotels on a long-term basis and rent out hotel rooms in the properties we lease. We currently have a portfolio of hotel rooms in New York, Miami Beach, New Orleans, and Los Angeles through long-term lease agreements and manage these hotels directly. Our revenues are generated through the rental of rooms to guests and through ancillary services such as cancellable room rate fees, resort fees, late and early check-in and check-out fees, baggage fees, parking fees, grab and go food service fees, and upgrade fees. As of the date of this Annual Report, we have 1,406 hotel rooms available for rent through our portfolio. We believe the COVID-19 pandemic created, and current economic conditions continue to present, an historic opportunity for us to lease additional dislocated and underutilized hotels at favorable economics for our company. We have been expanding our domestic operations and U.S.-based portfolio of available hotel rooms since inception, with our next planned target city being Boston, and have plans to open one or more international markets in the near term, with London as the initial target international market.
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 more than 85% of revenue during the three month ended March 31, 2024 and more than 85% of revenue during the three months ended March 31, 2023.
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Our company has been engaged in a dedicated effort to enhance our management and operations teams through the recruitment of talented directors and officers who have meaningful and broad experience in the hotel and online travel services industries, as well as business development expertise. These efforts have included the recently announced additions of Elan Blutinger and Kim Schaefer, hotel and travel technology veterans, to our board of directors. We are continuing the efforts to deepen management and operational experience across all areas of our company through active recruitment of new personnel and the assignment of existing management personnel to areas in which their expertise can be focused.
General
We have been and are continuing to build a portfolio of existing 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 COVID-19 pandemic and the high interest rate environment. We target business and vacation travelers under our consumer brand LuxUrban and we market our hotel properties primarily through numerous third-party online travel agency (“OTA”) channels and our own listing platforms. See Note 19 to our Financial Statements included in this Report.
Many of the hotels that we lease are hotels that were shuttered or underutilized as a result of the global pandemic. Other properties that we lease were either poorly managed prior to our acquisition, which caused landlords to seek a more stable tenant, or became attainable when LuxUrban provided landlords with more desirable long-term lease terms and prospects than other potential tenants.
Currently, we focus our portfolio expansion efforts 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 prime hotel lease acquisition opportunities diminish, but believe there will remain many attractive opportunities for properties where the economics will still be favorable despite the additional capital investment requirements. In these cases, we believe we will be able to obtain greater concessions from landlords as a result of the capital outlays that would be required from us.
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 December 31, 2023, we leased 18 properties with 1,599 units available for rent. In March 2024 and in April of 2024, we surrendered four of these hotels, based on our evaluation that such properties (a) had relatively poor performance, (b) presented suboptimal size and scale, and (c) are of general quality that over time could present risks to our company. After giving effect to the surrender of these properties, we leased 13 properties with 1,341 units available for rent. We are in active negotiations with one or more of the hotels we surrendered in March 2024 for modified lease terms that would allow such hotels to work within our operating model, but there is no assurance that we will obtain the terms desired or that if we do we will not replace these hotels with other hotels that we believe present greater opportunity for our company. In addition, in late 2023, we elected to not move forward on a previously agreed to long-term lease for a hotel because required repairs had not been timely completed by the landlord.
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Our portfolio of properties as of March 31, 2024 (as adjusted for the surrender of certain properties mentioned above) was as follows:
| Property | # of Units | Property Type | Lease Term | Lease Remaining at 3/31/24 (years) |
Extension Option (remaining at 3/31/24) |
Annual Escalation |
Date Commenced |
|||||||||||||
| Blakely: 136 W 55th St, New York, NY 10105 | 117 | Licensed hotel | 15-year | 12.6 | 10-year | 3% | 11/1/2021 | |||||||||||||
| Herald: 71 W 35th St, New York, NY 10001 | 168 | Licensed hotel | 15-year | 13.2 | None | 3% | 6/2/2022 | |||||||||||||
| Variety: 1700 Alton Rd Miami Beach, FL 33139 | 68 | Licensed hotel | 12.5-year | 9.6 | None | 3% | 3/26/2021 | |||||||||||||
| Lafayette: 600 St Charles Ave, New Orleans, LA 70130 | 60 | Licensed hotel | 19.4-year | 18.0 | None | 2% | 11/1/2022 | |||||||||||||
| Townhouse: 150 20th St., Miami Beach, FL 33139 | 70 | Licensed hotel | 11.25-year | 10.2 | 10-year | 3% | 3/1/2023 | |||||||||||||
| Tuscany: 120 E 39th St., New York, NY 10016 | 125 | Licensed hotel | 15-year | 13.8 | 10-year | 2% | 1/1/2023 | |||||||||||||
| O Hotel: 2869 819 Flower St, Los Angeles, CA 90017 | 68 | Licensed hotel | 15-year | 14.0 | 5-year | 3% | 4/1/2023 | |||||||||||||
| Hotel 57: 2869 130 E 57th St., New York, NY 10022 | 216 | Licensed hotel | 15-year | 14.3 | 10-year | 3% | 7/1/2023 | |||||||||||||
| Condor: 56 Franklin Ave, Brooklyn, NY 11205 | 35 | Licensed hotel | 15-year | 14.4 | 10-year | 3% | 9/1/2023 | |||||||||||||
| BeHome: 56 765 8th Ave, New York, NY 10036 | 44 | Licensed hotel | 25-year | 24.3 | None | 10% | 7/1/2023 | |||||||||||||
| Hotel 46: 129 West 46th St., New York, NY 11206 | 79 | Licensed hotel | 25-year | 24.6 | None | 3% | 11/1/2023 | |||||||||||||
| Hotel 27: 62 Madison Ave, New York, NY 10016 | 74 | Licensed hotel | 15-year | 14.6 | 10-year | 3% | 11/1/2023 | |||||||||||||
| Washington: 8 Albany Street, New York, NY 10006 | 217 | Licensed hotel | 15.2-year | 13.9 | None | 2% | 9/20/2022 | |||||||||||||
| Weighted Avg. | Weighted Avg. | Weighted Avg. | Weighted Avg. | |||||||||||||||||
| Operating Units as of 3/31/2024(1) | 1,341 | 14.9 | 14.5 | 19.5 | 2.9% |
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Due to the triple-net structure of our leases, we are typically responsible for the interior maintenance of our properties, and the landlord is responsible for the exterior maintenance and roof. When we enter into new property leases, we target leases of 10 to 15 years with 5- to 10-year extension options. We try to keep annual escalations of between 2 to 3% fixed and none of our leases at March 31, 2024, are tied to inflation or CPI.
As a matter of course, from time to time we become, and are currently, involved in disputes with landlords for certain hotel properties. The complexity of each lease for each of our hotels requires us to be diligent with respect to the terms of each lease, including deposit requirements, deliverables, and management and maintenance terms, among other terms and covenants. A dispute under a lease can range from minor issues to issues that could give rise to claims of default by us or the landlord under the lease. Currently, we have defaults across certain properties totaling 216 keys, all of which we believe are in the process of being cured and which will be cured in the near term. In the event we are unable to cure our default under a lease, an event of default could ultimately be declared by the landlord thereunder, with the landlord then having remedies that include the right to terminate the lease. Where landlords have breached and have not cured, we may be required to litigate to protect our rights under one or more leases, which could divert management attention from our regular operations and could be costly to our company without any guarantee of success in the action.
