美國
證券和交易委員會
華盛頓，DC 20549
表格
截至季度結束
或者
過渡期從__________到_____________
委員會
文件編號：
（公司章程中指定的準確公司名稱）
| （州或其他轄區) 公司成立或組織） |
（IRS僱主 （標識號碼） |
| （總部地址） | (郵政編碼) |
(
每一類別股票所在的交易所名稱
根據證券法第12(b)條註冊的證券：
| 每類 的名稱 | 交易 標的(們) | 在每個註冊交易所的名稱 | ||
| 股票市場有限責任公司 | ||||
| 股票市場有限責任公司 |
請勾選報告註冊人：(1) 在過去12個月內（或註冊人被要求提交報告的較短期間內）是否已提交《1934年證券交易法》第13條或第15條（d）要求提交的所有報告，以及 (2) 在過去90天內是否受到這些提交要求的約束。
請打勾表示，註冊者是否在過去12個月內（或者在註冊者被要求提交這些文件的較短期間內）根據S-t規則405要求提交了每個互動數據文件。
請通過勾選的方式指明註冊人是大型加速報告公司、加速報告公司、非加速報告公司還是較小的報告公司。有關「較大加速報告公司」、「加速報告公司」、「較小的報告公司」和「新興成長公司」的定義，請參見《交易所法》第120億.2條。
| 大型 加速披露人 | ☐ | 加速 報告者 | ☐ |
| ☒ | 小型 報告公司 | ||
| 新興 成長公司 |
如果是新興成長型企業，請在勾選標記中說明註冊機構是否選擇不使用延長過渡期以遵守根據《證券交易法》第13(a)條規定提供的任何新的或修訂後的財務會計準則。
請勾選表示註冊者是否是空殼公司（如《交易所法》第120億.2條所定義）。是 ☐
截至2024年11月19日，註冊人員已 資產
目錄
i
第一部分-財務信息
項目 1 - 財務報表。
LUXURBAN HOTELS INC.
彙編簡明資產負債表
(未經審計)
| 9月30日, 2024 |
12月31日 2023 |
|||||||
| 資產 | ||||||||
| 流動資產 | ||||||||
| 現金及現金等價物 | $ | $ | ||||||
| 應收賬款淨額 | ||||||||
| 所有基金類型，淨值後的渠道留存基金 | ||||||||
| 所有基金類型，淨值後的處理器留存基金 | ||||||||
| 在線旅行社應收款淨額 | ||||||||
| 紐約市政府和房東應收款淨額 | ||||||||
| 預付款項及其他流動資產 | ||||||||
| 預付擔保trust-關聯方 | ||||||||
| 流動資產合計 | ||||||||
| 其他資產 | ||||||||
| 傢俱、設備及租賃改善淨額 | ||||||||
| 按金-非流動資產 | ||||||||
| 預付費用和其他非流動資產 | ||||||||
| 經營租賃權使用資產淨額 | ||||||||
| 其他總資產 | ||||||||
| 資產合計 | $ | $ | ||||||
| 負債和股東權益（赤字） | ||||||||
| 流動負債 | ||||||||
| 應付賬款及應計費用 | $ | $ | ||||||
| 預收訂金 | ||||||||
| 開空期業務融資淨額 | ||||||||
| 短期貸款 - 流動負債 | ||||||||
| 租賃初次直接費用 - 流動負債 | ||||||||
| 經營租賃負債-流動 | ||||||||
| 發展激勵 預付款-流動 | ||||||||
| 總計 流動負債 | ||||||||
| 長期 負債 | ||||||||
| 應付貸款 | ||||||||
| 發展激勵預付款-非流動 | ||||||||
| 租賃初期直接成本-非流動 | ||||||||
| 經營租賃負債 - 非流動資產 | ||||||||
| 總計 長期負債 | ||||||||
| 總計 負債 | ||||||||
| 次級資本 股權 | ||||||||
| 13%可贖回優先股；清算 優先權 $ 每股； 授權股份; 截至2024年9月30日和2023年12月31日，已發行和流通股份 | ||||||||
| 承諾和事後約定 | ||||||||
| 股東赤字 | ||||||||
| 普通股 ( 股份 授權、發行、流通 ， 和 ， 分別) | ||||||||
| 資本公積金 | ||||||||
| 累計赤字 | ( |
) | ( |
) | ||||
| 普通股東權益-回購前 | ( |
) | ( |
) | ||||
| 自家保管的股票 | ( |
) | ||||||
| 總股東債務 | ( |
) | ( |
) | ||||
| 總負債和股東債務 | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
1
LUXURBAN HOTELS INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
| For The | For The | |||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 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 | ||||||||||||||||
| Termination of Franchise Agreement | ||||||||||||||||
| Non-Cash Issuance of Common Stock for Operating Expenses | ||||||||||||||||
| Non-Cash Stock Compensation and Option Expense | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| (Loss) Income from Operations | ( |
) | ( |
) | ||||||||||||
| Other Income (Expense) | ||||||||||||||||
| Other Income | ||||||||||||||||
| Cash Interest and Financing Costs | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Non-Cash Financing Costs | ( |
) | ( |
) | ( |
) | ||||||||||
| Total Other Expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income (Loss) Before Provision for Income Taxes | ( |
) | ( |
) | ( |
) | ||||||||||
| Provision for Income Taxes | ( |
) | ||||||||||||||
| Net Income (Loss) | ( |
) | ( |
) | ( |
) | ||||||||||
| Preferred Stock Dividend | ( |
) | ( |
) | ||||||||||||
| Net Income (Loss) Attributable to Common Stockholders | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||
| Basic Income (Loss) Per Common Share | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Diluted Income (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
(UNAUDTIED)
| Common Stock | Additional Paid in Capital |
Accumulated Deficit |
Treasury Stock |
Stockholders’ Equity (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 | ( |
) | ( |
) | ||||||||||||||||||||
| Net Loss | ( |
) | ( |
) | ||||||||||||||||||||
| Issuance of Shares for Revenue Share Agreements | ( |
) | ||||||||||||||||||||||
| Non-Cash Stock Compensation Expense | ||||||||||||||||||||||||
| Non-Cash Option Compensation Expense | ||||||||||||||||||||||||
| Issuance of Shares to Satisfy Loans | ||||||||||||||||||||||||
| Issuance of Shares for Operating Expenses | ||||||||||||||||||||||||
| Public Offering, Net of Issuance Fees | ||||||||||||||||||||||||
| Private Offering, Net of Issuance Fees | ||||||||||||||||||||||||
| Modification of Warrants | ||||||||||||||||||||||||
| Purchase of Treasury Stock | ( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Preferred Dividends | ( |
) | ( |
) | ||||||||||||||||||||
| Balance - June 30, 2024 | ( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Net Loss | ( |
) | ( |
) | ||||||||||||||||||||
| Issuance of Shares for Operating Expenses | ||||||||||||||||||||||||
| Public Offering, Net of Issuance Fees | ||||||||||||||||||||||||
| Issuance of Shares for Dilution Share Agreements | ( |
) | ||||||||||||||||||||||
| Warrant Exercise | ( |
) | ||||||||||||||||||||||
| Modification of Warrants | ||||||||||||||||||||||||
| Debt discount | ||||||||||||||||||||||||
| Equity converted into debt | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||
| Non-Cash Stock Compensation Expense | ||||||||||||||||||||||||
| Non-Cash Option Compensation Expense | - | ( |
) | ( |
) | |||||||||||||||||||
| Preferred Dividends | ( |
) | ( |
) | ||||||||||||||||||||
| Balance -September 30, 2024 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||
| 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 | ( |
) | ( |
) | ||||||||||||||||||||
| Net Loss | - | ( |
) | ( |
) | |||||||||||||||||||
| Non-Cash Stock Option Expense | - | |||||||||||||||||||||||
| Conversion of Loans | ||||||||||||||||||||||||
| Issuance of Shares for Operating Expenses | ||||||||||||||||||||||||
| Warrant Expense | ||||||||||||||||||||||||
| Issuance of Shares to Satisfy Loans | ||||||||||||||||||||||||
| Issuance of Shares for Deferred Compensation | ||||||||||||||||||||||||
| Issuance of Shares for Revenue Share Agreements | ||||||||||||||||||||||||
| Termination of Revenue Share Agreement Adjustment | - | |||||||||||||||||||||||
| Modification of Warrants | - | |||||||||||||||||||||||
| Balance - June 30, 2023 | ( |
) | ||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||
| Non-Cash Stock Option Expense | ||||||||||||||||||||||||
| Issuance of Shares for Operating Expenses and Settlements | ||||||||||||||||||||||||
| Issuance of Shares for Director Compensation | ||||||||||||||||||||||||
| Warrant Exercise | ||||||||||||||||||||||||
| Issuance of Shares for Revenue Share Agreements | ( |
) | ||||||||||||||||||||||
| Balance - September 30, 2023 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
LUXURBAN HOTELS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND SEPTEMBER 30, 2023
(UNAUDITED)
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net (Loss) | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
| Writeoff of bad debts | ||||||||
| Writeoff of channel retained funds security deposit | ||||||||
| Writeoff of security deposits | ||||||||
| Non-cash stock compensation expense | ||||||||
| Non-cash stock director and option expense | ||||||||
| Amortization of debt discount | ||||||||
| 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 | ( |
) | ||||||
| Issuance of Shares for Revenue Share Agreement | ||||||||
| Termination of Revenue Share Agreement | ||||||||
| Non-cash Financing Charges Associated with Short Term Business Financing | ||||||||
Writeoff of amounts due from NYC & LL |
||||||||
| Loss on Debt Extinguishment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) Decrease in: | ||||||||
| Accounts Receivable, Net | ||||||||
| Processor retained funds | ( |
) | ||||||
| Channel retained funds and receivables from OTA’s | ( |
) | ||||||
| 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 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 | ( |
) | ||||||
| Proceeds from public and private sales of common stock | ||||||||
| Warrant Exercises | ||||||||
| Proceeds from Letter of Credit guarantors | ||||||||
| Proceeds from Development Incentive Advances | ||||||||
| Proceeds from (Repayments of) loans payable - net | ||||||||
| Repayments of loans payable - net | ( |
) | ( |
) | ||||
| Preferred shareholder dividends paid | ( |
) | ||||||
| Net cash provided by 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 | ||||||||
| Cash paid for Interest | $ | $ | ||||||
| Noncash operating activities: | ||||||||
| Acquisition of New Operating Lease Right-of-Use Assets | $ | $ | ||||||
| Net settlement of receivables and payables to City of New York | $ | $ | ||||||
| Noncash financing activities: | ||||||||
| Conversion of debt to common stock and additional paid-in capital | $ | $ | ||||||
| Accrued deferred offering costs | $ | $ | ||||||
| Issuance of Warrants to purchase Treasury Stock | $ | $ | ||||||
| Equity converted to debt | $ | $ | ||||||
| Issuance of shares to satisfy loans | $ | $ | ||||||
| Debt discount | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
4
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
LUXURBAN HOTELS INC.
