As filed with the Securities and Exchange Commission on August 14, 2019.
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
THE SECURITIES ACT OF 1933
The We Company
(Exact name of registrant as specified in its charter)
115 West 18th Street
New York, New York 10011
Telephone: (646) 491-9060
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Co-President and Chief Legal Officer
Deputy Chief Legal Officer
115 West 18th Street
New York, New York 10011
Telephone: (646) 491-9060
With copies to:
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
The Registrant hereby amends this Registration Statement on such date as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
This is an initial public offering of Class A common stock by The We Company. The estimated initial public offering price is between $ and $ per share. We intend to apply to list our Class A common stock on the (the " ") under the symbol "WE". We have three classes of common stock: Class A common stock, Class B common stock and Class C common stock. The Class A common stock has one vote per share and the Class B common stock and Class C common stock (together, "high-vote stock") have twenty votes per share. Holders of our Class A common stock, Class B common stock and Class C common stock vote together as a single class on all matters, except as otherwise set forth in this prospectus or as required by applicable law. The holders of our outstanding shares of high-vote stock will hold approximately % of the voting power of our outstanding capital stock upon completion of this offering, and Adam Neumann, our Co-Founder and Chief Executive Officer, will hold or have the ability to control approximately % of the voting power of our outstanding capital stock upon completion of this offering. Following this offering, we will be a "controlled company" within the meaning of the corporate governance rules of the . We will be treated as an "emerging growth company" under the federal securities laws for certain purposes until we complete this offering. Investing in our Class A common stock involves risks. See "Risk factors" beginning on page 24. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. (1) Assumes no exercise of the underwriters' option to purchase additional shares of our Class A common stock described below. (2) See "Underwriting" for a description of compensation payable to the underwriters. Per Share Total 1 Initial public offering price Underwriting discounts and commissions2 Proceeds to us, before expenses $ $ $ $ $ $ We have granted the underwriters an option for a period of 30 days following the date of this prospectus to purchase up to additional shares of Class A common stock. See "Underwriting". The underwriters expect to deliver the shares of Class A common stock to purchasers on , 2019. Prospectus dated , 2019. Class A Common Stock Shares Subject to completion, dated August 14, 2019 The information in this preliminary prospectus is not complete and may be changed. The securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The We Company Goldman Sachs & Co. LLC BofA Merrill Lynch Barclays Citigroup Credit Suisse HSBC UBS Investment Bank Wells Fargo Securities J.P. Morgan
WE DEDICATE THIS TO THE ENERGY OF WE- GREATER THAN ANY ONE OF US BUT INSIDE EACH OF US.
ABCDEFGA Better Day at WorkA WEWORK, COMMUNITY TEAMOlivia Thompson, Alex FeldmanB WEWORK, CREATIVE DESIGN TEAMDevin Vermeulen (Employee #7),Jeremiah Britton (Employee #22)C WEWORK, CHIEF ARCHITECT BJARKE INGELSShown with BIG partner Daniel SundlinD STRIPE, MEMBERMolly McArdle, Nate SaeteE DROPBOX, MEMBERJade Dhir, Ryan Cahalane, Jeff JusticeF SKAI BLUE MEDIA, MEMBERJavier Alonzo, Christina Ciabattoni,Brandon Thompson, Rakia ReynoldsG QUEEN OF RAW, WEWORK MEMBERAND CREATOR AWARDS WINNERPhil Derasmo, Stephanie Benedetto
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus or contained in any free writing prospectus that we have filed with the Securities and Exchange Commission (the “SEC”). Neither we nor the underwriters have authorized anyone to provide you with additional information. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
We are offering to sell, and seeking offers to buy, our Class A common stock only in jurisdictions where offers and sales are permitted. For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, this offering and the distribution of this prospectus outside the United States.
Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “we”, “our”, “us”, “the Company” and “our company” refer to The We Company (or any predecessor entities, including WeWork Companies Inc.) and its consolidated subsidiaries. Certain amounts, percentages and other figures presented in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals, dollars or percentages may not represent the arithmetic summation or calculation of the figures that accompany them.