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. Our make-ready efforts include, but are not limited to, minor repairs or property updates, hiring appropriate property-level staff, installation of utility, Wi-Fi, Internet and cable services, and listing the property on the OTA channels we utilize. We anticipate that in the near future, we will also utilize surety bonds for the funding of lease deposit requirements. In March 2024, we entered into an agreement with Berkley Insurance Company (“Berkley”) pursuant to which Berkley will provide us with up to an aggregate of $10 million in surety bonds that can be used to fund deposit requirements under long-term hotel leases. The bonds have a 70% collateral requirement. For example, a $1,000,000 bond would require us to maintain a collateral position of $700,000, which can be deposited in either cash or in the form of a letter of credit. In addition to collateral, we entered into an agreement of indemnity with Berkley. The bonds will cost 2.5% of the penalty amount of each bond annually.
We lease entire properties, which could include food service, gyms, or store fronts. We currently, and in the future plan to, in most cases, sublease food services and hotel-based store fronts to generate additional income. We believe these items are noncore to our operations.
Our average deposits (including letters of credit) by city as of March 31, 2024, as adjusted for the surrender of certain properties in March 2024 (as discussed above), were as follows:
| Location | Miami Beach | New York | LA | NOLA | Total | |||||||||||||||
| Units | 138 | 1,075 | 68 | 60 | 1,341 | |||||||||||||||
| Deposit | $ | 1,750,000 | $ | 15,933,113 | $ | 400,000 | $ | 300,000 | $ | 18,383,133 | ||||||||||
| Per Unit | $ | 12,681 | $ | 14,822 | $ | 5,882 | $ | 5,000 | $ | 13,709 | ||||||||||
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.
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Property Operations
When we lease a new property, we typically streamline operations from the manner in which the property was managed by the prior operator by taking numerous measures, including but not limited to:
| ● | Reduction of staffing. Legacy properties we lease often have staffing at levels higher than we typically operate our properties. In addition to paring staff to ensure efficient operation, we eliminate staffing for areas we do not plan to operate initially or at all, including in hotel-based restaurants, bars, and workout facilities. |
| ● | Hiring quality general manager (or GM). We believe that our operational success is partially related to empowering our 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 or the guest experience. |
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 generationally favorable terms. We estimate that the property-level break-even rate for total revenue per available room (or TRevPAR) for our portfolio as of December 31, 2023, was between $160 to $180 a night. We define TRevPAR as total revenue received by our company inclusive of room rental rates, ancillary fees (which include but are not limited to resort fees, late/early check-in, baggage fees, parking fees paid to us, and upgrade fees), cancellation fees, taxes (including other pass-through expenses) and other miscellaneous income received by us, divided by the average available rooms for rent during a given period.
The following table shows historical occupancy and TRevPAR at our leased properties:
| Year | Occupancy | TRevPAR | ||||||
| 2018 | 86 | % | $ | 160 | ||||
| 2019 | 84 | % | $ | 157 | ||||
| 2020 | 61 | % | $ | 103 | ||||
| 2021 | 72 | % | $ | 122 | ||||
| 2022 | 77 | % | $ | 247 | ||||
| 2023 | 79 | % | $ | 249 | ||||
| 2024 YTD | 77 | % | $ | 208 | ||||
During the fourth quarter of 2023, our business was significantly impacted by our transition of our property rental listings to a third-party platform because such properties were taken off our prior OTAs and unavailable for rent during such transition. The amounts above are not adjusted by our estimate of this impact.
Our early historic operations involved the leasing of units within multifamily properties. In late 2021, we began to transition our business to focus on leasing hotel properties in commercially-zoned areas, and we have completed this transition. As a result, we believe that our historical financial and operating results (in particular for the years 2018 through 2021), including operating metrics such as occupancy rate and TRevPAR, are not indicative of our current and future operations. We do believe, however, that the above table is useful in illustrating the higher TRevPAR and improved results that we can achieve as a result of our hotel-centric business strategy.
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Overall Hospitality Market
Since early 2022, we, along with the broader lodging industry, have experienced a steady recovery of demand for our properties in all of our markets. As a result, we have been able to increase our average daily rates during this period. Outside of post year-end seasonality, we continued to experience this recovery in 2023 and into 2024. We believe this trend will continue despite recessionary fears due to rising inbound international travel, including the anticipated opening of Chinese travel, which had a significant impact on our business in 2023, which impact should continue in 2024.
Seasonality
Operations at hotel properties in general have historically been seasonal in nature, reflecting lower revenues and occupancy rates during the first quarter of each year when compared to the remaining three quarters. In 2023 and 2024 we experienced such seasonality with respect to our properties. While the foregoing is based on only limited historical data with respect to the seasonality of our business, we expect that this seasonality may continue to cause fluctuations in our quarterly operating revenues, profitability, and cash flow.
Competition
The U.S. hotel industry is highly competitive. Our hotels compete with other hotels for guests in each of their markets on the basis of several factors, including, among others, location, quality of accommodations, convenience, brand affiliation, room rates, service levels and amenities, and level of customer service. In addition to traditional hotels, our properties also compete with non-traditional accommodations for travelers such as online room sharing services. Competition is often specific to the individual markets in which our hotels are located and includes competition from existing and new hotels.
Our competition also includes online and offline travel companies that target leisure and corporate travelers, including travel agencies, tour operators, travel supplier direct websites and their call centers, consolidators and wholesalers of travel products and services, large online portals and search websites, certain travel metasearch websites, mobile travel applications, social media websites, as well as traditional consumer ecommerce and group buying websites. We face these competitors in local, regional, national and/or international markets. We also face competition for customer traffic on internet search engines and metasearch websites, which impacts our customer acquisition and marketing costs.
However, while we expect new competitors may arise, we expect that we will continue to enjoy a competitive advantage over new competitors. We believe this to be the case because of:
| ● | Our ability to identify hotel properties available for lease on terms that work within our operating plan, the speed at which we can close on leases for new properties and thereafter commencing the marketing and renting of rooms therein; |
| ● | our experience and track record of quickly opening, listing, and marketing properties, |
| ● | the existing and growing operational skillset and experienced brought by our management terms and day-to-day property managers, and |
| ● | our reputation within the industry. |
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Human Capital
As of March 31, 2024, we had a total of 509 full-time employees, 291 of which are unionized. We believe that our corporate culture and employee relationships are healthy and productive.
Our operations are overseen directly by a management team that encourages our employees to take a long-term approach to our business. We may expand our current management to retain other skilled employees with experience relevant to our business. Our management’s relationships will provide the foundation through which we expect to grow our business in the future.
Our future success is dependent in part on our continued ability to attract, hire and retain qualified personnel. Therefore, investing, developing and maintaining human capital is critical to our success. The Company strives to provide its employees with a safe and healthy workplace. We have recently accelerated initiatives to recruit and retain directors and officers that bring additional hotel and online travel industry expertise to our management and day to day operations.
We are an equal opportunity employer and it is our company’s policy to recruit, hire, train and promote personnel in all job classifications, without regard to race, religion, color, national origin, sex or age. We are committed to inclusivity and diversity across our entire operation and to fostering a culture where everyone feels empowered to do their best work. Cultivating a diverse and inclusive workplace helps us embrace different perspectives, talents and experiences. We believe achieving a culture of integrity and transparency starts with leadership and encourages every employee to work in support of our company’s goals. Continuous employee engagement helps us understand our employees’ perspectives and identify areas for additional focus.
