LuxUrban Hotels (LUXH) 424B3Prospectus supplement

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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FORM 10-Q

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For the quarterly period ended September 30, 2022

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OR

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For the transition period from ___________ to __________

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Commission File Number: 001-41473

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LUXURBAN HOTELS INC.

(Exact name of registrant as specified in its charter)

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(833)-723-7368

(Registrant’s telephone number including area code)

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Securities registered pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☐  No  ☒

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

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As of November 10, 2022, the registrant had 26,529,418 shares of common stock, $.00001 par value, outstanding.

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Part I - Financial Information

LUXURBAN HOTELS INC.

Condensed Consolidated Balance Sheets

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See accompanying notes to condensed consolidated financial statements.

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LUXURBAN HOTELS INC.

Condensed Consolidated Statements of Operations

(Unaudited)

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See accompanying notes to condensed consolidated financial statements.

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LUXURBAN HOTELS INC.

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

For the three and nine month periods ended September 30, 2022 and 2021

(Unaudited)

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See accompanying notes to condensed consolidated financial statements.

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LUXURBAN HOTELS INC.

Condensed Consolidated Statement of Cash Flows

(Unaudited)

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See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

LUXURBAN HOTELS INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2022

1 -   DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION

LuxUrban Hotels Inc. (LUXH) utilizes a long-term lease, asset-light business model to acquire and manage a growing portfolio of short-term rental properties in major metropolitan cities. The Company’s future growth focuses primarily on seeking to create “win-win” opportunities for owners of dislocated hotels, including those impacted by COVID-19 travel restrictions, while providing LUXH favorable operating margins. LUXH operates these properties in a cost-effective manner by leveraging technology to identify, acquire, manage, and market them globally to business and vacation travelers through dozens of third-party sales and distribution channels, and the Company’s own online portal.

The Company manages a portfolio of multi-family and hotel units located in metropolitan cities in New York, Washington D.C., Miami Beach, Denver, and Los Angeles. As of September 30, 2022 and 2021, total units available were 571 and 469, respectively. Average units available for the three months and nine months ended September 30, 2022, were 571 and 592, respectively as compared to 446 and 444, respectively for the three months and nine months ended September 30, 2021.

The consolidated financial statements include the accounts of LuxUrban Hotels Inc. (“LuxUrban”) and its wholly owned subsidiary SoBeNY Partners LLC (SoBeNY”). On November 2, 2022, CorpHousing Group Inc. (“CorpHousing”) changed its name to LuxUrban Hotels Inc. In June 2021, the members of SoBeNY exchanged all of their membership interests for additional membership interests in Corphousing LLC, with SoBeNY becoming a wholly owned subsidiary of Corphousing LLC. Both entities were under common control at the time of the transaction. Since there was no change in control over the net assets, there is no change in basis in the net assets.

In January 2022, Corphousing LLC and its wholly owned subsidiary, SoBeNY, converted into C corporations, with the then current members of Corphousing LLC becoming the stockholders of the newly formed C corporation, CorpHousing Group Inc. The conversion has no effect on our business or operations and was undertaken to convert the forms of these legal entities into corporations for purposes of operating as a public company. All properties, rights, businesses, operations, duties, obligations and liabilities of the predecessor limited liability companies remain those of CorpHousing Group Inc. and SoBeNY Partners Inc.

All significant intercompany accounts and transactions have been eliminated in consolidation.

These condensed consolidated financial statements should be read in conjunction with the financial statements and additional information as contained in our prospectus for the year ended December 31, 2021 filed on August 15, 2022. Results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2022. The other information in these condensed consolidated financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise.

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2 -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.    Basis of Presentation — The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

b.    Revenue Recognition — The Company’s revenue is derived primarily from the rental of Units to its guests. The Company recognizes revenue when obligations under the terms of a contract are satisfied and control over the promised goods and services is transferred to the guest. For the majority of revenue, this occurs when the guest occupies the Unit for the agreed upon length of time and receives any services that may be included with their stay. Revenue is measured as the amount of consideration it expects to receive in exchange for the promised goods and services. The Company recognizes any refunds and allowances as a reduction of rental income in the consolidated statements of operations.

The Company accounts for revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606 which was adopted at the beginning of fiscal year 2018 using the modified retrospective method. The Company did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the effect was immaterial.

Payment received for the future use of a rental unit is recognized as a liability and reported as rents received in advance on the balance sheets. Rents received in advance are recognized as revenue after the rental unit is occupied by the customer for the agreed upon length of time. The rents received in advance balance as of September 30, 2022 and December 31, 2021, was $1,279,992 and $1,819,943, respectively and is expected to be recognized as revenue within a one-year period.