Until , 2019 (25 days after the date of this prospectus), all dealers that buy, sell or trade in our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Investing in our Class A common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as the other information included in this prospectus, including the consolidated financial statements and related notes appearing elsewhere in this prospectus, before making an investment decision. The risks described below are not the only risks we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, results of operations and prospects. In that case, the trading price of our Class A common stock could decline, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Please refer to “Cautionary Note Regarding Forward-Looking Statements” for more information regarding forward-looking statements.
Risks Relating to Our Business
Our business has grown rapidly, and we may fail to manage our growth effectively.
We have experienced rapid growth in our business, including in the number of our locations and in the size of our membership base. This rapid growth places a significant strain on our existing resources. Difficulties associated with our continued growth could result in harm to our reputation and could have a material adverse effect on our business, including our prospects for continued growth, and on our financial condition, results of operations and cash flows.
We expect our capital expenditures and operating expenses to increase on an absolute basis as we continue to invest in additional locations, launch additional solutions, products and services, hire additional team members and increase our marketing efforts. In particular, we expect to continue to invest in local infrastructure to support our continued growth. As we continue to decentralize and localize certain decision-making and risk management functions, we may discover that our internal processes are ineffective or inefficient. In particular, to manage our rapid growth, we will need to enhance our reporting systems and procedures and continue to improve our operational, financial, management, sales and marketing and information technology infrastructure. Continued growth could also strain our ability to maintain reliable service levels for our members. If we do not manage our growth effectively, increases in our capital expenditures and operating expenses could outpace any increases in our revenue, which could have a material adverse effect on our results of operations.
Our rapid growth may not be sustainable.
Our historical growth rates may not be indicative of future growth. The market for our solutions, products and services may not continue to grow at the rate we expect or at all, and our memberships may decline as a result of increased competition in the space-as-a-service sector or the maturation of our business. Additionally, as we grow, the ability of our management to source sufficient reasonably-priced opportunities for new locations of the type we have historically targeted or to develop and launch additional solutions, products and services may become more limited.
Our business strategy includes entering into new markets and introducing new solutions, products and services. This strategy is inherently risky, may not be successful and could be costly.
As part of our growth strategy, we intend to continue expansion into additional locations in existing and new markets within the United States and throughout the world, while also enhancing our product and service offerings. We may also continue to pursue new strategic opportunities, including real estate acquisition and management. Such expansion efforts also generally involve significant risks and uncertainties, including distraction of management from our existing solutions, products and services and the operations of our existing locations. As we attempt to grow our foothold in an evolving industry and acquire new businesses that enhance value for our members, we may encounter issues and risks not discovered in our development or analysis of such expansion efforts. Our operations in any new markets or solutions, products and services into which we expand may also generate less revenue or cash flow than our core WeWork space-as-a-service offering in our existing locations.
Our expansion efforts have required, and we expect them to continue to require, substantial resources and management attention. We spend significant time, money, energy and other resources trying to understand our members’ needs and working to accommodate them, which may include exploring and negotiating for new solutions,
products and services. However, as we expand into new markets and introduce new solutions, products and services, our members may not be satisfied with our solutions, products and services, including any new offerings that we launch. The time, money, energy and other resources we dedicate to exploring and pursuing new solutions, products and services may be greater than the short-term, and potentially the total, returns from these new offerings.
We will also face new operational risks and challenges as we continue to enter into new markets. Expansion into foreign jurisdictions subjects us to legal, regulatory, economic and political risks that may be different from and additional to those that we face in jurisdictions where we currently operate, and we may operate at a disadvantage relative to competitors who are more familiar with local market practices and networks. Expansion into new solutions, products and services subjects us to similar risks as we compete with the many established participants in those markets, and we face additional regulatory, legal and execution risks as we implement new business practices and integrate a new offering into our existing range of solutions, products and services. To the extent the benefits of our expansion efforts do not meet our expectations, we may recognize a loss on our investment or gains that do not justify our investment. See “—We plan to continue expanding our business into markets outside the United States, which will subject us to risks associated with operating in foreign jurisdictions”.
Our success in this regard may increasingly depend on the financial success and cooperation of local partners and other third parties. For more information, see “—Our growth and success depends on our ability to maintain the value and reputation of our brand and the success of our strategic partnerships”.