The majority of our employees are currently represented by labor unions and/or covered by collective bargaining agreements. We may in the future acquire additional portfolios of units in other hotels or other building serviced by organized or unionized labor. In addition, union, worker council, or other organized labor activity may occur at other locations we already lease. Under the applicable agreements with labor unions or collective bargaining agreements, we are obligated to provide enhanced severance benefits that, in certain circumstances, may have to be paid upon termination of employment of hotel employees who are members of a union. We cannot predict the outcome of any labor-related proposal or other organized labor activity. Increased unionization of our workforce or other collective labor action, new labor legislation or changes in regulations could be costly, reduce our staffing flexibility or otherwise disrupt our operations, and reduce our profitability. While we have not experienced work stoppages to date, from time to time, hospitality operations may be disrupted because of strikes, lockouts, public demonstrations or other negative actions and publicity involving employees and third-party contractors. We may also incur increased legal costs and indirect labor costs because of disputes involving our workforce. Additionally, from time to time we are subject to arbitration conducted under applicable union regulations and cold be subject to various arbitration rulings. We are subject to various union agreements and among other obligations are required to provide the applicable unions with data on the size and scope of our operations and the number of employees at each applicable property and to post a bond covering at least three months of employee wages for each property. We are also subject to a payment schedule with NYHTC with respect to accrued pension, health, and union employee related obligations aggregating approximately $3 million as of the date of this Annual Report on Form 10-K that were not remitted on our behalf during the last part of 2023 (during a gap period resulting from our company’s switch to a new payroll service provider), through which we are obligated to make monthly payments until the accrued amount is fully paid down.
Intellectual Property (Trademarks and Patents)
We have filed for eight trademarks, including with respect to the “LuxUrban” brand. We intend to use these and other trademarks in building our brand, proprietary corporate philosophies in creating our operations and guests experiences, and certain proprietary technology, applications and databases and know how in our operations. As a result, our success depends in part on our ability to operate without infringing upon the proprietary rights of others, and to prevent others from infringing upon our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. trademark and copyright applications, nondisclosure and assignment of invention agreements with employees, and enforcing our rights as applicable. We also rely on trade secrets, know-how, and continuing technological innovation and may rely on licensing opportunities to develop and maintain our proprietary position.
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Regulation
We must ensure regulatory compliance in our operations across numerous jurisdictions.
Property and Accommodations Regulation
Our business is subject to U.S. federal, state and local and foreign laws and regulations that vary widely by city, country and property type. Hospitality accommodations operations are also subject to compliance with the U.S. Americans with Disabilities Act and other laws and regulations relating to accessibility, and to laws, regulations and standards in other areas such as zoning and land use, licensing, permitting and registrations, fire and life safety, environmental and other property condition matters, staffing and employee training, cleaning protocols and other COVID-19 requirements, and property “star” ratings where required. Additionally, our real estate owners are also typically responsible for their own compliance with laws, including with respect to their employees, property maintenance and operations, environmental laws and other matters.
When signing leases in a new market, we engage local legal counsel to help identify relevant regulatory requirements. The efforts of local counsel include analysis on licensing and zoning, building code, accessibility and operations requirements, fire and life safety regulations, tax compliance, and local employment laws. Every leased property has unique characteristics, requiring further due diligence and regulatory analysis before each new lease signing.
We monitor regulatory changes in each existing market on an ongoing basis. To facilitate our growth and compliance work in each city, we attempt to establish relationships with local regulatory agencies, elected officials, business and community groups to build trust and improve understanding of our business model.
Our growing portfolio of accommodation units are comprised of units in entire hotels we lease on a long-term basis. Our hotel units are located in commercially zoned areas. Hotel units enjoy the benefits of commercial zoning, allowing for short-stay rentals of any length, even as a short as one day. As commercially zoned buildings are not typically subject to local short-stay length regulation, we are able to offer the vast majority of our accommodation portfolio with maximum flexibility in terms of stay length.
Privacy and Data Protection Regulation
In processing travel transactions and information about guests and their stays, we receive and store a large volume of personally identifiable data. The collection, storage, processing, transfer, use, disclosure and protection of this information are increasingly subject to legislation and regulations in numerous jurisdictions around the world, such as the European Union’s General Data Protection Regulation (“GDPR”) and variations and implementations of that regulation in the member states of the European Union, as well as privacy and data protection laws and regulations in various U.S. States and other jurisdictions, such as the California Consumer Privacy Act (as amended by the California Privacy Rights Act), the Canadian Personal Information Protection and Electronic Documents Act (“PIPEDA”), and the UK General Data Protection Regulation and UK Data Protection Act. We have implemented a variety of technical and organizational security measures and other procedures and protocols to protect data, including data pertaining to guests and employees, and we are engaged in an ongoing process of evaluating and considering additional steps to comply with the California Consumer Privacy Act, GDPR, PIPEDA, the UK General Data Protection Regulation, and UK Data Protection Act.
Employment
We are also subject to laws governing our relationship with employees, including laws governing wages and hours, benefits, immigration, workplace safety and health, and hotel-specific ordinances.
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Other Regulation
Our business is subject to various other laws and regulations, involving matters such as income tax and other taxes, consumer protection, online messaging, advertising and marketing, the U.S. Foreign Corrupt Practices Act and other laws governing bribery and other corrupt business activities, and regulations aimed at preventing money laundering or prohibiting business activities with specified countries or persons. As we expand into additional markets, we will be subject to additional laws and regulations.
The regulatory environment in each market is often complex and evolving, and can be subject to significant change. Some relevant laws and regulations are inconsistent and ambiguous, and could be interpreted by regulators and courts in ways that could adversely affect our business, results of operations, and financial condition. Moreover, certain laws and regulations have not historically been applied to businesses such as ours, which often makes their application to our business uncertain.
Non-Hotel Properties
In 2021 we commenced efforts to transition our operations away from the renting of rooms in residential multifamily buildings. These units are subject to short-term rental regulations, which can be difficult to ascertain, accurately interpret, and apply. We substantially completed this transition by the end of 2022 and our current operations focus solely on hotel-based room rental units.
Corporate Information
Corphousing LLC (“Corphousing LLC”) was formed on October 24, 2017, as a Delaware limited liability company. In January 2022, Corphousing LLC converted into a C corporation, with the members of Corphousing LLC becoming the stockholders of CorpHousing.
The conversion had no effect on our business or operations and was undertaken to convert the form of the legal entity into a corporation for purposes of operating as a public company. All properties, rights, businesses, operations, duties, obligations, and liabilities of the predecessor limited liability company remained those of CorpHousing Group Inc.
On November 1, 2022, we filed an amendment to our certificate of incorporation with the Secretary of State of the State of Delaware, changing the name of our company from “CorpHousing Group Inc.” to “LuxUrban Hotels Inc.” On December 30, 2022, we dissolved SoBeNY, which was the entity that covered our legacy apartment rental business. We substantially exited the residential-based rental business prior to year-end 2022.