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.    Fair Value of Financial Instruments — The carrying amount of cash, processor retained funds, security deposits, accounts payable and accrued expenses, rents received in advance, and merchant cash advances approximate their fair values as of September 30, 2022 and December 31, 2021 because of their short term natures.

e.    Advertising — Advertising and marketing costs are expensed as incurred. During the three months and nine months ended September 30, 2022, advertising and marketing costs incurred by the Company totaled $0 and $26, compared to $10,045 and $109,220 for the three months and nine months ended September 30, 2021, and are included in general and administrative expenses in the accompanying consolidated statements of operations.

f.    Commissions — The Company pays commissions to third-party sales channels to handle the marketing, reservations, collections, and other rental processes for most of the units. For the three months and nine months ended September 30, 2022, were $2,148,000 and $4,838,000, respectively compared to $268,000 and $722,000, respectively for the three months and nine months ended September 30, 2021. These expenses are included in cost of revenue in the accompanying consolidated statement of operations.

g.    Deferred Rent — The Company has entered into several operating lease agreements, some of which contain provisions for future rent increases. In accordance with GAAP, the Company records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease term. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent, which is reflected as a separate line item in long-term liabilities in the accompanying consolidated balance sheets. The Company adopted Topic 842 effective January 1, 2022. See note 4 for more details.

h.    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.

For the nine months ended September 30, 2022, the Company did not record a provision for income taxes as a result of a net loss for the period.

For 2021, the Company, which has been classified as a partnership for federal income tax purposes, is not subject to federal, state, and certain local income taxes and, accordingly, makes no provision for income taxes in its financial statements. The Company’s taxable income or loss is reportable by its stockholders. For 2022, the Company, converted into a C corporation.

i.    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, 2022 and December 31, 2021, the Company accrued sales tax payable of approximately $816,000 and $296,000, respectively and it is included in accounts payable and accrued expenses in the consolidated balance sheet. The Company is in the process of filing for the Voluntary

Disclosure and Compliance Program with any taxing authority to avoid any potential penalties where the Company has been delinquent in filing returns.

j.    Paycheck Protection Program Loan (“PPP”) — As disclosed in Note 3, the Company has chosen to account for the loan under FASB ASC 470, Debt. Repayment amounts due within one year are recorded as current liabilities, and the remaining amounts due in more than one year, if any, as other liabilities. In accordance with ASC 835, Interest, no imputed interest is recorded as the below market interest rate applied to this loan is governmentally prescribed. If the Company is successful in receiving forgiveness for those portions of the loan used for qualifying expenses, those amounts will be recorded as a gain upon extinguishment as noted in ASC 405, Liabilities.

k.    Earnings Per Share (“EPS”) — The Company has incurred a net loss for the periods presented for 2022 and as such, result basic and diluted shares and weighted average shares outstanding are the same.

3 -   GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business.

The Company has negative working capital of $7,336,469, as of September 30, 2022. For the nine months ended September 30, 2022, the Company reported a net loss of $1,035,720. Management believes these conditions raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months following the date these financial statements are issued. Management intends to finance operations over the next twelve months through remaining proceeds from its recent initial public offering and debt financings, cash generated from operaions, and additional equity or debt financings.

The accompanying consolidated financial statements do not include any adjustments that might be required should the Company be unable to continue as a going concern.

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4 -   LEASES

In February 2017, the FASB issued ASU No. 2016-02, Leases (“Topic 842”), to provide guidance on recognizing lease assets and lease liabilities on the consolidated balance sheet and disclosing key information about lease arrangements, specific differentiating between different types of leases. The Company adopted Topic 842, with an effective date of January 1, 2022. The consolidated financial statements from this date are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy. This standard requires all lessees to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments.

Under Topic 842, the Company applied a dual approach to all leases whereby the Company is a lessee and classifies leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the Company. Lease classification is evaluated at the inception of the lease agreement. Regardless of classification, the Company records a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Operating lease expense is recognized on a straight-line basis over the term of the lease.

Operating right of use (“ROU”) assets and operating lease liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating right of use assets represent our right to use an underlying asset and is based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases.

The adoption of the new lease standard had a significant impact on the Consolidated Balance Sheets, resulting in the recognition on 1/1/2022 a right-of-use asset of $36,304,289, current lease liabilities of $7,370,890 and long-term lease liabilities of $29,884,584. In addition, the Company recognized $414,373 cumulative effect adjustment to retained earnings on the Consolidated Statements of Shareholders’ Equity related to the unamortized deferred lease costs incurred in prior periods which do not meet the definition of initial direct costs under Topic 842. The adoption of Topic 842 did not have a significant impact on the lease classification or a material impact on the Consolidated Statements of Operations and liquidity.

