CORPHOUSING GROUP INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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. Overview 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 brands, including SoBeNY and 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. 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 Cityprohibits 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. 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. As of June 30, 2022, we operated 590 accommodation units across seven cities in the United States. We also plan to launch international operations prior to the end of 2022 and are currently evaluating Londonand Parisfor launch of our first commercial international operations. 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. 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. 16
As of the date of this quarterly report, we operate in seven cities:
Boston; ? Denver; ? Los Angeles; ? Miami Beach; ? New York; ? Seattle; ? Washington, D.C.
We use our own and third-party technology across the full spectrum of our operations and customer experience, including
? Our proprietary data analytics for property selection;
? Our proprietary data systems for revenue management and dynamic pricing;
? global sales distribution through dozens of direct-to-consumer and B2B sales
third-party sales pipelines;
? third-party AI guest background and security screening and verification; and
proprietary and third-party technologies integrated to manage our operations
? remotely, including internal employee communications, asset monitoring and
Key DriversSupply Growth
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.
Attraction of guests
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 Sobenewyork.com and our SoBeNY and LuxUrban apps. 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. Service
Our “Hero Division” is our core service component, which is operated in a service-oriented and customer-centric manner, with each team member trained and expected to adhere to delivering high-quality customer experiences.
17 Table of Contents Operational Efficiency 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.
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.
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.
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 Opinion on the Business Impact of COVID-19
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. 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. 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 18
0% and 13%, respectively for the six months ended
Year OCC REVPAR 2018 86 % 160 2019 84 % 157 2020 61 % 103 2021 72 % 122
2022 (Six months ended
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:
We used the relief clauses contained in many of our leases and negotiated them further
? additional rent concessions and deferrals with property owners. These
efforts have allowed us to achieve significant rent savings compared to its first 2020
? focused its efforts on increasing existing sources of demand and generating new ones
sources of demand during the COVID-19 pandemic; and
? kept our doors open to serve guests ensuring their stay was clean and safe;
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. 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.
Regulations governing short-term rentals
We launched our
New York Cityoperations 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 Cityimplemented 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 Cityand only operate properties that are not subject to these short-stay regulations. In conjunction with this divestiture, we have worked with New York City'sDOB and OSE 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 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. 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 19
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.
Local tax compliance and monitoring
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, 2020and December 31, 2021and the six months ended June 30, 2022. We estimate that total payment obligations for these amounts will approximate $866,409. 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.
Revenue and expenditure by city
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: Annual % of Revenue By City 2021 2020 2019 Boston 18 % 6 % - DC 3 % 15 % 13 % Denver 7 % 1 % 7 % Fort Lauderdale 2 % - - Los Angeles 11 % 6 % - Miami 6 % 16 % 10 % Miami Beach 24 % 21 % 23 % New York 23 % 30 % 18 % Seattle 6 % 5 % 16 % Nashville - - 13 % Total 100 % 100 % 100 % Annual % of Expenses By City 2021 2020 2019 Boston 10 % 8 % - DC 6 % 15 % 14 % Denver 3 % 3 % 10 % Fort Lauderdale 2 % - - LA 17 % 10 % - Miami 7 % 15 % 14 % Miami Beach 29 % 13 % 25 % New York 21 % 34 % 15 % Seattle 4 % 3 % 14 % Nashville - - 8 % Total 100 % 100 % 100 %
Non-GAAP Financial Measures
To supplement the summary consolidated financial statements, which are prepared in accordance with GAAP, we use EBITDA as a non-GAAP financial measure.
The following table provides a reconciliation of net income and EBITDA:
Three Months Ended
June 30, (unaudited)
2022 2021 2022 2021 Net Income (loss) $ 762,409 $
Provision for income taxes $750,000
- $ 750,000 $ - Interest and Financing cost $ 595,742 $ 542,764
$ 1,159,879$ 660,007 Depreciation Expense $ - $
- $ 2,556 $ - EBITDA
$ 2,108,151$ (590,368) $ 4,094,277 $ (1,780,031)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. We utilize EBITDA because it provides us with an operating metric closely tied to the operations of the business.
