SONDER HOLDINGS INC. 
The following discussion and analysis of the financial condition and results of operations ofSonder Holdings Inc. ("Sonder," "we," "us" or "our") should be read together with Sonder's audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Sonder's actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section entitled "Risk Factors" herein or in other parts of this Annual Report on Form 10-K. Sonder's historical results are not necessarily indicative of the results that may be expected for any period in the future. Except as otherwise noted, all references to 2022 refer to the year endedDecember 31, 2022 , and references to 2021 refer to the year endedDecember 31, 2021 . 55
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The following discussion and analysis does not include certain items related to the year endedDecember 31, 2020 , including year-over-year comparisons between the year endedDecember 31, 2021 and the year endedDecember 31, 2020 . For a comparison of our results of operations for the fiscal years endedDecember 31, 2021 andDecember 31, 2020 , refer to Exhibit 99.2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 8-K/A, filed with theSEC onMarch 28, 2022 . OnJanuary 18, 2022 , Sonder consummated the previously announced business combination by and amongGores Metropoulos II, Inc. ("GMII"), two subsidiaries of GMII, andSonder Operating Inc. , aDelaware corporation formerly known asSonder Holdings Inc. ("Legacy Sonder") (the "Business Combination").
Overview
We are on a mission to revolutionize hospitality through innovative, tech-enabled service, and inspiring, thoughtfully designed accommodations combined into one seamless experience. Sonder was born from a desire to offer the modern traveler better accommodation choices than unremarkable "big box" hotels, often unreliable home-shares, and overly expensive boutique hotels. We lease and operate a variety of accommodation options - from fully-equipped serviced apartments to spacious hotel rooms - in 43 cities in 10 countries. As ofDecember 31, 2022 , we had approximately 9,700 units available for guests to book at over 250 properties.
Management Discussion Regarding Opportunities, Challenges, and Risks
Cash Flow Positive Plan
OnJune 9, 2022 , we announced our cash flow positive plan, which focuses on achieving positive quarterly free cash flow ("FCF") within 2023 (the "Cash Flow Positive Plan"). The Cash Flow Positive Plan shifted our focus from hyper growth to generating positive FCF more rapidly than previously planned. This shift in focus was not due to a lack of growth opportunities, but instead because market conditions had changed, and we thought it was prudent to shift our strategy to adapt to the changing macroeconomic environment. We have continued to make meaningful progress against our Cash Flow Positive Plan, including reducing our FCF burn by over 50.0% from the first quarter of 2022 to the fourth quarter of 2022. Our focus remains on reaching our first quarter of positive FCF in 2023. Our ability to reach our overall FCF goal is subject to certain risks, including a significant change in the macroeconomic environment and its impact on travel demand, inflation, or our ability to achieve our intended cost efficiencies. Supply Growth A key driver of our revenue growth is our ability to convert units for which we have signed real estate contracts but are not yet available for guests to book ("Contracted Units") into units available for guest booking ("Live Units") and to continue signing properties with favorable terms. As part of our Cash Flow Positive Plan, we slowed our planned pace of new unit signings to refocus on growth primarily through our already contracted portfolio. In 2022, our Live Units grew by 27.6% year-over-year to over 9,700 units, driven by strong conversion of our Contracted Units to Live Units. We are also focused on targeting high quality, 100% capital light deals (as defined below) for incremental unit signings. While we signed high quality, capital light units over the course of 2022, we also saw development cost uncertainty and augmented risk around financing in the second half of the year. We continue to meaningfully scale the business and have a robust portfolio of Contracted Units as well as a strong pipeline of potential new unit signings. 56
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Ability to Attract and Retain Guests
Another key driver of our revenue growth is our ability to attract demand from
repeat guests and to attract new guests through various channels. We source
demand from a variety of channels, including indirectly, through online travel
agencies ("OTAs") such as Airbnb, Booking.com , and Expedia and directly, through
Sonder.com, the Sonder app, or our sales personnel. While bookings made through
OTAs incur channel transaction fees, where we pay a certain percentage of the
revenue booked on the OTA in order to compensate the OTA for its listing
services, they allow us to attract new guests who may not be familiar with the
Sonder brand. In general, direct bookings are more advantageous to us as they do
not incur channel transaction fees and also allow us to have a more direct
relationship with our guests. Direct bookings as a percentage of total bookings
have fluctuated in recent years due to the COVID-19 pandemic but have stabilized
above 40% (42.2% for the year ended December 31, 2022 ).
Additionally, we are focused on expanding our corporate business, including strengthening our position on Global Distribution System ("GDS") platforms and adding a significant amount of corporate travel accounts.
Technology
We have invested, and will continue to invest, resources in our technology architecture and infrastructure. These improvements have allowed us to deploy the latest tools and technologies to build external and internal facing technology. Our technology is essential to our user experience, as it leads guests through their entire Sonder stay, from booking through check-out. Technology also underpins our hospitality operations, from underwriting and supply growth, to building openings, pricing and revenue management, demand generation, interior design, and day-to-day operations. By leveraging technology, our goal is to reduce operating costs and provide both a better guest experience and a compelling value.