The components of the right-of-use asset and lease liabilities as of September 30, 2022 are as follows:

At September 30, 2022, supplemental balance sheet information related to leases were as follows:

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At September 30, 2022, future minimum lease payments under the non-cancelable operating leases are as follows:

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The following summarizes other supplemental information about the Company’s operating lease:

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5 -   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued expenses totaled $3,653,939 and $4,209,366 as of September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, the balance consisted of approximately $852,000 of credit cards payable, $816,000 in sales tax, $520,000 in costs related to the initial public offering, $574,000 of rent, $172,000 of accrued payroll and related liabilities, $161,000 of legal and accounting fees, $93,000 of accrued interest, $67,000 of software expense, and $55,000 of other miscellaneous items. As of December 31, the balance consisted of approximately $980,000 of credit cards payable, $600,000 of professional fees, $570,000 of rent, $570,000 of commissions, $475,000 of short-term negative cash balances, $295,000 in sales tax, $290,000 in costs related to the initial public offering, $228,000 of refunds, $97,000 of furniture, and $105,000 of other miscellaneous items.

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 $10,000,000. Under the terms of the CARES Act and the PPP, the Company can apply for and be granted forgiveness for all or a portion of the loan issued to the extent the proceeds are used in accordance with the PPP.

In April and May 2020, SoBeNY and CorpHousing obtained funding of $516,225 and $298,958, respectively, from a bank established by the Small Business Administration (“SBA”). The loans have an initial deferment period wherein no payments are due until the application of forgiveness is submitted, not to exceed ten months from the covered period. Interest will continue to accrue during this deferment period. The April loan was written off by the bank in the September 2022 quarter and subsequently taken to other income. After the deferment period ends, the May loan is payable in equal monthly installments of $15,932, including principal

and interest at a fixed rate of 1.00%. No collateral or personal guarantees were required to obtain the PPP loans. The Company does not intend to apply for forgiveness of these loans and expects to repay the loans in accordance with the terms of the agreements.

Accrued interest at September 30, 2022 and December 31, 2021, was $13,337, and is included in accounts payable and accrued expenses in the consolidated balance sheets.

Future minimum principal repayments of the SBA — PPP loans payable are as follows:

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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 30-year loans under the EIDL program, which is administered through the SBA. Under the guidelines of the EIDL, the maximum term is 30 years; however, terms are determined on a case-by-case basis based on each borrower’s ability to repay and carry an interest rate of 3.75%. The EIDL loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The proceeds from this loan must be used solely as working capital to alleviate economic injury caused by the COVID-19 pandemic.

On April 21, 2020, SoBeNY received an EIDL loan in the amount of $500,000. The loan bears interest at 3.75% and requires monthly payments of principal and interest of $2,437 beginning April 21, 2022, and is personally guaranteed by a managing stockholder. On June 18, 2020, Corphousing received an EIDL loan in the amount of $150,000. The loan bears interest at 3.75% and requires monthly payments of principal and interest of $731 beginning June 18, 2022. On July 25, 2020, S-Be received an EIDL loan in the amount of $150,000. The loan bears interest at 3.75% and requires monthly payments of principal and interest of $731 beginning July 25, 2022. Any remaining principal and accrued interest is payable thirty years from the date of the EIDL loan.

The outstanding balance at September 30, 2022 and December 31, 2021, was $800,000 and $800,000, respectively.

Accrued interest at September 30, 2022 was $62,656 and is included in accounts payable and accrued expenses in the consolidated balance sheets.

Future minimum principal repayments of the SBA — EIDL loans payable are as follows:

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8 -   MERCHANT CASH ADVANCES

The Company entered into multiple Merchant Cash Advance (“MCA”) factoring agreements to fund operations. The Company is required to repay the MCA in fixed daily payments until the balance is repaid. The MCA is personally guaranteed by a stockholder. Fees associated with the MCA have been recognized in interest expense in the accompanying consolidated statement of operations. As of September 30, 2022 and December 31, 2021, the outstanding balance on these merchant cash advances net of unamortized costs was $324,527 and $1,386,008, respectively and is expected to be repaid within twelve months.

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9 -   LOANS PAYABLE

Loans payable consist of the following as of:

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In conjunction with the initial public offering in August of 2022, we repaid $2,500,000 of Investor Notes which included a prepayment premium of 15%. On September 16, 2022, under the terms of the agreement, we sold an additional $2,070,000 of Investor Notes, including an original issue discount of 15%. In conjunction with this sale, we issued 517,500 warrants with an exercise price of $4.00. In conjunction with these warrants and notes sale, we recorded $349,899 of debt discount associated with this warrant issuance.

