LuxUrban Hotels (LUXH) - 2022 Q4 - Annual Report

PART I Business LuxUrban Hotels Inc. operates an asset-light model, leasing entire hotels for long-term rentals, with approximately 1,200 rooms available and plans for international expansion - The company utilizes an asset-light business model, leasing entire hotels on a long-term basis and renting out the rooms. As of the filing date, the portfolio has grown to approximately 1,200 hotel rooms[21] - In late 2021, the company began winding down its legacy business of leasing multifamily residential units to pivot its strategy towards leasing hotels[22] Property Portfolio Summary (as of December 31, 2022) | Metric | Value | | :--- | :--- | | Total Properties | 10 | | Total Units Available | 839 | | Weighted Avg. Lease Term (years) | 12.8 | | Weighted Avg. Remaining Lease Term (years) | 12.0 | | Weighted Avg. Remaining Term (incl. options) (years) | 15.3 | | Total Security Deposits / Letters of Credit ($) | 10,515,000 | Historical Occupancy and RevPAR | Year | Occupancy (%) | RevPAR ($) | | :--- | :--- | :--- | | 2021 | 72 | 122 | | 2022 | 77 | 247 | - The company estimates its property-level break-even RevPAR (revenue per available room) for its portfolio was between $135 to $145 per night as of December 31, 2022. The actual RevPAR for the full year 2022 was $247[37] - As of December 31, 2022, the company had 213 full-time employees, with 135 being unionized, primarily as a result of the lease for the former Blakely NY Hotel[44][48] Risk Factors The company faces significant business risks, including economic conditions, limited operating history, net losses, and substantial debt, alongside public company risks such as management inexperience and internal control weaknesses Risks Related to Our Business Business risks include macroeconomic impacts, limited operating history, a history of net losses, significant debt, reliance on long-term leases and third-party booking platforms, and unionized labor - The company has a history of net losses, reporting a net loss of $(9,390,353) in 2022, $(2,233,384) in 2021, and $(4,615,725) in 2020[84] - A significant amount of indebtedness is maturing in 2023. Investor Financing Notes are secured by a first-priority lien on all company assets and cash flows, which could hinder securing additional financing[85][86] - Historically, over 90% of revenues have been generated through third-party booking websites such as Booking.com, VRBO, Airbnb, and Expedia[109] - A majority of the company's employees are represented by labor unions and/or covered by collective bargaining agreements, which could increase costs and reduce staffing flexibility[134] Risks Related to Being a Public Company Risks as a public company include management's limited experience, historical material weaknesses in internal controls, the CEO's controlling ownership, and a prior SEC settlement involving the CEO - The company's management team has limited experience managing a publicly traded company, having completed its IPO in August 2022[159] - Prior to its IPO, the company had material weaknesses in its internal control over financial reporting, particularly concerning its financial close processes[162][163] - The Chairman and CEO, Brian Ferdinand, beneficially owns approximately 59.2% of the voting power, making the company a "controlled company" under Nasdaq rules, which qualifies it for exemptions from certain corporate governance requirements[172][173] - The CEO, Brian Ferdinand, previously entered into an Offer of Settlement with the SEC in April 2020 related to disclosure and reporting violations at a different public company where he was a board member[158] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - None[184] Properties The company's property portfolio is detailed in Item 1, with corporate headquarters located in leased office space in Miami, Florida - The company leases office space for its corporate headquarters in Miami, Florida, which it believes is adequate for its immediate needs[186] Legal Proceedings The company is not a party to any pending or threatened legal proceedings expected to materially affect its business or financial condition - The company is not currently a party to any legal proceedings that it believes could have a material adverse effect on its business[187] Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[188] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "LUXH", has never paid dividends, and used its $13.5 million IPO proceeds for deposits, debt repayment, and working capital - The company's common stock is traded on the Nasdaq Stock Market LLC under the ticker symbol "LUXH"[191] - The company has never declared or paid cash dividends and does not expect to in the foreseeable future, intending to retain future earnings[193] - The company's IPO was completed on August 16, 2022, generating gross proceeds of $13,500,000. Net proceeds were used to fund letters of credit for property deposits, repay related-party debt, pay executive bonuses and director fees, and for general working capital[200][201] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's transition to an asset-light hotel leasing model, which drove significant revenue growth but also widened net losses due to increased operating expenses and exit costs, while liquidity is supported by IPO proceeds despite a working capital deficit Results of Operations Net rental revenue increased 105% to $43.8 million in 2022, driving a 486% surge in gross profit, but total operating expenses rose 457% to $15.8 million, widening the net loss to $9.4 million Comparison of Operations for Years Ended December 31 | Metric | 2022 ($) | 2021 ($) | % Change YoY | | :--- | :--- | :--- | :--- | | Net Rental Revenue | 43,825,424 | 21,379,913 | 105% | | Gross Profit | 12,375,349 | 2,110,760 | 