The Business Combination and Public Company Costs
OnJanuary 18, 2022 , we consummated the Business Combination, pursuant to which Legacy Sonder merged into one of our subsidiaries and we changed our corporate name toSonder Holdings Inc. Legacy Sonder has been deemed the accounting predecessor and as such, Legacy Sonder's financial statements for previous periods are disclosed in Sonder's periodic reports filed with theSEC subsequent toJanuary 18, 2022 . The Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, GMII was treated as the acquired company for financial statement reporting purposes. Upon consummation of the Business Combination, our Common Stock began trading on the Nasdaq Global Select Market under the ticker symbol "SOND." As a publicly traded company, Legacy Sonder's management team and business operations comprise our management and operations. Sonder will need to continue to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors' and officers' liability insurance, director fees, and additional internal and external accounting, legal, administrative resources, including increased audit and legal fees. Restructuring As part of the Cash Flow Positive Plan, we completed a restructuring of our operations resulting in an approximate 21.0% reduction of then-existing corporate roles and a 7.0% reduction of then-existing frontline roles. As part of this restructuring, we incurred$4.0 million in one-time restructuring costs in the year endedDecember 31, 2022 , of which approximately$3.7 million was paid out in 2022, and the remainder is expected to be paid out by early 2023. OnMarch 1, 2023 , we announced a restructuring affecting approximately 14.0% of the corporate workforce, which is expected to lead to approximately$10.0 million in annualized cost savings. We expect the restructuring to be substantially complete by the end of the first quarter of 2023. Total costs and cash expenditures for the restructuring are estimated at$2.0 million to$3.0 million , substantially all of which are related to employee severance and benefits costs and will be recognized in the first quarter of 2023. We expect to pay the majority of these restructuring amounts in the first quarter of 2023. 57
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Key Business Metrics
We track the following key business metrics to evaluate our performance,
identify trends, formulate financial projections, and make strategic decisions.
Accordingly, we believe these key business metrics provide useful information to
investors and others in understanding and evaluating our results of operations
in the same manner as our management team. These key business metrics may be
different from similarly titled metrics presented by other companies.
The following table provides the key metrics for the periods indicated
(rounded):
Year ended December 31, Change
2022 2021 No. %
Live Units (End of Period) 9,700 7,600 2,100 27.6 %
Bookable Nights 3,051,000 2,032,000 1,019,000 50.1 %
Occupied Nights 2,466,000 1,380,000 1,086,000 78.7 %
Total Portfolio 17,600 18,100 (500) (2.8) %
RevPAR $ 151 $ 115 $ 36 31.3 %
ADR $ 187 $ 169 $ 18 10.7 %
Occupancy Rate 81.0 % 68.0 % 13.0 % 19.1 %
Live Units
Live Units generate Bookable Nights (as defined below) which generate revenue.
Live Units are a key driver of revenue, and a key measure of the scale of our
business, which in turn drives our financial performance.
Growth in Live Units is driven by the number of units contracted in prior
periods, and the lead time and opening period associated with making those units
available to guests. The time from contract signing to building opening varies
widely, ranging from relatively short periods for hotels that already meet
Sonder's brand standards and/or that are already live hotels operating under
another brand, to many months or even years for projects under renovation or
construction. The number of Live Units at the end of a period is also affected
by the number of units that were removed from Sonder's portfolio during that
same period, which Sonder refers to as dropped units. Typically, Sonder does not
drop many Live Units, other than certain units at the end of their contracts,
during atypical times such as during the COVID-19 pandemic, or due to unforeseen
regulatory changes within an existing market.
The increase in Live Units year-over-year was driven by our continued focus on
converting Contracted Units into Live Units. As of December 31, 2022 , our five
largest cities (New York City , Dubai , Philadelphia , New Orleans and London )
accounted for approximately 38.4% of our Live Units, and our 10 largest cities
accounted for approximately 59.0% of our Live Units.
Bookable Nights / Occupied Nights
Bookable Nights represent the total number of nights available for stays across
all Live Units. Occupied Nights represent the total number of nights occupied
across all Live Units. Occupancy Rate ("OR") is calculated as Occupied Nights
divided by Bookable Nights. Bookable Nights, Occupied Nights, and OR are key
drivers of revenue, which in turn drives financial performance.
In the first quarter of 2022, we implemented a pricing strategy to target higher
occupancy in order to take advantage of demand elasticity and continued to
pursue this strategy throughout 2022. We are marketing bookings further in
advance, continuously improving our pricing strategy, and developing additional
sales and marketing capabilities and our corporate travel offering to bolster
demand. We are continually evaluating the balance between demand and rate, and
therefore we view occupancy as more of an output of Revenue per Available Room
("RevPAR") optimization efforts rather than a standalone strategy.
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The increase in Bookable Nights and Occupied Nights year-over-year was largely driven by our focus on converting Contracted Units into Live Units. The increase in Occupied Nights year-over-year was also driven by our strategy shift targeting higher occupancy.
RevPAR and Average Daily Rate
RevPAR represents the average revenue earned per available night and can be
calculated either by dividing revenue by Bookable Nights, or by multiplying
Average Daily Rate ("ADR") by OR. ADR represents the average revenue earned per
night occupied and is calculated as Revenue divided by Occupied Nights. RevPAR
and ADR are key drivers of revenue, and key measures of our ability to attract
and retain guests, which in turn drives financial performance.