On September 30, 2022, we sold an additional $1,408,750 of Investor Notes, including an original issue discount of 15%. In conjunction with this sale, we issued 352,188 warrants with an exercise price of $4.00. In conjunction with these warrants and notes sale, we recorded $241,455 of debt discount associated with this warrant issuance.

Future minimum principal repayments of the loans payable are as follows:

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10 - LOANS PAYABLE — RELATED PARTIES

Loans payable — related parties consists of the following:

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Future minimum principal repayments of the loans payable — related parties are as follows:

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11 - CONVERTIBLE NOTES - RELATED PARTIES

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12 - LINE OF CREDIT

In February 2019, the Company entered into a line of credit agreement in the amount of $95,000. The line bears interest at prime, 6.25% as of September 30, 2022, plus 3.49%. The line matures in February 2029. Outstanding borrowings were $94,975 as of September 30, 2022 and December 31, 2021.

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13 - RELATED PARTY TRANSACTIONS

Consulting services related to the management of the Company, including overseeing the leasing of additional units and revenue management, were provided to the Company through a consulting agreement with SuperLuxMia LLC, a consulting firm owned by a stockholder of the Company. For the three months and nine months ended September 30, 2022, these consulting fees of the Company totaled approximately $0 and $192,000, respectively, as compared to $206,000 and $593,000, respectively for the three months and nine months ended September 30, 2021, and are included in general and administrative expenses in the accompanying consolidated statements of operations.

The Company’s Chief Accounting Officer (CAO) provided services to our company through a consulting agreement with an entity owned by the CAO. For the three months and nine months ended September 30, 2022, related fees totaled approximately $82,500 and $130,000, respectively as compared to $16,000 and $61,000, respectively, for the three months and nine months ended September 30, 2021, and are included in general and administrative expenses in the accompanying consolidated statements of operations.

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14 - RISKS AND UNCERTAINTIES

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash. The Company places its cash with high quality credit institutions. At times, balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. All accounts at an insured depository institution are insured by the FDIC up to the standard maximum deposit insurance of $250,000 per institution.

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15 - MAJOR SALES CHANNELS

The Company uses third-party sales channels to handle the reservations, collections, and other rental processes for most of the units. Three sales channels represented approximately, 92% and 90%, respectively, of total revenue during the three months and nine months ended September 30, 2022, as compared to 94% and 93%, respectively for the three months and nine months ended September 30, 2021. The loss of business from one or a combination of the Company’s significant sales channels, or an unexpected deterioration in their financial condition, could adversely affect the Company’s operations.

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16 - COMMITMENTS AND CONTINGENCIES

The World Health Organization characterized the Covid-19 virus as a global pandemic on March 11, 2020. The COVID-19 outbreak in the United States has caused business disruption through mandated and voluntary closings of multiple industries. While disruption is currently expected to be temporary, there is considerable uncertainty regarding the duration of the closings. The extent to which COVID-19 impacts future results, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the action to contain it or treat its impact, among others. At this time, the Company cannot estimate with meaningful precision the potential impact to its financial and operational results.

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17 - STOCK OPTIONS AND WARRANTS

Options

During the nine months ended September 30, 2022, the Company granted options to purchase an aggregate of 2,630,024 shares of common stock under the Company’s 2022 performance equity plan. These options were granted in conjunction of our initial public offering on August 11, 2022 and have a per-share exercise price of $4.00, which is equal to the per-share price in our initial public offering.

The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model using the assumptions noted as follows: expected volatility was based on the historical volatility of a peer group of companies. The expected term of options granted was determined using the simplified method under SAB 107 which represents the mid-point between the vesting term and the contractual term. The risk-free rate is calculated using the U.S. Treasury yield curve and is based on the expected term of the option.

The Black-Scholes option pricing model was used with the following weighted assumptions for options granted during the period:

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The following table summarizes stock option activity for the nine months ended September 30, 2022:

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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 $206,545 and $206,545 for the three and nine months ended September 30, 2022, respectively. No stock compensation expense was recorded in 2021. Unamortized option expense as of September 30, 2022, for all options outstanding amounted to $4,048,167. These costs are expected to be recognized over a weighted average period of 1.9 years.

A summary of the status of the Company’s nonvested options as of September 30, 2022, is presented below:

Nonvested options

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Warrants

In connection with certain private placements funded by certain of our officers and directors prior to our initial public offering, we issued notes and warrants. The warrants were contingent upon, and became effective only upon, consummation of our initial public offering on August 11, 2022.In total, 695,000 of such warrants were issued to certain of our officers and directors with a weighted average exercise price of $4.20 were issued. These warrants are exercisable for five years.

