Inspirato rporated(ISPO) - 2023 Q4 - Annual Report

Part I Business Inspirato is a subscription-based luxury travel company offering access to a managed portfolio of luxury homes and hotel accommodations through an asset-light model - Inspirato is a subscription-based luxury travel company providing access to a managed portfolio of vacation options, including approximately 450 private luxury homes and rooms at over 250 luxury hotel partners as of December 31, 2023[18][19] - The company's primary offerings are two paid subscription models: Inspirato Club (access with nightly rates) and Inspirato Pass (all-inclusive subscription), with newer channels like Inspirato for Good and Inspirato for Business expanding the customer base[20][24][25] - A key business strategy is an asset-light model, leasing homes with flexible terms (typically terminable with 180 days to one year's notice) rather than owning them, allowing for portfolio curation in response to market trends[33] - The company's competitive strengths include its managed and controlled residential inventory, rate and calendar control, flexible cost structure, and predictable subscription revenue[37][42] - As of December 31, 2023, the company employed approximately 630 team members globally, with a high concentration in Operations and Sales and Marketing[47] - Travel revenues are seasonal, with the first, third, and fourth quarters typically being higher than the second quarter, while subscription revenues from existing members are not impacted by seasonality[51] Risk Factors The company faces risks related to brand, member retention, property supply, financial losses, internal control weaknesses, and regulatory compliance - The business is highly dependent on its brand reputation, member retention, and the ability to secure and renew leases for attractive luxury properties[69][71][79] - The company has a history of net losses, incurring a $51.8 million net loss in 2023, and may not achieve or sustain profitability[105] - The company has identified material weaknesses in its internal control over financial reporting, which resulted in the restatement of financial statements for Q1 and Q2 2022 and may lead to misstatements or failure to meet reporting obligations[120][121] - The company faces risks related to its debt, including a $25.0 million Senior Secured Convertible Note, and potential difficulties in complying with Nasdaq's continued listing standards, having received multiple non-compliance notices[113][114][116] - Significant obligations exist under a Tax Receivable Agreement (TRA), requiring the company to pay Continuing Inspirato Members 85% of realized tax savings, which could be substantial and may be accelerated under certain conditions[123][124][128] - The company is exposed to cybersecurity risks, including phishing and social engineering attacks, and must comply with complex and evolving data privacy laws like GDPR and CCPA, with non-compliance carrying significant potential penalties[144][149][151] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[161] Cybersecurity The company integrates cybersecurity risk management through a dedicated committee, employee training, and an incident response plan - A cross-functional "Cybersecurity Risk Committee" is responsible for assessing and managing the company's Cybersecurity Program and reports regularly to the Audit Committee of the Board[165] - The company undertakes several activities to manage cybersecurity threats, including annual employee training, regular phishing simulations, carrying cyber liability insurance, and maintaining a Technical Review Committee to evaluate third-party technology partners[166] - An incident response plan is in place to coordinate activities for preparing, responding to, and recovering from cybersecurity incidents[163] Properties The company's corporate headquarters are in Denver, Colorado, leasing approximately 44,715 square feet of office space - The company is headquartered in Denver, Colorado, with lease commitments for approximately 44,715 square feet of office space[166] Legal Proceedings The company is involved in a class action lawsuit alleging federal securities law violations related to financial statement restatements - On February 16, 2023, a class action lawsuit was filed against the company and certain officers, alleging violations of the Exchange Act related to the restatement of its Q1 and Q2 2022 financial statements[168][420] Mine Safety Disclosures This item is not applicable to the company - Not applicable[169] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Inspirato's Class A Common Stock and Warrants are listed on NASDAQ, with no cash dividends paid or anticipated - The company's Class A Common Stock is listed on the NASDAQ Global Select Market under the symbol "ISPO"[172] - As of March 8, 2024, there were approximately 35 holders of record of Class A Common Stock and 35 holders of record of Class V Common Stock[173] - The company has not paid any cash dividends to date and does not intend to declare any in the foreseeable future[174] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Total