Soho House & (SHCO) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements, detailing significant net losses and negative cash flows from operations Condensed Consolidated Balance Sheets The balance sheet reflects a worsening equity position with an increased total shareholders' deficit | Metric (in thousands) | July 4, 2021 | January 3, 2021 | | :-------------------- | :----------- | :-------------- | | Total Assets | $2,092,825 | $2,104,445 | | Total Liabilities | $2,186,555 | $2,303,333 | | Total Shareholders' Deficit | $(486,541) | $(373,993) | - Total shareholders' deficit increased from $(373,993) thousand as of January 3, 2021, to $(486,541) thousand as of July 4, 2021, indicating a worsening equity position[18] Unaudited Condensed Consolidated Statements of Operations Quarterly revenues recovered due to reopenings, but the six-month period shows a slight revenue decline and a wider net loss | Metric (in thousands) | 13 Weeks Ended July 4, 2021 | 13 Weeks Ended June 28, 2020 | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 | | :-------------------- | :-------------------------- | :--------------------------- | :-------------------------- | :--------------------------- | | Total Revenues | $124,079 | $57,004 | $196,480 | $198,556 | | Operating Loss | $(46,860) | $(58,089) | $(110,420) | $(85,241) | | Net Loss | $(57,108) | $(77,857) | $(150,145) | $(122,837) | | Net Loss Attributable to MCG | $(55,987) | $(76,150) | $(146,466) | $(119,781) | | Basic & Diluted EPS | $(0.32) | $(0.43) | $(0.79) | $(0.67) | - Total revenues for the 13 weeks ended July 4, 2021, significantly increased to $124,079 thousand from $57,004 thousand in the prior year, primarily due to the reopening of Houses and easing of COVID-19 restrictions[20]. However, net loss attributable to MCG improved from $(76,150) thousand to $(55,987) thousand for the same period[20] - For the 26 weeks ended July 4, 2021, total revenues slightly decreased to $196,480 thousand from $198,556 thousand, while net loss attributable to MCG worsened to $(146,466) thousand from $(119,781) thousand[20] Unaudited Condensed Consolidated Statements of Comprehensive Loss The company's total comprehensive loss improved quarterly but worsened over the 26-week period | Metric (in thousands) | 13 Weeks Ended July 4, 2021 | 13 Weeks Ended June 28, 2020 | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 | | :-------------------- | :-------------------------- | :--------------------------- | :-------------------------- | :--------------------------- | | Net Loss | $(57,108) | $(77,857) | $(150,145) | $(122,837) | | Foreign currency translation adjustment | $(1,481) | $4,579 | $14,599 | $18,056 | | Total comprehensive loss attributable to MCG | $(57,539) | $(71,557) | $(131,982) | $(101,461) | - The company reported a total comprehensive loss attributable to MCG of $(57,539) thousand for the 13 weeks ended July 4, 2021, an improvement from $(71,557) thousand in the prior year[22]. For the 26-week period, the comprehensive loss worsened to $(131,982) thousand from $(101,461) thousand[22] Unaudited Condensed Consolidated Statements of Changes in Redeemable Shares and Shareholders' Deficit Shareholders' deficit increased due to net losses, though new preference share issuance provided capital - Total shareholders' deficit increased from $(373,993) thousand as of January 3, 2021, to $(486,541) thousand as of July 4, 2021, primarily due to net loss, non-cash dividends on senior convertible preference shares, and accretion of redeemable preferred shares[18][24][25] - Issuance of senior convertible preference shares (net of issuance costs) contributed $161,574 thousand to redeemable shares during the 26 weeks ended July 4, 2021[24] - Additional paid-in capital increased from $72,755 thousand to $133,129 thousand, reflecting share-based compensation and C2 ordinary shares issued for acquisitions, partially offset by non-cash dividends on senior convertible preference shares[18][24][25] Unaudited Condensed Statements of Cash Flows Cash flow from operations worsened significantly, while financing activities provided less cash than the prior year | Cash Flow Activity (in thousands) | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 | | :-------------------------------- | :-------------------------- | :--------------------------- | | Net cash used in operating activities | $(94,220) | $(14,695) | | Net cash used in investing activities | $(50,028) | $(67,166) | | Net cash provided by financing activities | $140,983 | $168,490 | | Net (decrease) increase in cash and cash equivalents, and restricted cash | $(3,023) | $83,705 | - Net cash used in operating activities significantly increased to $(94,220) thousand for the 26 weeks ended July 4, 2021, compared to $(14,695) thousand in the prior year, primarily due to a higher net loss[26][358] - Net cash provided by financing activities decreased to $140,983 thousand from $168,490 thousand, despite new borrowings and issuance of preferred shares, due to significant debt repayments[26][363][364] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of accounting policies, business nature, acquisitions, and other financial statement components 1. Nature of the Business The company operates