LuxUrban Hotels (LUXH) 10-Q2023 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 001-41473

LUXURBAN HOTELS INC.

(Exact name of registrant as specified in its charter)

(833)-723-7368
(Registrant’s telephone number including area code)

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

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 ☐

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 ☐

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:

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

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

As of August 8, 2023, the registrant had 35,696,591 shares of common stock, $.00001 par value, outstanding. Shares outstanding inclusive of shares committed to be issued but not yet issued as of this date are 44,279,341.

Table of Contents

Part I - Financial Information

Item 1 - Financial Statements.

LUXURBAN HOTELS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

LUXURBAN HOTELS INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

LUXURBAN HOTELS INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

LUXURBAN HOTELS INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND JUNE 30, 2022

(UNAUDITED)

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONSDENSED CONSOLIDATED FINANCIAL STATEMENTS
LUXURBAN HOTELS INC.
June 30, 2023

1 - DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION

LuxUrban Hotels Inc. (“LUXH” or the “Company”) utilizes an asset light business model to lease entire hotels on a long-term basis and rent out hotel rooms in the properties it leases. The Company currently manages a portfolio of hotel rooms in New York, Washington D.C., Miami Beach, New Orleans and Los Angeles.

In late 2021, LUXH commenced the process of winding down its legacy business of leasing and re-leasing multifamily residential units, as it pivoted toward its new strategy of leasing hotels.

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

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

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

2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Payment received for the future use of a rental unit is recognized as a liability and reported as rents received in advance on the balance sheets. Rents received in advance are recognized as revenue after the rental unit is occupied by the customer for the agreed upon length of time. The rents received in advance balance as of June 30, 2023 and December 31, 2022, was $3,092,972 and $2,566,504, respectively and is expected to be recognized as revenue within a one-year period.

The Company is subject to income taxes in the jurisdictions in which it operates. The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carry-forwards. A valuation allowance is recorded for deferred tax assets if it is more likely than not that the deferred tax assets will not be realized.

For the three and six months ended June 30, 2023, the Company recorded a tax provision of $1,893,039 and $2,015,200, respectively. For the three and six months ended June 30, 2022, the Company recorded a provision of $750,000 and $750,000, respectively,

3 - LEASES

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

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

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

The adoption of the new lease standard had a significant impact on the Consolidated Balance Sheets, resulting in the recognition on January 1, 2022 a right-of-use asset of $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 that 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.

The components of the right-of-use assets and lease liabilities as of June 30, 2023 and December 31, 2022 were as follows:

At June 30, 2023 and December 31, 2022, supplemental balance sheet information related to leases were as follows:

At June 30 2023, future minimum lease payments under the non-cancelable operating leases are as follows:

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

4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued expenses totaled $6,581,745 and $6,252,492 as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, the balance consisted of approximately $1,405,000 of accrued payroll and related liabilities, $975,000 of legal exposure, $847,000 of tax exposure, $347,000 for printing, $265,000 of credit cards payable, $857,000 professional fees, $890,000 for utilities, $289,000 for repairs and maintenance, $302,000 for linens and sundries, $269,000 for cleaning expense, and $136,000 of other miscellaneous items. As of December 31, 2022, the balance consisted of approximately $1,570,000 of accrued payroll and related liabilities, $1,002,000 of accrued interest, $805,000 of legal exposure, $572,000 of commissions, $507,000 of credit cards payable, $495,000 professional fees, $371,000 in sales and real estate taxes, $104,000 of rent, $268,000 in costs related to the initial public offering, $265,000 of legal and accounting fees, $135,000 of director fees, and $158,000 of other miscellaneous items. As of June 30, 2023, the Company has accrued income taxes of $2,015,200. There were no accrued income taxes as of December 31, 2022.

Of the legal amounts accrued, the company believes the accrual best estimates the most likely outcomes of these matters however the range of outcomes could be between $900,000–$1,500,000.

5 - LOANS PAYABLE — SBA — PPP LOAN

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to provide emergency assistance for individuals, families, and organizations affected by the coronavirus pandemic. The PPP, created through the CARES Act, provides qualified organizations with loans of up to $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 June 30, 2023 and December 31, 2022, was $747 and $5,571, respectively, 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:

6 - LOANS PAYABLE — SBA — EIDL LOAN

During 2020, the Company received three 3 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, SoBeNY 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 June 30, 2023 and December 31, 2022, was $794,134 and $800,000, respectively.