Also, in conjunction with the initial public offering, the Company issued 135,000 warrants to the underwriter of the initial public offering, Maxim, with an exercise price of $4.40. These warrants are exercisable for five years.

Also, in connection with certain private placements with a third-party investor, the Company issued 920,000 warrants with an exercise price of $4.00. These warrants are exercisable for five years. In connection with such private placements, we also issued, 32,000 warrants to Maxim (which served as agent for such private placement) at an exercise price of $4.40. These warrants are exercisable for five years.

On September 16 and 30, 2022 in conjunction with a financing with the same third-party investor, we issued 517,500 and 352,188 warrants with an exercise price of $4.00 per share.

The following table summarizes warrant activity for the nine months ended September 30, 2022:

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In the nine months ended September 30, 2022, no shares were issued from the exercise of warrants.

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18 - SUBSEQUENT EVENTS

The Company’s management has evaluated subsequent events through November 14, 2022, the date the financial statements were available to be issued.

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Subsequent to September 30, 2022, the Company entered into leases, letter of intents, or agreements to enter into leases with start dates through December 31, 2022. The new lease terms expire on various dates though December 31, 2037.

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On October 20, 2022, the Company closed on the final portion of the private placement under the terms of the September 2022 Investor Purchase Agreement, issuing a $1,466,250 principal amount September 2022 Investor Note (“Second Closing Note”) and September 2022 Investor Warrants to purchase 366,563 shares of common stock for gross proceeds of $1,275,000 (giving effect to the 15% original issue discount). The Second Closing Note matures on October 23, 2023.

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The September 2022 Investor Financing continues the Company’s existing relationship with the investor to which it previously sold in private placements of 15% original issue discount notes (“Prior Investor Notes”) and five-year warrants (“Prior Investor Warrants”). As of the date of this Report, the Company has received $7,500,000 aggregate gross proceeds under the 2022 Investor Financings and issued $8,625,000 principal amount of notes. In connection with the Company’s IPO, the Company repaid an aggregate principal amount of $2.2 million of the First 2022 Investor Financing Notes ($2.5 million inclusive on prepayment penalty). As of the date of this Report and giving effect to the September 2022 Investor Financing, the Company approximately $6,500,000 principal amount of September 2022 Investor Notes and Prior Notes outstanding, and warrants to purchase an aggregate of 2,156,251 shares outstanding.

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As additional consideration to investors in the 2022 Investor Financing, the Company granted revenue participation rights to the investors providing them, as a group, with an aggregate share, typically 5% to 10% in the first five years of the relevant lease, and 1% thereafter, of the quarterly revenues generated by certain of the Company’s hotel properties, during the initial term of the subject lease relating to such property (including any prescribed extensions thereof).

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The notes and warrants provide for certain conversion and exercise price adjustments in the event we effectively issue shares in future financings for cash and other circumstances at per share prices below the then effective conversion or exercise prices of such notes and warrants. On October 10, 2022, the Company entered into an addendum to the September 2022 Investor Purchase Agreement, effective as of September 30, 2022, which provides that it shall not issue, nor shall we be required to issue, upon conversion of the notes or exercise of the warrants, an aggregate of more than 19.99%, or 5,303,230 shares (subject to adjustment for stock splits, stock dividends and the like), of the Company’s common stock (the “Nasdaq Exchange Cap); provided, that such limitation shall not apply in the event that the Company (A) obtains the approval of its stockholders as required by the applicable rules of Nasdaq for issuances of shares of common stock upon conversion of such notes and exercises of such warrants in excess of the Nasdaq Exchange Cap or (B) obtain a written opinion from outside counsel to the Company that such approval is not required.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

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You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this quarterly report on SEC Form 10-Q (“Quarterly Report”). This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we describe under “Risk Factors” and elsewhere in this Quarterly Report. See “Note on Forward-Looking Statements.” Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.

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Overview

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We utilize a long-term lease, asset-light business model to acquire and manage a growing portfolio of short-term rental properties in major metropolitan cities. Our future growth focuses primarily on seeking to create “win-win” opportunities for owners of dislocated hotels, including those impacted by COVID-19 travel restrictions, while providing us with favorable operating margins. We operate these properties in a cost-effective manner by leveraging technology to identify, acquire, manage, and market them in our operating cities to business and vacation travelers through dozens of third-party sales and distribution channels, and our own online portal. Guests at our properties are provided Heroic Service™ under our consumer brand, LuxUrban. Our Heroic Service™ provides guests a hassle-free experience which exceeds their expectations with “Heroes” who respond to any issue in a timely, thoughtful, and thorough manner.