Several factors may explain period-to-period RevPAR variances, including:
•Live Units that became live in recent months and have not yet reached mature economics. Typically, new Live Units take several months to achieve mature ADR and OR as buildings stabilize and drive organic bookings. If a period has a significant increase in Live Units, this may reduce the portfolio's RevPAR. •Market mix represents the composition of our portfolio based on geographic presence. Certain markets such asNew York orLondon typically earn higher RevPARs, while certain other markets such asHouston orPhoenix typically earn lower RevPARs. Therefore, if the market mix shifts toward lower RevPAR markets, it may adversely impact the portfolio's RevPAR. •Product mix represents the composition of our portfolio between apartment and hotel style units. In general, apartments are higher RevPAR bookings because they typically offer more amenities (e.g., kitchen, in-unit washer/dryer) and have higher square footage compared to hotel units. Therefore, if the product mix shifts towards hotel units, it may adversely impact the portfolio's RevPAR. •Seasonality drives typical period-to-period variances in a particular property's RevPAR depending upon seasonal factors (e.g., weather patterns, local attractions and events, holidays) as well as property location and type. Based on results prior to the COVID-19 pandemic, RevPAR tends to be lower across our portfolio in the first quarter and fourth quarters of each year due to seasonal factors such as weather and holidays and the market mix and product mix of our portfolio at the time. However, the effect of seasonality will vary as our market mix and product mix continues to evolve.
The increase in RevPAR year-over-year was driven by a 19.1% Occupancy Rate increase due to our strategy shift targeting higher occupancy and a 10.7% increase in ADR due to continued travel recovery.
Impact of COVID-19 and Macroeconomic Factors on the Business
Our financial results for all of 2020, 2021, and the first half of 2022 were materially adversely affected by the COVID-19 pandemic, and the pandemic may continue to adversely impact business operations, results of operations, and liquidity in the near term and possibly longer if additional serious variants or resurgences of the virus occur. While quarterly RevPAR has been generally improving sinceMay 2020 , and we continue to evaluate the nature and extent of the impact of the pandemic on our business, the extent and duration of the current travel recovery remain uncertain and will be largely dependent on the effectiveness of COVID-19 prevention and treatment measures, infection rates, and governmental responses in the cities and countries in which we operate, as well as the other factors that affect travel demand. Additionally, the uncertainty surrounding macroeconomic factors in theU.S. and globally, characterized by inflationary pressures, rising interest rates, significant volatility of global markets and geopolitical conflicts, could have a material adverse effect on our business and could lead to further economic disruption and expose us to greater risk of a potential deceleration or reversal of the current travel market recovery trends. 59
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Results of Operations
The following table sets forth our results of operations for the periods
indicated and as a percentage of revenue (in thousands, except percentages):
Year ended December 31,
2022 2021
Revenue $ 461,083 100.0 % $ 232,944 100.0 %
Cost of revenue (excluding depreciation and
amortization) 320,016 69.4 % 201,445 86.5 %
Operations and support 211,081 45.8 % 142,728 61.3 %
General and administrative 132,445 28.7 % 106,135 45.6 %
Research and development 28,896 6.3 % 19,091 8.2 %
Sales and marketing 51,224 11.1 % 23,490 10.1 %
Restructuring and other charges 4,033 0.9 % - - %
Total costs and operating expenses $ 747,695 162.2 % $ 492,889 211.6 %
Loss from operations $ (286,612) (62.2) % $ (259,945) (111.6) %
Total non-operating (income) expense, net (121,403) (26.3) % 34,200 14.7 %
Loss before income taxes (165,209) (35.8) % (294,145) (126.3) %
Provision for income taxes 533 0.1 % 242 0.1 %
Net loss $ (165,742) (35.9) % $ (294,387) (126.4) %
Other comprehensive loss:
Change in foreign currency translation adjustment 5,686 1.2 % 1,633 0.7 %
Comprehensive loss $ (160,056) (34.7) % $ (292,754) (125.7) %
Revenue
Sonder generates revenues by providing accommodations to its guests. Direct revenue is generated from stays booked through Sonder.com, the Sonder app, or directly with our sales personnel, while indirect revenue is generated from stays booked through third-party corporate and online travel agencies.
The following table sets forth our revenue for the periods indicated (in thousands, except percentages):
Year ended December 31, Change
2022 2021 $ %
Revenue $ 461,083 $ 232,944 $ 228,139 97.9 %
Revenue increased, primarily due to a 31.3% increase in RevPAR, driven by
continued travel market recovery and our strategy targeting higher occupancy,
along with an increase of 27.6% in Live Units contributing to a 78.7% increase
in Occupied Nights.
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Table of Content s Costs and Operating Expenses
The following table sets forth our total costs and operating expenses for the periods shown (in thousands, except percentages):
Year ended December 31, Change
2022 2021 $ %
Cost of revenue (excluding depreciation and
amortization) $ 320,016 $ 201,445 $ 118,571 58.9 %
Operations and support 211,081 142,728 68,353 47.9 %
General and administrative 132,445 106,135 26,310 24.8 %
Research and development 28,896 19,091 9,805 51.4 %
Sales and marketing 51,224 23,490 27,734 118.1 %
Restructuring and other charges 4,033 - 4,033 100.0 %
Total costs and operating expenses $ 747,695 $ 492,889 $ 254,806 51.7 %
Cost of Revenue (excluding depreciation and amortization): Cost of revenue
primarily consists of fixed and variable lease costs to real estate owners for
our Live Units, cleaning costs, and payment processing charges. We expect our
cost of revenue will continue to increase on an absolute dollar basis for the
foreseeable future as we experience growth in bookings and expand our portfolio
of properties. Cost of revenue may vary as a percentage of revenue from
period-to-period based on the timing and seasonality of bookings. Additionally,
our cost of revenue does not necessarily increase at a rate commensurate with
the increase in revenue, given that drivers of increases in revenue, such as
increase in occupancy, do not necessarily require additional costs.