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Results of Operations
| For The Three Months Ended March 31, |
||||||||||||
| 2024, as restated | 2023 | % ∆ YoY | ||||||||||
| Net Rental Revenue | $ | 13,957,361 | $ | 22,814,175 | (39 | )% | ||||||
| Rent Expense | 8,344,007 | 5,421,867 | ||||||||||
| Non-Cash Rent Expense Amortization | 2,093,667 | 1,651,669 | ||||||||||
| Surrender of Deposits | 750,000 | - | ||||||||||
| Other Expenses | 24,350,623 | 10,378,765 | ||||||||||
| Total Cost of Revenue | 35,538,297 | 17,452,301 | 104 | % | ||||||||
| Gross (Loss) Profit | (21,580,936 | ) | 5,361,874 | (502 | )% | |||||||
| General and Administrative Expenses | 12,143,305 | 2,742,586 | ||||||||||
| Non-Cash Issuance of Common Stock for Operating Expenses | 304,925 | 884,816 | ||||||||||
| Non-Cash Stock Compensation Expense | 724,514 | 429,996 | ||||||||||
| Non-Cash Stock Option Expense | 152,339 | 167,573 | ||||||||||
| Partnership Considerations | 2,679,469 | - | ||||||||||
| Total Operating Expenses | 16,004,552 | 4,224,971 | 278 | % | ||||||||
| Income (Loss) from Operations | (37,585,488 | ) | 1,136,903 | (3,406 | )% | |||||||
| Other Income (Expense) | ||||||||||||
| Other Income | 210,076 | 39,878 | ||||||||||
| Cash Interest and Financing Costs | (2,459,800 | ) | (2,130,605 | ) | ||||||||
| Non-Cash Financing Costs | (2,324,270 | ) | (1,704,549 | ) | ||||||||
| Total Other Expense | (4,573,994 | ) | (3,795,276 | ) | 21 | % | ||||||
| Loss Before Benefit from for Income Taxes | (42,159,482 | ) | (2,658,373 | ) | 1,486 | % | ||||||
| Provision for Income Taxes | - | 122,161 | ||||||||||
| Net Loss | $ | (42,159,482 | ) | $ | (2,780,534 | ) | 1,416 | % | ||||
Three Months Ended March 31, 2024, as restated, as compared to Three Months Ended March 31, 2023
Net Rental Revenue
The decrease in net rental revenue of 39% for the three months ended March 31, 2024 to $14.0 million as compared to $22.8 million for the three months ended March 31, 2023 was a result of the decrease in average units available to rent from 571 for the three months ended March 31, 2023 to 1,535 for the three months ended March 31, 2024 partially offset by lower RevPAR, or revenue per available room, from $257 for the three months ended March 31, 2023 to $208 for the three months ended March 31, 2024. The lower RevPar in the current quarter is attributable to the overall unit mix as well as the impact on our business from the partnership we exited in April of 2024. RevPAR includes both average daily rate (“ADR”) and occupancy.
Cost of Revenue
For the three months ended March 31, 2024, the principal component responsible for the increase in our cost of revenue was expenses for our units available to rent, which increased by $18.1 million, or 104%, from $17.5 million in the three months ended March 31, 2023, to $35.5 million in the three months ended March 31, 2024, 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 as well as greater costs associated with the surrender of properties such as, deposit surrenders and greater commissions to relocate guests.
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Gross Profit
The decrease in our gross profit of $26.9 million, or approximately 502%, to ($21.6) million for the three months ended March 31, 2024, as compared to $5.4 million for the three months ended March 31, 2023, is primarily attributable greater costs associated with the surrender of properties such as, deposit surrenders and greater commissions to relocate guests as well as greater number of units and lower RevPAR over these periods.
Total Operating Expenses
Total operating expenses incurred for the three months ended March 31, 2024, increased by approximately $11.8 million from the three months ended March 31, 2023. Of this increase, $3.5 million were for costs related to the exit of our partnership, which did not occur in the three months ended March 31, 2023. The Company recorded bad expense in the amount of $7.8 million in the three months ended March 31, 2024. The balance of this increase was primarily related to greater units and related corporate staffing.
Other Income (Expense)
Total other expense for the three months ended March 31, 2024 was $4.6 million as compared to $3.8 million for the three months ended March 31, 2023. This increase is primarily due to higher cash interest and financing costs during the three months ended March 31, 2024 as compared with three months ended March 31, 2023 partially offset by greater non-cash financing costs.
Liquidity and Capital Resources
The following table provides information about our liquidity and capital resources as of March 31, 2024 and December 31, 2023:
| As of March 31, 2024 |
As of December 31, 2023 |
|||||||
| Cash and Cash Equivalents | $ | 994,904 | $ | 752,848 | ||||
| Other Current Assets | $ | 4,009,370 | $ | 18,968,209 | ||||
| Total Current Assets | $ | 5,004,274 | $ | 19,721,057 | ||||
| Total Current Liabilities | $ | 61,994,101 | $ | 33,125,741 | ||||
| Working Capital (Deficit) | $ | (56,939,827 | ) | $ | (13,404,684 | ) | ||
As of March 31, 2024, our cash and cash equivalents balance was $994,904 as compared to $752,848 at December 31, 2023, and total current assets were $5,004,274 at March 31, 2024, as compared to $19,721,057 at December 31, 2023.
As of March 31, 2024, our company had total current liabilities of $61,994,101 as compared to $33,125,741 at December 31, 2023. Total current liabilities at March 31, 2024 consisted of: accounts payable and accrued expenses of $30,779,912 as compared to $23,182,305 at December 31, 2023; rents received in advance of $14,626,651 at March 31, 2024, as compared to $4,404,216 at December 31, 2023; short-term business loans of $3,733,417 at March 31, 2024, as compared to $1,115,120 at December 31, 2023; loans payable of $1,666,108 at March 31, 2024, as compared to $1,654,589 at December 31, 2023; operating lease liability of $1,944,026 at March 31, 2024, as compared to $1,982,281 at December 31, 2023; and development incentive advances of $8,893,987 at March 31, 2024 as compared to $300,840 at December 31, 2023.
As of March 31, 2024, our company had a working capital deficit of $56,939,827 as compared to a deficit of $13,404,684 at December 31, 2023.
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.
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We record cash collected prior to stays as “bookings 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.
Our current liquidity position raises substantial doubt about our ability to continue as a going concern. If we are unable to improve our liquidity position we may not be able to continue as a going concern. Our ability to raise the capital needed to improve our financial condition may be hindered or limited by provisions contained in our existing financing agreements or other agreements. The accompanying consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial portion of their investment.
Our company is still in the relatively early stages of growth, the resources needed for the management and operation of our portfolio of hotels is relatively similar to larger, long-standing and well-capitalized companies, such as Marriot, Hyatt, and Hilton. To operate our existing portfolio of hotels and continue our expansion of our portfolio of hotels in major cities will require substantial capital resources and will require us to utilize our cash flows, and will likely require us to engage in equity or debt transactions to fund required expenditures if we choose to continue expansion at our historic or an accelerated pace.
The operation of many of our properties involves unionized labor. Unionized labor provides us with skilled employees that are trained, vetted by their unions, and subject to the performance and conduct codes established by their unions. It also provides us with formal channels to resolve various labor issues. At the same time, with respect to properties utilizing unionized labor, we are subject to labor agreements and requirements applicable to companies of our size and capital profile, including requirements that require us to post deposits or bonds with respect to three-month union employee wages for each such hotel. The funding of these deposits and bonds require substantial capital.
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.
Going Concern
Our current liquidity position raises substantial doubt about our ability to continue as a going concern. If we are unable to improve our liquidity position we may not be able to continue as a going concern. Our ability to raise the capital needed to improve our financial condition may be hindered or limited by provisions contained in our existing financing agreements or other agreements. The accompanying consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial portion of their investment.