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An important part of our growth strategy is to increase the percentage of our portfolio that is comprised of units located in hotels and other commercially zoned buildings. As commercially zoned buildings are not typically subject to local short-stay length regulation (e.g. New York City prohibits stays of less than 30 days in many residential areas), we will be able to offer a larger number of our units for stays as short as one day, providing us with maximum booking flexibility. Our portfolio growth strategy also includes divesting older leases for properties located in residential areas, in order to further diminish the portion of our operations that could be subject to short-stay length regulation. To this end, in late 2021, we began to wind down portions of our portfolio comprising apartments and residential area units through negotiated surrender and release agreements, while still growing our total portfolio of accommodation units.

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Given the complexity of short-stay regulations in the cities in which we operate, we seek to complete the wind-down of our non-performing, residential area-located apartment inventory by the end of the third quarter of 2022. As a result of this, we have ceased operations in certain cities in which we operated during 2021 and in which we maintained principally residentially zoned accommodation units, including Ft. Lauderdale and Miami. We plan to operate and maintain our accommodation units portfolio at a ratio of between 85% to 95% of commercially zoned hotel room inventory and 5% to 15% residential area-located apartment inventory. As of the date of this Quarterly Report, our accommodation units portfolio is comprised of over 90% hotel units located in commercially zoned areas and not subject to short-stay length regulations or contractual provisions and the balance apartment units subject to such regulations. We estimate that more than 90% of our revenues are now generated by accommodation units located in properties that are not subject to any short-stay length regulation or contractual or lease provisions. As our portfolio growth strategy involves (a) adding, almost exclusively, commercially zoned properties that are not subject to short-stay length regulations and (b) divesting older leases for residential area properties, we expect the vast majority of our revenues to be generated through properties allowing for guest stays of any length desired.

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As of September 30, 2022, we operated 571 accommodation units across five cities in the United States. We also plan to launch international operations in early 2023 and are currently evaluating London and Paris for launch of our first commercial international operations.

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We identify and acquire lease rights to hotels and multi-family apartments and hotels with multiple rooms (which we refer to as “units”), directly from real estate developers and property owners through multi-year leases in high-density, urban core, major metropolitan cities located in close proximity to convention centers, universities, hospitals, cultural venues, and annual events.

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An integral part of our operations is to secure longer-term leases with economic terms that allow us to make a profit on each accommodations unit individually and on our portfolio of units in the aggregate at projected rental and occupancy rates. In this regard we use proprietary data analytics to select and dynamically price our accommodations offerings. We continually focus on profit margins, by both increasing revenue and minimizing costs, in order to maintain flexibility to invest in acquiring more accommodations units as they become available on attractive terms. This flexibility also enables us, we believe, to out price our competitors while providing comparable or better accommodations and experiences to our guests.

As of the date of this Quarterly Report, we operated in five cities:

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We utilize our own and third-party technology across the spectrum of our operations and the guest experience, including

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Key Drivers

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Supply Growth

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A key driver of our expected revenue growth will be our ability to continue signing leases for hotel properties on compelling commercial terms. In late 2020 and early 2021, we sought to take advantage of the supply glut of short-stay accommodations presented by the Covid-19 pandemic to rapidly grow our portfolio. As 2021 progressed and the country began to emerge from the pandemic, we sought to bring newly acquired units “online” to scale our business in an environment of rising occupancy rates and ADR, which ensured added units would be accretive to growth from the start. As part of our growth strategy, we will continue to seek additional leases for units to increase our portfolio.

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Guest Attraction

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Another key driver of our expected revenue growth is our ability to continue attracting new guests through various channels. We source demand from a variety of channels, including Online Travel Agencies (“OTAs”), such as Booking.com, Expedia, and Airbnb, as well as directly through our website. Bookings made through OTAs incur channel fees, requiring us to pay a certain percentage of the revenue booked on the OTA in order to compensate the OTA for its listing services. In general, direct bookings are more financially advantageous to us as they do not incur channel fees.

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Service

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Our “Hero Division” is our primary service component, which is operated in a service-oriented, guest-centric, manner with each team member trained, and expected to adhere to the provision of high-quality guest experiences.

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Operational Efficiency

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We maximize operational efficiency by maintaining only a nominal physical headquarters and leveraging technology to oversee and communicate with our property-based team members (Heroes). Each is supported by the entire organization and given authority to act as a host/concierge to provide exceptional experiences for our guests. Each of Our Heroes act as resident manager to protect and maintain value for our property owners, and as a business development representative to identify ways to increase profit margins for our company. While our units which are distributed across the United States, within each city, they are clustered in close proximity to one another to enhance and expedite effective execution of ground operations.