September 30, 2024
1 - DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
LuxUrban Hotels Inc. (LUXH) (“LuxUrban” or the “Company”) 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 nine hotel rooms in New York and New Orleans 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, the Company 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 and as of the date of this Report the Company operates no residential units. 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 the Company 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. In connection with the foregoing, the Company de-platformed these properties from Wyndham’s systems and moved each hotel listing back under the Company’s control.
All significant intercompany accounts and transactions have been eliminated in consolidation.
5
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| a. | Basis of Presentation — The accompanying condensed 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 September 30, 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 condensed consolidated 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, the
nine-months ended September 30, 2024 and for the year ended December 31, 2023, 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 September 30, 2024, the Company had cash and cash equivalents of $ |
6
| f. | Accounts Receivable, Channel Retained Funds, Processor
Retained Funds, Receivables from City of New York, Landlords and On-Line Travel Agencies — The Company’s receivables consist of amounts due from landlords, amounts due from the
City of New York, and receivables from channel retained funds, Online Travel Agents (“OTAs”), processor retained funds
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. |
| 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 September 30, 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 Company’s units. For the three and nine months ended September 30, 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. The Company has recorded a full valuation allowance against all deferred tax assets and liabilities at September 30, 2024 and December 31, 2023.
For the three and nine months ended September 30, 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 September 30, 2024 and December 31, 2023, the Company accrued sales tax payable of $ |
7
| 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 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. |
| l. | Earnings Per Share (“EPS”) — Basic net loss per share is the same as diluted net loss per share for the three and nine months ended September 30, 2024 because the inclusion of potentially issuable shares of common stock would have been anti-dilutive for the periods presented. For the three and nine months ended September 30, 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. |
| n. | New Accounting Pronouncements — In November 2023, the Financial Accounting Standards Board (FASB) issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires an enhanced disclosure of significant segment expenses on an annual and interim basis. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. Upon adoption, the guidance should be applied retrospectively to all prior periods presented in the financial statements. We do not expect the adoption of this guidance to have a material impact on our condensed consolidated financial statements. The Company did not adopt any new accounting pronouncements during the nine months ended September 30, 2024. |
3 - 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.
At September 30, 2024 and December 31, 2023, supplemental balance sheet information related to leases were as follows:
| September 30, 2024 |
December 31, 2023 |
|||||||
| Operating lease right of use assets, net | $ | $ | ||||||
| Operating lease liabilities, current portion | $ | $ | ||||||
| Operating lease liabilities, net of current portion | $ | $ | ||||||
At September 30, 2024, future minimum lease payments under the non-cancellable operating leases are as follows:
8
Schedule of future minimum lease payments under the non-cancellable operating leases
| Twelve Months Ending September 30, | ||||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter (through 2048) | ||||
| 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 leases:
| September 30, 2024 |
December 31, 2023 |
|||||||
| Weighted average discount rate | % | % | ||||||
| Weighted average remaining lease term (years) | ||||||||
Three Months Ended
|
Nine Months Ended September 30, |
|||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Short-term lease cost | $ | $ | ( |
) | $ | $ | ||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
4 - ACCOUNTS RECEIVABLES, PROCESSOR AND CHANNEL RETAINED FUNDS
As of September 30,
2024, we had $
9
5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of September 30, 2024 and December 31, 2023, were as follows:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accrued payroll and related liabilities | $ | $ | ||||||
| Bank and service fees payable | ||||||||
| Board of director fees payable | ||||||||
| Cleaning expense payable | ||||||||
| Commissions payable | ||||||||
| Insurance expense payable | ||||||||
| Interest expense | ||||||||
| Legal exposure | ||||||||
| License and public relations payable | ||||||||
| Linens, sundries and supplies payable | ||||||||
| Other payables | ||||||||
| Printing expense payable | ||||||||
| Processing fees payable | ||||||||
| Professional fees payable | ||||||||
| Rent expense payable | ||||||||
| Repairs, maintenance and improvements payable | ||||||||
| Sales and other taxes | ||||||||
| Telephone and cable payable | ||||||||
| Union liabilities | ||||||||
| Utilities payable | ||||||||
| $ | $ | |||||||
Of the legal exposure amounts accrued and noted above, 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 $26.4 million.
6 - 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 September 30, 2024 and December 31, 2023, was $
Future minimum principal repayments of the SBA - PPP loans payable are as follows:
| For the Twelve Months Ending September 30, | ||||
| 2025 | $ | |||
10
7 - LOANS PAYABLE – SBA – EIDL LOAN
During 2020, the Company received
three SBA Economic Injury Disaster Loans (“EIDL”) in response to the COVID-19 pandemic. These are
On April 21, 2020, SoBeNY received an EIDL loan in the amount of $
The outstanding balance at September 30, 2024 and December 31, 2023, was $
Accrued interest at September 30, 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 and EIDL loans payable
| For the 12 Months Ending September 30, | ||||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| Thereafter | ||||
| Total | $ | |||
8 - SHORT-TERM BUSINESS FINANCING
The Company has from time to
time entered into short-term factoring agreements related to future credit card receipts to fund operations. The Company is
required to repay these financings in fixed daily payments until the balances are repaid. Fees associated with this financing have been
recognized in interest expense in the accompanying consolidated statement of operations. As of September 30, 2024 and
December 31, 2023, the outstanding balance on these merchant cash advances net of unamortized costs was $
In September 2024, the
Company has entered into a Factoring and Security Agreement with a factor, in which the Company may receive up to $1,800,000 cash
advance in exchange for the sale of eligible accounts receivable with recourse. The Company’s obligations to the factor are
collateralized by substantially all of the Company’s assets. The advances for factored receivables are made pursuant to the
pricing and terms of the Factoring and Security Agreement. The Company draws down advances against the facility up to 80% of
eligible accounts receivables. The Company is required to repay these financings as the receivables are collected. As of September
30, 2024 and December 31, 2023, the outstanding balance was $
11
9 - LOANS PAYABLE
Loans payable consist of the following as of:
| September 30, 2024 |
December 31, 2023 |
|||||||
| Senior Secured Convertible Notes which requires twenty-four equal monthly payments beginning one year after issuance bearing annual interest
at a rate of |
$ | $ | ||||||
| Note payable to a related party of the current payroll processor due upon demand | ||||||||
| Original payable of $ |
||||||||
| Original payable of $ |
||||||||
| Original payable of $ |
||||||||
| Original borrowings of $60,000, bears interest at |
||||||||
| Original amounts due of $ |
||||||||
| Other borrowing | ||||||||
| Debt discount | ( |
) | ||||||
| Less: Current maturities | ||||||||
| $ | $ | |||||||
Future minimum principal repayments of the loans payable are as follows:
| For the Twelve Months Ending September 30, | ||||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Loans payable | $ | |||
10 - LINE OF CREDIT
In February 2019, the
Company entered into a line of credit agreement in the amount of $
11 - 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 (“December 2022 Extension 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 “June 2022 Notes”) and warrants to purchase our common stock (“June 2022 Warrants”) under certain securities purchase agreements and loan agreements between us and Greenle, including the Securities Purchase Agreement dated as of June 30 2022, as amended by the letter agreement dated October 20, 2022, and the Loan Agreement dated as of November 23, 2022.
12
Under the December 2022
Extension Agreement, Greenle agreed to convert from time to time up to $
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 (as may be adjusted for stock splits and similar transactions, the “Trigger Price”). The restriction on sales of our common stock by our company below the Trigger Price terminated on November 6. 2024. This waiver permitted us 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 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 our company through November 6, 2024 in excess of 15 million shares at prices below the Trigger Price. To date, we have been required to issue the Greenle an aggregate of 23,628,324 shares of common stock in connection the foregoing rights and obligations as a result of private placements and underwritten public offerings of our common stock.
On November 17, 2023, the Company entered into a financing agreement with THA Holdings LLC (“THA”), an entity controlled and operated by Ferdinand, pursuant to which the Company agreed to issue to THA an unsecured, advancing term promissory note (the “November 2023 Note”). Under the November 2023 Note, the Company would have been able to borrow up to an aggregate principal amount of $10,000,000 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 THA. On December 3, 2023, the Company and THA mutually agreed to cancel the November 2023 Note as a result of the Company’s desire to engage in the Wyndham relationship and its related financing resources. The amount of proceeds, less taxes, resulting from sales of common stock prior to the cancelation in the amount of $311,234 was contributed 100% to the Company by THA. This was recorded as a contribution by the founder in the accompanying consolidated statement of changes in equity.
During the nine months ended September
30, 2024 and year ended December of 2023, we amortized $
In April 2024, the Company and Ferdinand entered into a consulting agreement pursuant to which Ferdinand agreed, among other things, to oversee the day-to-day management of our company’s acquisition and long-term lease acquisition activities and to assist our then newly appointed chief executive officer in his assumption of that role. In consideration for the services provided by Ferdinand, we agreed to pay Ferdinand a monthly consulting fee of $50,000. Pursuant to a subsequent modification of the consulting agreement in May 2024, it was agreed that all amounts payable to Ferdinand under such consulting agreement through its term (approximately $1.8 million) would be satisfied through the issuance of 5,692,600 shares of common stock upon the increase in the number of shares of common stock issuable under our 2022 equity incentive plan to 15,000,000 shares.
13
In May 2024, in order to provide for available authorized shares to consummate a public offering of shares of common stock, we entered into an exchange agreement (the “May 2024 Exchange Agreement”) with Ferdinand, pursuant to which he relinquished 7,500,000 shares of common stock that he beneficially owned through THA (the “May 2024 Exchange Agreement Shares”) in exchange for a warrant to acquire 7,500,000 shares of our common stock with an exercise price of $0.01 per share (the “May 2024 Exchange Agreement Warrant”). In June 2024, in order to provide for available authorized shares to consummate a private placement in June 2024, we entered into an exchange agreement (the “June 2024 Exchange Agreement”) with Ferdinand, pursuant to which Ferdinand relinquished an aggregate of 11,804,872 shares of common stock that he beneficially owned individually or through THA (the “June 2024 Exchange Agreement Shares”) in exchange for warrants to acquire an aggregate of 11,804,872 shares of our common stock with an exercise price of $0.01 per share (the “June 2024 Exchange Agreement Warrants” and collectively with the May 2024 Exchange Warrants, the “Exchange Warrants”)).
In July 2024, the Company entered into amended and restated promissory notes with THA Family II LLC and other parties affiliated with Ferdinand, which replaced existing promissory notes evidencing amounts loaned to our company to support letters of credit with respect to certain of our hotels. These notes extend the maturity dates by 24 months of up to an aggregate of $3.1 million principal amount currently owed by our company and bear interest at 14% interest, with interest being payable monthly commencing August 1, 2024, and monthly payments evolving into payments of principal and interest in accordance with an amortization schedule commencing seven months from the July 2024 date of the notes. These notes were subsequently converted in the notes sold to investors in our debt and warrant private placement consummated August 2024.
In May 2024, the company sold common stock in an underwritten public offering at $ per share. Elan Blutinger, nonexecutive chairman of the board purchased common shares in the offering.