We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level (as determined in accordance with GAAP) for the foreseeable future.
We had an accumulated deficit as of December 31, 2017 and 2018 and as of June 30, 2018 and 2019 and had net losses of $0.4 billion, $0.9 billion and $1.9 billion for the years ended December 31, 2016, 2017 and 2018, respectively, and $0.7 billion and $0.9 billion for the six months ended June 30, 2018 and 2019. Our accumulated deficit and net losses have historically resulted primarily from the substantial investments required to grow our business, including the significant increase in recent periods in the number of locations we operate. We expect that these costs and investments will continue to increase as we continue to grow our business. We also intend to invest in maintaining our high level of member service and support, which we consider critical to our continued success. We also expect to incur additional general and administrative expenses as a result of our growth. These expenditures will make it more difficult for us to achieve profitability, and we cannot predict whether we will achieve profitability for the foreseeable future. Although we do not currently believe our net loss will increase as a percentage of revenue in the long term, we believe that our net loss may increase as a percentage of revenue in the near term and will continue to grow on an absolute basis.
Our operating costs and other expenses may be greater than we anticipate, and our investments to make our business and our operations more efficient may not be successful. Increases in our costs, expenses and investments may reduce our margins and materially adversely affect our business, financial condition and results of operations. In addition, non-mature locations and pipeline locations may not generate revenue or cash flow comparable to those generated by our existing mature locations, and our mature locations may not be able to continue to generate existing levels of revenue or cash flow. Further, our We Company offerings, such as WeLive, WeGrow, Flatiron School and Meetup, and additional We Company offerings that we may launch or acquire in the future, may not generate meaningful revenue or cash flow. For any of these reasons, we may be unable to achieve profitability for the foreseeable future and may face challenges in growing our cash flows.
We may not be able to continue to retain existing members, most of whom enter into membership agreements with short-term commitments, or to attract new members in sufficient numbers or at sufficient rates to sustain and increase our memberships or at all.
We principally generate revenues through the sale of memberships. We have in the past experienced, and expect to continue to experience, membership agreement terminations. In many cases, our members may terminate their membership agreements with us at any time upon as little notice as one calendar month. Members may cancel their memberships for many reasons, including a perception that they do not make sufficient use of our solutions and services, that they need to reduce their expenses or that alternative work environments may provide better value or a better experience.
Our results of operations could be adversely affected by declines in demand for our memberships. Demand for our memberships may be negatively affected by a number of factors, including geopolitical uncertainty, competition, cybersecurity incidents, decline in our reputation and saturation in the markets where we operate. Prevailing general and local economic conditions may also negatively affect the demand for our memberships, particularly from current and potential members that are small- and mid-sized businesses and may be disproportionately affected by adverse economic conditions.
Substantially all of our leases with our landlords are for terms that are significantly longer than the terms of our membership agreements with our members. The average length of the initial term of our U.S. leases is approximately 15 years, and our future undiscounted minimum lease cost payment obligations under signed operating and finance leases was $47.2 billion as of June 30, 2019. If we are unable to replace members who may terminate their membership agreements with us, our cash flows and ability to make payments under our lease agreements with our landlords may be adversely affected. These same factors that reduce demand for our memberships may not have the same impact on a landlord that has longer commitments from its tenants than we have from our members.
We must continually add new members both to replace departing members and to expand our current member base. We may not be able to attract new members in sufficient numbers to do so. Even if we are able to attract new members to replace departing members, these new members may not maintain the same level of involvement in our community. In addition, the revenue we generate from new members may not be as high as the revenue generated from existing members because of discounts we may offer to these new members, and we may incur marketing or other expenses, including referral fees, to attract new members, which may further offset our revenues from these new members. For these and other reasons, we could experience a decline in our revenue growth, which could adversely affect our results of operations.
An economic downturn or subsequent declines in market rents may result in increased member terminations and could adversely affect our results of operations.