a global membership platform and completed its IPO in July 2021 - Membership Collective Group Inc (MCG) was incorporated on February 10, 2021, as a holding company to facilitate its IPO, which was completed on July 19, 2021[29][30]. Prior to the IPO, MCG acquired 100% of Soho House Holdings Limited (SHHL), which operates a global membership platform including 30 Soho Houses, nine Soho Works Clubs, The Ned, Scorpios Beach Club, and Soho Home[31] 2. Summary of Significant Accounting Policies The company prepares statements under US GAAP and, despite losses, asserts its ability to continue as a going concern due to recent financing - The financial statements are prepared in accordance with US GAAP[33]. The company operates on a fiscal year ending on the last Sunday in December or first Sunday in January[34]. The company has experienced net losses and significant cash outflows from operations, with a consolidated net loss of $150 million and negative cash flow from operations of $94 million for the 26 weeks ended July 4, 2021, and an accumulated deficit of $903 million as of July 4, 2021[41] - Despite ongoing losses and COVID-19 impacts, management believes the company can continue as a going concern due to recent financing events, including new senior secured notes, senior convertible preference shares, and IPO proceeds of $402 million (net), used to repay debt and for general corporate purposes[45][46][48] - The company early adopted ASU 2020-06 on January 4, 2021, which simplifies accounting for certain financial instruments, with no material impact on the condensed consolidated financial statements[52] 3. Acquisitions The company completed several acquisitions in 2021, primarily using C2 ordinary shares as consideration - In May 2021, MCG acquired the remaining 50% interest in Cipura (Mandolin Aegean Bistro) for $9 million in C2 ordinary shares, recognizing a $7 million gain and $17 million in goodwill[54][56] - MCG acquired intellectual property rights for Mr Mandolin and Mrs Mandolin for $1 million in C2 ordinary shares in May 2021[58] - In May 2021, MCG acquired the remaining 30% equity in Soho Works North America for $54 million in C2 ordinary shares, derecognizing $33 million in noncontrolling interest[60] - MCG increased its equity interest in Scorpios Beach Club by 23% for $9 million cash and $8 million in C2 ordinary shares in April-May 2021[61] - In June 2021, MCG acquired operating agreements for 'The Line' and 'Saguaro' hotels for $26 million in C2 ordinary shares, recognizing $24 million in intangible assets and $2 million in goodwill[62][63] 4. Consolidated Variable Interest Entities MCG consolidates several entities as Variable Interest Entities (VIEs) where it is the primary beneficiary - MCG consolidates Soho Restaurants Limited, Soho House-Sydell, LLP, Soho Works Limited, and Soho Works North America, LLC as Variable Interest Entities (VIEs)[67] - Soho Restaurants Limited was consolidated from August 18, 2020, after a reorganization where an affiliate became the sole equity holder and MCG's variable interest (loan notes and lease guarantees) made it the primary beneficiary[69] | VIE Assets & Liabilities (in thousands) | July 4, 2021 | January 3, 2021 | | :------------------------------------- | :----------- | :-------------- | | Total Assets | $347,527 | $342,345 | | Total Liabilities | $339,286 | $333,669 | | Net Assets | $8,241 | $8,676 | 5. Equity Method Investments The company holds several investments accounted for under the equity method due to significant partner influence - MCG holds equity method investments in Soho House Toronto Partnership and 56-60 Redchurch Street, London, where joint venture partners have significant decision-making power, preventing consolidation[75][80] | Equity Method Investees (in thousands) | 13 Weeks Ended July 4, 2021 | 13 Weeks Ended June 28, 2020 | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 | | :------------------------------------- | :-------------------------- | :--------------------------- | :-------------------------- | :--------------------------- | | Revenues | $6,407 | $3,959 | $13,051 | $15,465 | | Operating Loss | $(1,614) | $(5,072) | $(3,178) | $(4,416) | | Net Loss | $(1,881) | $(4,434) | $(3,178) | $(4,388) | | Equity Method Investees (in thousands) | July 4, 2021 | January 3, 2021 | | :------------------------------------- | :----------- | :-------------- | | Total Assets | $171,015 | $180,911 | | Total Liabilities | $136,302 | $130,117 | 6. Leases The company holds a significant portfolio of operating and finance leases with substantial future payment commitments - MCG has 95 operating leases and 2 finance leases for its properties, with terms ranging from 1 to 50 years[86]. Deferred lease payments recorded in accounts payable were $35 million as of July 4, 2021, up from $20 million as of January 3, 2021[87] | Lease Liabilities (in thousands) | Operating Leases | Finance Leases | | :------------------------------- | :--------------- | :------------- | | Total undiscounted lease payments | $1,966,370 | $234,821 | | Total net lease liabilities | $1,024,860 | $74,125 | - The company has 11 operating lease agreements under construction, with estimated total undiscounted lease payments of $1,122,819 