Sonder, “virtual” hotel company, restates 2023 financials; turns to Marriott

Sonder Holdings Inc.'s original financial statements for the fiscal year ending December 31, 2022, and the interim periods in 2022 and 2023, were deemed unreliable due to significant errors. These statements included audited consolidated financials for 2022 and unaudited interim financial information for quarterly periods during 2022 and 2023. They provided key financial insights into Sonder's performance, including valuation and impairment of assets, revenues, expenses, and cash flow metrics.

Restatement background and issues identified

On March 14, 2024, Sonder’s Audit Committee determined, based on management's recommendation, that the previously issued financial statements for 2022 should no longer be relied upon. The need for a restatement was driven by material weaknesses in Sonder’s internal controls over financial reporting, particularly related to lease valuations and impairments. Specific errors were found in the processes and procedures surrounding the assessment of the valuation and impairment of right-of-use (ROU) lease assets. These errors led to incorrect financial information being reported, impacting the accuracy of the company's financial position and performance metrics.

The company also identified several immaterial errors related to 2021 that had been corrected out of period in 2022. In the restatement process, these were revisited and adjusted appropriately in the 2021 restated financials.

Revised numbers and implications

The restatement corrected errors that were previously overlooked or considered immaterial, adjusting the financial results of the affected periods. While the report does not specify exact numerical changes in the summary available, the adjustments impacted key areas, including:

Lease Valuations and Impairments: Revised calculations for ROU lease assets and related liabilities, which affected the overall asset base and lease expenses reported.
Accurate Reflection of Cash Flow and Profitability Metrics: Revisions helped provide a more accurate picture of cash flows, operating losses, and the company’s financial position, reflecting a clearer trajectory of its economic realities.

These restated financials clarified the need for improved control measures and provided stakeholders with a more reliable view of the company’s actual financial health.

Reasons for invalidating the original statements

The primary reasons the original financial statements were invalidated include:

Material Weaknesses in Internal Controls: Sonder reported deficiencies in its financial reporting processes, particularly concerning lease valuations, impairments, and related items. The weaknesses highlighted gaps in the company's ability to accurately assess and report its financial condition.
Specific Errors in Lease Valuations: Management identified specific miscalculations regarding ROU assets, significantly impacting reported values and necessitating a revision.
Lack of Confidence in Previous Processes: The identified issues were significant enough to undermine confidence in the financial statements' accuracy, prompting the Audit Committee to restate the affected periods.

Corrective actions and Marriott to the rescue

Following the restatement, Sonder has committed to implementing corrective measures to address the identified weaknesses. The company is focused on the following steps:

Strengthening Internal Controls: Sonder aims to enhance its internal control environment by tightening its financial reporting processes and improving oversight mechanisms, especially concerning lease valuations and impairments.
Hiring External Advisors: The company has engaged financial and legal advisors to assist in bolstering internal audit functions and ensuring compliance with accounting standards.
Improving Transparency and Accountability: Sonder is taking steps to improve the accuracy of its future financial reporting by adopting more rigorous standards and ensuring comprehensive reviews of financial data before disclosure.
Focus on Strategic Initiatives: Despite past financial inaccuracies, Sonder is concentrating on strategic initiatives such as its portfolio optimization program and the Marriott Agreement, which are expected to improve revenue streams and cash flow, positioning the company on a clearer path to sustainable success.

Revised Success Picture Moving Forward

The restatement process, although a setback, has highlighted critical areas for improvement, enabling Sonder to recalibrate its financial management practices. With enhanced controls, revised financial baselines, and strategic efforts aligned with cash flow improvement, Sonder aims to rebuild investor confidence. The integration with Marriott and portfolio adjustments are anticipated to provide financial stability and growth opportunities, positioning Sonder towards achieving long-term profitability and operational resilience.

By addressing its internal control deficiencies and refining its business strategy, Sonder is setting a foundation for a more accurate, transparent, and promising financial trajectory moving forward.