revenue decreased by 5% to $329.1 million in 2023, with net loss widening to $93.9 million due to asset impairments, while liquidity remains sufficient Overview The company launched Inspirato Rewards, secured a $25.0 million convertible note from Capital One, and executed a 1-for-20 reverse stock split - In August 2023, the company launched Inspirato Rewards, a new member loyalty program designed to incentivize repeat business with exclusive discounts and benefits[186] - The company secured a $25.0 million strategic investment from an affiliate of Capital One through the private placement of an 8% Senior Secured Convertible Note due 2028, with net proceeds of approximately $23.1 million[187] - A 1-for-20 reverse stock split of the company's common stock became effective on October 16, 2023, with all historical share and per-share amounts in the report adjusted to reflect this split[191][192] Key Business Metrics Key business metrics declined in 2023, with active subscriptions decreasing to 13,800 and occupancy falling to 72% Active Subscriptions as of December 31 | | 2022 | 2023 | | :--- | :--- | :--- | | Legacy | 9,400 | 7,900 | | Pass | 3,600 | 2,500 | | Club | 3,100 | 3,400 | | Total Active Subscriptions | 16,100 | 13,800 | Total Travel Operating Statistics (Year ended December 31) | | 2022 | 2023 | | :--- | :--- | :--- | | Paid Nights Delivered | 106,600 | 103,300 | | Total Nights Delivered | 187,600 | 185,000 | | Occupancy | 80% | 72% | | ADR | $1,513 | $1,464 | Results of Operations Total revenue decreased by 5% to $329.1 million in 2023, with net loss widening to $93.9 million due to increased asset impairments Consolidated Statements of Operations Highlights (in thousands) | | Year ended Dec 31, 2022 | Year ended Dec 31, 2023 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $345,530 | $329,100 | (5)% | | Gross margin | $116,204 | $54,314 | (53)% | | Asset impairments | $925 | $40,844 | n/m | | Net loss | $(51,081) | $(93,859) | (84)% | - Total revenue decreased by $16.4 million (5%) in 2023, with travel revenue down $8.7 million and subscription revenue down $8.0 million[213][215][216] - Asset impairments surged by $39.9 million to $40.8 million in 2023, primarily due to identifying 63 underperforming leases, most of which were in a single geographic location[219] - Operating expenses saw mixed changes: General & administrative costs increased 10% to $72.1 million, while Sales & marketing, Operations, and Technology & development expenses decreased by 16%, 34%, and 20% respectively, reflecting cost-saving initiatives[220][221][222] Liquidity and Capital Resources The company held $36.6 million in cash as of December 31, 2023, with $23.1 million from a convertible note, facing $326.2 million in lease obligations - As of December 31, 2023, the company had $36.6 million of cash and cash equivalents and $5.7 million of restricted cash[229] Summarized Cash Flow Information (in thousands) | | Year ended Dec 31, 2022 | Year ended Dec 31, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(45,689) | $(51,393) | | Net cash used in investing activities | $(14,270) | $(12,124) | | Net cash provided by financing activities | $58,945 | $23,844 | - The company's principal source of liquidity in 2023 was the net proceeds of approximately $23.1 million from the issuance of a convertible note to Capital One[230] Future Minimum Annual Lease Commitments as of Dec 31, 2023 (in thousands) | Year | Amount | | :--- | :--- | | 2024 | $79,749 | | 2025 | $64,655 | | 2026 | $47,853 | | 2027 | $35,770 | | 2028 | $27,477 | | 2029 and thereafter | $70,703 | | Total | $326,207 | Non-GAAP Financial Metrics Adjusted Net Loss increased to $55.4 million in 2023, while Adjusted EBITDA improved to a loss of $29.3 million Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | | Year ended Dec 31, 2022 | Year ended Dec 31, 2023 | | :--- | :--- | :--- | | Net loss and comprehensive loss | $(51,081) | $(93,859) | | Interest, net | $188 | $1,133 | | Income tax expense | $799 | $721 | | Depreciation and amortization | $5,436 | $10,553 | | Equity-based compensation | $8,802 | $13,652 | | (Gain) loss on fair value instruments | $1,696 | $(2,368) | | Asset impairments | $925 | $40,844 | | Public company readiness costs | $1,092 | — | | Adjusted EBITDA | $(32,143) | $(29,324) | Reconciliation of Net Loss to Adjusted Net Loss (in thousands) | | Year ended Dec 31, 2022 | Year ended Dec 31, 2023 | | :--- | :--- | :--- | | Net loss and comprehensive loss | $(51,081) | $(93,859) | | Asset impairments | $925 | $40,844 | | (Gain) loss on fair value instruments | $1,696 | $(2,368) | | Adjusted Net Loss | $(48,460) | $(55,383) | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate and foreign currency fluctuations, with a $2.7 million impact from a 10% USD change - The company's primary market risks are exposure to interest rates and foreign currency fluctuations[267] - The fair value of the $25.0 million convertible note is subject to changes based on the market price of the company's stock and interest rates[269] - In 2023, operating expenditures in foreign currencies were approximately $27.1 million, and a