While we believe that we have a durable business model in all economic cycles, there can be no assurance that this will be the case. A significant portion of our member base consists of small- and mid-sized businesses and freelancers who may be disproportionately affected by adverse economic conditions. In addition, our concentration in specific cities magnifies the risk to us of localized economic conditions in those cities or the surrounding regions. For the year ended December 31, 2018 and the six months ended June 30, 2019, we generated the majority of our revenue from locations in the United States and the United Kingdom. The majority of our revenue from locations in the United States was generated from our locations in the greater New York City, San Francisco, Los Angeles, Seattle, Washington, D.C. and Boston markets. A majority of our locations in the United Kingdom are in London. Economic downturns in these markets or other markets in which we are growing our number of locations may have a disproportionate effect on our revenue and our ability to retain members, in particular among members that are small- and mid-sized businesses, and thereby require us to expend time and resources on sales and marketing activities that may not be successful and could impair our results of operations. While our business has withstood localized recessions in various geographies, we have yet to experience a global economic downturn since founding our business. In addition, our business may be affected by generally prevailing economic conditions in the markets where we operate, which can result in a general decline in real estate activity, reduce demand for our solutions and services and exert downward pressure on our revenue.
We may not be able to successfully negotiate satisfactory arrangements in respect of spaces that we occupy, or renew or replace existing spaces on satisfactory terms or at all, any of which will necessarily constrain our ability to grow our member base.
We currently lease real estate for the majority of our locations, and we are actively pursuing management agreements and participating leases, under which the landlord pays in whole or in part for the build-out costs, and other occupancy arrangements with real estate owners. If we are unable to negotiate these lease and other arrangements on satisfactory terms, we may not be able to expand our portfolio of locations.
Our lease renewal options are typically tied to upward-only rent reviews, whereby rent for any given lease renewal term is typically equal to the greater of the rent in effect for the period immediately prior to the rent review date and the then-prevailing net effective rent in the open market. As a result, increases in rental rates in the markets in which we
operate, particularly in those markets where initial terms under our leases are shorter, could adversely affect our business, financial condition, results of operations and prospects.
In addition, our ability to negotiate favorable terms to extend an expiring lease or to secure an alternate location will depend on then-prevailing conditions in the real estate market, such as overall rental cost increases, competition from other would-be tenants for desirable leased spaces and our relationships with current and prospective building owners and landlords, and may depend on other factors that are not within our control. If we are not able to renew or replace an expiring lease, we will incur significant costs related to vacating that space and redeveloping whatever alternative space we are able to find, if any. In addition, if we are forced to vacate a space, we could lose members who purchased memberships based on the design, location or other attributes of that particular space and may not be interested in the other spaces we have available.
The average length of the initial term of our U.S. leases is approximately 15 years. As we continue to expand our presence into certain international markets, including Europe, Latin America, China, Japan and the Pacific, local market practices may require us to enter into leases that have shorter initial terms, which reduces the certainty of our future obligations with respect to these locations and the continued availability of our occupied spaces at these locations.
The long-term and fixed-cost nature of our leases may limit our operating flexibility and could adversely affect our liquidity and results of operations.
We currently lease a significant majority of our locations under long-term leases that, with very limited exceptions, do not contain early termination provisions. Our obligations to landlords under these agreements extend for periods that significantly exceed the length of our membership agreements with our members, which may be terminated by our members upon as little notice as one calendar month. Our leases generally provide for fixed monthly payments that are not tied to space utilization or the size of our member base, and all of our leases contain minimum rental payment obligations. As a result, if members at a particular space terminate their membership agreements with us and we are not able to replace these departing members, our lease cost expense may exceed our revenue. In addition, in an environment where cost for real estate is decreasing, we may not be able to lower our fixed monthly payments under our leases at rates commensurate with the rates at which we would be pressured to lower our monthly membership fees, which may also result in our rent expense exceeding our membership and service revenue. In any such event, we would not have the ability to reduce our rent under the lease or otherwise terminate the lease in accordance with its terms.