In July 2024, the company sold stock in an underwritten public offering at $ per share. Mr. Blutinger, purchased common shares, Patrick McNamee, a former director of our company, purchased common shares, Kimberly Schaefer, a director of our company, purchased common shares, Leonard Toboroff, a director of our company purchased common shares, Robert Arigo, our chief executive officer, purchased common shares and Michael James, our chief financial officer, purchased common shares in the offering.
In August 2024, the Company issued in a private placement (the “August 2024 Note and Warrants Debt Offering”) 18% senior secured convertible notes (“August 2024 Notes”) and common stock purchase warrants (“August 2024 Warrants”). Mr. Blutinger purchased $of these securities, Mr. McNamee, purchased $of these securities, and Mr. James, purchased $of these securities. The August 2024 Note and Warrants Debt Offering was extended in October 2024 as discussed in Note 19, below.
12 - 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 $
13 - 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
14
Options
During the nine months ended September 30, 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 nine months ended September 30, 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 September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable at September 30, 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 $ and $ for the three and nine months ended September 30, 2024. The Company recognized stock option expense of $ and $ for the three and nine months ended September 30, 2023, respectively. Unamortized option expense as of September 30, 2024, for all options outstanding amounted to $. These costs are expected to be recognized over a weighted average period of years.
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding at September 30, 2023 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2023 | $ | $ | ||||||||||||||
The Company is expensing these stock option awards on a straight-line basis over the requisite service period. The Company recognized stock option expense of $ and $ for the three and nine months ended September 30, 2023. Unamortized option expense as of September 30, 2023, for all options outstanding amounted to $. These costs are expected to be recognized over a weighted average period of years.
15
A summary of the status of the Company’s nonvested options as of September 30, 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 September 30, 2024 | $ | |||||||
Restricted Stock
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 $.
During the three months ended September 2024, we entered into agreements to issue an aggregate of up to restricted shares with certain officers and directors as set forth in the table immediately below, with the issuances of such shares having been subject to an increase in our authorized capital stock and shares available under our 2022 equity incentive plan, which were effected in July 8, 2024, and the shares thereafter issued.
| Directors and Officers | Number of shares | |||
| Elan Blutinger | ||||
| Patrick McNamee | ||||
| Robert Arigo | ||||
| Michael James | ||||
| Total | ||||
As of September 30, 2024, there was $ of unrecognized compensation cost related to unvested restricted shares.
Rights and Warrants
On February 16, 2024, the Company entered into a letter agreement with Greenle Alpha and Greenle Beta as 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.
On May 23, 2024, the exercise price of the Warrants held by Greenle have been reduced from $2.50 to $0.25. Except as described above, the Warrants remain unchanged.
16
On May 23, 2024, the Company
issued warrants to purchase up to
On June 27, 2024, in
connection with a private placement of common stock, the Company issued rights to purchase up to
On June 27, 2024, the Company
issued warrants to purchase up to
On July 15, 2024, the Company
issued warrants to purchase up to
On July 17, 2024, the Company
issued warrants to purchase up to
On July 30, 2024, the Company
issued warrants to purchase up to
On August 30, 2024, the Company
issued warrants to purchase up to
The following tables summarizes warrant and right activity for the nine months ended September 30, 2024 and September 30, 2023:
| 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 September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2024 | $ | $ | ||||||||||||||
During the nine months ended
September 30, 2024,
17
| Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (Years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Expired | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding at September 30, 2023 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2023 | $ | $ | ||||||||||||||
During the nine months ended September 30, 2023,
Under the terms of agreements entered into with Greenle, we were obligated to make quarterly payments (each a “Revenue Share”) to Greenle based on certain percentages of the revenues generated by certain of our leased properties during the term of the applicable leases (including any extensions thereof).
As previously reported, on February 13, 2023, the Company and Greenle entered into an agreement pursuant to which certain Revenue Share payments for 2023 were converted into an obligation to issue shares of our common stock to Greenle in the amounts prescribed therein (the “February 2023 Revenue Share Agreement”), with all future Revenue Share obligations accruing on and after January 1, 2024 remaining in place.
On May 21, 2023, we entered into a further agreement with Greenle (the “May 2023 Revenue Share Exchange Agreement”) pursuant to which the right to receive any and all Revenue Share with respect to any property or operations of the Company has been terminated in its entirety for 2024 and forever thereafter, and Greenle shall not be entitled to receive any payment therefor (other than the remaining periodic share issuances and cash payments under the February 2023 Revenue Share Agreement, all of which shall be completed by January 1, 2024).
In consideration for the termination of the Revenue Share for 2024 and thereafter, we agreed to issue to Greenle, from time to time, in each case, at Greenle’s election upon 61 days’ prior written notice delivered to us on and after September 1, 2023 and before August 31, 2028, up to an aggregate of 6,740,000 shares of our common stock (the “Agreement Shares”). As a result of this transaction, we recorded interest expense of $
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.
In May and June 2024, Greenle elected to receive shares from the May 2023 Revenue Share Exchange Agreement.
In September 2024, Greenle elected to receive shares from the August 2023 Revenue Share Exchange Agreement.
In September 2024, Greenle elected to receive shares from the May 2024 Revenue Share Exchange Agreement.
18
16 - WYNDHAM AGREEMENTS
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.
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.
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 de-platformed these properties from Wyndham’s systems and moved each hotel listing back under the Company’s control. 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 September 30, 2024, we recorded the Development Incentive Advances made to us by Wyndham as a current liability on our Condensed Consolidated
Balance Sheets and recorded an additional charge of $
In May 2024, Wyndham filed a complaint against the Company in the Superior Court of New Jersey Law Division: Morris County for damages in the principal sum of $18,330,471 due and owing together with interest, attorneys’ fees and cost of suit. We are defending this suit and will raise all available defenses and counterclaims available to the Company.
17 - 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 September 30, 2024 Balance Sheet and expects to do so until October 26, 2024.
During the three and nine
months ended September 30, 2024, the Company paid $
19
18 - 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 nine months ended September 30, 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 | $ | $ | |||||||||||||
| Non-employee director compensation | Non-Cash Issuance of Common Stock for Director Compensation Expenses | 5/3/2024 | $ | $ | |||||||||||||
| Non-employee commission expense | Commission Expense | 5/9/2024 | $ | $ | |||||||||||||
| Non-employee investor relations expense | Investor Relations Expense | 7/8/2024 | $ | $ | |||||||||||||
| Non-employee director Compensation | Non-Cash Issuance of Common Stock for Director Compensation Expense | 9/16/2024 | $ | $ | |||||||||||||
| Employee Compensation | Non-Cash Issuance of Common Stock for Compensation Expenses | 9/16/2024 | $ | $ | |||||||||||||
| Subtotal | $ | ||||||||||||||||
For the nine months ended September 30, 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 | $ | $ | |||||||||||||
| Non-employee Board members pursuant to related comp policy | Non-Cash Stock Compensation Expenses | 8/16/2023 | $ | $ | |||||||||||||
| In connection with certain property finders’ fee arrangements | Non-Cash Issuance of Common Stock for Operating Expenses | 8/21/2023 | $ | $ | |||||||||||||
| Advisory and legal services | Non-Cash Issuance of Common Stock for Operating Expenses | 8/21/2023 | $ | $ | |||||||||||||
| Acorn Management Partners in connection with advisory services | Non-Cash Issuance of Common Stock for Operating Expenses | 8/28/2023 | $ | $ | |||||||||||||
| Elizabeth Brown in connection with her termination of employment | Non-Cash Issuance of Common Stock for Operating Expenses | 8/28/2023 | $ | $ | |||||||||||||
| Subtotal | $ | ||||||||||||||||
20
19 - SUBSEQUENT EVENTS
Capital Raises and Default Cures
In October 20204, the Noteholders
extended the private placement (the “August 2024 Note and Warrants Debt Offering”)
The August 2024 Notes bear
interest at 18%, are secured by substantially all of the assets of the Company under the terms of a guarantee and security agreement
dated as of August 13, 2024 (“Security Agreement”), and were sold to certain accredited investors in a private offering
exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). The principal of the Augst
2024 Notes shall be repaid in twenty-four (24) equal monthly installments commencing on August 13, 2025 and continuing on the same
day of each month thereafter until the principal amount is paid in full, with all principal and interest due thereon to be paid on or
prior to August 13, 2027, unless the Notes are previously converted into common stock or preferred stock as described below. The
August 2024 Notes are senior debt of the Company, and subject to the terms and conditions of the Notes, the Company shall not issue any
debt senior to the August 204 Notes while any August 2024 Notes remain outstanding without the consent of a majority of the then outstanding
principal amount of the Notes. The August 2024 Notes were convertible initially into that number of shares of common stock determined
by dividing the principal amount of the Note purchased by the purchaser by 110% of the average VWAP of the common stock for the three
consecutive trading days immediately following the date the Company filed its Quarterly Report on Form 10-Q for the six months ended
June 30, 2024, not to exceed $0.15 (“Three-Day VWAP”). The Three-Day VWAP was set at $0.08404. As a result of opening the
offering, and curing of any existing defaults under the August 2024 Notes, the conversion price of the August 2024 Notes were reset to
$0.06;provided, that in the event the VWAP of the common stock for the three trading days immediately following
the date of our pending reverse stock split is implemented (and thereafter the effectiveness of the registration statement to be filed
to register the resale of the shares of common stock underlying the August 2024 Notes and August 2024 Warrants) is lower than the then-current
split-adjusted conversion price, the conversion price shall be reset to such three-day VWAP; provided, that such exercise price (the
“VWAP Adjusted Conversion Price”) shall not be less than $0.05 (as adjusted for the Reverse Stock Split). For example, if
a
The August 2024 Warrants have a five-year term from the date of the initial closing of the Debt Placement and shall become exercisable commencing on the date of the earliest to occur of (a) shareholder approval of the Reverse Split (as defined below) and the Nasdaq Compliance Waiver (as defined below) and (b) the 91st day after the initial closing of the Debt Placement. The August 2024 Warrants initially entitled the purchaser to purchase up to that number of shares of common stock determined by dividing the principal amount of the Note purchased by the purchaser by 110% of the average VWAP of the common stock for the three consecutive trading days immediately following the date the Company filed its Quarterly Report on Form 10-Q for the six months ended June 30, 2024, not to exceed $0.15 (“Three-Day VWAP”). The Three-Day VWAP was set at $0.08404. As a result of opening the offering, and curing of any existing defaults under the August 2024 Notes, the exercise price of the warrants were reset at $0.06;provided, that in the event the VWAP of the common stock for the three trading days immediately following the date of our pending reverse stock split is implemented (and thereafter the effectiveness of the registration statement to be filed to register the resale of the shares of common stock underlying the August 2024 Notes and August 2024 Warrants) is lower than the then-current split-adjusted exercise price, the exercise price shall be reset to such three-day VWAP; provided, that such exercise price (the “VWAP Adjusted Exercise Price”) shall not be less than $0.05 (as adjusted for the Reverse Stock Split). For example, if a 1-for-70 split is effected, the per-share exercise price shall not be adjusted to less than $3.50.