Accrued interest at June 30, 2023 was $27,644 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:

7 - SHORT-TERM BUSINESS FINANCING

The Company entered into multiple short-term factoring agreements related to future credit card receipts to fund operations. The Company is required to repay this financing in fixed daily payments until the balance is repaid. Fees associated with this financing have been recognized in interest expense in the accompanying consolidated statement of operations. As of June 30, 2023 and December 31, 2022, the outstanding balance on these merchant cash advances net of unamortized costs was $1,706,836 and $2,003,015, respectively and is expected to be repaid within twelve months.

8 - LOANS PAYABLE

Loans payable consist of the following as of:

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

9 - LOANS PAYABLE — RELATED PARTIES

Loans payable — related parties consists of the following:

In May of 2023, the company issued 58,088 shares of common stock to repay this loan.

10 - CONVERTIBLE NOTES

On February 17, 2023, we entered into an exchange agreement with investors pursuant to which all principal, interest and prepayment premium outstanding under a nonconvertible 15% original issue discount (“OID”) note with private investors, which was exchanged for a convertible note in the principal amount of $2,079,686 and having a maturity date of August 17, 2023. This transaction was treated as an extinguishment of debt, and the Company recorded a loss of $58,579 as a result in February of 2023. As a result of this transaction, we recorded the value of convertible feature using the Black-Scholes valuation model. In March 2023, we repaid $808,000 of the principal amount and subsequent to this repayment the balance of the notes converted to equity. As of June 30, 2023, none of the notes remains outstanding.

11 - 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, 8.25% as of June 30, 2023, plus 3.49%. The line matures in February 2029. Outstanding borrowings were $94,975 as of June 30, 2023 and December 31, 2022.

12 - SECURITY DEPOSIT LETTER OF CREDIT

In November of 2022, the Company entered into a standby letter of credit agreement in the amount of $2,500,000 as security on a particular property. The letter of credit automatically renews annually unless canceled beforehand with final maturity March 2038. In January of 2023, the Company entered into a standby letter of credit agreement in the amount of $1,000,000 as security on a particular property. The letter of credit automatically renews annually unless canceled beforehand with final maturity January 2028.

13 - RELATED PARTY TRANSACTIONS

Consulting services related to the management of the Company, including overseeing the leasing of additional units and revenue management, were provided to the Company through a consulting agreement with SuperLuxMia LLC, a consulting firm owned by the Chief Executive Officer and Chairman of the Company. For the three and six months ended June 30, 2023, these consulting fees of the Company were zero0. For the three and six months ended June 30, 2022, these consulting fees of the Company were zero 0 and $192,000, respectively, and are included in general and administrative expenses in the accompanying consolidated statements of operations.

On December 20, 2022, the Company, and our chairman and chief executive officer, Brian Ferdinand (“Ferdinand”), entered into a Note Extension and Conversion Agreement with Greenle Partners LLC Series Alpha PS (“Greenle Alpha”) and Greenle Partners LLC Series Beta P.S., a Delaware limited liability company (“Greenle Beta” and, together with Greenle Alpha, “Greenle”). Greenle was the purchaser of 15% OID senior secured notes (the “Notes”) and warrants to purchase our common stock (“Warrants”) under certain securities purchase agreements and loan agreements between us and Greenle, including the Securities Purchase Agreement dated as of September 30, 2022, as amended by the letter agreement dated October 20, 2022, and the Loan Agreement dated as of November 23, 2022.

Under the terms of the Note Extension and Conversion Agreement, Greenle has agreed to convert from time to time up to $3,000,000 aggregate principal amount of the Notes into up to 1,000,000 shares of our common stock (the “Conversion Shares”) at the conversion price of $3.00 per share prescribed by the Notes. Additionally, Greenle agreed that the payment date of certain of our notes in the aggregate principal amount of $1,250,000, maturing on January 30, 2023, shall be extended to March 1, 2023, which was subsequently extended further to April 15, 2025 pursuant to a Letter Agreement, dated April 16, 2023, by and between Greenle and the Company. In February of 2023, the entire $3,000,000 was converted into shares of the Company’s common stock. As part of this conversion, Ferdinand provided 874,474 Conversion Shares to Greenle.