Cost of revenue increased, primarily due to: (i) a $87.5 million increase in
rent expense related to leases as a result of a 2,100 unit increase in Live
Units; (ii) a $20.0 million increase in cleaning expenses as a result of an
increase in the number of Occupied Nights; and (iii) a $7.8 million increase in
payment processing fees due to an increase in bookings, driven by continued
travel recovery and our Live Unit growth.
Operations and support: Operations and support costs are related to guest-facing
functions and variable expenses associated with property-level operations, such
as customer service and hospitality, depreciation of property and equipment,
utilities, costs to open new properties, and the cost of guest-room consumable
items and low-cost furnishings. We expect operations and support costs to
increase on an absolute dollar basis for the foreseeable future to the extent
that we continue to grow our Live Units.
Operations and support increased, primarily due to: (i) a $26.0 million increase
in unit-related expenses due to an increase in Live Units, along with an
increase in Occupied Nights; (ii) a $22.8 million increase in employee
compensation expense, inclusive of stock compensation expense, due to an
increase in average headcount; (iii) a $6.5 million increase in onboarding costs
as a result of our focus on converting Contracted Units into Live Units; and
(iv) a $5.7 million increase in customer service costs, driven by an increase in
Occupied Nights.
General and administrative: General and administrative costs primarily consist
of personnel-related expenses for administrative functions, such as legal,
finance and accounting, public policy, and human resources. It also includes
certain professional services fees, corporate offices, technology expenses, bad
debt expense, general corporate and director and officer insurance, and other
corporate-level expenses we incur to manage and support our operations. We
expect to continue to incur certain general and administrative costs as a result
of operating as a public company, including expenses to comply with the rules
and regulations of the SEC and Nasdaq, as well as expenses for corporate
insurance, director and officer insurance, investor relations, and professional
services. Overall, we expect our general and administrative costs will decrease
as a percentage of revenue in 2023 as compared to 2022.
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General and administrative increased, primarily due to: (i) a$7.6 million increase in tax expense related to transaction (sales and value-added tax) taxes, largely driven by an increase in bookings due to continued travel recovery during the period and our Live Unit growth; (ii) a$6.7 million increase in legal and professional fees due to ongoing routine legal and professional costs; (iii) a$4.9 million increase in insurance expense due to additional costs incurred in connection with becoming a public company; and (iv) a$3.5 million increase in employee compensation expense, inclusive of stock compensation expense, due to an increase in average headcount. Research and development: Research and development expenses primarily consist of personnel-related expenses and an allocation of our facility expenses incurred in connection with the development of our existing and new services. Our research and development efforts in the short- to mid-term are focused primarily on increasing the functionality and enhancing the ease of use of existing services, and to a lesser extent, adding new features and services. We capitalize the portion of our software development costs that meets the criteria for capitalization. We expect that our research and development expenses will decrease as a percentage of revenue in 2023 as compared to 2022. Research and development increased, primarily due to: (i) a$6.1 million increase in employee compensation expense, inclusive of stock compensation expense, driven by an increase in average headcount; (ii) a$1.6 million increase in computer software expense related to the growth of our business; and (iii) a$1.3 million increase in professional fees related to the growth of our business and in connection with becoming a public company. Sales and marketing: Sales and marketing expenses primarily consist of service charges for bookings made through OTAs, personnel-related expenses for sales, marketing, advertising costs, and branding. We expect our sales and marketing expense will decrease as a percentage of revenue in 2023 as compared to 2022. Sales and marketing increased, primarily due to: (i) a$22.9 million increase in channel transaction fees resulting from an increase in revenue booked through third-party OTAs, consistent with total revenue growth; and (ii) a$3.4 million increase in compensation expense, inclusive of stock compensation expense, driven by an increase in average headcount. Restructuring and other charges: Restructuring and other charges consists primarily of employee termination benefits of approximately$4.0 million for the year endedDecember 31, 2022 as part of our Cash Flow Positive Plan announced in the second quarter of 2022.
The entirety of the increase in restructuring and other charges is due to the Cash Flow Positive Plan discussed above.
Total Non-operating (Income) Expense, Net
Total non-operating (income) expense, net consists primarily of the change in fair value of the Earn Out, SPAC Warrants, and other instruments carried at fair value, realized and unrealized gains and losses on foreign currency transactions and balances, and interest expense related to the term loans and convertible debt.
The following table sets forth our total non-operating (income) expense, net for the periods indicated (in thousands, except percentages):
Year ended December 31, Change
2022 2021 $ %
Interest expense, net $ 21,505 $ 44,090 $ (22,585) (51.2) %
Change in fair value of SPAC Warrants (25,260) - (25,260) (100.0) %
Change in fair value of Earn Out liability (95,700) - (95,700) (100.0) %
Change in fair value of share-settled
redemption feature and gain on conversion of
convertible notes (29,512) - (29,512) (100.0) %
Other expense (income), net 7,564 (9,890) 17,454 (176.5) %
Total non-operating (income) expense, net $ (121,403) $ 34,200 $ (155,603) (455.0) %
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Interest expense, net: Interest expense, net decreased due to the conversion of the Convertible Notes to equity inJanuary 2022 , offset by interest expense recognized in connection with the payoff of the term loan inJanuary 2022 and interest expense on the Delayed Draw Notes issued inJanuary 2022 . Change in fair value of SPAC Warrants: The change in the fair value of the SPAC Warrants is impacted by the initial recognition of, and subsequent fair value adjustments to, the SPAC Warrants. The decrease in the fair value of this line item resulted from a decrease in our stock price period-over-period and is recognized as a credit on the consolidated statements of operations and comprehensive loss, thereby decreasing our net loss. Change in fair value of Earn Out Liability: The change in the fair value of the Earn Out Liability is impacted by the initial recognition of, and subsequent fair value adjustments to, the Earn Out Liability. The decrease in the fair value of this line item resulted from a decrease in our stock price period-over-period and is recognized as a credit on the consolidated statements of operations and comprehensive loss, thereby decreasing our net loss. Change in fair value of share-settled redemption feature and gain on conversion of convertible notes: The change in fair value of the share-settled redemption feature related to the Convertible Notes resulted from an increase in other income as a result of the conversion of the Convertible Notes. Other expense (income), net: Other expense (income), net increased primarily due to a decrease in the fair value adjustments for preferred stock warrant liabilities that were converted to equity as a result of the consummation of the Business Combination and fluctuations in foreign currency which impacted the remeasurement of foreign balances to reporting currency.