21
Nasdaq Meeting regarding Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.
On October 15, 2025 the Company had a hearing with The Nasdaq Stock Market LLC (“Nasdaq”) panel, regarding the delisting notifications. On November 4, 2024 (as amended on November 6, 2024), the Panel granted the Company’s request for continued listing on the Exchange, subject to the following: On or before November 12, 2024, the Company shall obtain shareholder approval for a reverse split at a ration that will allow the Company to maintain long-term compliance with the Bid Price Rule; 2. On or before November 21, 2024, the Company shall demonstrate compliance with Listing Rule 5550(a)(2). It is a requirement during the exception period that the Company provide prompt notification of any significant events that occur during this time that may affect the Company’s compliance with Nasdaq requirements. Stockholder approval of the reverse stock split was obtained on November 12, 2024 at a duly called and held special meeting of stockholders and the reverse stock split will be effected on November 20, 2024.
Preferred Stock
On October 26, 2024 the Company achieved the terms required for the Preferred Stock to be classified as permanent equity under FASB Topic D-98: Classification and Measurement of Redeemable Securities.
Reverse Stock Split
On November 12, 2024, LuxUrban Hotels Inc. (the “Company”) held a special meeting of stockholders (the “Special Meeting”). At the Special Meeting, the Company’s stockholders considered two proposals: (i) a proposal (the “Reverse Stock Split Proposal”) to amend the Company’s Amended and Restated Certificate of Incorporation (the “Charter”) to effect a reverse stock split (the “Reverse Stock Split”) of the Company’s outstanding common stock by a ratio of not less than one-for-thirty and not more than one-for-seventy, with the exact number to be set at a whole number within this range to be determined by the Company’s board of directors, in consultation with the Company’s investment banking advisors, in its sole discretion and to authorize our board of directors to implement the reverse stock split by filing an amendment to the Charter; and (ii) a proposal (the “Nasdaq Compliance Proposal”) to approve, for purposes of complying with Nasdaq Stock Market LLC Listing Rule 5635, the issuance of shares of the Company’s common stock upon conversion of certain outstanding Company convertible promissory notes and exercise of certain outstanding Company warrants in excess of the 19.99% share limitation contained in such securities. Both proposals were approved. Unless otherwise indicated, the information and data presented in this Report does not give effect to the reverse stock split, which shall be effected on November 20, 2024.
Proposed Joint Venture
We have entered into a non-binding letter of intent with Lockwood Development Partners LLC, a company engaged in real estate development, management, and finance, and The Bright Hospitality Management, LLC, a hospitality management company and provider of technology-based hotel management platforms, proposing to establish a joint venture (“JV”) focused on hotel services and operations. If consummated, we believe that this strategic initiative would provide our company with the opportunity to broaden market impact and deliver an elevated guest experience. If consummated, the joint venture would initially focus on two LuxUrban properties, with the parties to consider expansion of the relationship to include additional LuxUrban hotels based on success of the pilot initiative. The collaboration would leverage Lockwood’s established presence in hotel development and Bright’s innovative hospitality technology to create a unique guest experience and optimize operational efficiencies. It is proposed that in connection with the pilot JV, Lockwood would initially invest approximately $7 million to address certain obligations in arrears with respect to, and enhance facilities in, the two JV pilot hotels, with potential additional investments of up to $35 million if all existing LuxUrban hotels are later added to the JV structure. The JV would focus on rejuvenating the initial two JV properties, incorporating advanced technologies and amenities designed to improve operational performance and guest satisfaction using Bright’s platform. This platform features AI-driven management tools intended to enhance guest satisfaction and streamline hotel operations. The JV, if launched, will introduce Lockwood’s Vitality brand to the New York City market, enhancing customer engagement through a loyalty program and cohesive branding strategy. The nonbinding letter of intent contemplates that the definitive agreements will outline a pathway for expanding the JV to include additional LuxUrban properties, contingent upon achieving initial success and obtaining necessary consents and approvals, including the approval of our stockholders and noteholders of LuxUrban and the landlords for any additional properties.
The initial pilot JV will require approval of the landlords for the pilot hotels, approval of certain of LuxUrban’s debt holders (which has been obtained), and the negotiation and execution of by the parties of definitive agreements governing the JV. While the companies have undertaken to work closely together to secure all consents and approvals and finalize the definitive agreements, there can be no certainty that these will be obtained and executed. There are numerous risks and factors that could result in the terms of the JV being modified or not being consummated or commercially launched at all. We will disclose final terms of the definitive agreements if and when same are executed.
22
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”).
On August 20, 2024, the Company filed a Form 10-Q/A for the period ended March 31, 2024, with the Securities and Exchange Commission that restated the Form 10-Q for the same period previously filed on May 13, 2024. The financial information set forth herein gives effect to this restatement. The stockholders of the Company approved a 1-for-70 reverse stock split that will be effected on November 20, 2024. The information and data presented in this Report does not give effect to the reverse stock split.
Special Note Regarding Forward-Looking Statements
This Quarterly Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The statements contained in this Quarterly Report that are not purely historical are forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this Quarterly Report may include, for example, statements about:
| ● | our 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; |
23
| ● | 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; |
| ● | 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. During 2024, we have engaged in a sweeping program to improve our company’s management and operations, which we call “LuxUrban 2.0.” These efforts have included adding hotel and financing veterans throughout our management team and board of directors, the elimination from our operations of non-performing hotels properties, and initiatives to reduce operating overhead. Although continued material effort is required, as our company operates in the third quarter and enters the fourth quarter of 2024, we believe LuxUrban 2.0 is beginning to produce the intended benefits. We also continue to explore capital raising transactions, as well as strategic initiatives to improve the company, including potential joint ventures and other transactions, although there can be no certainty that any such transactions will occur.
We currently have a portfolio of nine hotel rooms in New York, 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 Report, we have 996 hotel rooms available for rent through our portfolio. We have been reducing our domestic operations and U.S.-based portfolio of available hotel rooms over the past nine months, focusing only on properties that we believe can generate on positive cash flow.
24
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 nine months ended September 30, 2024 and more than 85% of revenue during the nine months ended September 30, 2023.
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. Robert Arigo was appointed as chief executive officer, bringing to us extensive experience from the hotel industry. Michael James was appointed as chief financial officer, bringing to us extensive financial experience. 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 actively refining our portfolio of hotels that provide short-term accommodations for guests at average nightly and occupancy rates that will exceed unit operating costs. 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 13 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.
During 2024 we have been modifying our portfolio of hotels towards the goal of achieving positive cash flow from our properties. To this end, the Company has recently exited several hotels that had a history of negative cash flow. Our main focus is currently on the New York hotel market.
In prior quarters, including the third quarter of 2024, we did not generate sufficient cash to pay our operating expenses. As a result, we were required to go to the capital markets in May, June, July and August 2024 to raise capital through the sale of equity and debt in order to continue operations. At the same time, we experienced significant decline in our stock price, making these capital raises relatively more expensive and dilutive. Legacy operations and results have resulted in the accumulation of significant liabilities. While we believe we are close to achieving positive cash flow on a monthly basis from going forward operations, legacy liabilities will continue to place significant strains on our company and will require us to secure additional capital funding, continue to engage in material cost cutting efforts, and continue to take measures to focus and improve our operational efficiencies. If we are unable to continue improvements to our business and operations while also securing additional financings, our ability to continue as a going concern is in doubt. Potential financings could continue to include materially dilutive equity financings and debt financings. There can be no assurance then necessary capital financings will be available to us on commercially reasonable terms or at all.
The Company anticipates that the fourth quarter will have a positive impact on the Company’s overall operating results and conditions, as the New York hotel market is historically strongest during the fourth quarter and the Company anticipates being able to generate revenues at higher daily room rates.
25
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 September 30, 2024, we leased eight (8) properties with 996 units available for rent. In March 2024 through September of 2024, we surrendered three 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. Although we have been able to negotiate terms for the surrender of certain of our units, the surrender of these properties have and could continue to expose the Company to potential claims by landlords.
Our portfolio of properties as of September 30, 2024 (as adjusted for the surrender of certain properties mentioned above) was as follows:
| Property | # of Units | Property Type | Lease Term | Lease Remaining at 9/30/24 (years) |
Extension Option (remaining at 9/30/24) |
Annual Escalation |
Date Commenced | |||||||
| Blakely: 136 W 55th St, New York, NY 10105 | 117 | Licensed hotel | 15-year | 12.3 | 10-year | 3% | 11/1/2021 | |||||||
| Herald: 71 W 35th St, New York, NY 10001 | 168 | Licensed hotel | 15-year | 12.9 | None | 3% | 6/2/2022 | |||||||
| Tuscany: 120 E 39th St., New York, NY 10016 | 125 | Licensed hotel | 15-year | 13.5 | 10-year | 2% | 1/1/2023 | |||||||
| Hotel 57: 2869 130 E 57th St., New York, NY 10022 | 216 | Licensed hotel | 15-year | 14.0 | 10-year | 3% | 7/1/2023 | |||||||
| Condor: 56 Franklin Ave, Brooklyn, NY 11205 | 35 | Licensed hotel | 15-year | 14.2 | 10-year | 3% | 9/1/2023 | |||||||
| BeHome: 56 765 8th Ave, New York, NY 10036 | 44 | Licensed hotel | 25-year | 24.0 | None | 3% | 7/1/2023 | |||||||
| Hotel 27: 62 Madison Ave, New York, NY 10016 | 74 | Licensed hotel | 15-year | 14.3 | 10-year | 3% | 11/1/2023 | |||||||
| Washington: 8 Albany Street, New York, NY 10006 | 217 | Licensed hotel | 15.2-year | 13.4 | None | 2% | 9/20/2022 | |||||||
| Weighted Avg. | Weighted Avg. | Weighted Avg. | Weighted Avg. | |||||||||||
| Operating Units as of 9/30/2024(1) | 996 | 15.5 | 13.7 | 5.7 | 2.7% |
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.
26
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 719 keys, all of which we believe are in the process of being cured. 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.
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 September 30, 2024, as adjusted for the surrender of certain properties in the nine months ended September 30, 2024 (as discussed above), were as follows:
| Location | Miami Beach | New York | Total | |||||||||
| Units | 0 | 996 | 996 | |||||||||
| Deposit | $ | 550,000 | $ | 16,464,123 | $ | 17,014,123 | ||||||
| Per Unit | $ | 0 | $ | 16,530 | $ | 17,082 | ||||||
Revenue Management
We use third-party 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 the technology to both maximize occupancy rates through attractive pricing and increase cash flow in advance of potential guest stays.
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. |
27
| ● | 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 estimate that the property-level break-even rate for total revenue per available room (or TRevPAR) for our portfolio as of September 30, 2024, 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 | 81 | % | $ | 158 | ||||
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. From January through May 2024, the Company sold guaranteed reservation rooms at substantial discounts to market in order to generate cash as necessary to operate the business. This resulted in substantially lower TRevPar during the period and will negatively affect TRevPar during the remainder of 2024. The revenue generated from the sale of these rooms could not be recognized as earned revenues for the periods during which the rooms were sold, but will be recognized by the Company in future periods as guests utilized the rooms.