Unaudited information presented for the quarters and half-years ended
Three Months Ended
(unaudited) Semester ended
2022 2021 % change 2022 2021 % change Gross Rental Revenue
$ 12,656,540 $ 6,728,68688 % $ 24,419,439 $ 11,688,873109 % Refunds $ 2,455,202 $ 2,545,820(4) % $ 5,118,676 $ 4,199,97822 % Net Rental Revenue $ 10,201,338 $ 4,182,866144 % $ 19,300,763 $ 7,488,895158 % Cost of Revenue $ 7,344,720 $ 4,035,23882 % $ 13,930,882 $ 7,920,53176 % Gross Profit (Loss) $ 2,856,618 $ 147,628
$ 885,621 $ 738,430
$ (458,588) $ (542,330)
$ 1,512,409 $ (1,133,132)
$ 750,000$ - - Net Income (Loss) $ 762,409 $ (1,133,132)(167) % $ 2,181,842 $ (2,440,038)(189) %
Three months completed
Net rental income
The increase in net rental revenue of 144% for the three months ended
June 30, 2022to $10,201,338as compared to $4,182,866for the three months ended June 30, 2021was a result of the increase in average units available to rent from 376 at June 30, 2021to 565 at June 30, 2022as well as better occupancy rates and ADRs over this period. Cost of Revenue For the three months ended June 30, 2022, the principal component responsible for the increase in our cost of revenue was rental expenses for our units available to rent, which increased by $3,309,482, or 82%, from $4,035,238in the three months ended June 30, 2021, to $7,344,720in the three months ended June 30, 2022, as a result of the increase in size of our rental unit's portfolio period over period as well as related increases in furniture rentals, cleaning costs, cable / WIFI costs and credit card processing fees.
Gross profit (loss)
The increase in our gross profit margins of
$2,708,990to $2,856,618, or approximately 1835% for the three months ended June 30, 2022, as compared to $147,628for the three months ended June 30, 2021is primarily attributable to a reduction in the impact of Covid-19 as well as greater unit counts and better occupancy rates and ADRs over this period.. 21 Table of Contents Total Operating Costs Total operating costs incurred for the three months ended June 30, 2022increased by approximately 20% to $885,621as compared to $738,430for the three months ended June 30, 2021. Operating costs include contracted services, selling and administrative expenses, professional fees, and software fees all of which increased over these periods primarily attributable to the operation of additional units.
Total other expenses
Total other expense, for the three months ended
June 30, 2022was $458,588as compared to $542,330for the three months ended June 30, 2021. These expenses are primarily due to interest and financing costs related to borrowing for working capital.
Net rental income
The increase in net rental revenue of 158% for the six months ended
June 30, 2022to $19,300,763as compared to $7,488,895for the six months ended June 30, 2021was a result of the increase in units available to rent from 423 at June 30, 20212020 to 584 at June 30, 2022as well as better occupancy and ADRs
over this period. Cost of Revenue
For the six months ended
June 30, 2022, the principal component responsible for the increase in our cost of revenue was rental expenses for our units available to rent, which increased by $6,010,351or 76%, from $7,920,531in the six months ended June 30, 2021, to $13,930,882in the six months ended June 30, 2022, as a result of the increase in size of our rental unit's portfolio period over period as well as related increases in furniture rentals, cleaning costs, utilities, cable / WIFI costs and credit card processing fees.
Gross profit (loss)
The increase in our gross profit margins of
Total operating costs
Total operating costs incurred for the six months ended
June 30, 2022increased by approximately 38 % to $1,865,527as compared to $1,348,862for the six months ended June 30, 2021. Operating costs include contracted services, selling and administrative expenses, professional fees, and software fees all of which increased over these periods primarily attributable to the operation of additional units.