Provision for income taxes
As of
We are subject to income taxes inthe United States and foreign jurisdictions in which we do business. Foreign jurisdictions have different statutory tax rates than those inthe United States . Additionally, certain of our foreign earnings may also be taxable inthe United States . Accordingly, our effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, intercompany transactions, changes in how we do business, changes in our deferred tax assets and liabilities and their valuation, foreign currency gains and losses, changes in statutes, regulations, case law, and other laws and accounting rules in various jurisdictions, and relative changes of expenses or losses for which tax benefits are not recognized. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured as the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We recognize interest and penalties, if any, related to income tax matters as a component of income tax expense.
The following table sets forth the provision for income taxes for the periods indicated (in thousands, except percentages):
Year ended December 31, Change
2022 2021 $ %
Provision for income taxes $ 533 $ 242 $ 291 120.2 %
The provision for income taxes increased, primarily as a result of taxes related to operations in foreign jurisdictions.
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Table of Content s Non-GAAP Financial Measures We prepare our consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP" or "U.S. GAAP"). However, some of the financial measures discussed herein are non-GAAP financial measures. In accordance withSEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of operations and comprehensive loss, balance sheets, or statements of cash flows.
To supplement the consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: Free Cash Flow ("FCF"), Cash Contribution, and Cash Contribution Margin ("CCM") (collectively, the "non-GAAP financial measures").
FCF
The following table presents the calculation of FCF for the periods indicated
(in thousands):
Year ended December 31,
2022 2021
Cash used in operating activities $ (149,015) $ (179,391)
Cash used in investing activities (30,993) (21,587)
FCF, including restructuring costs (180,008) (200,978)
Cash paid for restructuring costs 3,712 -
FCF, excluding restructuring costs $ (176,296) $ (200,978)
Free cash flow, excluding restructuring costs, represents cash used in operating
activities less cash used in investing activities, excluding the impact of
restructuring charges. The most directly comparable GAAP financial measure is
cash used in operating activities. Our near-term focus is to reach positive FCF,
as detailed in our Cash Flow Positive Plan. Our Cash Flow Positive Plan seeks to
reach positive quarterly free cash flow within 2023 without additional
fundraising and while preserving strong liquidity. The Cash Flow Positive Plan
includes four key levers: (i) reducing cash costs; (ii) reducing planned pace of
signing new units (growing primarily by opening previously Contracted Units);
(iii) only targeting 100% "capital light" deals for any incremental unit
signings, whereby real estate owners fund the vast majority of our upfront
capital expenditures in exchange for slightly higher rents; and (iv) focusing on
RevPAR initiatives with a quick return on investment, such as increasing prices,
adding parking, pet fees, or other similar add-on options to bookings, and more.
We believe FCF, excluding restructuring costs, is meaningful to investors as it
is the primary liquidity measure that we focus on internally to evaluate our
progress towards the objectives outlined in our Cash Flow Positive Plan. We
believe that achieving our goals around this measure will put us on a path to
financial sustainability and will help fund our future growth.
Our FCF may differ from similarly titled measures used by other companies due to
different methods of calculation. Presentation of these measures is not intended
to be considered in isolation or as a substitute for, or superior to, the
financial information prepared and presented in accordance with GAAP. In
addition, this measure may not provide a complete understanding of our cash flow
as a whole. As such, these measures should be reviewed in conjunction with our
GAAP cash flow.
The change in FCF year-over-year represented a 12.3% improvement, primarily
driven by a decrease in cash used in operating activities, excluding the impact
of restructuring costs, of $30.4 million , partially offset by an increase in
cash used in investing activities of $9.4 million . Refer to the section entitled
"Liquidity and Capital Resources - Cash Flow Information" below for further
discussion surrounding the changes in our cash flow figures period-over-period.