hypothetical 10% change in the U.S. dollar against the Mexican Peso and Euro would impact financial statements by $2.7 million[270] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021-2023, including balance sheets, income statements, and cash flows Consolidated Balance Sheets Total assets decreased to $330.7 million in 2023, with total liabilities at $485.4 million, widening the equity deficit to $154.7 million Consolidated Balance Sheets (in thousands) | | Dec 31, 2022 | Dec 31, 2023 | | :--- | :--- | :--- | | Total current assets | $116,881 | $74,840 | | Right-of-use assets | $271,702 | $209,702 | | Total assets | $430,367 | $330,727 | | Total current liabilities | $278,118 | $245,194 | | Lease liabilities, noncurrent | $208,159 | $196,875 | | Convertible note | $— | $23,854 | | Total liabilities | $505,357 | $485,425 | | Total equity (deficit) | $(74,990) | $(154,698) | Consolidated Statements of Operations and Comprehensive Loss Total revenues were $329.1 million in 2023, with a net loss of $93.9 million, or $15.31 per share, due to asset impairments Consolidated Statements of Operations (in thousands, except per share amounts) | | 2022 | 2023 | | :--- | :--- | :--- | | Revenue | $345,530 | $329,100 | | Gross margin | $116,204 | $54,314 | | Asset impairments | $925 | $40,844 | | Net loss and comprehensive loss | $(51,081) | $(93,859) | | Net loss attributable to Inspirato Inc. | $(24,057) | $(51,755) | | Basic and diluted net loss per Class A share | $(9.20) | $(15.31) | Notes to Consolidated Financial Statements Notes detail accounting policies, including the reverse stock split, revenue recognition, convertible note, lease impairments, and contingent liabilities - A 1-for-20 Reverse Stock Split became effective on October 16, 2023, with all historical share and per-share amounts adjusted to reflect the split[295][299] - In August 2023, the company launched a loyalty program, "Rewards," with deferred revenue related to this program totaling $10.7 million as of December 31, 2023[325][353] - The company issued a $25.0 million 8% Senior Secured Convertible Note due 2028 to an affiliate of Capital One, with net proceeds of $23.1 million, and has elected to carry the note at fair value[360][367] - During 2023, the company recorded a $40.5 million right-of-use asset impairment related to 63 underperforming leases, primarily in a single geographic location[316][377] - The company is subject to a class action lawsuit filed in February 2023 related to the restatement of its 2022 interim financial statements[420] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on financial disclosure - None[441] Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2023, due to ongoing material weaknesses in internal controls - Management concluded that as of December 31, 2023, the company's disclosure controls and procedures were not effective at a reasonable assurance level[443] - Management's assessment concluded that internal control over financial reporting was not effective as of December 31, 2023, due to ongoing material weaknesses[447] - The material weaknesses relate to (1) processes and controls over financial closing and reporting and (2) the design and effectiveness of Information Technology General Controls (ITGCs), including user access rights and segregation of duties[449] - A remediation plan is in progress, which includes enhancing risk assessment processes, implementing additional controls, and providing more training to control operators, but the weaknesses were not fully remediated as of year-end[450][452] Other Information The company reports no other information for this item - None[454] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[455] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 proxy statement - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2024 Annual Meeting of Stockholders[457] Executive Compensation Executive compensation information is incorporated by reference from the 2024 proxy statement - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2024 Annual Meeting of Stockholders[458] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan information is incorporated by reference from the 2024 proxy statement - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2024 Annual Meeting of Stockholders[459] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 proxy statement - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2024 Annual Meeting of Stockholders[460] Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the 2024 proxy statement - Information required by this item is incorporated by reference from the registrant's definitive proxy statement for its 2024 Annual Meeting of Stockholders[461] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with or incorporated by reference into the Form 10-K - This section provides a list of all financial statements, financial statement schedules (which have been omitted as not applicable or the information is included elsewhere), and exhibits filed with or incorporated by reference into the Form 10-K[463][464][465] Form 10-K Summary The company reports no summary for this item - None[470]