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the strangest and most alarming things

CEO of WeWork Adam Neumann

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WeWork's parent company, the We Company, caused a sensation earlier this week with the release of the highly anticipated IPO prospectus.

The company's S-1 is the foundation for what is expected to be one of the largest public offerings of the year after Uber's IPO in May.

It is also filled with unusual things that should put off all but the most stubborn investors with a healthy appetite for the risk. Here is an overview.

Increasing Losses

WeWork's revenue in the first half of 201

9 may have been more than double that of the previous year, but losses are increasing just as fast. The company stated in its IPO filing that losses increased to over $ 900 million in the first six months of the year, compared to a net loss of $ 1.9 billion in 2018 for the full year.

Massive losses have become a major component of IPOs among unicorns This is demonstrated, among other things, by the debut of high-flying tech companies Uber and Lyft earlier this year. However, WeWork continues to face tough questions about the sustainability of its business, and few have been answered in the S-1.

"You can say I'm growing faster, but you can not say you lose a dollar for every dollar you get," said Kathleen Smith, director of Renaissance Capital.

Likewise MKM Partners & # 39; Rohit Kulkarni said in a statement on Friday that investors must "leap ahead to believe WeWork is showing signs of a sustainable economic model," given the rising costs at its 528 locations , He said WeWork could soon be strapped in for cash.

"Based on an estimated $ 1500-200 million cash burn per month, we expect the company to have six months left before a liquidity crisis occurs," Kulkarni wrote in a research report.

Expensive leases

WeWorks lease obligations must be observed.

The company concludes long-term leases with landlords who have a term of up to 15 years. According to data provider CB Insights, the company has to pay hundreds of millions of dollars in future rents. In the S-1 application, WeWork announced that future lease liabilities as of June 30 were $ 47.2 billion (compared to approximately $ 34 billion at the end of 2018).

At the same time, WeWork offers members short-term leases. In an effort to provide flexibility and to collect the rent over an average of two years, Smith said.

This is a blessing for its members, but could pose a risk to WeWork's business as these short-term tenants could rise and can be abandoned at any time, leaving the company on hold for long-term rentals.

"This mismatch can be deadly in a recession," Smith said. "This means the company must be able to pay the leasing costs, and if there is any price pressure, lack of renewals and cancellations for whatever reason, and the company has a time when it does not rent out its space, it can be a huge risk in a recession. "

The company's decline in revenue per membership also raises some concerns.

WeWork estimates a total addressable market opportunity of $ 945 billion if the average revenue per WeWork membership is applied to the potential member population. However, WeWork also warned that revenue per member will decline in the future as it expands internationally into "cheaper markets".

"Investors Want an Increase [average revenue per member] as this may prove this idea of ​​ancillary services." Smith said.

Services are expected to be a long-term driver of company revenue. CEO Adam Neumann has previously stated that he sees WeWork as a "global platform" for things like "space-as-a-service," a game called "software-as-a-service."

If WeWork already has problems in increasing the average revenue per member, it could be difficult to get members to spend a few extra dollars on things like software or other services.

Puzzling Corporate Structure and Unpredictable China Business

After WeWork was renamed The We Company in April, it adopted a complicated corporate structure, called Umbrella Partnership Corporation, or Up-C.

WeWork has become a limited liability company overseen by The We Company and joint ventures in Asia and other affiliates, such as the ARK Capital Advisors fund, which oversees global real estate management and acquisitions. (The acronym stands for Adam, Rebekah and Kids and refers to his wife, who is listed as a co-founder and has a significant influence on the company, and their five children.)

This table is from the S-1 shows, how complicated the whole thing is:

  HANDOUT Work Structure

The Up-C structure offers tax advantages to Neumann and other executives, as they can tax profits on an individual income tax rate. according to the Financial Times. In the meantime, public shareholders are subject to double taxation because the holding company is liable to income tax and investors have to pay another dividend tax.

WeWork said in its S-1, the Up-C structure would give it more flexibility to pursue acquisitions, while keeping the debt and obligations of other companies separate.

"Such a structure will allow us to separate our WeWork Space-as-a-Service offering from the rest of our existing businesses and to separately manage future business areas that we could expand into," the file says. 19659002] Kulkarni said in an interview with CNBC that WeWork's business in Asia is still at an early stage of development, so the structure allows them to "isolate" the associated losses.

In the Company's S-1, WeWork found that its contribution margin, which represents membership and service revenue after deducting the operating expenses of those locations, would have been three percentage points higher if the China business had been excluded.

WeWork is exposed to unique risks with its activities in China. The business in the region is run by groups that can not be controlled. Local laws vary in terms of rental duration and are covered by the 2017 Chinese Cybersecurity Act, which provides the Chinese government with access to corporate data.

Kulkarni said He believes that WeWork "did not provide sufficient information about the asset holdings in China and Asia" and that the confusing corporate structure may pose significant risks.

"It's a puzzle that needs to be solved," Kulkarni said.

A purely male board of directors

The We Company announced in the IPO prospectus who will serve on its board of directors. Not a single woman will be on the company's seven-member board, which could later be criticized.

Neumann is chairman of the board and is assisted by Bruce Dunlevie, a founding partner of Benchmark Capital, Ronald Fish, vice chairman of WeWorks largest backer, SoftBank. Lewis Frankfort, Steven Langman, Mark Schwartz and John Zhao also serve as directors.

By appointing only male directors, WeWork opposes the larger trend towards gender-specific bodies. As of last month, every S & P 500 company had at least one woman on the board. Having a broader board is generally seen as a means of improving shareholder return.

Control by CEO Adam Neumann and Potential Conflicts of Interest

If you rely on WeWork, you bet on Neumann.

He controls the majority of the voting rights over the Company's Class B and Class C Shares, with both Classes having 20 votes per share compared to Class A Shares with one vote per share. Neumann's holdings could be further enhanced by a pre-IPO allotment option of up to 42.5 million shares, which will be exercisable over the next 10 years.

To make matters worse, WeWork concludes leases and pays for buildings, some of which belong to Neumann. He is involved in four commercial properties leased to WeWork (S-1). Between 2016 and June 2019, the company had paid $ 20.9 million to the landlords in charge of these leases, including Neumann.

When WeWork was renamed The We Company in April, it acquired the trademark of "We" We Holdings LLC, an investment vehicle with Neumann and co-founder Miguel McKelvey. As part of the deal, We Holdings LLC received an additional $ 5.9 billion in We.

These types of transactions do not usually attract investors, Smith said.

So much of the company drives Neumann to be among the risks listed in WeWorks S-1. The company noted that Neumann is "critical" of its business but has "no employment contract".

"If Adam does not continue to act as our chief executive officer, this could have a material adverse impact on our business operations," the file says.

Should Neumann ever be permanently disabled or deceased, his wife Rebekah, who serves as the company's Chief Brand and Impact Officer, is one of two other people to choose his successor. If two preselected directors are no longer on the board, Rebekah can also choose which board members to assist in the selection process.

WeWork admits in the S-1 that Neumann is "deeply involved in all aspects of growth". of the company, adding that he has "proven he can simultaneously carry the hats of visionary, operator and innovator while thriving as a community and cultural creator."

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