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Table of Content s Cash Contribution and CCM
The following table presents the calculation of Cash Contribution and CCM for the periods indicated (in thousands):
Year ended December 31,
2022 2021
Non-property level sales and marketing:
Sales and marketing $ 51,224 $ 23,490
Less: property level sales and marketing 38,752
15,916
Non-property level sales and marketing$ 12,472 $
7,574
Non-property level operations and support: Operations and support$ 211,081 $
142,728
Less: property level operations and support 101,157 57,879
Non-property level operations and support
Non-property level operating expenses: General and administrative$ 132,445 $
106,135
Add: research and development 28,896
19,091
Add: non-property level sales and marketing 12,472
7,574
Add: non-property level operations and support 109,924 84,849 Less: stock-based compensation
22,957 25,247
Less: depreciation and amortization 23,911
17,714
Non-property level operating expenses$ 236,869 $
174,688
Cash Contribution: Cash used in operating activities$ (149,015) $
(179,391)
Add: cash paid for restructuring costs 3,712 - Add: non-property level operating expenses 236,869 174,688 Cash contribution (numerator)$ 91,566 $ (4,703) Revenue (denominator)$ 461,083 $ 232,944 CCM(1) 19.9 % (2.0) % ____________
(1)Cash used in operating activities includes the benefit of furniture, fixtures, and equipment ("FF&E") allowance realized, and therefore, Cash Contribution and CCM include the benefit of FF&E allowance realized. FF&E allowance realized represents payments received from the real estate owner to help offset the capital invested to prepare and furnish a building and the individual units during the period.
Cash contribution is defined as operating cash flow before non-property level costs and the impact of restructuring charges, if any. CCM is defined as cash contribution as a percentage of revenue. The most directly comparable GAAP financial measure is cash used in operating activities. CCM is a unit economics measure for our property-level cash performance. We use CCM to assess the cash performance of our Live Units portfolio, taking into account the benefit of upfront rent abatement, which is typical in the deals we sign. We believe CCM is meaningful to investors as it functions as a useful measure of property-level unit cash economics. Our CCM may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of this measure is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. In addition, this measure may not provide a complete understanding of our operating cash flow as a whole. As such, this measure should be reviewed in conjunction with our GAAP cash flow. CCM improved year-over-year by 2,188 basis points, driven primarily by an increase in cash contribution of$96.3 million , which increased at a higher rate than the increase in revenue of$228.1 million . Refer to the section entitled "Liquidity and Capital Resources - Cash Flow Information" below for further discussion surrounding the changes in our cash flow figures period-over-period. 65
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Liquidity and Capital Resources
Sources and Uses of Cash
AtDecember 31, 2022 , we had a cash balance, not including restricted cash, of$246.6 million , which was held for working capital purposes. Reaching Free Cash Flow positivity is our primary focus in the near-term, as detailed in our Cash Flow Positive Plan. Once we reach positive free cash flow, we expect cash from operations will provide our principal source of liquidity. We generate revenue from digital transactions through Sonder.com or the Sonder app which are settled immediately through a payment processor, from transactions with third party corporate customers which are settled based on contractual terms, and indirectly through OTAs, which are settled based on contractual terms. The most significant source of cash in 2022 was the consummation of the Business Combination. This resulted in an increase in cash of approximately$401.9 million , which is net of$24.7 million in payments on debt and approximately$58.6 million of non-recurring transaction costs. Cash consists of checking, interest-bearing accounts, and AAA-rated money market funds. We have incurred losses since inception, and we expect to continue to incur additional losses in the future. AtDecember 31, 2022 , our accumulated deficit was$980.6 million . Our operations to date have been financed primarily by private equity investments in our common and redeemable convertible preferred stock, convertible notes, and other note and warrant purchase agreements, as described in Note 7, Debt, in the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K. We believe that our existing sources of liquidity will be sufficient to fund our operations and debt obligations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of RevPAR growth, our ability to achieve cost efficiencies, our ability to provide security instruments such as letters of credit in lieu of cash deposits pursuant to leases, and the extent of real estate owners' funding of capital expenditures and other pre-opening costs at our leased properties. To the extent that our existing cash balance and ongoing cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, including convertible debt or short-term bridge financing, or otherwise, but such funds may not be available on acceptable terms. If sufficient cash from operations or external funding is not available, we may be unable to adequately fund our business plans and it could have a negative effect on our business, operating cash flows, and financial condition. Most of our cash is held inthe United States . AtDecember 31, 2022 , our foreign subsidiaries held$20.6 million of cash in foreign jurisdictions. We currently do not intend or foresee a need to repatriate these foreign funds. As a result of the Tax Cuts and Jobs Act of 2017, however, we anticipate theU.S. federal tax impact to be minimal if these foreign funds are repatriated and would not repatriate funds where there was a material tax cost. In addition, based on our current and future needs, we believe our current funding and capital resources for our international operations are adequate. Debt Arrangements: Debt arrangements, such as our credit facilities and delayed draw notes, have been a source of cash for our day-to-day operations. Refer to Note 7, Debt, in the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K for discussion of our debt arrangements, including the timing of expected maturity of such arrangements. These arrangements include our$60.0 million loan and security agreement withSilicon Valley Bank ("SVB"). SVB was closed and placed under government receivership inMarch 2023 , and the receiver may not honor further borrowing requests under SVB's existing loan agreements, including ours. Future Cash Obligations: Our estimated future obligations as ofDecember 31, 2022 include both current and long-term obligations. As of that date, we had debt obligations of$208.4 million , all of which is long-term and includes paid-in-kind interest. Additionally, we had$38.8 million of irrevocable standby letters of credit outstanding which were collateralized by our restricted cash, all of which represents a long term cash obligation. Under our operating leases as discussed in Note 8, Leases, in the notes to our consolidated financial statements included in this Annual Report on Form 10-K, we had a current obligation, before imputed interest, of$297.1 million and a long-term obligation, before imputed interest, of$1.7 billion . 66