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.

15 - MAJOR SALES CHANNELS

The Company uses third-party sales channels to handle the reservations, collections, and other rental processes for most of the units. These sales channels represented over 90% of total revenue during the three months and six months ended June 30, 2023 and June 30, 2022, respectively. 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.

16 - STOCK OPTIONS AND WARRANTS

Options

During the six months ended June 30, 2023, the Company granted options to purchase an aggregate of 75,000 shares of common stock under the Company’s 2022 performance equity plan with a weighted average exercise price of $2.61.

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

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

Schedule of Black-Scholes option pricing model was used with the following weighted assumptions for options granted

The following table summarizes stock option activity for the three months ended June 30, 2023:

Schedule of stock option activity

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 $204,814 for the three months ended June 30, 2023 and $372,387 for the six months ended June 30, 2023. No stock compensation expense was recorded during the three and six months ended June 30, 2022. Unamortized option expense as of June 30, 2023, for all options outstanding amounted to $1,393,537. These costs are expected to be recognized over a weighted average period of 2.1 years.

A summary of the status of the Company’s nonvested options as of June 30, 2023, is presented below:

Nonvested options

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. These warrants are exercisable for five 5 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 5 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 5 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 5 years.

On September 16, September 30, and October 20, 2022 in conjunction with a financing with the same third-party investor, we issued 517,500, 352,188 and 366,562 warrants with an exercise price of $4.00 per share. These warrants were subsequently cancelled and reissued at $2.00 per share.

On February 15, 2023 in conjunction with an advisory agreement, we issued 250,000 warrants with an exercise price of $4.00 per share.

On April 16, 2023 in conjunction with an agreement with certain lenders, we issued 1,000,000 warrants with an exercise price of $3.00 per share and 250,000 warrants with an exercise price of $4.00 per share. Under this agreement, these lenders would be forced to convert under trigger prices ranging between $3.00 per share - $4.00 per share. On June 19, 2023, we modified this agreement to convert all of related outstanding debt within two trading days in exchange for a reduction in the exercise price of these warrants from $3.00 or $4.00 per share to $2.50 per share. In conjunction with these transactions we recorded non-cash financing expenses of $259,074.

The following table summarizes warrant activity for the six months ended June 30, 2023:

During the six months ended June 30, 2023, 1,500,000 shares were issued from the exercise of warrants.

17 - Revenue Share Exchange

Under the terms of agreements entered into with Greenle, we were obligated to make quarterly payments (each a “Revenue Share”) to Greenle based on certain percentages of the revenues generated by certain of our leased properties during the term of the applicable leases (including any extensions thereof).

As previously reported, on February 13, 2023, the Company and Greenle entered into an agreement pursuant to which certain Revenue Share payments for 2023 were converted into an obligation to issue shares of our common stock to Greenle in the amounts prescribed therein (the “February 2023 Revenue Share Agreement”), with all future Revenue Share obligations accruing on and after January 1, 2024 remaining in place.

On May 21, 2023, we entered into a further agreement with Greenle (the “May 2023 Revenue Share Exchange Agreement”) pursuant to which the right to receive any and all Revenue Share with respect to any property or operations of the Company has been terminated in its entirety for 2024 and forever thereafter, and Greenle shall not be entitled to receive any payment therefor (other than the remaining periodic share issuances and cash payments under the February 2023 Revenue Share Agreement, all of which shall be completed by January 1, 2024). 

In consideration for the termination of the Revenue Share for 2024 and thereafter, we agreed to issue to Greenle, from time to time, in each case, at Greenle’s election upon 61 days’ prior written notice delivered to us on and after September 1, 2023 and before August 31, 2028, up to an aggregate of 6,740,000 shares of our common stock (the “Agreement Shares”). As a result of this transaction, we recorded interest expense of $28,174,148 in the period.

18 - SUBSEQUENT EVENTS

Warrant Exercises

On July 5, 2023 and July 11, 2023, Greenle exercised its right to purchase an aggregate of 160,000 and 400,000 shares, respectively, of the Company’s common stock at an exercise price of $2.50 per share pursuant to rights underlying certain of its warrants that were issued pursuant to the April 2023 Letter Agreement. In connection with such exercise, the Company received aggregate gross proceeds of $1,400,000.