486% | | Total Operating Expenses | 15,831,540 | 2,844,637 | 457% | | Loss from Operations | (3,456,191) | (733,877) | 371% | | Net Loss | (9,390,353) | (2,233,384) | 320% | - The increase in operating expenses was primarily driven by costs not present in 2021, including $2.5 million in non-cash stock compensation, $2.4 million in non-cash write-offs for exiting the apartment business, and $4.1 million in cash costs for the same exit[230] Liquidity and Capital Resources As of December 31, 2022, the company reported a working capital deficit of $13.9 million, an increase from the prior year, primarily due to higher current liabilities, though management expects sufficient liquidity for the next 12 months Liquidity Position as of December 31 | Metric | 2022 ($) | 2021 ($) | | :--- | :--- | :--- | | Cash and Cash Equivalents | 1,076,402 | 6,998 | | Total Current Assets | 11,547,594 | 1,279,426 | | Total Current Liabilities | 25,439,614 | 9,519,725 | | Working Capital (Deficit) | (13,892,020) | (8,240,299) | - The company incurred $6.5 million in exit costs related to its apartment unit business in 2022, which included guest relocation, lease termination, personnel costs, and non-cash lease exit costs[238] Financing Activities The company funds operations through affiliate loans, third-party investor financings, and its IPO, with significant loans payable and revenue participation rights granted in conjunction with certain financings Outstanding Third-Party Investor Financings (as of Dec 31, 2022) | Financing Series | Original Principal ($) | Amount Outstanding ($) | | :--- | :--- | :--- | | First Investor Financing | 3,325,000.00 | 3,403,033.34 | | Second Investor Financing | 2,875,000.00 | 2,907,459.54 | | Third Investor Financing | 2,875,000.00 | 2,889,375.00 | | Total | 9,075,000.00 | 9,199,867.89 | - In conjunction with financings from Greenle Partners, the company granted revenue participation rights, typically 5% to 10% of quarterly revenues for the first five years of a relevant lease, and 1% thereafter[246] Critical Accounting Policies and Estimates Critical accounting policies include revenue recognition upon guest occupancy, the adoption of ASC Topic 842 for leases, stock-based compensation valuation using Black-Scholes, and income tax accounting - Revenue is recognized when a guest occupies a rental unit for the agreed-upon time. Payments received for future stays are recorded as a liability ('rents received in advance') until the stay occurs[266][272] - The company adopted the new lease accounting standard, ASC Topic 842, effective January 1, 2022. This resulted in recording a net Operating Lease Right-Of-Use Asset of $83.3 million and corresponding current and noncurrent Operating Lease Liabilities on the balance sheet as of December 31, 2022[278][290] - Stock-based compensation for option awards is estimated using the Black-Scholes-Merton option pricing model, with expense recognized on a straight-line basis over the service period[286][287] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, LuxUrban Hotels Inc. is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is therefore not required to provide quantitative and qualitative disclosures about market risk[293] Financial Statements and Supplementary Data This section refers to the company's consolidated financial statements, which begin on page F-1 of the Annual Report - The company's Consolidated Financial Statements are included in the report, starting on page F-1[294] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on matters of accounting and financial disclosure - There have been no disagreements with the company's accountants on accounting and financial disclosures[295] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2022, due to material weaknesses in financial close processes, with a remediation plan underway - Management concluded that as of December 31, 2022, the company's disclosure controls and procedures were not effective at a reasonable assurance level[296] - The ineffectiveness was due to material weaknesses identified in internal controls over financial reporting, specifically related to the periodic and annual financial close processes[297][306] - A remediation plan has been initiated, which includes hiring additional qualified financial personnel, engaging specialized external resources, forming an audit committee, and adopting other entity-level controls[298][306] Other Information There is no other information to report in this section - None[309] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Not applicable[310] PART III Directors, Executive Officers, and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Proxy Statement - Information for this item is incorporated by reference from the company's 2023 Proxy Statement[313] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Information for this item is incorporated by reference from the company's 2023 Proxy Statement[314] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's 2023 Proxy Statement - Information for this item is incorporated by reference from the company's 2023 Proxy Statement[315] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2023 Proxy Statement - Information for this item is incorporated by reference from the company's 2023 Proxy Statement[316] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2023 Proxy Statement - Information for this item is incorporated by reference from the company's 2023 Proxy Statement[317] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Annual Report, including consolidated financial statements and a detailed index of all exhibits - This section contains the index of financial statements and a comprehensive list of all exhibits filed with the Form 10-K[319][323] Form 10-K Summary This item is not applicable - Not Applicable[328]