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Operating lease obligations primarily represent the initial contracted term for leases that have commenced as ofDecember 31, 2022 , not including any future optional renewal periods. In addition, as ofDecember 31, 2022 , we have entered into leases that have not yet commenced with short-term future lease payments totaling$44.7 million and long-term future lease payments totaling$1.9 billion , excluding purchase options, that are not yet recorded on the consolidated balance sheets and are not reflected in the figure above. These leases will commence between 2023 and 2026 with lease terms of three to 20 years. Cash Flow Information The following table sets forth our cash flows for the periods indicated (in thousands): Year ended December 31, 2022 2021 $ Change Net cash used in operating activities$ (149,015) $ (179,391) $ 30,376 Net cash used in investing activities (30,993) (21,587)
(9,406)
Net cash provided by financing activities 400,599 148,571
252,028
Effects of foreign exchange on cash (1,346) (760)
(586)
Net change in cash and restricted cash
Operating Activities: Net cash used in operating activities decreased year-over year, primarily due to a decrease in our net loss of$128.6 million , the adoption of ASU 2016-02, Leases, onJanuary 1, 2022 , which resulted in an increase in amortization of operating lease right-of-use assets of$145.3 million , partially offset by a net decrease related to operating lease right-of-use-assets and operating lease liabilities of$73.9 million , a decrease in the fair value of the Earn Out Liability of$95.7 million , and a decrease in the fair value of SPAC warrants of$25.3 million . Cash used in operating activities is subject to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable, and other items, as well as variability in our stock price as it relates to fair value of the SPAC Warrants and Earn Out Liability. Investing Activities: Net cash used in investing activities increased year-over-year, primarily as a result of an increase in purchases of property and equipment of$12.0 million , largely related to purchases for furnishings and fixtures for our live units. Financing Activities: Net cash provided by financing activities increased year-over-year, primarily related to proceeds of$159.2 million from the Delayed Draw Notes, net of issuance costs and proceeds of$325.9 million from the Business Combination and PIPE offering, partially offset by a decrease in proceeds from the issuance of debt of$162.4 million and an increase in cash outflows of$58.6 million for common stock issuance costs, primarily related to the close of the Business Combination.
Off-Balance Sheet Arrangements
As of
Letters of Credit: We had$38.8 million of irrevocable standby letters of credit outstanding, of which$36.7 million were under our revolving credit facilities. Letters of credit are primarily used as a form of security deposits for the buildings and partial buildings we lease. As ofDecember 31, 2022 , approximately$10.1 million of these letters of credit were issued with SVB as the providing bank. SVB was closed and placed under government receivership inMarch 2023 , and the receiver may not honor these letters of credit or further requested letters of credit under our existing loan agreement. 67
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Surety Bonds: A portion of our leases are supported by surety bonds provided by affiliates of certain insurance companies. As ofDecember 31, 2022 , we had assembled commitments from five surety providers in the amount of$67.1 million , of which$35.4 million was outstanding and was an off-balance sheet arrangement. The availability, terms and conditions, and pricing of bonding capacity are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating.
Indemnification Agreements
In the ordinary course of business, Sonder includes limited indemnification provisions under certain agreements with parties with whom Sonder has commercial relations of varying scope and terms. Under these contracts, Sonder 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 Sonder's 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 significant costs have been incurred, either individually or collectively, in connection with Sonder's indemnification provisions. In addition, Sonder has entered into indemnification agreements with Sonder's directors, executive officers and certain other employees that require Sonder, 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.
See Note 12., Commitments and Contingencies, in the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K for a description of our indemnification agreements.
Effect of Exchange Rates
Our changes in cash can be impacted by the effect of fluctuating exchange rates. Foreign exchange had a negative effect on cash in both periods, decreasing our total cash balance each year. Additionally, the effect of foreign exchange on cash had a negative impact on cash that was$0.6 million larger in 2022 than in 2021.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenue, and expenses. We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present consolidated financial condition and results of operations. These policies and estimates are considered critical because they have a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions, or estimates. We believe that the judgments, estimates, and assumptions used in the preparation of our financial statements are reasonable and appropriate, based on the information available at the time they were made. However, actual results may differ from those estimates, and these differences may be material. 68
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Leases
Our cost of revenue primarily consists of rental expenses from buildings or
portions of buildings that serve as accommodations for our guests. We also lease
other properties such as warehouses to store furniture and corporate offices.
Our rent payment schedules vary by lease term per executed lease agreements and
can be monthly, quarterly, or bi-annually. A large majority of our leases
contain provisions for rent abatement periods, rent escalation, and tenant
improvement allowances. Certain leases require the payment of real estate taxes,
insurance, and certain common area maintenance costs in addition to minimum rent
payments. These amounts are expensed as incurred and are included within
operations and support on our consolidated statement of operations for guest
properties and within general and administrative on our consolidated statement
of operations for our warehouses and corporate offices in the accompanying
consolidated statements of operations and comprehensive loss.
In accordance with ASU 2016-02, Leases (Topic 842), ("ASU 2016-02" or "ASC
842"), at the inception of an arrangement, we determine whether the arrangement
is or contains a lease based on the unique facts and circumstances present in
the arrangement. Leases with a term greater than one year are recognized on the
balance sheet as right-of-use assets and short-term and long-term lease
liabilities, as applicable. We do not have material financing leases.