Wyndham Transaction

On August 2, 2023, the Company entered into several agreements, including seventeen franchise agreements (each, a “Franchise Agreement”), with certain affiliates of Wyndham Hotels & Resorts, Inc. (collectively, “Wyndham”) pursuant to which the following hotels operated by the Company (the “Initial Properties”) will become part of the Trademark Collection® by Wyndham and Travelodge by Wyndham brands while staying under the operational control of the Company:

The Company expects rebranding of the Initial Properties, including the Initial Properties’ use of Wyndham booking channels, to be completed by December 2023.

The Franchise Agreements have initial terms of 15 to 20 years and require Wyndham to provide financial, sales and operational-related support with respect to the Initial Properties. The Franchise Agreements contain customary representations, warranties, covenants, indemnification, liquidated damages and other terms for transactions of a similar nature, including customary membership and marketing fees in an initial aggregate amount of 6.0% of gross room revenue, increasing to 6.5% of gross room revenue over the term of the Franchise Agreements.

Pursuant to the Franchise Agreements, the Company agreed to make certain property improvements, modifications and maintenance items (collectively, “Capital Improvements”), which the Company expects to complete over the next twelve months. In exchange for these Capital Improvements, Wyndham will provide capital through development advance notes (“Key Money”) to the Company for these Capital Improvements, which the Company expects will provide significant working or growth capital to the Company. Consistent with market practice, such Key Money will be evidenced by certain promissory notes with customary amortization and repayment terms. In conjunction with the Company’s entry into the Franchise Agreements, the Company paid a one-time, initial, nonrefundable franchise fee to Wyndham.

As a result of entering into the Franchise Agreements, the Company expects to be subject to significantly reduced booking fees, inclusive of franchise and other fees, as a result of using the Wyndham booking platform. Conversely, to the extent that the Company continues to use third party online travel agencies for bookings, the Company expects to benefit from Wyndham’s lower online travel agency commission rates, while paying franchise fees and other fees on such booking activity, as a result of the Company’s entry into the Franchise Agreements. The Company expects that the net impact of the Franchise Agreements will be a material reduction to such fees in comparison to the Company’s previous operations.

In addition to the Initial Properties, the Company and Wyndham are in the process of reviewing a pipeline of properties currently under letter of intent, already executed lease, or subject to an executed lease with the Company (such properties, “Pipeline Properties”). To the extent that the Company ultimately enters into master leasing agreements with respect to any such Pipeline Properties, the Company has set up a general framework to bring new LuxUrban properties onto the Wyndham platform and expects to add such Pipeline Properties to both the Company’s and Wyndham’s booking platforms. The Franchise Agreements provide for future commitments to Wyndham, and in return Wyndham has agreed to fund capital to the Company via Key Money on a property-by-property basis, which the Company expects will provide significant working or growth capital to the Company. The Company expects that any such working or growth capital provided by Wyndham will offset a percentage of the deposit money required. Wyndham has the ability to accept or reject properties to the platform on a property by property basis, subject to certain conditions, with a three-year right of first refusal.

In conjunction with the Company’s entry into the Franchise Agreements and the positive impact such Franchise Agreements are expected to have on the Company, including the reduced costs mentioned above, the Company agreed to terms that incentivize Brian Ferdinand, the Company’s Chairman and Chief Executive Officer, to remain with the Company for an extended period of time, including the requirement of Brian Ferdinand to personally guaranty (the “Key Man Terms”) the Company’s obligations under the Franchise Agreements and Key Money during the term of the Franchise Agreements, with the ability of the Company to remove the Key Man Terms after five years.

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When we refer to “we,” “us,” “our,” “LUXH,” or “the Company,” we mean LuxUrban Hotels Inc. and its consolidated subsidiaries. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this quarterly report on Form 10-Q (“Quarterly Report”). Some of the comments we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section below entitled “Special Note Regarding Forward-Looking Statements.” Certain factors that could cause actual results or events to differ materially from those the Company anticipates or projects are described in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (“Annual Report”).