Financing Activities
Since formation we have funded our operations and growth through capital contributions and loans from affiliates of our company, third-party investor financings, and our initial public offering. At March 31, 2024, we had short-term business financing indebtedness of $3,733,417, short-term loans payable of $1,666,108, and long-term loans payable of $1,447,720. The proceeds from these financings have been or will be used to fund security deposits for our newly leased properties.
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Affiliate Financings
In November 2023, our company entered into a non-dilutive financing agreement with THA Holdings LLC (“THA”), an entity controlled and operated by Mr. Ferdinand, pursuant to which the Company agreed to issue to the THA an unsecured, advancing term promissory note (the “THA Note”). Under the THA Note, we were able to borrow, up to an aggregate principal amount of $10,000,000 (the “Initial Principal Amount”) to be funded in increments of $1,000,000 upon on request by the sale, from time to time, of shares of our common stock owned by THA. The interest on the THA Note was to be compounded annually and the THA Note was repayable at maturity in November 2026.
As a result of our company entering into a relationship with Wyndham Hotels & Resorts, in December 2023, we and THA mutually agreed to cancel the THA Note, pursuant to a payoff letter, dated December 3, 2023 (the “Payoff Letter”). In connection therewith, an amount equal to the proceeds resulting from recent sales by THA common stock under the terms of the THA Note in the amount of approximately $311,234 was gifted to the Company. This was recorded as a contribution by founder in the accompanying consolidated statement of equity.
In December 2022, our company and Mr. Ferdinand entered into a Note Extension and Conversion Agreement with Greenle. Greenle was previously the purchaser of 15% OID senior secured notes (“Extension Notes”) and warrants to purchase our common stock under certain securities purchase agreements and loan agreements between us and Greenle. Under the terms of the Note Extension and Conversion Agreement, Greenle agreed to convert from time to time up to $3,000,000 aggregate principal amount of the notes into up to 1,000,000 shares of our common stock (the “Conversion Shares”) at the conversion price of $3.00 per share prescribed by the notes. Additionally, Greenle agreed that the payment date of certain of the notes in the aggregate principal amount of $1,250,000, maturing on January 30, 2023, would be extended to March 1, 2023. On the date of any such conversion, we would be obligated to issue to Greenle a number of credits under our then-existing revenue share agreements with them equal to fifteen percent (15%) of the principal amount of the notes so converted. As of December 31, 2022, $300,000 of these notes were converted and the entire $3,000,000 remaining amount under the notes was converted in January 2023. As part of this conversion, Mr. Ferdinand contributed to our company 874,474 shares of common stock owned by him and his affiliates, which in turn, were used by our company to fund the issuance of the Conversion Shares to Greenle in exchange for the conversion of the debt under the notes, which was maturing within a few months of this contribution. At the time of such contribution by Mr. Ferdinand, the market value of the shares of common stock so contributed was approximated $1.5 million.
In June 2022, Mr. Ferdinand personally provided us with an additional $750,000 of financing via a credit facility for operating expenses relating to the launch of certain of our newer properties, including the Astor Hotel and 1000 29th Street. This loan was evidenced by an unsecured, 24-month note, bearing interest at 6% per annum, with interest payable at maturity. We had the right to prepay this note at any time without prepayment penalty, subject to the terms of our other existing debt. In October 2021, we issued a promissory note (the “October 2021 Note”) to THA Family II LLC, an affiliate of our chief executive officer, in the principal amount of $2 million. As part of the note purchase we also issued warrants to purchase 250,000 shares of our common stock at an exercise price of $4.20. The October 2021 Note had a maturity date of April 15, 2023, and bared interest at the rate of 6% per annum, with such interest payable monthly in arrears in cash. At the close of our initial public offering, $1 million of the principal balance of this note was converted into 312,500 shares of our stock and remaining balance was repaid.
In May 2022, SuperLuxMia LLC, an entity controlled by our founder, chairman and chief executive officer, Brian Ferdinand, provided $661,000 in financing to our company for general operating expenses relating to the launch of our Marriott Herald Square property. This loan was evidenced by an unsecured, 24-month note, bearing interest at 6% per annum, with interest payable at maturity. We were entitled to prepay this note at any time without prepayment penalty, subject to the terms of our other existing debt, and this note was repaid in 2023.
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In November 2021, we issued a promissory note (the “November 2021 Note”) to EBOL Holdings LLC, an entity controlled by a holder of more than 5% of our common stock, in the principal amount of $500,000. As part of the note purchase we also issued the investor warrants to purchase 125,000 shares of our common stock at an exercise price of $4.20 per share. The November 2021 Note had a maturity date of May 15, 2023. At the closing of our IPO, $200,000 of the November 2021 Note was repaid and the remaining balance was repaid in May of 2023.
Greenle Financings
At January 1, 2023, we had outstanding notes in the aggregate principal amount of $8,275,040 and warrants to purchase an aggregate of 2,156,250 shares of our common stock at a weighted average exercise price of $4.00, sold by us in various private placements to Greenle. In addition, we had revenues share arrangements with Greenle with respect to certain of our hotels, obligating us to pay to Greenle a prescribed share of our revenues generated by each such property (ranging initially from 10-14% of the subject property and scaling down to 1-3% over a ten-year period).
During 2023 and 2024, we consummated the transactions described below with Greenle which (a) eliminated our revenue share arrangements with Greenle, (b) eliminated our indebtedness to Greenle (and decreased our overall outstanding indebtedness), and (c) enhanced the equity capital of our company. As of December 31, 2023, as a result of the transactions described below, Greenle owned outstanding warrants to purchase an aggregate of 4,450,000 shares of our common stock at a weighted average exercise price of $4.79. As a result these transactions, Greenle also received the right to require us to issue up to an aggregate of 6,740,000 shares of our common stock to Greenle from time to time through August 2028, of which an aggregate of 2,800,000 shares had been issued as of the date of this report.