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.
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.
28
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. |
Human Capital
As of September 30, 2024, we had a total of 357 full-time employees, 328 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.
29
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. As part of our legacy issues, 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 Report 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.
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.
30
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.
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
The Company began as Corphousing LLC (“Corphousing LLC”), which 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 a wholly-owned subsidiary of ours and the entity that covered our legacy apartment rental business. We substantially exited the residential-based rental business prior to year-end 2022.
31
Results of Operations
| For The Three Months Ended September 30, | ||||||||||||
| 2024 | 2023 | % ∆ | ||||||||||
| Net Rental Revenue | $ | 13,133,103 | $ | 31,208,248 | (58 | )% | ||||||
| Rent Expense | 8,509,487 | 7,802,847 | ||||||||||
| Non-Cash Rent Expense Amortization | 1,684,546 | 1,952,599 | ||||||||||
| Surrender of Deposits | 700,000 | - | ||||||||||
| Other Expenses | 20,740,915 | 13,640,517 | ||||||||||
| Total Cost of Revenue | 29,950,401 | 23,395,963 | 28 | % | ||||||||
| Gross (Loss) Profit | (16,817,298 | ) | 7,812,285 | (315 | )% | |||||||
| General and Administrative Expenses | 11,697,043 | 1,981,774 | ||||||||||
| Termination of Franchise Agreement | 310,356 | - | ||||||||||
| Non-Cash Issuance of Common Stock for Operating Expenses | 111,000 | 334,081 | ||||||||||
| Non-Cash Stock Compensation and Option Expense | 25,302 | 407,553 | ||||||||||
| Total Operating Expenses | 12,143,701 | 2,723,408 | 346 | % | ||||||||
| Income (Loss) from Operations | (28,960,999 | ) | 5,088,877 | (669 | )% | |||||||
| Other Income (Expense) | ||||||||||||
| Other Income | 1,331,423 | 31,627 | ||||||||||
| Cash Interest and Financing Costs | (984,792 | ) | (2,185,202 | ) | ||||||||
| Non-Cash Financing Costs | (2,115,004 | ) | - | |||||||||
| Total Other Expense | (1,768,373 | ) | (2,153,575 | ) | 18 | % | ||||||
| Loss Before Benefit from for Income Taxes | (30,729,372 | ) | 2,935,302 | (1147 | )% | |||||||
| Provision for Income Taxes | - | (1,999,498 | ) | |||||||||
| Net Income (Loss) | (30,729,372 | ) | 4,934,800 | (723 | )% | |||||||
| Preferred Stock Dividend | (238,992 | ) | - | |||||||||
| Net Income (Loss) Attributable to Common Stockholders | $ | (30,968,364 | ) | $ | 4,934,800 | (728 | )% | |||||
Three Months Ended September 30, 2024, as compared to Three Months Ended September 30, 2023
Net Rental Revenue
Net rental revenue for the three months ended September 30, 2024 was $13.1 million, as compared to $31.2 million for the three months ended September 30, 2023, a decrease of 58%. This decrease predominantly resulted from the decrease in average units available to rent from 1,625 for the three months ended September 30, 2023 to 996 for the three months ended September 30, 2024. This decrease in net rental revenues was exacerbated by bookings of guaranteed reservations at relatively lower rates for the three months ended September 30, 2024 as compared to the same period during the prior year. The TRevPAR, or revenue per available room, decreased from $257 for the three months ended September 30, 2023 to $172 for the three months ended September 30, 2024. The lower TrevPar in the current quarter is attributable to the impact from preselling of the rooms at lower rates versus the same period last year. TRevPAR includes both average daily rate (“ADR”) and occupancy.
Cost of Revenue
Cost of revenue increased from $30.0 million in the three months ended September 30, 2023 to $23.4 million for the three months ended September 30, 2024, an increase of 28%, primarily as a result of the Company expensing the unamortized lease acquisition costs and security deposits surrendered for the properties that were exited during the period, as well as increases in costs related to utilities, labor, cable/WIFI, credit card processing fees and commissions, and costs related to the relocation of guests from our terminated properties to alternative properties.
32
Gross Profit
Gross Profit decreased to ($16.8) million in the three months ended September 30, 2024 from $7.8 million in the three months ended September 30, 2023, a net decrease of $24.6 million or 315%. This decrease is primarily as a result of the Company expensing the unamortized lease acquisition costs and security deposits surrendered for the properties that were exited during the period, as well as deposit surrenders and commission costs to relocate guests from our terminated properties to alternative properties.
Total Operating Expenses
Total operating expenses incurred for the three months ended September 30, 2024, increased by approximately $9.4 million from the three months ended September 30, 2023. Of this increase, $9.7 million was for costs related to the increase in the reserve for litigation with landlords included in general and administrative expenses increased by $0.3 million by the exit of our partnership with Wyndham.
Other Income (Expense)
Total other expense for the three months ended September 30, 2024 was ($1.8) million as compared to ($2.12) million for the three months ended September 30, 2023. This decrease is primarily due to gain on exiting leases, and higher cash interest and financing costs during the three months ended September 30, 2024 as compared with three months ended September 30, 2023 as a result of materially reducing use during the period of merchant cash advances, partially offset by greater non-cash financing costs from the Greenle exchange.
Results of Operations
| For The Nine Months Ended September 30, | ||||||||||||
| 2024 | 2023 | % ∆ | ||||||||||
| Net Rental Revenue | $ | 45,276,687 | $ | 85,883,521 | (47 | )% | ||||||
| Rent Expense | 22,387,122 | 18,068,828 | ||||||||||
| Non-Cash Rent Expense Amortization | 5,449,098 | 6,187,540 | ||||||||||
| Surrender of Deposits | 4,151,628 | - | ||||||||||
| Other Expenses | 73,919,562 | 38,273,980 | ||||||||||
| Total Cost of Revenue | 105,907,410 | 62,530,348 | 69 | % | ||||||||
| Gross (Loss) Profit | (60,630,723 | ) | 23,353,173 | (360 | )% | |||||||
| General and Administrative Expenses | 26,326,941 | 9,297,097 | ||||||||||
| Termination of Franchise Agreement | 3,625,868 | - | ||||||||||
| Non-Cash Issuance of Common Stock for Operating Expenses | 489,936 | 1,847,711 | ||||||||||
| Non-Cash Stock Compensation and Option Expense | 1,872,623 | 1,209,936 | ||||||||||
| Total Operating Expenses | 32,315,368 | 12,354,744 | 102 | % | ||||||||
| Income (Loss) from Operations | (92,946,091 | ) | 10,998,429 | (945 | )% | |||||||
| Other Income (Expense) | ||||||||||||
| Other Income | 2,418,403 | 129,875 | ||||||||||
| Cash Interest and Financing Costs | (4,060,348 | ) | (5,505,708 | ) | ||||||||
| Non-Cash Financing Costs | (4,885,867 | ) | (30,227,289 | ) | ||||||||
| Total Other Expense | (6,527,812 | ) | (35,603,122 | ) | (82 | )% | ||||||
| Loss Before Benefit from for Income Taxes | (99,473,903 | ) | (24,604,693 | ) | 304 | % | ||||||
| Provision for Income Taxes | - | 15,702 | ||||||||||
| Net Loss | (99,473,903 | ) | (24,620,395 | |||||||||
| Preferred Stock Dividend | (716,975 | ) | - | |||||||||
| Net Loss | $ | (100,190,878 | ) | $ | (24,620,395 | ) | 307 | % | ||||
33
Nine Months Ended September 30, 2024, as compared to Nine Months Ended September 30, 2023
Net Rental Revenue
Net rental revenue for the nine months ended September 30, 2024 was $45.3 million, as compared to $85.9 million for the nine months ended September 30, 2023, a decrease of 47%. This decrease predominantly resulted from the decrease in average units available to rent from 1,625 for the nine months ended September 30, 2023 to 996 for the nine months ended September 30, 2024. This decrease in net rental revenues was exacerbated by bookings of guaranteed reservations at relatively lower rates for the nine months ended September 30, 2024 as compared to the same period during the prior year. The TRevPAR, or revenue per available room, decreased from $291 for the nine months ended September 30, 2023 to $158 for the nine months ended September 30, 2024. The lower TrevPar in the current quarter is attributable to the impact from preselling of the rooms at lower rates versus the same period last year. TRevPAR includes both average daily rate (“ADR”) and occupancy.
Cost of Revenue
Cost of revenue increased from $62.5 million in the nine months ended September 30, 2023 to $105.9 million for the nine months ended September 30, 2024, an increase of 69%, primarily as a result of the Company expensing the unamortized lease acquisition costs and security deposits surrendered for the properties that were exited during the period, as well as increases in costs related to utilities, labor, cable/WIFI, credit card processing fees and commissions, and costs related to the relocation of guests from our terminated properties to alternative properties.
Gross Profit
Gross Profit decreased to ($60.6) million in the nine months ended September 30, 2024 from $23.4 million in the nine months ended September 30, 2023, a net decrease of $84.0 million or 360%. This decrease is primarily as a result of the Company expensing the unamortized lease acquisition costs and security deposits surrendered for the properties that were exited during the period, as well as deposit surrenders and commission costs to relocate guests from our terminated properties to alternative properties.
Total Operating Expenses
Total operating expenses incurred for the nine months ended September 30, 2024, increased by approximately $20.0 million from the nine months ended September 30, 2023. Of this increase, $3.6 million were for costs related to the exit of our partnership with Wyndham in the nine months ended September 30, 2024. The company wrote off receivables to bad debt expense in the amount of $7.8 million during the nine months ended September 30, 2024. The Company increased its reserve for the litigation with landlords.
Other Income (Expense)
Total other expense for the nine months ended September 30, 2024 was $6.5 million as compared to $35.6 million for the nine months ended September 30, 2023. This decrease is primarily due to gain on exiting $2.4 million, lower cash interest and financing costs during the nine months ended September 30, 2024 as compared with nine months ended September 30, 2023 as a result of materially reducing use during the period of merchant cash advances, partially offset by greater non-cash financing costs from the Greenle exchange.
Liquidity and Capital Resources
The following table provides information about our liquidity and capital resources as of September 30, 2024 and December 31, 2023:
| As of September 30, 2024 |
As of December 31, 2023 |
|||||||
| Cash and Cash Equivalents | $ | 198,868 | $ | 752,848 | ||||
| Other Current Assets | $ | 2,531,013 | $ | 18,968,209 | ||||
| Total Current Assets | $ | 2,729,881 | $ | 19,721,057 | ||||
| Total Current Liabilities | $ | 83,566,518 | $ | 33,125,741 | ||||
| Working Capital (Deficit) | $ | (80,836,636 | ) | $ | (13,404,684 | ) | ||
34
As of September 30, 2024, our cash and cash equivalents balance was $198,868 as compared to $752,848 at December 31, 2023, and total current assets were $2,729,881 at September 30, 2024, as compared to $19,721,057 at December 31, 2023.