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Pricing

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To compete with other providers and attract guests, we must provide our accommodations at pricing points that are perceived by our guests as providing value. This is a function of the quality of the accommodations, the location, the then-current demand for such accommodations, and the pricing of accommodations available from our competitors. Because we strive to incur minimal corporate overhead by operating with only nominal physical corporate headquarters and on an asset-light basis (with our only material assets being our leases and intellectual properties) we believe we are able to provide a similar quality product for less than our competitors or provide a better-quality product for the same price, while remaining profitable. We closely monitor the economics of our units to ensure the price, referred to as Average Daily Rate (ADR), is highly competitive in order to drive high occupancy rates.

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Marketing

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To continue to drive growth we will need to further build our brand and invest in direct-to-consumer marketing and enhanced Search Engine Optimization (SEO) and social media advertising to increase direct bookings. We will also invest in building business-to-business relationships within the travel industry. These relationships diversify our sales. Our existing B2B relationships were excellent sources of additional revenue streams during the pandemic, when we experienced lower occupancy levels and pricing pressure.

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Technology

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We will need to continually invest in technology to ensure we provide guests with the latest technology-based amenities and to regularly enhance the safety and management of our properties. We also will continue to develop and invest in data and analytics to better select our properties and provide dynamic pricing. We also intend to invest in technology to enhance our direct-to-consumer marketing via our own mobile apps, a customer relationship management (CRM) database and system to support a loyalty program and drive repeat business, and a learning management system (LMS) to enhance initial and continuing training of our personnel. We are also presently studying a variety of energy management technologies which will make it possible to not only monitor energy consumption with the utmost accuracy, but adjust and optimize energy consumption in response to real-time consumption patterns.

Management’s Opinion of COVID-19’s Business Impact

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The ongoing impact of the COVID-19 pandemic on the global economy and the extent to which it will continue to adversely impact us specifically remains uncertain. We believe, based on our historical results prior to COVID-19, the reported results of other companies operating in the travel and accommodation industry during the pandemic, and our improved results (and the improved results of other companies operating in the travel and accommodation industry) following the easing of travel restrictions and other COVID-19 precautions, that our financial results for 2020 and 2021 were materially adversely affected by the COVID-19 pandemic. Since mid 2021, we have seen material improvements in our Occupancy Rates and revenues, trending back towards pre-Covid levels. We cannot be certain, however, that all declines in our operations during the height of Covid were specifically or solely related to Covid or that we will return fully to pre-Covid levels.

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While monthly Occupancy Rates and revenue per available room (“RevPAR”) have been gradually improving since the height of the pandemic, we believe that continued improvement will be largely dependent on the effectiveness of COVID-19 prevention (vaccination and continued social distancing) and treatment, infection rates, and governmental responses in the cities and countries in which we operate.

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As shown in the table below, we saw Occupancy Rates and RevPAR drop dramatically throughout 2020, with Occupancy Rates dropping by approximately 23% and RevPAR by approximately 35% year over year from 2019 to 2020. In 2021 and 2022, Occupancy Rates and RevPAR rebounded in part, increasing by approximately 18% and 11%, respectively for the full years 2021 and

21% and 22%, respectively for the nine months ended September 30, 2022. We expect to see these metrics continue to increase toward pre-Covid results over time, unless new material shutdowns and travel restrictions are put into place.

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The COVID-19 pandemic transformed how society works, connects, and travels, while at the same time creating incredible challenges, particularly for the hospitality industry. In early March 2020, we began to experience the early effects of the COVID-19 pandemic. As the world locked down, we acted to reduce costs and bolster revenues to mitigate the impacts of the COVID-19 pandemic. As part of our COVID-19 response strategy, we:

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Despite travel restrictions, guests continued to utilize our inventory. At the height of COVID-19 lockdowns, many consumers turned to us, including people social distancing from roommates and family members, those who were stranded away from home, and guests taking “staycations” or a change of scenery. We also hosted nurses and other healthcare professionals working in cities away from home or who simply needed to be nearer to their hospitals and health care facilities.

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Notwithstanding the foregoing, the extent and duration of the impact of the COVID-19 pandemic over the longer term remain uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the introduction and spread of new variants of the virus, including, for example, the Delta and Omicron variant.