These transactions with Greenle in 2023 and 2024 included the following:
| ● | In December 2022, Greenle agreed to convert $3 million principal amount and interest under the notes it held into shares of common stock at the conversion price of $3.00 per share prescribed by the notes. Additionally, Greenle agreed that the payment date of certain of the notes in the aggregate principal amount of $1,250,000, maturing on January 30, 2023, would be extended to March 1, 2023. On the date of any such conversion, we would be obligated to issue to Greenle a number of credits under our then-existing revenue share agreements with them equal to fifteen percent (15%) of the principal amount of the notes so converted. As of December 31, 2022, $300,000 of these notes were converted and the entire $3,000,000 remaining amount under the notes was converted in January 2023. As part of this conversion, Mr. Ferdinand contributed to our company 874,474 shares of common stock owned by him and his affiliates, which in turn, were used by our company to fund the issuance of the Conversion Shares to Greenle in exchange for the conversion of the debt under the notes, which was maturing within a few months of this contribution. At the time of such contribution by Mr. Ferdinand, the market value of the shares of common stock so contributed was approximately $1.5 million. |
| ● | In January 2023, we prepaid $454,457 of the principal amount owed to Greenle under certain of the notes. |
| ● | In February 2023, we issued to Greenle an aggregate of 2,457,002 shares of our common stock in exchange for the termination of our existing obligations to pay to Greenle an aggregate of $5 million for the last quarter of 2022 and all quarters in 2023 under revenue share rights previously granted to Greenle by us with respect to certain of our properties. |
| ● | In February 2023, we entered into an exchange agreement (“Exchange Agreement”) with Greenle pursuant to which $2,079,686 principal amount of (and interest and prepayment premium relating thereto) owed by us to Greenle under certain notes was exchanged for a convertible 15% original issue discount note (“Exchange Note”) having a maturity date of August 17, 2023. |
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| ● | In March 2023, we repaid $808,000 of the principal amount of the Exchange Note and subsequent to this repayment the balance of the Exchange Note was converted into 196,994 shares of our common stock. |
| ● | In April 2023 we entered into an agreement that provided for a two-year extension on maturity of all of our remining notes held by Greenle to April 15, 2025. In connection with this agreement, we issued Greenle warrants to purchase up to 1,000,000 shares of our common stock at an exercise price of $3.00 per share and warrants to purchase up to 250,000 shares of our common stock at an exercise price of $4.00 per share. |
| ● | In April 2023, our company and Greenle also agreed to a modification of the terms of our outstanding notes and warrants requiring mandatory conversion of same into shares of our common stock if (a) the volume-weighted average price of our common stock for each of the three trading days prior to the forced conversion was at least equal to defined trigger prices (ranging from $2.00 to $5.50), (b) the shares underlying the notes and warrants were registered with the SEC for resale, (c) the aggregate dollar volume of the common stock sold on the principal trading market over the 10 consecutive days prior to conversion was at least $3.75 million, and (d) such mandatory conversion does not cause Greenle to beneficially own more than 9.9% of our common stock. |
| ● | In May 21 2023, we entered into an agreement (which was amended in April 2024) with Greenle pursuant to which Greenle’s revenue rights were terminated in 2024 and thereafter. In consideration for the termination of such rights, we agreed to issue to Greenle, from time to time, in each case at Greenle’s election upon ten business days’ prior written notice delivered to us on and before August 31, 2028, up to an aggregate of 6,740,000 shares of common stock (“Greenle Agreement Shares”), subject to resale restrictions limiting the amount Greenle may sell into the market during any calendar quarter. In 2023, we issued an aggregate of 614,250 shares of our common stock to Greenle pursuant to this obligation. In 2024, through the date of this Annual Report on Form 10-K, we have issued an additional 614,250 shares or our common stock to Greenle pursuant to this obligation |
| ● | In June 2023, Greenle agreed to convert all of the remaining notes held by it in exchange for a reduction in the exercise price of certain of its warrants to $2.50 per share. |
| ● | In November 2023, in consideration of Greenle’s waiver of certain waive registration rights for any currently issued common stock held by it for a period of 12 months and any future issuances to it for a rolling 12-month period from the date such of issuance, we issued Greenle warrants to purchase up to an aggregate of 2,000,000 shares of common stock at an exercise price of $4.00 a share. |
| ● | In December 2023, Greenle agreed to exercise warrants to purchase an aggregate of 1,500,000 shares of our common stock at $4.00 per share. As consideration for this exercise, we issued new warrants to Greenle purchase up to 2,000,000 shares of our common stock at an exercise price of $5.00 per share and warrants to purchase up to 1,000,000 shares of our common stock at an exercise price of $5.50 per share. |
| ● | In April 2024, we secured from Greenle a waiver on the restrictions contained in its financing agreements with our company that prohibit our sale of shares of common stock prior to November 2024 at per-share prices below $5.00. This waiver permits us to sell up to an aggregate of 15 million shares prior to November 2024 at prices below $5.00 regardless of any prohibitions contained in our agreements with Greenle. The restriction on sales of our common stock by our company below $5.00 also terminates completely and forever in November 2024. In consideration of this waiver, Greenle is entitled to be issued up to an aggregate of 2.8 million shares of our common stock from time to time upon written notice to our company. We also revised the leak-out provisions applicable to the Greenle Agreement Shares (described above) by which Greenle shall only be permitted to resell Greenle Agreement Shares as follows: |
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(a) up to 20% of such shares may be sold on and after the date on which the shares are first issued to Greenle; (b) up to an additional 20% of the shares may be sold on after the date of each subsequent issuance to Greenle; and (c) all such shares may be sold without these restrictions on and after the date all Greenle Agreement Shares have been issued to Greenle. Our agreements with Greenle also prohibit issuances to Greenle under any of our agreements that would result in Greenle owning in excess of 9.9% of our then-outstanding common stock.
| ● | This waiver was amended in May 2024 to increase number of shares permitted to be sold by our company at prices under the Trigger Price prior to November 2024 to the greater of (i) 30 million shares and (ii) $30 million (based on the gross sale prices of such shares). In consideration of this waiver modification, Greenle is entitled to demand from time to time that we issue an amount of additional shares (the “Additional Greenle Waiver Shares” and collectively with the Initial Greenle Shares and the Greenle Revenue Participation Shares, the “Greenle Shares”) equal to 0.22 shares of common stock for each share of common stock sold by the Company through November 6, 2024 in excess of 15 million shares at prices below the Trigger Price. |
Cash Flows from Operating Activities
During the three months ended March 31, 2024, we used $9,456,285 of cash in operating activities that was primarily related to an increase in prepaid expenses of $4,073,427, increase in security deposits of $1,050,000, offset by non-cash amount of lease expense of $10,146,639, modification of warrants of $2,036,200, prepaid guarantee trust of $351,000, and accounts payable and accrued expense of $7,547,607.
During the three months ended March 31, 2023, generated $383,281 of cash from operating activities that was primarily related to an increase in security deposits of $3,907,720 and decreased by net non-cash amount of lease expense of $1,651,670 and rents received in advance of $2,630,239, stock compensation expense of $429,996, stock option expense of $167,573, changes in accounts payable and accrued expenses of $1,024,948, accrued income taxes of $122,161, and shares used for operating expense of $884,816.
Cash Flow from Investing Activities
During the three months ended March 31, 2024, no cash used for investing activities versus cash generated of $2,442,634 during the three months ended March 31, 2023 primarily from the proceeds from the sale of Treasury Bills.
Cash Flow from Financing Activities
During the three months ended March 31, 2024, net cash provided by financing activities of $9,893,482 included warrant exercises of $4,800,000, proceeds from short term business financing of $2,618,297 and proceeds from development incentive advances of $3,000,500. During the three months ended March 31, 2023, net cash used by financing activities was $1,021,408 which was primarily made up or repayments on short term business financing of $1,255,512.
Third-Party Payment Processors
We utilize third-party payment processors to process guest transactions via credit card. Over 85% 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 March 31, 2024. 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.
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Advisory Shares
The tables below outline equity issuances not related to the conversion from an LLC to C Corp, the initial public offering the exercise of Options or Warrants, the conversion of debt into equity or the issuance of shares pursuant to revenue share agreements.