thousand expected to be capitalized[95][96] 7. Revenue Recognition Revenue is primarily generated from membership fees, in-House sales, and other services like restaurants and retail - MCG's revenues primarily consist of annual membership fees, initial registration fees, in-House revenues (food, beverage, accommodation, spa), and other revenues (stand-alone restaurants, design fees, retail, Soho Works, Scorpios, management fees from The Ned)[97] | Contract Liabilities (in thousands) | July 4, 2021 | January 3, 2021 | | :---------------------------------- | :----------- | :-------------- | | Contract receivables | $17,560 | $8,367 | | Contract assets | $7,122 | $8,099 | | Contract liabilities | $112,765 | $97,497 | - Revenue recognized from contract liabilities at the beginning of the period was $37 million for the 26 weeks ended July 4, 2021, compared to $36 million for the 26 weeks ended June 28, 2020[100] 8. Inventories, Prepaid Expenses and Other Current Assets This note details the components of inventories and other current assets, showing an increase in prepayments - Inventories consist of raw materials, service stock, supplies (primarily food and beverage), and finished goods[101]. Finished goods increased from $15 million to $18 million from January 3, 2021, to July 4, 2021[101] | Prepaid Expenses and Other Current Assets (in thousands) | July 4, 2021 | January 3, 2021 | | :------------------------------------------------------- | :----------- | :-------------- | | Amounts owed by equity method investees | $785 | $2,350 | | Prepayments and accrued income | $27,692 | $13,789 | | Contract assets | $7,122 | $8,099 | | Other receivables | $20,683 | $19,325 | | Total prepaid expenses and other current assets | $56,282 | $43,563 | 9. Property and Equipment, Net Capital expenditures on property and equipment decreased compared to the prior year period - Additions to property and equipment, net, totaled $37 million for the 26 weeks ended July 4, 2021, primarily for leasehold improvements and fixtures for sites under development, a decrease from $61 million in the prior year period[104] 10. Goodwill and Intangible Assets Goodwill increased during the period primarily as a result of recent acquisitions | Goodwill (in thousands) | January 3, 2021 | July 4, 2021 | | :---------------------- | :-------------- | :----------- | | UK | $101,602 | $102,583 | | US | $28,780 | $47,847 | | RoW | $71,100 | $68,895 | | Total | $201,482 | $219,325 | - Goodwill increased by $17,024 thousand from the Cipura Acquisition and $2,043 thousand from the Line and Saguaro Acquisition during the period[105] 11. Accrued Liabilities and Other Current Liabilities Accrued liabilities show a significant decrease in accrued interest and a large increase in trade accruals | Accrued Liabilities (in thousands) | July 4, 2021 | January 3, 2021 | | :--------------------------------- | :----------- | :-------------- | | Accrued interest | $3,034 | $23,110 | | Hotel deposits | $12,739 | $7,008 | | Trade, capital and other accruals | $65,784 | $30,999 | | Total | $81,557 | $61,117 | - Accrued interest significantly decreased from $23,110 thousand to $3,034 thousand, while trade, capital and other accruals more than doubled from $30,999 thousand to $65,784 thousand[106] - Other current liabilities include a $12 million contingent liability for membership credits issued due to the COVID-19 pandemic, with associated marketing expenses of $4 million for the 26 weeks ended July 4, 2021[108][157] 12. Debt The company restructured its debt, repaying existing facilities and issuing new Senior Secured Notes | Debt (in thousands) | July 4, 2021 | January 3, 2021 | | :------------------ | :----------- | :-------------- | | Revolving credit facilities | $96,042 | $81,615 | | Permira Senior Facility | — | $542,638 | | US government-backed bank loan | — | $21,481 | | Senior Secured Notes | $437,122 | — | | Other loans | $20,683 | $17,648 | | Total Debt, net of current portion | $457,169 | $574,580 | - The company repaid the Permira Senior Facility and US government-backed bank loan in March 2021, incurring a $9 million loss on extinguishment of debt[114][117]. New Senior Secured Notes totaling $437,122 thousand were issued in March 2021, maturing in March 2027 with an 8.1764% interest rate[116] | Future Principal Payments (in thousands) | Amount | | :--------------------------------------- | :----- | | Remainder of 2021 | $98,903 | | 2022 | $19,601 | | 2023 | $9,025 | | 2024 | $117,809 | | 2025 | $7,262 | | Thereafter | $450,790 | | Total | $703,390 | 13. Fair Value Measurements The carrying values of most financial instruments are reported to approximate their fair values - The carrying values of current assets and liabilities approximate fair value due to short-term maturities[126]. The carrying value of Senior Secured Notes ($437,122 thousand) closely approximates its fair value ($448,432 thousand) as of July 4, 2021[129] 14. Share-Based Compensation The company recorded share-based compensation expense related to its 2020 Equity and Incentive Plan - The company established the 2020 Equity and Incentive Plan, issuing Share Appreciation Rights (SARs) and Growth Shares settled in ordinary D shares[131]. As of July 4, 2021, there