Total other expenses
Total other expense, for the six months ended
June 30, 2022was $572,812as compared to $659,540for the six months ended June 30, 2021. These expenses are primarily due to interest and financing costs related to borrowings for working capital. 22 Table of Contents
Cash and capital resources
The following table provides information about our liquidity and capital resources at
As of June 30, As of December 31, 2022 2021 Cash $ 566 $ 6,998 Other Current Assets
$ 6,640,637$ 1,272,428 Total Current Assets $ 6,641,193$ 1,279,426 Total Current Liabilities $ 25,143,248$ 9,519,725 Working Capital (Deficit) $ (18,502,055) $ (8,240,299)As of June 30, 2022, our cash balance was $566as compared to $6,998at December 31, 2021, and total current assets were $6,641,193as compared to $1,279,426at December 31, 2021. As of June 30, 2022, our company had total current liabilities of $25,143,248as compared to $9,519,725at December 31, 2021. Total current liabilities at June 30, 2022consisted of accounts payable and accrued expenses of $5,301,053as compared to $4,209,366at December 31, 2021, rents received in advance of $4,071,095as compared to $1,819,943at December 31, 2021, merchant cash advances of $575,489as compared to $1,386,008at December 31, 2021, loans payable of $7,263,230as compared to $2,104,408at December 31, 2021and operating lease liability of $7,182,381compared to a zero balance at December 31, 2021as a result of the adoption of the ASC 842. As of June 30, 2022, our company had a working capital deficit of $18,502,055as compared to $8,240,299at December 31, 2021. The decrease in working capital of $10,261,756was primarily attributed to an increase in operating lease liability of $7,182,381as a result of the adoption of ASC 842 partially as well as an increase in rents received in advance of $2,251,152due to an increase in bookings as a result of the reduction in travel restrictions and an decrease in merchant cash advances of $810,519.
before costs (
We have obtained funding through the
Small Business Administration(SBA) Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) totaling $815,183and $800,000, respectively. These funds have been used in our ongoing operations. We intend to repay these loans in accordance with the terms of the respective loan agreements or seek forgiveness, as permitted. We believe that our current capital resources, together with the net proceeds of our initial public offering ("IPO") and cash flows from operations, will be sufficient to fund our operations and growth initiatives for at least 12 months following consummation of our IPO. We believe that our current capital resources are sufficient to fund our operations through the consummation of our IPO. Following the IPO, if we do not generate cash flows sufficient to fund operations as planned, we may need to raise additional capital through the sale of equity or debt securities or through asset-related sales transactions. We cannot be certain that any such transactions will be available to us on commercially reasonable terms or at all as and when required. As noted below, from time to time, affiliates of our company have made other loans to our company to fund working capital requirements as required and such parties have advised that they will continue to provide funding as necessary through the consummation of our IPO. Historically, we have operated as a private, closely held company, with our operating capital requirements funded by a combination of related party loans, cash flows from operations, and third-party high-interest merchant cash advances. For the year ended December 31, 2021, we incurred a net loss of ( $2,233,384). However, for the six months ended June 30, 2022, we achieved a net income of $2,181,842. Components of the 2021 loss included what we believe are non-ordinary course expenses arising from cancelations due to the COVID-19 pandemic. Prior to the pandemic, for the year ended December 31, 2019, we had aggregate refunds and allowances of $917,084, or 14% of revenue. The following table summarizes the increases in refunds post the pandemic. As of 6/30/22 2021 2020 Total Refunds 21.0 % 33.7 % 38.9 %
We believe that the pandemic, the necessary closure and the growth of traveler caution are causing a significant reduction in the number of travelers, especially in the cities, where we operate our accommodation units. During the post-pandemic periods in which Covid infection and hospitalization rates have declined, we have experienced measurable improvement in our occupancy rates and reductions in
23 Table of Contents
our cancellation rates. Accordingly, we expect our reimbursement and compensation rates to normalize over time to at or slightly above 2019 levels as the pandemic subsides and provided further physical closures and travel restrictions do not occur. are not implemented.
We record cash collected prior to stays as "rents received in advance" on our balance sheet as a liability. These collections are either recognized as revenue when guests stay at our properties or refunded in accordance to our cancelation policies. In addition, a portion of our "processor retained funds" on our balance sheet is related to refunds as processors, under certain situations, get involved in customer refunds. As processors retain funds related to customer refunds, this can delay the actual refund as the processor wants to ensure we have not refunded the customer (avoiding double refunds). The recent increase in both of these accounts in partially related to the exit of some apartment units. In addition, we incurred a greater amount of relocation expenses related to this exit, which we expect to continue into the third quarter of 2022.
We do not have any institutional credit facilities in place. Since formation we have funded our operations and growth through capital contributions by founding equity holders, loans from affiliates of our company, third-party investor financings, and our initial Public offering consummated in
2022 Insider Bridge Funding
In a private placement consummated on
April 8, 2022("Insider Bridge Financing") we issued promissory notes ("2022 Insider Bridge Notes") to certain of our officers and directors having an aggregate principal amount of $1.33 million, together with warrants to purchase an aggregate of 320,000 shares of our common stock at a per-share exercise price of $4.20. All of the 2022 Insider BridgeNotes were converted at the closing of our IPO into 426,667 shares of our common stock.