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Regulations Governing Short-Term Rentals

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We launched our New York City operations in late 2019. Cities, such as New York, have been diligent in the implementation and enforcement of short-stay rental regulations to ensure the safety of its communities and housing availability and affordability. Typically these regulations prohibit rentals having durations of less than 30 days. As the COVID-19 global pandemic, and related travel restrictions and shutdowns, emerged, New York City implemented unprecedented eviction moratoriums. As a result of our operations and the pandemic, we historically experienced violations of short-term rental regulations in some of our units located in residentially zoned areas, including those caused by subtenants who illegally occupy some of our units beyond their rental term (i.e., “squatters”), and, in some cases, illegally “sublet” our units to others. In these circumstances, we took legal measures to reclaim our units, including filing lawsuits seeking orders of removal, and notifying the applicable authorities. Given existing state and local government policy, as well as pandemic-affected resource limitations within the courts, we received limited relief. As part of our going-forward strategy, we have divested ourselves of all leases of residentially zoned properties in New York City and only operate properties that are not subject to these short-stay regulations. In conjunction with this divestiture, we have worked with New York City’s DOB and OSE to settle any past short-term stay violations, with any settlement expected by management to be nonmaterial.

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As our business has grown, we have implemented additional measures to avoid or minimize the incurrence of such violations in all of our operating cities. These measures include our strategy to build our growing portfolio of accommodation units with the acquisition of long-term leases for hotels and other buildings that are commercially zoned and not subject to the regulations applicable to residentially zoned areas. We also continuously refine our booking platforms and related software and data to properly identity each type of unit being marketed on our platforms and to systematically prohibit rental lengths that do not comply with existing regulations in the municipalities in which such units are located.

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Given the complexity of short-stay regulations in the cities in which we operate, we seek to complete the wind-down of our non-performing, residential area-located apartment inventory by the end of the third quarter of 2022. We plan to operate and maintain our accommodation units portfolio at a ratio of between 85% to 95% of commercially zoned hotel room inventory and 5% to 15%% residential area-located apartment inventory. As of the date of this Quarterly Report, our accommodation units portfolio is comprised of over 90% hotel units that are not subject to short-stay length regulations or contractual provisions and the balance apartment units

that are subject to such restrictions. Our portfolio growth strategy involves (a) adding, almost exclusively, commercially zoned properties that are not subject to short-stay length regulations and (b) divesting older leases for residential area properties. As a result, the need to comply with local or contractual short-stay length regulations or requirements, and the costs related thereto, have become increasingly immaterial to our operations.

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Local Tax Compliance and Monitoring

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As part of our compliance review, we determined that certain state and local tax payments for short-term stays below prescribed tax regulation cutoffs had not been properly collected and applied, either directly by us or the platforms through which customers reservation and payments are made. We are working with state and local tax authorities to pay all applicable taxes, penalties, and interest. We have reserved amounts to cover such payments on our financial statements for the years ended December 31, 2020 and December 31, 2021 and the nine months ended September 30, 2022. We estimate that total payment obligations for these amounts will approximate $816,409. To properly scale our business in a compliant manner, we have implemented a leading tax compliance, filing, and reporting platform into our operations. As a result of these efforts, all tax collection is automated across the entire scope of our operations and portfolios.

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Revenue and Expense by City

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We endeavor to maintain a percentage of total revenue and expense in each city in which operate that matches our projected revenue potential of each city. The table below outlines our distribution of revenue and expense across our operating cities during the past three years:

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Non-GAAP Financial Measures

To supplement the condensed consolidated financial statements, which are prepared in accordance with GAAP, we use EBITDA and Adjusted EBTIDA as a non-GAAP financial measures.

The following table provides reconciliation of net loss to EBITDA and Adjusted EBITDA:

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EBITDA is defined as net income or loss before the impact of interest, taxes and depreciation and amortization. EBITDA is a key measure of our financial performance and measures our efficiency and operating cash flow before financing costs, taxes and working capital needs. Adjusted EBITDA adjusts for non-cash stock compensation expense, as well as the costs associated with the exit of our apartment rental business under SoBeNY. Adjusted EBITDA is a key measure of our financial performance as, like EBITDA, measures our efficiency and operating cash flow before non-cash stock compensation costs, financing costs, taxes and working capital as well as the one-time nature of exit costs associated with SoBeNY. We utilize EBITDA and Adjusted EBITDA because they provide us with an operating metric closely tied to the operations of the business.

To supplement EBITDA and Adjusted EBITDA, we have adjusted our net income for non-cash items to calculate, Cash Net Income as another non-GAAP financial measure. We have also removed the one-time costs associated with the exit costs associated with SoBeNY. The follow table provides reconciliation of net income (loss) to Cash Net Income (Loss) and Adjusted Cash Net Income (Loss):