were 7,189,393 SARs and 2,850,897 Growth Shares outstanding[131] | Share-Based Compensation (in thousands) | 13 Weeks Ended July 4, 2021 | 26 Weeks Ended July 4, 2021 | | :-------------------------------------- | :-------------------------- | :-------------------------- | | SARs | $1,893 | $3,374 | | Growth Shares | $655 | $1,303 | | Total share-based compensation expense | $2,548 | $4,677 | - Total unrecognized compensation expense for unvested SARs is $23 million (over 3.23 years) and for Growth Shares is $9 million (over 3.14 years) as of July 4, 2021[133] 15. Redeemable Preferred Shares The company issued new senior convertible preference shares which were converted to common stock upon the IPO - The 2016 redeemable preferred shares were accreted to their $20 million redemption value as of July 4, 2021, with a $5 million accretion reflected as a reduction in additional paid-in capital[134][135] - In March 2021, MCG issued 12,970,766 senior convertible preference shares for $175 million (net proceeds $162 million)[136]. These shares accrue an 8% non-cash dividend and were converted into Class A common stock upon IPO in July 2021[137] 16. C Ordinary Shares Redeemable C ordinary shares were issued in 2020 and 2021 and were converted to common stock upon the IPO - MCG issued 9,502,993 redeemable C ordinary shares in May 2020 for $94 million net proceeds, and an additional 4,751,497 shares in March 2021 for $47 million net proceeds, totaling 21,187,494 redeemable C ordinary shares outstanding as of July 4, 2021[140][141] - These redeemable C ordinary shares have redemption options between October 2023 and March 2024, but redemption was not probable as of July 4, 2021[142]. All outstanding redeemable C ordinary shares were converted into Class A and Class B common stock upon IPO[144] 17. Loss Per Share and Shareholders' Deficit The company calculates loss per share across its multiple classes of ordinary shares - The company has four classes of shares (A, B, C, C2 ordinary shares) with varying voting and income rights[145][146](index=146&type=chunk][147](index=147&type=chunk][148]. D ordinary shares are issued under the 2020 Equity and Incentive Plan[149] | Basic and Diluted Loss Per Share | 13 Weeks Ended July 4, 2021 | 13 Weeks Ended June 28, 2020 | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 | | :------------------------------- | :-------------------------- | :--------------------------- | :-------------------------- | :--------------------------- | | A Ordinary Shares | $(0.32) | $(0.43) | $(0.79) | $(0.67) | | B Ordinary Shares | $(0.32) | $(0.43) | $(0.79) | $(0.67) | | C Ordinary Shares | $(0.32) | $(0.43) | $(0.79) | $(0.67) | | C2 Ordinary Shares | $(0.32) | $(0.43) | $(0.79) | $(0.67) | - Loss per share calculations exclude additional shares from redeemable C ordinary shares and Senior Preference Shares due to their anti-dilutive impact[154] 18. Commitments and Contingencies The company has accrued liabilities for membership credits and has minor capital expenditure commitments - The company is not party to any material litigation outside the ordinary course of business[155]. A $12 million liability for membership credits, issued as a goodwill gesture during COVID-19, was accrued as of July 4, 2021, with an expiration date extended to September 30, 2021[156][157] - Capital expenditure commitments contracted but not yet incurred totaled $4 million as of July 4, 2021, primarily for Soho House Austin[158] 19. Income Taxes A UK tax rate change increased deferred tax assets, but this was fully offset by a valuation allowance - The UK government enacted a tax rate change from 19% to 25% effective April 1, 2023, leading to a $21 million increase in net deferred tax assets (before valuation allowance) and a corresponding increase in valuation allowance, resulting in no impact on financial statements[160] - The effective tax rate for the 26 weeks ended July 4, 2021, was 0.54%, differing from the UK statutory rate primarily due to a full valuation allowance against tax losses and deferred tax assets[161] 20. Segments The company reports results across four primary geographic and business segments, with performance assessed by adjusted EBITDA - MCG operates through four reportable segments: UK, North America, Europe and RoW, and Soho House Design, with Retail, Home & Beauty and Soho Works grouped under 'All Other'[162][165]. Performance is assessed by adjusted EBITDA[164] | Total Consolidated Segment Revenue (in thousands) | 13 Weeks Ended July 4, 2021 | 13 Weeks Ended June 28, 2020 | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 | | :------------------------------------------------ | :-------------------------- | :--------------------------- | :-------------------------- | :--------------------------- | | North America | $53,833 | $26,710 | $92,265 | $90,509 | | UK | $39,613 | $13,155 | $54,025 | $61,784 | | Europe/RoW | $12,649 | $6,913 | $18,645 | $21,184 | | Soho House Design | $4,107 | $2,786 | $8,460 | $7,830 | | All Other | $13,877 | $7,440 | $23,085 | $17,249 | | Consolidated Revenue | $124,079 | $57,004 | $196,480 | $198,556 | | Consolidated Adjusted EBITDA (in thousands) | 13 Weeks Ended July 4, 2021 | 13 Weeks Ended June 28, 2020 | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 | | :------------------------------------------ | :-------------------------- | :--------------------------- | :-------------------------- | :--------------------------- | | Consolidated Adjusted EBITDA | $(9,609) | $(1,922) | $(16,923) | $4,814 | 21. Related Party Transactions The company engages in various transactions with related parties, including loans, leases, and advisory services - MCG has related party loans with Soho Works Limited shareholders and lease agreements with affiliates of The Yucaipa Companies LLC and Raycliff Capital, LLC[176][179][183] | Amounts owed by (to) equity method investees (in thousands) | July 4, 2021 | January 3, 2021 | | :---------------------------------------------------------- | :----------- | :-------------- | | Soho House Toronto Partnership | $(1,572) | $(1,787) | | Soho House—Cipura (Miami), LLC | — | $1,427 | | Raycliff Red LLP | $(2,263) | $(684) | | Mirador Barcel S.L. | $480 | $773 | | Little Beach House Barcelona S.L. | $42 | $1 | | Mimea XXI S.L. | $263 | $149 | | Total | $(3,050) | $(121) | - An affiliate of Yucaipa Companies LLC received a $10 million fee for financial and transaction advisory services related to the issuance of Senior Secured Notes and Senior Preference Shares[184] 22. Subsequent Events The company completed its IPO in July 2021, raising significant capital and restructuring its equity - On July 19, 2021, MCG completed its IPO, selling 30,567,918 shares of Class A common stock at $14.00 per share, generating net proceeds of $402 million[185] - IPO proceeds were used to repay $98 million of outstanding revolving credit facility debt and $20 million for redeemable preferred shares, with the remainder for general corporate purposes[187] - Immediately prior to the IPO, equity interests in Soho House Holdings Limited were exchanged for Class A and Class B common stock of MCG, and all outstanding Senior Preference Shares and redeemable C ordinary shares were converted into Class A common stock[137][144][186] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and results, highlighting COVID-19 impacts, acquisitions, and strategic initiatives Overview The company operates a global membership platform, with revenue composition shifting towards In-House and Other revenues post-COVID - MCG is a global membership platform with over 127,800 members (including 111,900 Soho House members) as of July 4, 2021, engaging through 30 Soho Houses, nine Soho Works, The Ned, Scorpios Beach Club, Soho Home, and digital channels[191] - For the 13 weeks ended July 4, 2021, total revenue was $124 million, with Membership Revenues at 36%, In-House Revenues at 37%, and Other Revenues at 27%[199]. This marks a significant shift from the prior year where Membership Revenues dominated at 78% due to COVID-19 closures[199] - The company has expanded its membership offerings with Cities Without Houses, Soho House Digital Membership, Soho Friends (over 9,300 members), and SOHO HOME+ (over 3,400 members), aiming to broaden reach and enhance member experience[206][207][210][211] Key Performance and Operating Metrics Evaluated by Management Management evaluates performance using metrics like membership numbers, app usage, and non-GAAP measures like Adjusted EBITDA | Metric | As of July 4, 2021 | As of June 28, 2020 | | :-------------------------- | :----------------- | :------------------ | | Number of Soho Houses | 30 | 26 | | Number of Soho House Members | 111,910 | 120,082 | | Number of Other Members | 15,930 | 129 | | Number of Active App Users | 94,678 | 71,956 | - Soho House members decreased by 8,172 (6.8%) year-over-year, while 'Other Members' (Soho Works, Soho Friends, SOHO HOME+) significantly increased from 129 to 15,930, reflecting diversification efforts[239] | Financial Metric (in thousands) | 13 Weeks Ended July 4, 2021 | 13 Weeks Ended June 28, 2020 | | :------------------------------ | :-------------------------- | :--------------------------- | | Operating Loss | $(46,860) | $(58,089) | | House-Level Contribution | $16,743 | $18,040 | | Other Contribution | $(3,779) | $(9,791) | | Adjusted EBITDA | $(12,556) | $(19,680) | Results of Operations - Comparison of the 13-Weeks Ended July 4, 2021 and June 28, 2020 Quarterly results show a strong revenue rebound driven by reopenings, leading to an improved Adjusted EBITDA | Revenue (in thousands) | July 4, 2021 | June 28, 2020 | Change % (Actuals) | Change % (Constant Currency) | | :--------------------- | :----------- | :------------ | :----------------- | :--------------------------- | | Membership Revenues | $44,863 | $44,456 | 1% | (11)% | | In-House Revenues | $45,793 | $3,111 | n/m | n/m | | Other Revenues | $33,423 | $9,437 | n/m | n/m | | Total Revenues | $124,079 | $57,004 | n/m | 91% | - Total revenues increased significantly by 91% in constant currency for the 13 weeks ended July 4, 2021, driven by the reopening of Houses and easing of restrictions, particularly in In-House and Other Revenues[241][253][260] - House-Level Contribution decreased by 7% (18% in constant currency) to $16,743 thousand, primarily due to reduced Soho House Membership Revenue and higher In-House Operating Expenses, despite increased In-House Revenues[264][269] - Adjusted