As of September 30, 2024, our company had total current liabilities of $83,566,518 as compared to $33,125,741 at December 31, 2023. Total current liabilities at September 30, 2024 consisted of: accounts payable and accrued expenses of $64,170,241 as compared to $23,182,305 at December 31, 2023; rents received in advance of $6,354,952 at September 30, 2024, as compared to $4,404,216 at December 31, 2023; short-term business loans of $3,922,103 at September 30, 2024, as compared to $1,115,120 at December 31, 2023; loans payable of $6,472,183 at September 30, 2024, as compared to $1,654,589 at December 31, 2023; indirect lease cost of $300,000 at September 30, 2024, as compared to $486,390 at December 31, 2023; operating lease liability of $2,347,039 at September 30, 2024, as compared to $1,982,281 at December 31, 2023; and development incentive advances of $0 at September 30, 2024 as compared to $300,840 at December 31, 2023.
As of September 30, 2024, our company had a working capital deficit of $80,836,636 as compared to a deficit of $13,404,684 at December 31, 2023.
Over the past few months, management has undertaken a strategic streamlining of the properties under operation. We are confident that current operations will generate positive cash flow at the property level. However, due to significant legacy liabilities—including outstanding payments to landlords, union dues and fringe benefits, sales and occupancy taxes, utility costs, lawsuits, and obligations to various vendors—the aggregate cash flow from these operations will not be sufficient to fully meet these obligations. Management remains committed to operating the existing properties while actively pursuing settlements for these legacy liabilities.
We have obtained funding through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loans (“EIDL”) totaling $814,244 and $800,000, respectively. We have used these funds for our ongoing operations. We have received forgiveness of $516,225 of the PPP loans, and for the balance of these funds we intend to repay them in accordance with the terms of the respective loan agreements or seek forgiveness, as permitted.
We record cash collected prior to stays as “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 development, 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. Many of the obligations due to the landlords, unions, utility providers and sales and other taxes have been accrued for by prior management but were not paid. The current management is working with the unions and other creditors to arrive at payment terms over time.
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.
35
Proposed Joint Venture
We have entered into a non-binding letter of intent with Lockwood Development Partners LLC, a company engaged in real estate development, management, and finance, and The Bright Hospitality Management, LLC, a hospitality management company and provider of technology-based hotel management platforms, proposing to establish a joint venture (“JV”) focused on hotel services and operations. If consummated, we believe that this strategic initiative would provide our company with the opportunity to broaden market impact and deliver an elevated guest experience. If consummated, the joint venture would initially focus on two LuxUrban properties, with the parties to consider expansion of the relationship to include additional LuxUrban hotels based on success of the pilot initiative. The collaboration would leverage Lockwood’s established presence in hotel development and Bright’s innovative hospitality technology to create a unique guest experience and optimize operational efficiencies. It is proposed that in connection with the pilot JV, Lockwood would initially invest approximately $7 million to address certain obligations in arrears with respect to, and enhance facilities in, the two JV pilot hotels, with potential additional investments of up to $35 million if all existing LuxUrban hotels are later added to the JV structure. The JV would focus on rejuvenating the initial two JV properties, incorporating advanced technologies and amenities designed to improve operational performance and guest satisfaction using Bright’s platform. This platform features AI-driven management tools designed to enhance guest satisfaction and streamline hotel operations. The JV, if launched, will introduce Lockwood’s Vitality brand to the New York City market, enhancing customer engagement through a loyalty program and cohesive branding strategy. The nonbinding letter of intent contemplates that the definitive agreements will outline a pathway for expanding the JV to include additional LuxUrban properties, contingent upon achieving initial success and obtaining necessary consents and approvals, including the approval of our stockholders and noteholders of LuxUrban and the landlords for any additional properties.
The initial pilot JV will require approval of the landlords for the pilot hotels, approval of certain of LuxUrban’s debt holders (which has been obtained), and the negotiation and execution of by the parties of definitive agreements governing the JV. While the companies have undertaken to work closely together to secure all consents and approvals and finalize the definitive agreements, there can be no certainty that these will be obtained and executed. There are numerous risks and factors that could result in the terms of the JV being modified or not being consummated or commercially launched at all. We will disclose final terms of the definitive agreements if and when same are executed.
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 September 30, 2024, we had short-term business financing indebtedness of $3,922,103, short-term loans payable of $6,472,183, and long-term loans payable of $5,565,733. The proceeds from these financings have been or will be used to fund security deposits for our newly leased properties.
Financings
Cash generated from operations during the nine months ended September 30, 2024 was not sufficient to support cost of operations and servicing of the Company’s obligations. While the Company believes that the LuxUrban 2.0 efforts to eliminate poorly performing hotels and minimize other operating costs, while improving management and operating efficiencies, will allow the Company to operate hotels on a cash flow positive basis, the Company has material legacy liabilities and obligations and litigation exposures that will require it to secure additional capital resources in the relatively near term. There can be no assurance such capital resources, including equity or debt or strategic joint venture related financing or other financings will be available to the Company on commercially reasonable terms, or at all. Since inception, the Company has engaged in various financings, including during 2004 as described below.
36
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 (“December 2022 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 “June 2022 Notes”) and warrants to purchase our common stock (“June 2022 Warrants”) under certain securities purchase agreements and loan agreements between us and Greenle, including the Securities Purchase Agreement dated as of June 30 2022, as amended by the letter agreement dated October 20, 2022, and the Loan Agreement dated as of November 23, 2022.
Under the terms of the December 2022 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 the Company’s 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, the Company would be obligated to issue to Greenle a number of credits under our 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 this note was converted and the entire $3,000,000 was converted in January 2023. As part of this conversion, Ferdinand contributed to the Company 874,474 shares of common stock owned by him and his affiliates, which in turn, were used by the 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 Ferdinand, the market value of the shares of common stock so contributed was approximated $1.5 million.
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 (as may be adjusted for stock splits and similar transactions, the “Trigger Price”). The restriction on sales of our common stock by our company below the Trigger Price terminates in November 2024. This waiver permitted us 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 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 our company through November 6, 2024 in excess of 15 million shares at prices below the Trigger Price. To date, we have been required to issue the Greenle an aggregate of 23,628,324 shares of common stock in connection the foregoing rights and obligations as a result of private placements and underwritten public offerings of our common stock.
On November 17, 2023, the Company entered into a financing agreement with THA Holdings LLC (“THA”), an entity controlled and operated by Ferdinand, pursuant to which the Company agreed to issue to THA an unsecured, advancing term promissory note (the “November 2023 Note”). Under the November 2023 Note, the Company would have been able to borrow up to an aggregate principal amount of $10,000,000 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 THA. On December 3, 2023, the Company and THA mutually agreed to cancel the November 2023 Note as a result of the Company’s desire to engage in the Wyndham relationship and its related financing resources. The amount of proceeds, less taxes, resulting from sales of common stock prior to the cancelation in the amount of $311,234 was contributed 100% to the Company by THA. This was recorded as a contribution by the founder in the accompanying consolidated statement of changes in equity.
During the nine months ended September 30, 2024 and year ended December of 2023, we amortized $1,038,375 and paid $1,350,000, respectively to Ferdinand under the terms of the Guarantee Trust agreement as part of his personal guarantees on the Wyndham agreements and related advances to our company thereunder. At December 31, 2023 and September 30, 2024, $1,023,750 and $341,250, respectively, of this payment was classified as prepaid. During the three and nine months ended September 30, 2024, $341,250 and $1,038,375, respectively, was expensed.
In April 2024, the Company and Ferdinand entered into a consulting agreement pursuant to which Ferdinand agreed, among other things, to oversee the day-to-day management of our company’s acquisition and long-term lease acquisition activities and to assist our then newly appointed chief executive officer in his assumption of that role. In consideration for the services provided by Ferdinand, we agreed to pay Ferdinand a monthly consulting fee of $50,000. Pursuant to a subsequent modification of the consulting agreement in May 2024, it was agreed that all amounts payable to Ferdinand under such consulting agreement through its term (approximately $1.8 million) would be satisfied through the issuance of 5,692,600 shares of common stock upon the increase in the number of shares of common stock issuable under our 2022 equity incentive plan to 15,000,000 shares.
37
In May 2024, in order to provide for available authorized shares to consummate a public offering of shares of common stock, we entered into an exchange agreement (the “May 2024 Exchange Agreement”) with Ferdinand, pursuant to which he relinquished 7,500,000 shares of common stock that he beneficially owned through THA (the “May 2024 Exchange Agreement Shares”) in exchange for a warrant to acquire 7,500,000 shares of our common stock with an exercise price of $0.01 per share (the “May 2024 Exchange Agreement Warrant”). In June 2024, in order to provide for available authorized shares to consummate a private placement in June 2024, we entered into an exchange agreement (the “June 2024 Exchange Agreement”) with Ferdinand, pursuant to which Ferdinand relinquished an aggregate of 11,804,872 shares of common stock that he beneficially owned individually or through THA (the “June 2024 Exchange Agreement Shares”) in exchange for warrants to acquire an aggregate of 11,804,872 shares of our common stock with an exercise price of $0.01 per share (the “June 2024 Exchange Agreement Warrants” and collectively with the May 2024 Exchange Warrants, the “Exchange Warrants”)).
In July 2024, the Company entered into amended and restated promissory notes with THA Family II LLC and other parties affiliated with Ferdinand, which replaced existing promissory notes evidencing amounts loaned to our company to support letters of credit with respect to certain of our hotels. These notes extend the maturity dates by 24 months of up to an aggregate of $3.1 million principal amount currently owed by our company and bear interest at 14% interest, with interest being payable monthly commencing August 1, 2024, and monthly payments evolving into payments of principal and interest in accordance with an amortization schedule commencing seven months from the July 2024 date of the notes. These notes were subsequently converted in the notes sold to investors in our debt and warrant private placement consummated August 2024.
In May 2024, the company sold common stock in an underwritten public offering at $0.25 per share. Elan Blutinger, nonexecutive chairman of the board purchased 400,000 common shares in the offering.
In July 2024, the company sold stock in an underwritten public offering at $0.17 per share. Mr. Blutinger, purchased 294,116 common shares, Patrick McNamee, a director of our company, purchased 735,294 common shares, Kimberly Schaefer, a director of our company, purchased 117,647 common shares, Leonard Toboroff, a director of our company purchased 147,058 common shares, Robert Arigo, our chief executive officer, purchased 176,470 common shares and Michael James, our chief financial officer, purchased 352,941 common shares in the offering.
In August 2024, the Company issued in a private placement (the “August 2024 Note and Warrants Debt Offering”) 18% senior secured convertible notes (“August 2024 Notes”) and common stock purchase warrants (“August 2024 Warrants”). Mr. Blutinger purchased $100,000 of these securities, Mr. McNamee, a former director, purchased $100,000 of these securities, and Mr. James, purchased $20,000 of these securities.