Bridge financing investors 2022
In May, June and
September 2022, we entered into security purchase agreements with certain private investors under which we sold, in a series of private placements through the date of this prospectus (collectively, the "2022 Investor Bridge Financing"), an aggregate $5,750,000principal amount of 15% original issue discount notes ("2022 Investor Bridge Notes") and five-year warrants ("2022 Investor Bridge Warrants") to purchase an aggregate of 1,437,500 shares of our common stock at a per-share exercise price of $4.00. The 2022 Investor Bridge Notes bear interest at 5% per annum, with all accrued interest payable at maturity. The 2022 Investor Bridge Notes mature on May 27, 2022, June 30, 2023and September 19, 2023. All of the 2022 Investor Bridge Notes are secured by a first priority security interest in all of our assets until such time as such notes are repaid or converted into our preferred stock or common stock under the terms thereof. As of the date of this Quarterly Report, we have received $5,000,000aggregate gross proceeds under the 2022 Investor Bridge Financing, after giving effect to the original issue discount. In connection with our August 2022IPO, we repaid an aggregate principal amounts of $2.2 millionof the 2022 Investor Bridge Notes ( $2.5 millioninclusive on prepayment penalty). Accordingly, as of the date of this Quarterly Report , an aggregate principal amount of $3.6 millionof the 2022 Investor Bridge Notes remains outstanding. The outstanding 2022 Investor Bridge Notes are prepayable by us at any time at our election, together with a 15% prepayment premium. We have the right, exercisable at our option, to convert all of the 2022 Investor Bridge Notes into a series of newly issued preferred stock. If we make such an election, all of the 2022 Investor Bridge Notes will convert into a series of our preferred stock that will have an aggregate stated value equal to the aggregate principal (and interest then accrued thereon) of the 2022 Investor Bridge Notes being so converted, and pay dividends at 5% per annum on such stated value (accruing and payable at maturity or redemption of the preferred stock) and will be senior in right of liquidation to all our common stock and other securities classified as junior securities. Any such preferred stock issued upon conversion of the 2022 Investor Bridge Notes shall, in turn, at the election of the holder, be convertible into that number of shares of our common stock determined by dividing (a) the aggregate stated value (and accrued and unpaid dividends thereon) of the preferred stock being converted by (b) a conversion price of $3.00per share. Additionally, the 2022 Notes are convertible into shares of our common stock at the option of the holders thereof at any time at a conversion price of $3.00per share. As additional consideration to investors in the 2022 Investor Bridge Financing, we 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 our New Properties, during the initial term of the subject lease relating to such property (including any prescribed extensions thereof). Our obligation to pay such revenue share commences with the quarter ending 24
September 30, 2022and shall continue for each calendar quarter thereafter during the term of the applicable lease. Such payment shall be made within 10 days of the filing of our quarterly report on Form 10Q or annual report on Form 10K, as applicable. In connection with the 2022 Investor Bridge Financing, we paid Maxim Group LLC("Maxim"), the lead-book-running manager of our IPO, agency fees of $256,000and issued Maxim five-year warrants (the "Bridge Agent Warrants") to purchase an aggregate of 32,000 shares of our common stock at a per-share exercise price of $4.40per share. We have granted Maxim certain registration rights with respect to the shares underlying the Bridge Agent Warrant, including the right to include such shares on the registration statement filed on behalf of the investors in the 2022 Investor Bridge Financing and customary piggyback registration rights.