EBITDA improved by 36% (44% in constant currency) to $(12,556) thousand, mainly due to higher In-House Revenues offsetting increased operating expenses and slightly lower Membership Revenue[288][289] Results of Operations - Comparison of the 26-Weeks Ended July 4, 2021 and June 28, 2020 The six-month period reflects a slight revenue decline and worsened Adjusted EBITDA due to ongoing pandemic impacts | Revenue (in thousands) | July 4, 2021 | June 28, 2020 | Change % (Actuals) | Change % (Constant Currency) | | :--------------------- | :----------- | :------------ | :----------------- | :--------------------------- | | Membership Revenues | $85,356 | $92,208 | (7)% | (16)% | | In-House Revenues | $62,052 | $70,982 | (13)% | (21)% | | Other Revenues | $49,072 | $35,366 | 39% | 25% | | Total Revenues | $196,480 | $198,556 | (1)% | (11)% | - Total revenues for the 26 weeks ended July 4, 2021, slightly decreased by 1% (11% in constant currency) compared to the prior year, primarily due to declines in Membership and In-House Revenues, partially offset by strong growth in Other Revenues[291][295][301][303] - House-Level Contribution decreased by 28% (35% in constant currency) to $26,867 thousand, mainly due to falls in Membership and In-House Revenues, despite a reduction in In-House Operating Expenses[307][310] - Adjusted EBITDA worsened by 23% (11% in constant currency) to $(35,348) thousand, reflecting the overall revenue decline and increased interest expense, partially offset by higher Other Revenues and reduced G&A[329][330] Non-GAAP Financial Measures This section reconciles net loss to non-GAAP measures like EBITDA and Adjusted EBITDA to provide further performance insight | Reconciliation (in thousands) | 13 Weeks Ended July 4, 2021 | 13 Weeks Ended June 28, 2020 | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 | | :---------------------------- | :-------------------------- | :--------------------------- | :-------------------------- | :--------------------------- | | Net Loss | $(57,108) | $(77,857) | $(150,145) | $(122,837) | | EBITDA | $(18,182) | $(44,061) | $(64,593) | $(56,439) | | Adjusted EBITDA | $(12,556) | $(19,680) | $(35,348) | $(28,623) | - Adjusted EBITDA for the 13 weeks ended July 4, 2021, improved by 36% to $(12,556) thousand, primarily due to higher In-House Revenues and reduced COVID-19 related charges[332][335][336] - For the 26 weeks ended July 4, 2021, Adjusted EBITDA worsened by 23% to $(35,348) thousand, impacted by increased foreign exchange losses, share-based compensation, and corporate financing/restructuring costs[343][344][347] Liquidity and Capital Resources The company's liquidity is strained by operating cash outflows, relying on financing activities and recent IPO proceeds - MCG's liquidity sources include operating cash flows, cash and cash equivalents, and credit lines[354]. Future expenditures are expected to be funded by these sources, potentially supplemented by equity/debt issuance or property sales[355] | Cash Flow Summary (in thousands) | 26 Weeks Ended July 4, 2021 | 26 Weeks Ended June 28, 2020 | | :------------------------------- | :-------------------------- | :--------------------------- | | Net cash used in operating activities | $(94,220) | $(14,695) | | Net cash used in investing activities | $(50,028) | $(67,166) | | Net cash provided by financing activities | $140,983 | $168,490 | | Net (decrease) increase in cash and cash equivalents | $(3,023) | $83,705 | - Net cash used in operating activities increased significantly to $(94,220) thousand for the 26 weeks ended July 4, 2021, primarily due to a higher net loss[358]. Investing activities used $50,028 thousand, mainly for property and equipment purchases and noncontrolling interest acquisitions[360] - Financing activities provided $140,983 thousand, driven by new borrowings and share issuances, partially offset by substantial debt repayments[363] Off-Balance Sheet Arrangements The company confirms it has no off-balance sheet arrangements as of the reporting date - As of July 4, 2021, the company did not have any off-balance sheet arrangements[367] Critical Accounting Estimates and Judgments No significant changes were made to critical accounting policies and estimates from the previous prospectus - There have been no significant changes in critical accounting policies and estimates compared to those disclosed in the final prospectus filed on July 16, 2021[368] Emerging Growth Company Status The company utilizes reduced disclosure requirements available to it as an emerging growth company - MCG is an 'emerging growth company' under the JOBS Act, allowing it to take advantage of reduced disclosure requirements, such as presenting only two years of audited financial statements and delaying adoption of new accounting standards[369] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to various market risks, including foreign exchange, credit, liquidity, and interest rate risk Foreign Exchange Risk The company faces currency risk from its international operations but does not currently use hedging instruments - MCG is exposed to foreign exchange risk due to operations in the UK, North America, and Europe, with financial results reported in US dollars[371]. No