On July 15, 2024, the Company issued in an underwritten public offering 30,000,000 common shares of the Company’s common stock at $0.17 raising gross proceeds of $5,100,000, after fees the Company netted $4,567,000. On July 15, 2024, the Company issued warrants to purchase up to 306,000 shares of the Company’s common stock to the underwriter of the public offering, Alexander Capital, L.P. (“Alexander”), with an exercise price of $0.187. These warrants are exercisable for five years and expire in July 2029. On July 18,2024, Alexander exercised the over-allotment to acquire an additional 4,500,000 common shares of the Company’s common stock at $0.17 raising gross proceeds of $765,000, after fees the Company netted $703,800. On July 18, 2024 the Company issued warrants to purchase up to 270,000 shares of the Company’s common stock to the underwriter of the public offering, Alexander, with an exercise price of $0.187. These warrants are exercisable for five years and expire in July 2029.
On July 30, 2024, the Company issued in another underwritten public offering 11,573,333 common shares of the Company’s common stock at $0.15 raising gross proceeds of $1,736,000, after fees the Company netted $1,530,800. On July 30, 2024, the Company issued warrants to purchase up to 694,400 shares of the Company’s common stock to the underwriter of the public offering, Alexander, with an exercise price of $0.165. These warrants are exercisable for five years and expire in July 2029.
In August 2024, the Company issued in a private placement (the “August 2024 Note and Warrants Debt Offering”) 18% senior secured convertible notes (“August 2024 Notes”) and common stock purchase warrants (“August 2024 Warrants”) raising gross proceeds of $4,122,000, after fees the Company netted approximately $3,836,000.
38
Under the terms of the August 2024 Note and Warrants Debt Offering, certain equity investors and holders of promissory notes evidencing existing borrowed money obligations of the Company, including THA and the investor in our June 2024 private placement, were entitled to convert such equity and debt into the August 2024 Note and Warrant Debt offering. As a result of these conversions, the Company issued an additional aggregate of $4.8 million principal amount of August 2024 Notes and August 2024 Warrants.
The Noteholders extended the private placement (the “August 2024 Note and Warrants Debt Offering”) 18% senior secured convertible notes (“August 2024 Notes”) and common stock purchase warrants (“August 2024 Warrants”) raising gross proceeds of $1,500,000, after fees the Company netted approximately $1,350,000.
The August 2024 Notes bear interest at 18%, are secured by substantially all of the assets of the Company under the terms of a guarantee and security agreement dated as of August 13, 2024 (“Security Agreement”), and were sold to certain accredited investors in a private offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). The principal of the Augst 2024 Notes shall be repaid in twenty-four (24) equal monthly installments commencing on August 13, 2025 and continuing on the same day of each month thereafter until the principal amount is paid in full, with all principal and interest due thereon to be paid on or prior to August 13, 2027, unless the Notes are previously converted into common stock or preferred stock as described below. The August 2024 Notes are senior debt of the Company, and subject to the terms and conditions of the Notes, the Company shall not issue any debt senior to the August 2024 Notes while any August 2024 Notes remain outstanding without the consent of a majority of the then outstanding principal amount of the Notes. The August 2024 Notes were convertible initially into that number of shares of common stock determined by dividing the principal amount of the Note purchased by the purchaser by 110% of the average VWAP of the common stock for the three consecutive trading days immediately following the date the Company filed its Quarterly Report on Form 10-Q for the six months ended June 30, 2024, not to exceed $0.15 (“Three-Day VWAP”). The Three-Day VWAP was set at $0.08404. As a result of opening the offering, and curing of any existing defaults under the August 2024 Notes, the conversion price of the August 2024 Notes were reset to $0.06;provided, that in the event the VWAP of the common stock for the three trading days immediately following the date of our pending reverse stock split is implemented (and thereafter the effectiveness of the registration statement to be filed to register the resale of the shares of common stock underlying the August 2024 Notes and August 2024 Warrants) is lower than the then-current split-adjusted conversion price, the conversion price shall be reset to such three-day VWAP; provided, that such exercise price (the “VWAP Adjusted Conversion Price”) shall not be less than $0.05 (as adjusted for the Reverse Stock Split). For example, if a 1-for-70 split is effected, the per-share conversion price shall not be adjusted to less than $3.50.
The August 2024 Warrants have a five-year term from the date of the initial closing of the Debt Placement and shall become exercisable commencing on the date of the earliest to occur of (a) shareholder approval of the Reverse Split (as defined below) and the Nasdaq Compliance Waiver (as defined below) and (b) the 91st day after the initial closing of the Debt Placement. The August 2024 Warrants initially entitled the purchaser to purchase up to that number of shares of common stock determined by dividing the principal amount of the Note purchased by the purchaser by 110% of the average VWAP of the common stock for the three consecutive trading days immediately following the date the Company filed its Quarterly Report on Form 10-Q for the six months ended June 30, 2024, not to exceed $0.15 (“Three-Day VWAP”). The Three-Day VWAP was set at $0.08404. As a result of opening the offering, and curing of any existing defaults under the August 2024 Notes, the exercise price of the warrants were reset at $0.06;provided, that in the event the VWAP of the common stock for the three trading days immediately following the date of our pending reverse stock split is implemented (and thereafter the effectiveness of the registration statement to be filed to register the resale of the shares of common stock underlying the August 2024 Notes and August 2024 Warrants) is lower than the then-current split-adjusted exercise price, the exercise price shall be reset to such three-day VWAP; provided, that such exercise price (the “VWAP Adjusted Exercise Price”) shall not be less than $0.05 (as adjusted for the Reverse Stock Split). For example, if a 1-for-70 split is effected, the per-share exercise price shall not be adjusted to less than $3.50.
Under the terms of the August 2024 Note and Warrant Debt Placement, the Company was obligated to file a proxy statement for purposes of calling a special meeting of the Company’s shareholders to seek approval of certain prescribed proposals. These proposals included an amendment to the Company’s certificate of incorporation to effect a reverse stock split (“Reverse Split”) of the Company’s outstanding common stock in the range of one share-for-30 shares to one share-for-70 shares. The specific split ratio was set at 1-for-70 by the board in November 2024. In connection with the Reverse Split, the number of authorized shares of the Company’s common stock will be maintained at 200,000,000 shares, preferred stock will be maintained at 20,000,0000 shares, and the shares authorized under the Company’s existing 2022 incentive plan will remain at 8,000,000 shares. The proposals also included approval of the transactions comprising the August 2024 Note and Warrant Debt Offering (“Nasdaq Compliance Waiver”) with respect to issuances or deemed issuances of common stock (including upon exercise of the Note Warrants or conversion of the Notes) in aggregate excess of 19.99% of the outstanding common stock at less than the Minimum Price (as defined in applicable Nasdaq regulations) as required to comply with Nasdaq regulations. The special meeting of stockholders was held on November 12, 2024 and all proposals were approved at the meeting. The reverse stock split will be effected on November 20, 2024.
39
Under the terms of the August 2024 Note and Warrant Debt Placement, as modified by the Modification Agreement,, promptly following the reverse stock split, the Company will use commercially reasonable efforts to file and have declared effective a resale registration statement under the Securities Act of 1933, as amended, covering the shares of common stock issuable up on conversation and exercise of the August 2024 Notes and August 2024 Warrants.
From the date hereof until the date that is the later of (a) the date on which no August 2024 Notes are outstanding and (b) the 18-month anniversary of the initial closing of the Debt Placement, upon any issuance by the Company or any of its subsidiaries of (1) common stock or common stock equivalents, (2) indebtedness or (3) a combination of units thereof, in each case for cash and not as part of any ordinary course of business operations or as part of any underwritten public offering or other exempt issuance (a “Subsequent Private Financing”), each Purchaser shall have the right to participate in such Subsequent Private Financing in an amount up to an amount equal to the principal of the Notes purchased by such Purchaser in the Debt Placement or if the amount of the Subsequent Private Financing is less than the aggregate principal amounts of all Notes purchased in the Debt Placement by all purchasers, such purchaser’s pro rata portion based on such purchaser’s principal amount of the Notes originally purchased in the Debt Placement as compared to the principal amount of all Notes purchased in the Debt Placement by all purchasers, on the same terms, conditions and price provided for in the Subsequent Private Financing.
Cash Flows from Operating Activities
During the nine months ended September 30, 2024, we used $37,408,972 of cash in operating activities that was primarily related to a non-cash writeoff of bad debts of $7,848,083, a non-cash writeoff of channel retained security deposit of $1,500,000, a non-cash writeoff of security deposits of $4,343,290, non-cash stock director expense of $1,729,135, modification of warrants of $2,593900, non-cash lease expense of $5,150,849, increase in security deposits of $1,050,000, offset by non-cash amount of prepaid expenses of $2,237,165, prepaid guarantee trust of $682,500, and accounts payable and accrued expense of $24,297,608 and rents received in advance of $1,950,736.
During the nine months ended September 30, 2023, we used $4,200,924 of cash in operating activities that was primarily related to an increase in security deposits of $8,132,745 an increase in channel retained funds and receivables from OTAs of $5,863,561 and an increase in operating lease liabilities of $9,494,760 offset by net non-cash amount of lease expense of $13,752,266, stock compensation expense of $897,212, stock option expense of $372,387, changes in accounts payable and accrued expenses of $329,254, accrued income taxes of $2,015,200, and shares used for operating expense of $1,669,130.
Cash Flow from Investing Activities
During the nine months ended September 30, 2024, no cash used for investing activities versus cash generated of $2,692,396 during the nine months ended September 30, 2023 primarily from the proceeds from the sale of Treasury Bills.
Cash Flow from Financing Activities
During the nine months ended September 30, 2024, net cash provided by financing activities of $36,854,992 included proceeds from short-term financing of $2,806,983, proceeds from public and private sales of common stock of $15,662,038, warrant exercises of $4,800,000, proceeds from loans payable of $8,577,560 and proceeds from development incentive advances of $3,000,500. During the nine months ended September 30, 2023, net cash used by financing activities was $4,608,575 included warrant exercises of $5,312,52 offset by net repayments of short-term business loans and debt totaling $703,927.
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 September 30, 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.