For the three months ended March 31, 2024
Schedule of equity transactions
| Description | General Ledger Account | Date | Shares | Price | Value | ||||||||||||
| Non-employee loan payment | Loan payable | 1/25/2024 | 20,008 | $ | 4.57 | $ | 91,437 | ||||||||||
| Non-employee commission expense | Commission Expense | 1/25/2024 | 10,079 | $ | 4.57 | $ | 46,061 | ||||||||||
| Non-employee investor relations expense | Investor Relations Expense | 1/30/2024 | 59,784 | $ | 4.33 | $ | 258,865 | ||||||||||
| Non-employee director compensation | Non-Cash Issuance of Common Stock for Director Compensation Expenses | 2/8/2024 | 197,800 | $ | 2.92 | $ | 577,576 | ||||||||||
| Employee Compensation | Non-Cash Issuance of Common Stock for Compensation Expenses | 3/15/2024 | 25,000 | $ | 2.22 | $ | 55,500 | ||||||||||
| Subtotal | 312,671 | $ | 1,029,439 | ||||||||||||||
For the three months ended March 31, 2023
| Description | General Ledger Account | Date | Shares | Price | Value | ||||||||||||
| Non-employee Board members pursuant to related comp. policy | Non-Cash Stock Compensation Expense | 3/1/2023 | 166,665 | $ | 2.58 | $ | 429,996 | ||||||||||
| In connection with certain property finders’ fee arrangements | Non-Cash Issuance of Common Stock for Operating Expenses | 3/17/2023 | 136,887 | $ | 2.45 | $ | 335,373 | ||||||||||
| In connection with a consulting agreement | Non-Cash Issuance of Common Stock for Operating Expenses | 2/10/2023 | 196,994 | $ | 1.85 | $ | 364,439 | ||||||||||
| In connection with a marketing agreement | Non-Cash Issuance of Common Stock for Operating Expenses | 2/10/2023 | 100,000 | $ | 1.85 | $ | 185,000 | ||||||||||
| Subtotal | 433,881 | $ | 884,812 | ||||||||||||||
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Revenue Shares
On September 11, 2023, the Company issued 36,179 shares of the Company’s common stock and 578,071 shares of the Company’s common stock to Greenle Beta and Greenle Alpha, respectively, in connection with the February 2023 Revenue Share Agreement. As of November 8, 2023, the registrant had 36,836,190 shares of common stock outstanding. Shares outstanding inclusive of shares committed to be issued but not yet issued as of this date on both the February 2023 Revenue Share Agreement and the May 2023 Revenue Share Exchange Agreement are 44,804,690 (or 1,228,500 for the February 2023 Revenue Share Agreement and 6,740,000 for the May 2023 Revenue Share Agreement).
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, 2023, as filed with the SEC on April 15, 2024.
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 Annual 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 rates on each accommodation unit, with more than 50% of bookings, on average, choosing the nonrefundable rate. As we are required to only reserve a small or no portion 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 in a future period is reflected in deferred revenue, and if cancelled is not ultimately realized as revenue.
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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 nonrefundable basis, in which cancellations results in forfeiture of entire amount. In connection with some of our bookings, the third-party sales channel handles payments, cancelations, and the refunds to guests.
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.
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 bookings received in advance on the balance sheets. Bookings received in advance are recognized as revenue after the rental unit is occupied by the customer for the agreed upon length of time. The bookings received in advance balance as of March 31, 2024 and December 31, 2023, was $6,576,403 and $4,404,216, 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 bookings 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 and are included in cost of sales on the consolidated statement of operations.
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Lease
The Company accounts for leases in accordance with ASC Topic 842, Leases (“Topic 842”). 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.
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 prescribe 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 December 31, 2021 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, our company converted into a C corporation. As we have realized a net loss for the year ended December 31, 2023 and December 31, 2022 and the three months ended March 31, 2024, and as such we have not made a provision for income taxes in our financial statements for these periods.
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 relieves such liability upon remittance to the taxing authority.
Paycheck Protection Program Loan (“PPP”)
As disclosed in the Notes to our financial statements, we have 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 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.
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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.
With regard to the issuance of warrants of common stock, these items are measured at the grant date based on the fair value of the award. The expense is recognized on the date of the grant as there is no vesting period.
We estimate the fair value of stock option awards granted and warrants using the Black-Scholes-Merton option pricing model. The value of stock issued is based on the market value on the date of the issuance.
This Black-Scholes-Merton 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-Merton 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 its 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.
Accounting Pronouncements
In June of 2016, the FASB issued ASU 2016-12 “Financial Instruments-Credit Losses” (Topic 326). ASU 2016-13 requires the use of an impairment methodology that reflects an estimate of expected credit losses, measured over the contractual life of an instrument, based on information about past events, current conditions, and forecasts of future economic conditions. We adopted ASU 2016-13 on January 1, 2023 using the modified retrospective approach.
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.
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Item 4 - Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and our principal 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 Annual Report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were not effective at the reasonable assurance level.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in those internal controls. With respect to the year ended December 31, 2023, we identified material weaknesses in our internal controls 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.
While we deem this type of material weakness typical in a closely held, private company, in preparation of becoming a public company, we commenced a remediation plan which included 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 formed an audit committee of independent directors. As part of our remediation plan, we also implemented entity-level controls, and continue to do so. Our auditors have identified need to further and properly segregate 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. Full implementation of this plan will require additional time and the devotion of material resources.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that our internal control over financial reporting was ineffective as of December 31, 2023 as a result of the material weakness described above.
This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
Changes in Internal Control Over Financial Reporting
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 will continue this process of remediation during 2024. We have also made organizational changes and trained our employees in order to strengthen and improve our internal controls over financial reporting.
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.
Except as otherwise stated above, there was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II - Other Information
Item 1 - Legal Proceedings
In the course of our operations, we become party to litigations, disputes, and regulatory compliance issues from time to time. We are currently, and expect to be in the future, party to various actions that require us to spend time and resources that could otherwise be applied to the management of our operations. However, we are not currently party to any litigations, disputes or regulatory actions that management believes would be materially adverse, individually or in the aggregate, to the operations or financial condition of our company if such actions were to be adjudicated or settled in a manner adverse to us.
Current litigations to which we are party include those that stem from our legacy apartment rental business, in which we are no longer engaged. As disclosed in our prior Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K, our company wound down the commercial operation of approximately 1,000 residential apartments across 11 cities towards the end of 2021 and continued wind down of residential-based operations in 2022 to focus our operations exclusively on leasing entire hotel properties. This process gave rise to certain litigations, the vast majority of which has been resolved. With respect to any remaining claims relating to our legacy operations, we are either engaged in settlement discussions or have determined to defend and in some cases, counterclaim, such actions.
In connection with our wind down of these legacy operations, we voluntary initiated discussion with the City of New York with respect to any violations resulting from our legacy business under applicable City of New York short-stay rental prohibitions and related regulations. We entered into a settlement with the City of New York with respect to the foregoing in March 2024, as further described in our Annual Report on Form 10-K for the year ended December 31, 2023 under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Regulations Governing Short-Term Rentals.”
As a public company, we could be subject from time to time to class action or other litigations brought by or on behalf of stockholders of our company. As of the date of this Quarterly Report, we are party to a class action brought in the United States District Court Southern District of New York entitled Janice Pack, Individually and on Behalf of All Others Similarly Situated, as Plaintiff, vs. LuxUrban Hotels Inc., Ferdinand and Shanoop Kothari, as Defendants, alleging, among other causes of action, securities violations in connection with our disclosure of the opening of a hotel for which a definitive lease had not then been executed and delivered. The parties to that proposed hotel opening had begun working toward a transaction in early fall 2023. We believed based on correspondence received that the material terms of the transaction had been agreed to. In addition, there was a commitment by a qualified banking institution to fund the letter of credit required under the proposed lease in a form agreeable by the landlord; however, a complete set of definitive agreements relating to the lease were not entered into by the parties. The noncompletion of this proposed lease transaction did not and will not have a material adverse effect on our operations or financial results. However, based on the complexity and multi-step process of closing long-term leases on hotel properties (and the related letter of credit and similar requirements), in 2024 and going forward, we will only announce acquisitions when they are opened for hosting guests and the entire lease execution and letter of credit process has been completed.