material financial instruments are currently used to mitigate this risk[372] | Currency Fluctuation Impact (in millions) | 10% USD Strengthening | 10% USD Weakening | 10% EUR Strengthening | 10% EUR Weakening | | :---------------------------------------- | :-------------------- | :---------------- | :-------------------- | :---------------- | | Q2 2021 Revenue Impact | $(7) | $7 | $(1) | $1 | | Q2 2021 Net Loss Impact | $(4) | $4 | $0 | $0 | | H1 2021 Revenue Impact | $(10) | $10 | $(1) | $1 | | H1 2021 Net Loss Impact | $(12) | $12 | $0 | $0 | Concentration of Credit Risk Credit risk from cash and receivables is managed by dealing with high-quality financial institutions - Credit risk primarily relates to cash equivalents and accounts receivable[377]. The company manages this by dealing with high-credit-quality financial institutions and performing periodic evaluations[378] Liquidity Risk The company manages liquidity risk by aiming to maintain sufficient cash to meet its operational and capital needs - MCG aims to maintain sufficient liquidity to meet foreseeable needs, with $49 million in cash and cash equivalents as of July 4, 2021[379]. Capital expenditures are expected to be funded by operating cash flows and existing cash[379] Cash Flow and Fair Value Interest Rate Risk Exposure to interest rate risk exists from variable-rate debt, which is not currently hedged - Operations are financed through bank borrowings and bond notes, generally fixed-rate[380]. Variable rate indebtedness exposes the company to interest rate risk, but no hedging arrangements are currently in place[380] Item 4. Controls and Procedures Management concluded that disclosure controls were not effective as of July 4, 2021, due to material weaknesses in internal control - As of July 4, 2021, disclosure controls and procedures were deemed ineffective due to material weaknesses in internal control over financial reporting[381] - Material weaknesses identified include insufficient qualified accounting and finance personnel with US GAAP knowledge and experience, and inadequately designed or ineffective policies for reviewing, supervising, and monitoring accounting and reporting functions[382] - No material changes in internal control over financial reporting occurred during the 26-week period ended July 4, 2021[383] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is subject to ordinary course legal proceedings not expected to have a material adverse effect on its financial statements - The company is not a party to any litigation other than in the ordinary course of business[387] - Management does not expect the ultimate outcome of ongoing legal proceedings to have a material adverse effect on the business, financial condition, results of operations, or cash flows[387] Item 1A. Risk Factors This section outlines significant risks including COVID-19 impacts, historical losses, growth challenges, and material weaknesses in internal controls Risks Related to our Business Business risks are dominated by the COVID-19 pandemic's impact, a history of net losses, and identified material weaknesses - The COVID-19 pandemic has severely impacted operations, leading to temporary closures, restricted hours, increased member attrition (over 10,800 frozen members as of July 4, 2021), and significant declines in In-House Revenues[392][393] - The company has incurred net losses since inception, including $57 million for Q2 2021, and had an accumulated deficit of $903 million as of July 4, 2021, with expectations of continued net losses in fiscal 2021[398] - Risks include strains on management and systems from planned growth, potential diminution of brand value (Soho House, Soho Home, Scorpios), challenges in protecting intellectual property (e.g, 'brand squatting' in Asia), and dependence on senior management, including CEO Nick Jones[399][401][410][415] - Material weaknesses in internal control over financial reporting were identified, related to insufficient US GAAP expertise and inadequate review policies, which are currently being remediated[416][417] Risks Related to Our Indebtedness Substantial debt levels and restrictive covenants pose risks to the company's financial flexibility and operations - The company has substantial debt ($688 million net of issuance costs as of July 4, 2021), which could limit financial flexibility, increase vulnerability to economic downturns, and require a significant portion of cash flow for debt service[443][444] - Restrictive covenants in debt facilities limit the company's ability to incur additional debt, engage in M&A, or declare dividends[447]. A breach could trigger acceleration of indebtedness and default[448] - Variable rate indebtedness exposes the company to interest rate risk, with no current hedging arrangements in place[452][454] Risks Related to Our Properties Risks related to properties include geographic concentration, development delays, and reliance on leased locations - Geographic concentration of properties (e.g, London, New York, Los Angeles) exposes the company to disproportionate harm from local economic downturns or disasters[459] - Ownership of some properties exposes the company to risks of falling property prices[460]. Development, redevelopment, or renovation