40
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 nine months ended September 30, 2024
| 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 | ||||||||||
| Non-employee director compensation | Non-Cash Issuance of Common Stock for Director Compensation Expenses | 5/3/2024 | 980,628 | $ | 0.84 | $ | 823,728 | ||||||||||
| Non-employee commission expense | Commission Expense | 5/9/2024 | 36,887 | $ | 0.71 | $ | 26,085 | ||||||||||
| Non-employee investor relations expense | Investor Relations Expense | 7/8/2024 | 600,000 | $ | 0.185 | $ | 111,000 | ||||||||||
| Non-employee director Compensation | Non-Cash Issuance of Common Stock for Director Compensation Expense | 9/16/2024 | 3,067,705 | $ | 0.072 | $ | 220,875 | ||||||||||
| Employee Compensation | Non-Cash Issuance of Common Stock for Compensation Expenses | 9/16/2024 | 1,485,504 | $ | 0.072 | $ | 106,956 | ||||||||||
| Subtotal | 6,483,395 | $ | 2,318,083 | ||||||||||||||
For the nine months ended September 30, 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 | ||||||||||
| Non-employee Board members pursuant to related comp policy | Non-Cash Stock Compensation Expenses | 8/16/2023 | 91,525 | $ | 2.85 | $ | 260,846 | ||||||||||
| In connection with certain property finders’ fee arrangements | Non-Cash Issuance of Common Stock for Operating Expenses | 8/21/2023 | 45,833 | $ | 2.77 | $ | 126,957 | ||||||||||
| Advisory and legal services | Non-Cash Issuance of Common Stock for Operating Expenses | 8/21/2023 | 9,250 | $ | 2.85 | $ | 26,363 | ||||||||||
| Acorn Management Partners in connection with advisory services | Non-Cash Issuance of Common Stock for Operating Expenses | 8/28/2023 | 8,741 | $ | 2.89 | $ | 25,261 | ||||||||||
| Elizabeth Brown in connection with her termination of employment | Non-Cash Issuance of Common Stock for Operating Expenses | 8/28/2023 | 50,000 | $ | 3.11 | $ | 155,500 | ||||||||||
| Subtotal | 805,895 | $ | 1,909,735 | ||||||||||||||
41
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 Quarterly Report, we believe that the following accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
Our revenue is derived primarily from the rental of units to our guests. We recognize revenue when obligations under the terms of a contract are satisfied and control over the promised services is transferred to the guest. For the majority of sales, this occurs when the guest occupies the unit for the agreed upon length of time and receives any services that may be included with their stay. Revenue is measured as the amount of consideration we expect to receive in exchange for the promised goods and services.
Current and future reservations for most of our accommodation units require prepayment upfront. A majority of our reservations require full prepayment at the time the reservation is placed, with the remaining charged at check-in. Payments are processed through third-party credit card processors and marketing and reservation channels. We typically offer both a refundable and nonrefundable 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.
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 result 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.
42
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 September 30, 2024 and December 31, 2023, was $6,354,952 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.
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.
43
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 years ended December 31, 2023, and December 31, 2022, and the nine months ended September 30, 2024, 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.
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.
44
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
New Accounting Pronouncements — In November 2023, the Financial Accounting Standards Board (FASB) issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07), which requires an enhanced disclosure of significant segment expenses on an annual and interim basis. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. Upon adoption, the guidance should be applied retrospectively to all prior periods presented in the financial statements. We do not expect the adoption of this guidance to have a material impact on our condensed consolidated financial statements. The Company did not adopt any new accounting pronouncements during the nine months ended September 30, 2024.
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.
45
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 Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Quarterly 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 September 30, 2024 as a result of the material weakness described above.
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.
46
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.
In addition to our litigation with Wyndham described elsewhere in this Report, we are currently party to other litigations, including:
| ● | Certain litigations to which we are a party 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 winding down our 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 have 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 voluntarily 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, which is incorporated by reference herein, under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Regulations Governing Short-Term Rentals.” | |
| ● | On July 19, 2024, we became aware of a post-judgment writ of garnishment issued against our company in the amount of approximately $621,000 with respect to a judgment rendered against our company in September 2023 in favor of Dimension Seattle. We had previously reserved for this obligation on our balance sheet. |
| ● | 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 prospectus supplement, we are a 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 non-completion 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. |
47
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.
We currently employ approximately 372 employees across our operations and book thousands of guests annually in our properties. As of the date of this prospectus supplement, we have litigations and arbitrations with certain of our former officers involving claims by them for back pay and other compensation, in which we intend to raise available defenses and counterclaims. Other than these, we currently 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. In connection with the termination of former executive officers, we could be subject to litigation from time to time or elect to bring affirmative litigation if circumstances warrant.
As of September 30, 2024, we had accrued an aggregate of $19.2 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 that any counterclaims will be successful. Assuming the most adverse outcomes, we expect aggregate liabilities from current litigations to comprise less than 2% of our anticipated revenues for 2024.
Item 1A - Risk Factors
As of September 30, 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. Those risks include risks, among others, relating to our ability to continue as a going concern, litigation exposures faced by our Company, and the need to raise substantial additional capital, all of which remain material risks to our Company. 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
Employment and Management Related Issuance Obligations
During the nine months ended September 30, 2024, we issued an aggregate of 6,463,387 shares on an unregistered basis comprised of 46,966 shares issued as commission on real estate lease transactions, 659,784 for services in lieu of cash payment, 4,246,133 issued to our independent board members under our independent director compensation policy, and 1,510,5040 shares as part of employee compensation.
We did not generate any cash proceeds from the sales of the above-described shares.
48
Private Placements
August 2024 Note and Warrant Debt Placement
In October 20204, the Noteholders extended the private placement (the “August 2024 Note and Warrants Debt Offering”) 18% senior secured convertible notes (“August 2024 Notes”) and common stock purchase warrants (“August 2024 Warrants”) raising in October and November 2024, gross proceeds of $1,500,000, after fees the Company netted approximately $1,350,000.
The August 2024 Notes bear interest at 18%, are secured by substantially all of the assets of the Company under the terms of a guarantee and security agreement dated as of August 13, 2024 (“Security Agreement”), and were sold to certain accredited investors in a private offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). The principal of the Augst 2024 Notes shall be repaid in twenty-four (24) equal monthly installments commencing on August 13, 2025 and continuing on the same day of each month thereafter until the principal amount is paid in full, with all principal and interest due thereon to be paid on or prior to August 13, 2027, unless the Notes are previously converted into common stock or preferred stock as described below. The August 2024 Notes are senior debt of the Company, and subject to the terms and conditions of the Notes, the Company shall not issue any debt senior to the August 204 Notes while any August 2024 Notes remain outstanding without the consent of a majority of the then outstanding principal amount of the Notes. The August 2024 Notes were convertible initially into that number of shares of common stock determined by dividing the principal amount of the Note purchased by the purchaser by 110% of the average VWAP of the common stock for the three consecutive trading days immediately following the date the Company filed its Quarterly Report on Form 10-Q for the six months ended June 30, 2024, not to exceed $0.15 (“Three-Day VWAP”). The Three-Day VWAP was set at $0.08404. As a result of opening the offering, and curing of any existing defaults under the August 2024 Notes, the conversion price of the August 2024 Notes were reset to $0.06;provided, that in the event the VWAP of the common stock for the three trading days immediately following the date of our pending reverse stock split is implemented (and thereafter the effectiveness of the registration statement to be filed to register the resale of the shares of common stock underlying the August 2024 Notes and August 2024 Warrants) is lower than the then-current split-adjusted conversion price, the conversion price shall be reset to such three-day VWAP; provided, that such exercise price (the “VWAP Adjusted Conversion Price”) shall not be less than $0.05 (as adjusted for the Reverse Stock Split). For example, if a 1-for-70 split is effected, the per-share conversion price shall not be adjusted to less than $3.50.
The August 2024 Warrants have a five-year term from the date of the initial closing of the Debt Placement and shall become exercisable commencing on the date of the earliest to occur of (a) shareholder approval of the Reverse Split (as defined below) and the Nasdaq Compliance Waiver (as defined below) and (b) the 91st day after the initial closing of the Debt Placement. The August 2024 Warrants initially entitled the purchaser to purchase up to that number of shares of common stock determined by dividing the principal amount of the Note purchased by the purchaser by 110% of the average VWAP of the common stock for the three consecutive trading days immediately following the date the Company filed its Quarterly Report on Form 10-Q for the six months ended June 30, 2024, not to exceed $0.15 (“Three-Day VWAP”). The Three-Day VWAP was set at $0.08404. As a result of opening the offering, and curing of any existing defaults under the August 2024 Notes, the exercise price of the warrants were reset at $0.06;provided, that in the event the VWAP of the common stock for the three trading days immediately following the date of our pending reverse stock split is implemented (and thereafter the effectiveness of the registration statement to be filed to register the resale of the shares of common stock underlying the August 2024 Notes and August 2024 Warrants) is lower than the then-current split-adjusted exercise price, the exercise price shall be reset to such three-day VWAP; provided, that such exercise price (the “VWAP Adjusted Exercise Price”) shall not be less than $0.05 (as adjusted for the Reverse Stock Split). For example, if a 1-for-70 split is effected, the per-share exercise price shall not be adjusted to less than $3.50.
June 2024 Private Placement
On June 26, 2024, we entered into a securities purchase agreement (the “June 2024 Purchase Agreement”) with a private investment fund (the “June 2024 Purchaser”), pursuant to which the Company sold 8,000,000 shares of the Company’s common stock (the “Common Stock”) at a purchase price of $0.25 per share (the “Private Placement”). The Purchaser is an existing shareholder of the Company. The gross proceeds of the June 2024 Private Placement were $2.0 million, with placement agent fees of approximately $140,000, resulting in net proceeds to the Company of approximately $1,860,000. The June 2024 Purchase Agreement contained customary representations, warranties and covenants. The June 2024 Purchaser was afforded various rights in connection with the purchase, including but not limited to, certain anti-dilution rights, and the right to purchase up to an additional 8,000,000 shares at $0.25 per share (subject to downward price adjustments for certain issuance by the Company below $0.25) during the period commencing nine months after the closing and ending on the 18-month anniversary of the closing. The June 2024 Purchaser was granted customary registration rights. All of these securities were converted, and all rights terminated, in connection with the June 2024 Purchaser’s election to convert same into the August 2024 Notes and August 2024 Warrants as part of the August 2024 Note and Warrant Debt Placement.
We utilized the proceeds from these private placements for working capital and general corporate purposes.
49
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.
Item 5 -
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. Mr. Kothari resigned from company in June 2024; |
| ● | 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 | |
| ● | 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. Andrew resigned from the board in June 2024. |
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).
50
In April 2024, the Company and Mr. Ferdinand entered into a consulting agreement pursuant to which Ferdinand agreed, among other things, to oversee the day-to-day management of our company’s acquisition and long-term lease acquisition activities and to assist our then newly appointed chief executive officer in his assumption of that role. In consideration for the services provided by Ferdinand, we agreed to pay Ferdinand a monthly consulting fee of $50,000. Pursuant to a subsequent modification of the consulting agreement in May 2024, it was agreed that all amounts payable to Ferdinand under such consulting agreement through its term (approximately $1.8 million) would be satisfied through the issuance of 5,692,600 shares of common stock upon the increase in the number of shares of common stock issuable under our 2022 equity incentive plan to 15,000,000 shares.
As part of the foregoing transitions, in June 2024, the Company entered into an Employment Agreement with Mr. Robert Arigo as the Chief Executive Officer. Mr. Arigo brings years of experience from the hotel industry.
As part of the foregoing transitions, in June 2024, the Company entered into an Employment Agreement with Mr. Michael James as the Chief Financial Officer. Mr. James brings years of financial experience.
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 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. To date, we have been required to issue the Greenle an aggregate of 23,628,324 shares of common stock in connection the foregoing rights and obligations as a result of private placements and underwritten public offerings of our common stock.
51
Item 6 – Exhibits
52
53
54
55
| (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. |
56
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: November 19, 2024 | By: | /s/ Michael James |
| Michael James | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
57