Exceptional Insider Funding
May 2022, SuperLuxMia LLC, an entity controlled by our founder, chairman and chief executive officer, Brian Ferdinand, provided $568,000in financing to our company for general operating expenses relating to the launch of our Marriott Herald Squareproperty. This loan is evidenced by an unsecured, 24-month note, bearing interest at 6% per annum, with interest payable at maturity. We may prepay this note at any time without prepayment penalty, subject to the terms of our other existing debt. In June 2022, Mr. Ferdinandpersonally provided us with an additional $750,000of financing via a credit facility for operating expenses relating to the launch of certain of our newer properties, including the Astor Hoteland 1000 29th Street. This loan is evidenced by an unsecured, 24-month note, bearing interest at 6% per annum, with interest payable at maturity. We may prepay this note at any time without prepayment penalty, subject to the terms of our other existing debt. In October 2021, we issued a promissory note (the " October 2021Note") to THA Family II LLC, an affiliate of our chief executive officer, in the principal amount of $2 million. As part of the note purchase we also issued warrants to purchase 250,000 shares of our common stock at an exercise price of $4.20. The October 2021Note has a maturity date of April 15, 2023, and bears interest at the rate of 6% per annum, with such interest payable monthly in arrears in cash. At the close of our IPO $1.0mm of principal balance of this note converted into 312,500 shares of our stock and remaining balance was repaid. In November 2021, we issued a promissory note (the " November 2021Note") to EBOL Holdings LLC, an entity controlled by a holder of more than 5% of our common stock, in the principal amount of $500,000. As part of the note purchase we also issued the investor warrants to purchase 125,000 shares of our common stock at an exercise price of $4.20per share. EBOL Contingent Warrants, the issuance and exercisability of which were contingent on an initial public offering. The November 2021Note had a maturity date of May 15, 2023. At the closing of our IPO, $200,000of the November 2021Note was repaid, with $300,000unpaid principal (and accrued interest thereon) remaining outstanding as of the date of this Quarterly Report.
Cash flow from operating activities
During the six months ended
June 30, 2021, we incurred a net loss of $2,440,038that was increased by a net increase in operating assets and liabilities of $1,868,389for a total of $571,649in net cash used by operating activities. During the six months ended June 30, 2022, we achieved a net income of $2,181,842that was increased by a net increase in rents received in advance of $2,251,152and a net increase in operating lease liability of $1,202,902and decreased by processor retained funds of $4,559,397, accounts payable and accrued liabilities of $1,091,687, deferred rent of $951,185and other smaller items for a total of $406,284in net cash used by operating activities.
Cash flow from financing activities
During the six months ended
June 30, 2021, net cash provided in financing activities of $579,006included net proceeds from loans of $1,583,705, reduced by distributions, net of contributions, totaling $954,699. During the six months ended June 30, 2022, net cash provided by financing activities of $1,101,267included loans proceeds of $2,374,332, offset by payments on merchant cash advances of $810,519and deferred offering costs of $462,546.
Exchange rate effect
Our operations are not affected by the effect of exchange rate fluctuations. We anticipate that we will be affected by currency exchange rates when we launch our international operations in 2022.
Off-balance sheet arrangements
We currently have no off-balance sheet arrangements.
25 Table of Contents Indemnification Agreements
In the normal course of our business, we include limited indemnification clauses in certain agreements with parties with whom we have business relationships of varying scope and duration.
Under these contracts, we may indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with breach of the agreements, or intellectual property infringement claims made by a third party, including claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are applicable to its performance under the subject agreement. It is not possible to determine the maximum potential loss under these indemnification provisions due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision.
To date, no material costs have been incurred, individually or collectively, with respect to indemnification provisions.
In addition, we have entered into indemnification agreements with our directors, executive officers and certain other employees that require us among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, executive officers, or employees.
Contractual obligations and commitments
The following table summarizes our contractual obligations and commitments as of
Payments Due by Period More than Total 1 Year 2 - 3 Years 4 - 5 Years 5 Years Loans payable
$ 10,149 $ 6,844 $ 2,543$ 32 $ 730Operating Lease Obligations(1) 120,738 9,731 20,023 18,211 72,773 Total $ 130,887 $ 16,575 $ 22,566 $ 18,243 $ 73,503
Obligations under operating leases primarily represent the initial contractual term(1) of the leases of our revenue-generating apartment and hotel units, not including
any future optional renewal periods. 26 Table of Contents
Third Party Payment Processors
We utilize third-party payment processors to process guest transactions via credit card. Over 95% of our reservations are processed through credit card transactions in which we pay a processing fee between 3% to 6.5% of the transaction amount. As we have has grown and evolved, from time to time, we have had short-term difficulty in securing and maintaining the necessary processing relationships. As of the date of this Quarterly Report, we maintain satisfactory relationships with all necessary third-party payment processors. As noted in our financial statements, we maintain significant cash under "Processor retained funds" on our balance sheet as of
June 30, 2022. These reserved funds are cash reserves held back by our processors to offset chargebacks and refunds due to guests. These reserves are intended to provide protection for both our guests and credit card processor with respect to cancellations and refunds. As part of our growth strategy, the large majority of our accommodation units are rented on a nonrefundable basis, in order to minimize cancellation and refund exposures.
© Edgar Online, source