If we experience a prolonged reduction in revenues at a particular space, our results of operations in respect of that space would be adversely affected unless and until the lease expires or we are able to assign the lease or sublease the space to a third party. Our ability to assign a lease or sublease the space to a third party may be constrained by provisions in the lease that restrict these transfers without the prior consent of the landlord. Additionally, we could incur significant costs if we decide to assign or sublease unprofitable leases, as we may incur transaction costs associated with finding and negotiating with potential transferees, and the ultimate transferee may require upfront payments or other inducements. Moreover, our leases generally contain notice requirements in connection with certain transactions, including the reorganization transactions or the incurrence of indebtedness, as well as this offering. The failure to deliver notice or satisfy the conditions related to providing such notices to our landlords and members could result in defaults under such leases. If we default under the terms of our leases and cease operations at leased spaces, we could be exposed to breach of contract and other claims, which could result in direct and indirect costs to us and could result in operational disruptions that could harm our reputation, brand and result of operations. Additionally, we are party to a variety of lease agreements and other occupancy arrangements, including management agreements and participating leases, containing a variety of contractual rights and obligations that may be subject to interpretation. Our interpretation of such contracts may be disputed by our landlords or members, which could result in litigation, damage to our reputation or contractual or other legal remedies becoming available to such landlords and members and may impact our results of operations.
While our leases are often held by special purpose entities, our consolidated financial condition and results of operations depend on the ability of our subsidiaries to perform their obligations under these leases over time. Our business, reputation, financial condition and results of operations depend on our subsidiaries’ ongoing compliance with their leases. We may determine that it is necessary to fund the lease payments of our subsidiaries beyond the terms of
our limited parent guarantees (if applicable), in which case any difficulty of our subsidiaries in performing their obligations under our leases could affect our liquidity. In addition, we provide credit support in respect of our leases in the form of letters of credit, cash security deposits and surety bonds. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Lease Obligations”. If our subsidiaries were to default under their leases, the applicable landlords could draw under the letters of credit or demand payment under the surety bonds, which could adversely affect our financial condition and liquidity. In addition, under our surety bonds, the applicable surety has the right to request collateral, including cash collateral or letters of credit, at any time the surety bonds are outstanding. We are also pursuing strategic alternatives to pure leasing arrangements, including management agreements, participating leases and other occupancy arrangements with respect to spaces. Some of our agreements contain penalties that are payable in the event we terminate the arrangement. In addition, we have limited experience to date with these types of transactions, and we may not be able to successfully complete additional transactions on commercially reasonable terms or at all.
We have engaged in transactions with related parties, and such transactions present possible conflicts of interest that could have an adverse effect on our business and results of operations.
We have entered into a number of transactions with related parties, including our significant stockholders, directors and executive officers and other employees. For example, we have entered into several transactions with our Co-Founder and Chief Executive Officer, Adam Neumann, including leases with landlord entities in which Adam has or had a significant ownership interest. We have similarly entered into leases with landlord entities in which other members of our board of directors have a significant ownership interest, such as through ARK (as defined in “Business—Our Organizational Structure—ARK”). See “Certain Relationships and Related Party Transactions”. We may in the future enter into additional transactions with entities in which members of our board of directors and other related parties hold ownership interests.
Transactions with a landlord entity in which related parties hold ownership interests present potential for conflicts of interest, as the interests of the landlord entity and its shareholders may not align with the interests of our stockholders with respect to the negotiation of, and certain other matters related to, our lease with that landlord entity. For example, conflicts may arise in connection with decisions regarding the structure and terms of the lease, tenant improvement allowances or termination provisions. Conflicts of interest may also arise in connection with the exercise of contractual remedies under these leases, such as the treatment of events of default.
Our leases with landlords generally provide that, if the landlord declines to reimburse us for buildout expenses or other tenant improvement allowances for which we have the right to be reimbursed under the relevant lease, we may apply such receivables as an offset to our related rental obligations on those impacted leases. Certain of our leases with related parties, including those with landlord entities in which Adam holds a significant ownership interest, provide for tenant improvement allowances. If any of these entities declined to reimburse us for buildout expenses to which we were entitled under the relevant lease, we expect that we would apply such receivables as an offset to our related rental obligations on those impacted leases.
Pursuant to our related party transactions policy, all additional material related party transactions that we enter into require either (i) the unanimous consent of our audit committee or (ii) the approval of a majority of the members of our board of directors. See “Certain Relationships and Related Party Transactions—Policies and Procedures for Related Party Transactions”. Nevertheless, we may have achieved more favorable terms if such transactions had not been entered into with related parties and these transactions, individually or in the aggregate, may have an adverse effect on our business and results of operations or may result in government enforcement actions or other litigation.