Special Note Regarding Forward-Looking Statements

This Quarterly Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The statements contained in this Quarterly Report that are not purely historical are forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this Quarterly Report may include, for example, statements about:

The forward-looking statements contained in this Quarterly Report are based on current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those risk factors described in “Item 1A. Risk Factors” of our Annual Report, elsewhere in this Form 10-Q and any updates to those factors as set forth in this and subsequent Quarterly Reports on Form 10-Q or other public filings with the SEC. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.

See Item 1A. “Risk Factors” within our Annual Report for further discussion of these risks, as well as additional risks and uncertainties that could cause actual results or events to differ materially from those described in the Company’s forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Quarterly Report.

Overview

We utilize an asset light business model to lease entire hotels on a long-term basis and rent out hotel rooms in the properties we lease. We currently manage a portfolio of hotel rooms in New York, Washington D.C., Miami Beach, New Orleans and Los Angeles. With recent hotel rooms becoming available, as of August 8, 2023, we have approximately 1,625 units under lease. We believe the pandemic created, and current economic conditions present, a historic opportunity for us to lease dislocated and underutilized hotels at favorable economics for our company.

We have plans to expand both domestically and internationally. At this time, London is the next city targeted for expansion.

We strive to improve operational efficiencies by leveraging proprietary technology to identify, lease, manage, and market globally the hotel space we lease to business and vacation travelers through our online portal and third-party sales and distribution channels. Our top three sales channels represented over 90% of revenue during the three months ended June 30, 2023.

Business

We are building a portfolio of hotels that provide short-term accommodations for guests at average nightly and occupancy rates that exceed our total cost and expenses. We are growing this portfolio by capitalizing on the dislocation in the hotel industry created by the pandemic and subsequent rising interest rate environment. We target business and vacation travelers under our consumer brand LuxUrban and we market our hotel properties through our proprietary sales portal as well as several worldwide online travel agency (“OTA”) channels.

We believe that as a result of pandemic-induced hotel closures, changing financial requirements for hotel owners, as well as a significantly higher interest rate and refinancing environment, LuxUrban has a multi-year pipeline of potential properties to lease at favorable economics to our Company.

Many of the hotels that we lease have been hotels that were shuttered or underutilized as a result of the global pandemic. Other properties that we lease were either poorly managed properties where the landlord was looking for a more stable tenant, or a refinancing opportunity where LuxUrban provided a landlord a more desirable lender-friendly, long-term lease agreement.

Based on the market dislocation mentioned above, we believe our pipeline of high-quality opportunities will provide multiple leasing opportunities in upcoming years. Currently, we are focused on turnkey properties that require limited amounts of incremental capital to make the property guest-ready. We expect over time that we may need to invest additional capital as the best opportunities in our pipeline become leased. Even if we need to increase the capital we invest to make ready a property, we believe there are many attractive opportunities for properties where the economics will still be favorable based on the above mentioned market dislocation. In addition, we may be able to obtain greater concessions from landlords as a result of the capital required.

Property Summary

We enter into triple net leases in which we are responsible for all of the costs on the property outside of exterior structural maintenance. As of June 30, 2023, we leased 12 properties with 1,086 units available for rent. As of August 8, 2023, we leased 15 properties with 1,411 units available for rent. As of August 8, 2023, including properties under lease but not yet available for rent we leased 17 properties with 1,625 units. Our portfolio of properties as of August 8, 2023, was as follows:

Our Business Strategy

When we lease properties, we typically do so with either a refundable security deposit, refundable letter of credit or both. In most cases we get a period of “free rent” in which we make ready the property. Make ready could include but is not limited to: minor repairs or property updates, hiring appropriate property level staff, getting utilities / Wi-Fi / cable installed, or listing the property on the OTA channels we utilize.

We lease entire properties, which could include food service, gyms, or store fronts. We do and plan to in most cases, sublease the food service or store fronts to generate additional income. We believe these items are non-core to our operations.

Our average deposits / letter of credit by city as of June 30, 2023, were as follows:

Revenue Management

We use our proprietary data science and algorithms to manage revenue and create dynamic pricing for our accommodation units. Pricing changes can occur multiple times a day based on revenue momentum or lack thereof. We utilize our technology to both maximize occupancy rates through attractive pricing and increase cash flow in advance of potential guest stays. We initially developed and further improved our revenue management algorithms in our legacy apartment rental business and have now applied it to our hotel operations.