Our business has grown in size and complexity as we have shifted our business focus to hotel operations. Hotel operations require the implementation and management of a wide array of resources, services and processes, including employment management policies and systems, insurance coverages, booking and guest management infrastructure, property tax management and payment systems, and security and fire safety infrastructure and processes. The management of our operations involves relationships with a multitude of third parties, including unionized and nonunion labor, hotel guests, outside hotel management and services providers, booking services providers, credit card processing companies, and hotel maintenance and service companies. While the company continually refines operations, the complexity presents an environment where claims are likely to arise from time to time in the course of operations. Current litigations also include claims related to our hotel-focused operations, including claims related to building maintenance fees, lease payment obligations, brokerage fees and third-party service provider payments. With respect to any current claims relating to our hotel operations, we are either engaged in settlement discussions or have determined to defend and in some cases, counterclaim, such actions.
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We currently employ approximately 509 employees across our operations and book thousands of guests annually in our properties. As of the date of this Annual Report, we have no current material litigation involving our employees or guests. However, it is possible that we could be subject to litigation brought by employees or guests from time to time in the course of our operations. Such matters could include slip in fall cases, discrimination cases, building maintenance, insurance claims, employee claims, and others.
As of March 31, 2024, we had accrued an aggregate of $7.7 million for all anticipated liabilities associated with our current litigation and regulatory actions. Management believes that the counterclaims the company has in connection with these actions could offset all or a portion of such anticipated liabilities, although there can be no assurance than any counterclaims will be successful. Assuming the most adverse outcomes, we expect aggregate liabilities from current litigations to comprise less than 1% of our anticipated revenues for 2024. After giving effect to the above-noted settlement with the City of New York, we are not currently party to any regulatory or administrative proceedings.
Item 1A - Risk Factors
As of March 31, 2024, 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 for the year ended December 31, 2023. 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.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During the three months ended March 31, 2024, we issued an aggregate of 312,671 shares on an unregistered basis comprised of 30,087 shares issued as commission on real estate lease transactions, 59,784 for services in lieu of cash payment, 197,800 issued to our independent board members under our independent director compensation policy, and 25,000 shares as part of employee compensation.
Use of Proceeds
We did not generate any cash proceeds from the sales of the above-described shares.
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
Management Transitions
The Company has been engaged in a dedicated effort to enhance its management and operations teams through the recruitment of talented directors and officers who possess meaningful and broad experience in the hotel and online travel services industries, as well as business development expertise. As part of these efforts, effective April 22, 2024, the Company implemented the following:
| ● | Elan Blutinger, a hotel and travel technology veteran and a member of the Company’s board of directors, was named its Nonexecutive Chairman of the Board; |
| ● | Shanoop Kothari, the Company’s Co-Chief Executive Officer and acting Chief Financial Officer, was named its sole Chief Executive Officer; |
| ● | Brian Ferdinand, the Company’s founder, stepped down as Chairman of the Board and Co-Chief Executive Officer and became a consultant to the Company, in which role he will oversee the management and expansion of the Company’s hotel properties portfolio and assist Mr. Kothari in his transition to sole Chief Executive Officer; and |
| ● | Andrew Schwartz, a respected financial industry veteran and credit, debt and equity financing expert, was elected as a member of the Company’s board of directors. |
As part of the foregoing transitions, the Company entered into a Nonexecutive Chairman of the Board Agreement with Mr. Blutinger for a term of three years and will pay him an annual fee of $100,000 cash and issue him an annual grant of 250,000 shares of our common stock (each such grant vesting in three equal annual installments).
As part of the foregoing transitions, the Company entered into a Consulting Agreement with Mr. Ferdinand for a term of three years and will pay him a monthly consulting fee of $50,000, and continue material compensation and other terms of the employment agreement between our company and Mr. Ferdinand that was in effect immediately prior to April 22, 2024.
Amended and Restated Claw Back Policy
In November 2023, the Company adopted a claw back policy that provides for the recovery, or “claw back”, of erroneously awarded incentive-based executive compensation, as required by Rule 10D-1 under the Securities Exchange Act of 1934 (“Rule 10D-1”) and the Nasdaq listing requirements. In April 2024, the Company adopted a restated and amended version of that policy to add immaterial but clarifying provisions.
Sale Restriction Waiver
In April 2024, the Company secured from 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”) a waiver on the restrictions contained in its financing agreements with the Company that prohibits the Company’s sales of shares of common stock prior to November 2024 at per-share prices below $5.00 (as may be adjusted for stock splits and similar transactions, the “Trigger Price”). The restriction on sales of common stock by the Company below the Trigger Price terminates in November 2024. This waiver permitted the Company to sell up to an aggregate of 15 million shares prior to November 2024 at prices below the Trigger Price. In consideration of this waiver, Greenle is entitled to be issued up to an aggregate of 2.8 million shares of our common stock (“Initial Greenle Waiver Shares”) from time to time upon written notice to our company. This waiver was amended in May 2024 to increase number of shares permitted to be sold by the Company at prices under the Trigger Price prior to November 2024 to the greater of (i) 30 million shares and (ii) $30 million (based on the gross sale prices of such shares). In consideration of this waiver modification, Greenle is entitled to demand from time to time that the Company issue an amount of additional shares (the “Additional Greenle Waiver Shares” and collectively with the Initial Greenle Shares and the Greenle Revenue Participation Shares, the “Greenle Shares”) equal to 0.22 shares of common stock for each share of common stock sold by the Company through November 6, 2024 in excess of 15 million shares at prices below the Trigger Price.
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Termination of Partnership Agreement
In May 2024, in light of discussions between our Company and Wyndham on the initial and projected future performance of our properties within the franchise relationships, we commenced the return of all property listings to our control, terminating our franchise relationship with Wyndham. The Company is currently in the process of de-platforming these properties from Wyndham’s systems and moving each hotel listing back under the Company’s control. The Company expects that this process will be completed by the end of May 2024 with minimal operational disruption, although unforeseen risks could cause delays. As part of the Company’s previously announced imitative to add industry depth and breadth to its board of directors and management to help evolve operations, the Company’s enhanced board and executive teams have reviewed all existing operational relationships. Given the Company’s operating model, it was concluded that over the long term the Company would be better served operationally and financially by operating the hotels as an independent operator.
At this time, we have recorded the Development Incentive Advances as a current liability from long-term on our Condensed Consolidated Balance Sheets as well as included an additional $2.6 million in accruals for all of the costs and potential additional liabilities related to this transition on our Condensed Consolidated Statement of Operations. However, we believe it is in the best interest of both parties to mutually work out an agreeable outcome for the complete settlement of this matter.
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Item 6 - Exhibits
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| Exhibit 101.INS | Inline XBRL Instance Document | |
| Exhibit 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| Exhibit 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| Exhibit 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | |
| Exhibit 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| Exhibit 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| Exhibit 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| (1) | Filed herewith. | |
| † | Certain of the exhibits and schedules to this agreement have been omitted in accordance with Regulation S-K Item 601(a)(5). The Company agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon request. |
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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 20, 2024 | By: | /s/ Robert Arigo |
| Robert Arigo | ||
| Chief Executive Officer | ||
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