Operating lease liabilities and their corresponding right-of-use assets are
initially recorded based on the present value of lease payments over the
expected remaining lease term. Certain adjustments to the right-of-use asset may
be required for items such as incentives received. The interest rate implicit in
lease contracts is typically not readily determinable. As a result, we utilize
our incremental borrowing rate to discount lease payments, which reflects the
fixed rate at which we could borrow on a collateralized basis the amount of the
lease payments in the same currency, for a similar term, in a similar economic
environment. The determination of our incremental borrowing rate requires
estimates surrounding our credit rating, credit spread, and the impact of
collateral. To estimate our incremental borrowing rate, a credit rating
applicable to us is estimated using a synthetic credit rating analysis since we
do not currently have an agency-based credit rating. Prospectively, we will
adjust the right-of-use assets for straight-line rent expense or any incentives
received and remeasure the lease liability at the net present value using the
same incremental borrowing rate that was in effect as of the lease commencement
or transition date.
We have elected not to recognize leases with an original term of one year or
less on the balance sheet. We typically only include an initial lease term in
our assessment of a lease arrangement. Options to renew a lease are not included
in our assessment unless there is reasonable certainty that we will renew.
Assumptions that we made at the commencement date are re-evaluated upon
occurrence of certain events, including a lease modification. A lease
modification results in a separate contract when the modification grants the
lessee an additional right of use not included in the original lease and when
lease payments increase commensurate with the standalone price for the
additional right of use. When a lease modification results in a separate
contract, it is accounted for in the same manner as a new lease.
In accordance with ASC 842, components of a lease should be split into three
categories: lease components; non-lease components; and non-components. The
fixed and in-substance fixed contract consideration (including any consideration
related to non-components) must be allocated based on the respective relative
fair values to the lease components and non-lease components. Entities may elect
not to separate lease and non-lease components. Rather, entities would account
for each lease component and related non-lease component together as a single
lease component. We have elected to account for lease and non-lease components
together as a single lease component for all underlying assets and allocate all
of the contract consideration to the lease component only. ASC 842 allows for
the use of judgment in determining whether the assumed lease term is for a major
part of the remaining economic life of the underlying asset and whether the
present value of lease payments represents substantially all of the fair value
of the underlying asset. We apply the bright line thresholds referenced in ASC
842-10-55-2 to assist in evaluating leases for appropriate classification. The
aforementioned bright lines are applied consistently to our entire portfolio of
leases.
Upon termination of a lease, related lease balances on the consolidated balance
sheet are written-off. A liability for costs to terminate a lease before the end
of its term is recognized in accordance with the lease terms and recorded in
operations and support on the consolidated statement of operations and
comprehensive loss.
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Table of Content s Income Taxes We are subject to income taxes inthe United States and foreign jurisdictions in which we operate. We account 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. We account for uncertainty in tax positions by recognizing a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination. Evaluating our uncertain tax positions, determining our provision for income taxes, and evaluating the impact of tax law changes, are inherently uncertain and require making judgments, assumptions, and estimates. In determining the need for a valuation allowance, we weigh both positive and negative evidence in the various jurisdictions in which we operate to determine whether it is more likely than not that our deferred tax assets are recoverable. We regularly assess all available evidence, including cumulative historic losses and forecasted earnings. Due to cumulative losses in theU.S. during the prior three years, including tax deductible stock compensation, and based on all available positive and negative evidence, we do not believe it is more likely than not that our netU.S. deferred tax assets will be realized as ofDecember 31, 2022 . Accordingly, a full valuation allowance has been established inthe United States , and no deferred tax assets and related tax benefit have been recognized in the consolidated financial statements. While we believe that we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes and the effective tax rate in the period in which such determination is made.
Stock-Based Compensation
Stock-based compensation expense attributable to equity awards granted to employees is measured at the grant date based on the fair value of the award. The expense is recognized on a straight-line basis over the requisite service period for awards that vest, which is generally the period from the grant date to the end of the vesting period. We estimate the fair value of stock option awards granted using the Black-Scholes option pricing model. This model requires various significant judgmental assumptions in order to derive a fair value determination for each type of award, including the fair value of our common stock, the expected term, expected volatility, expected dividend yield, and risk-free interest rate. These assumptions used in the Black-Scholes option-pricing model are estimated as follows: •Expected term - The expected term for options granted to employees, officers, and directors is calculated based on our historical pattern of option exercise behavior and the period of time they are expected to be outstanding. •Risk-free interest rate - The risk-free interest rate used in the valuation method is the implied yield currently available onthe United States treasury zero-coupon issues, with a remaining term equal to the expected term of our options. •Expected volatility - The expected volatility is based on the average volatility of similar public entities within our peer group as our stock has not been publicly trading for a long enough period to rely on our own expected volatility. •Expected dividend yield - Expected dividend yield is zero, as we have not paid and do not anticipate paying dividends on our common stock. All grants of stock options have an exercise price equal to or greater than the fair value of our common stock on the date of grant. We account for forfeitures as they occur. Recent Accounting Standards See Note 2, Recently Issued Accounting Standards, in the notes to our consolidated financial statements included in this Annual Report on Form 10-K for a description of recently adopted accounting standards and recently issued accounting standards not yet adopted. 70
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Emerging Growth Company Status
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. We are an emerging growth company as defined in Section 2(a) of the Securities Act and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. We will remain an emerging growth company until the earliest of: (i) the last day of the fiscal year in which the market value of Common Stock that is held by non-affiliates exceeds$700 million as of the end of that year's second fiscal quarter; (ii) the last day of the fiscal year in which we have total annual gross revenue of$1.235 billion or more during such fiscal year (as indexed for inflation); (iii) the date on which we have issued more than$1 billion in non-convertible debt in the prior three-year period; or (iv)December 31, 2026 , and we expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
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