A significant part of our international growth strategy and international operations will be conducted through joint ventures, and disputes with our partners may adversely affect our interest in these joint ventures.
Our international growth strategy has included entering into joint ventures in non-U.S. jurisdictions, such as in China, Japan and the broader Pacific region. Our success in these regions therefore depends on third parties whose actions we cannot control. Although in the case of certain of these joint ventures we have the right to appoint a majority of the members of the board of directors, there are many significant matters for which we require the consent of our partners in these joint ventures. Our partners in these joint ventures may have interests that are different from ours, and we may disagree with our partners as to the resolution of a particular issue to come before the joint venture or as to the
management or conduct of the business of the joint venture in general. In addition, in connection with these joint ventures and other strategic partnerships, we have entered into certain agreements that provide our partners with exclusivity or other preemptive rights that may limit our ability to pursue business opportunities in the manner that we desire. For instance, with respect to each of ChinaCo, JapanCo and PacificCo (each as defined and described under “Business—Our Organizational Structure” and “Certain Relationships and Related Party Transactions—Regional Joint Ventures and Strategic Partnerships”), we have agreed to conduct all or an agreed portion of our business through the relevant joint venture. We may not be able to resolve any dispute relating to our business, operations or management of the relevant joint venture, which could have a material adverse effect on our interest in the joint venture or the business of the joint venture in general.
Some of the counterparty risks we face with respect to our members are heightened in the case of enterprise members.
Enterprise members, which often sign membership agreements with longer terms and for a greater number of memberships than our other members, accounted for 32% and 38% of our total membership and service revenue for the year ended December 31, 2018 and the six months ended June 30, 2019, respectively. Memberships attributable to enterprise members generally account for a high proportion of our revenue at a particular location, and some of our locations are occupied by just one enterprise member. A default by an enterprise member under its agreement with us could cause a significant reduction in the operating cash flow generated by the location where that enterprise member is situated. We would also incur certain costs following an unexpected vacancy by an enterprise member. The greater amount of available space generally occupied by any enterprise member relative to our other members means that the time and effort required to execute a definitive agreement is greater than the time and effort required to execute membership agreements with individuals or small- or mid-sized businesses. In addition, in some instances, we offer configured solutions that require us to customize the workspace to the specific needs and brand aesthetics of the enterprise member, which may increase our build-out costs and our net capex per workstation added. If enterprise members were to delay commencement of their membership agreements, fail to make membership fee payments when due, declare bankruptcy or otherwise default on their obligations to us, we may be forced to terminate their membership agreements with us, which could result in sunk costs and transaction costs that are difficult or impossible for us to recover.
We are exposed to risks associated with the development and construction of the spaces we occupy.
Opening new locations subjects us to risks that are associated with development projects in general, such as delays in construction, contract disputes and claims, and fines or penalties levied by government authorities relating to our construction activities. We may also experience delays opening a new location as a result of delays by the building owners or landlords in completing their base building work or as a result of our inability to obtain, or delays in our obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations. We seek to open new locations on the first day of a month and delays, even if the delay only lasts a few days, can cause us to defer opening a new location by a full month. Failure to open a location on schedule may damage our reputation and brand and may also cause us to incur expenses in order to rent and provide temporary space for our members or to provide those members with discounted membership fees.
In developing our spaces, we generally rely on the continued availability and satisfactory performance of unaffiliated third-party general contractors and subcontractors to perform the actual construction work and, in many cases, to select and obtain certain building materials, including in some cases from sole-source suppliers of such materials. As a result, the timing and quality of the development of our occupied spaces depends on the performance of these third parties on our behalf.
We do not have long-term contractual commitments with general contractors, subcontractors or materials suppliers. The prices we pay for the labor or materials provided by these third parties, or other construction-related costs, could unexpectedly increase, which could have an adverse effect on the viability of the projects we pursue and on our results of operations and liquidity. Skilled parties and high-quality materials may not continue to be available at reasonable rates in the markets in which we pursue our construction activities.