Property Operations

When we lease a new property, we typically streamline operations versus how its operations were managed by the prior operator that includes, but is not limited to:

Unit Economics

We believe we have one of the lowest per night property-level break-even costs in our markets as a result of leasing our properties at a generational low point. We estimate that the property-level break-even rate for revenue per available room (or “RevPAR”) for our portfolio as of June 30, 2023, was between $150 to $160 a night. We believe RevPAR provides an informative reflection of our business as it combines ADRs (average daily rates) along with occupancy rates. RevPAR for the six months ended June 30, 2023 was $291, well above the property-level break-even level.

The following table shows historical occupancy and RevPAR at our leased properties:

In late 2021, we began to transition our business to focus on leasing hotel properties in commercially-zoned areas, and we have substantially completed this transition as of the date of the this Quarterly Report. As a result, we believe that our historical financial and operating results, including operating metrics such as occupancy and RevPAR, are not indicative of our future operations and are not comparable to our current strategy. However, we believe that the above table is useful in illustrating the higher RevPAR and improved results that we believe that we will achieve as a result of our transition in business strategy

Regulations Governing Short-Term Rentals

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

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

Given the complexity of short-stay regulations in the cities in which we operate, we generally wound-down the majority of our residential area-located apartment inventory by the end of 2022 as part of the transition of our business strategy. As of June 30, 2023, our accommodation units portfolio is comprised of over 98% hotel units that are not subject to short-stay length regulations or contractual provisions and the balance is comprised of apartment units that are subject to such restrictions. Our portfolio growth strategy involves adding exclusively commercially zoned properties that are not subject to short-stay length regulations and divesting our remaining leases for residential-area properties. As a result, the need to comply with local or contractual short-stay length regulations or requirements, and the costs related thereto, have become increasingly less important to our operations.

Results of Operations

Three Months Ended June 30, 2023 as compared to Three Months Ended June 30, 2022

Net Rental Revenue

The increase in net rental revenue of 212% for the three months ended June 30, 2023 to $31.9 million as compared to $10.2 million for the three months ended June 30, 2022 was a result of the increase in average units available to rent from 565 for the three months ended June 30, 2022 to 1,086 for the three months ended June 30, 2023 as well as better RevPAR, or revenue per available room, from $198 for the three months ended June 30, 2022 to $322 for the three months ended June 30, 2023. RevPAR includes both average daily rate, or ADR, and occupancy.

Cost of Revenue

For the three months ended June 30, 2023, the principal component responsible for the increase in our cost of revenue was expenses for our units available to rent, which increased by $14.3 million, or 195%, from $7.3 million in the three months ended June 30, 2022, to $21.7 million in the three months ended June 30, 2023, as a result of the increased number of units as well as related increases in property-related costs such as utilities, labor, cable / WIFI costs and cost related to greater revenues such as credit card processing fees and commissions.

Gross Profit

The increase in our gross profit of $7.3 million, or approximately 256%, to $10.2 million for the three months ended June 30, 2023, as compared to $2.9 million for the three months ended June 30, 2022, is primarily attributable to the greater number of units and better RevPAR over these periods.

Total Operating Expenses

Total operating expenses incurred for the three months ended June 30, 2023, increased by approximately $4.5 million from the three months ended June 30, 2022. Of this increase, general and administrative expenses increased 399% to $4.4 million as compared to $0.9 million. This increase is primarily related to an increase in payroll, legal and accounting, software costs and supplies in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. Non-cash expenses of $1.0 million were included in the three months ended June 30, 2023, that were not included in the three months ended June 30, 2022.

Other Income (Expense)

Total other expense for the three months ended June 30, 2023 was $29.7 million as compared to $0.5 million for the three months ended June 30, 2022. This increase is primarily due to (a) interest and financing costs related to borrowings for working capital that increased from $0.6 million during the three months ended June 30, 2022 to approximately $1.2 million during the three months ended June 30, 2023, (b) offset by a marginal decrease in other income, and (c) non-cash financing costs of $28.5 million included in the three months ended June 30, 2023, that were not included in the three months ended June 30, 2022.