efforts are subject to delays and cost overruns[461] - Reliance on leased properties creates risks of lease expiration or termination, and the use of joint ventures for development projects may limit control and introduce additional risks[463][468] Risks Related to our Technology and Data The company is vulnerable to IT system failures and cybersecurity breaches, with significant compliance duties under data privacy laws - Heavy reliance on IT systems and third-party service providers makes the company vulnerable to failures, interruptions, and security incidents, which could disrupt operations, compromise data, and damage reputation[473][475] - Cybersecurity attacks or data breaches could lead to negative publicity, claims, investigations, litigation, and significant costs, potentially exceeding insurance coverage[479][485] - Failure to comply with evolving data privacy and security laws (e.g, GDPR, CCPA, CPRA) could result in fines, penalties, litigation, and reputational harm, requiring costly changes to business operations[491][492][495][497] Risks Related to Regulations The business is subject to extensive labor, health, safety, and anti-corruption regulations, with non-compliance posing significant risks - The company is exposed to risks from unionization and various labor and employment laws, which could increase costs and restrict operations, particularly with recent hotel acquisitions[499][500] - Operations are subject to extensive regulations (food, alcohol, workplace safety, environmental), and non-compliance could lead to sanctions, liabilities, and business disruption[501][502] - Litigation concerning food quality, health and safety, or employee conduct could result in liabilities and damage customer perception[505]. Failure to comply with anti-corruption laws (FCPA, UK Bribery Act) could lead to severe penalties[506] Risks Related to Taxation Tax-related risks include potential volatility in effective tax rates and limitations on the use of net operating losses - Future effective tax rates are subject to volatility due to changes in tax laws (e.g, Brexit impact), valuation of deferred tax assets/liabilities, and audit outcomes[507][508][509] - Net operating losses (NOLs) and excess interest deductions may be subject to limitations or forfeiture, potentially expiring unused and impacting future tax liabilities[510][511][512] Risks Related to Being a Public Company Being a public company introduces higher costs, stringent compliance requirements, and risks from existing material weaknesses - Operating as a public company incurs increased legal, accounting, and administrative costs, requiring substantial management time for compliance with SEC and NYSE requirements (e.g, Sarbanes-Oxley Act)[513] - Persistence of material weaknesses in internal controls or future failures could adversely affect financial reporting accuracy, investor confidence, and stock value[517][518] - As an 'emerging growth company,' reduced disclosure requirements may make Class A common stock less attractive to some investors, potentially leading to lower trading activity and increased price volatility[519][520][521] Risks Related to Our Common Stock A dual-class stock structure concentrates voting control, and the company's 'controlled company' status reduces certain governance protections - The dual-class stock structure (Class B with 10 votes per share) concentrates voting control with the Voting Group (Yucaipa, Mr Caring, Mr Jones), limiting other stockholders' influence on corporate matters[522][523] - The company is a 'controlled company' under NYSE rules, allowing exemptions from certain corporate governance requirements (e.g, independent directors on committees), which may reduce protections for stockholders[527] - A significant portion of outstanding shares is restricted but may be sold in the near future, potentially causing the Class A common stock price to drop[536]. The company has never paid dividends and does not anticipate doing so in the foreseeable future[539] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the use of proceeds from the company's initial public offering completed on July 19, 2021 - The company completed its IPO on July 19, 2021, selling 30,567,918 shares of Class A common stock at $14.00 per share, generating aggregate net proceeds of $402 million[550] - IPO proceeds were used to repay $98 million of outstanding revolving credit facility debt and $20 million for redeemable preferred shares, with the remainder for general corporate purposes[187][551] - There were no unregistered sales of equity securities or issuer purchases of equity securities during the period[549][552] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[554] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[555] Item 5. Other Information No other information was reported under this item - No other information was reported[556] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including corporate governance documents and certifications - Exhibits include Amended and Restated Certificate of Incorporation and Bylaws, Certifications of Principal Executive and Financial Officers (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), and XBRL Instance and Taxonomy documents[557]