The people we engage in connection with a construction project are subject to the usual hazards associated with providing construction and related services on construction project sites, which can cause personal injury and loss of
life, damage to or destruction of property, plant and equipment, and environmental damage. Our insurance coverage may be inadequate in scope or coverage amount to fully compensate us for any losses we may incur arising from any such events at a construction site we operate or oversee. In some cases, general contractors and their subcontractors may use improper construction practices or defective materials. Improper construction practices or defective materials can result in the need to perform extensive repairs to our spaces, loss of revenue during the repairs and, potentially, personal injury or death. We also can suffer damage to our reputation, and may be exposed to possible liability, if these third parties fail to comply with applicable laws.
Supply chain interruptions may increase our costs or reduce our revenues.
We depend on the effectiveness of our supply chain management systems to ensure reliable and sufficient supply, on reasonably favorable terms, of materials used in our construction and development and operating activities, such as furniture, lighting, millwork, wood flooring, security equipment and consumables. The materials we purchase and use in the ordinary course of our business are sourced from a wide variety of suppliers around the world. Disruptions in the supply chain may result from weather-related events, natural disasters, trade restrictions, tariffs, border controls, acts of war, terrorist attacks, third-party strikes or ineffective cross dock operations, work stoppages or slowdowns, shipping capacity constraints, supply or shipping interruptions or other factors beyond our control. In the event of disruptions in our existing supply chain, the labor and materials we rely on in the ordinary course of our business may not be available at reasonable rates or at all. In some cases, we may rely on a single source for procurement of construction materials or other supplies in a given region. Any disruption in the supply of certain materials could disrupt operations at our existing locations or significantly delay our opening of a new location, which may cause harm to our reputation and results of operations.
We incur costs relating to the maintenance, refurbishment and remediation of our spaces.
The terms of our leases generally require that we ensure that the spaces we occupy are kept in good repair throughout the term of the lease. The terms of our leases may also require that we return the space to the landlord at the end of the lease term in the same condition it was delivered to us, which, in such instances, will require removing all fixtures and improvements to the space. The costs associated with this maintenance, removal and repair work may be significant.
We also anticipate that we will be required to periodically refurbish our spaces to keep pace with the changing needs of our members. Extensive refurbishments may be more costly and time-consuming than we expect and may adversely affect our results of operations and financial condition. Our member experience may be adversely affected if extensive refurbishments disrupt our operations at our locations.
Our growth and success depends on our ability to maintain the value and reputation of our brand and the success of our strategic partnerships.
Our brand is integral to our business as well as to the implementation of our strategies for expanding our business. In 2019, we launched a global rebranding effort that may affect our ability to attract and retain members, which may have a material adverse effect on our business or results of operations.
Maintaining, promoting and positioning our brand will depend largely on our ability to provide a consistently high quality member experience and on our marketing and community-building efforts. To the extent our locations, workspace solutions or product or service offerings are perceived to be of low quality or otherwise are not compelling to new and existing members, our ability to maintain a positive brand reputation may be adversely affected.
In addition, failure by third parties on whom we rely but whose actions we cannot control, such as general contractors and construction managers who oversee our construction activities or facilities management staff, to uphold a high standard of workmanship, ethics, conduct and legal compliance could subject us to reputational harm based on their association with us and our brand. As we pursue our growth strategies of entering into joint ventures, revenue-sharing arrangements and other partnerships with local partners in non-U.S. jurisdictions, such as through ChinaCo, JapanCo, PacificCo and IndiaCo, we become increasingly dependent on third parties whose actions we cannot control.
We receive a high degree of media coverage domestically and internationally and we believe that much of our reputation depends on word-of-mouth and other non-paid sources of opinion, including on the internet. Unfavorable
publicity or consumer perception or experience of our solutions, practices, products or services could adversely affect our reputation, resulting in difficulties in attracting and retaining members and business partners, and limiting the success of our community-building efforts and the range of solutions, products and services we are able to offer.
Historically, many of our members have signed up for memberships because of positive word-of-mouth referrals by existing members, which has reduced our need to rely on traditional marketing efforts. To the extent that we are unable to maintain a positive brand reputation organically, we may need to rely more heavily on traditional marketing efforts to attract new members, which would increase our sales and marketing expenses both in absolute terms and as a percentage of our revenue.
If our employees, members of our community or other people who enter our spaces act badly, our business and our reputation may be harmed.
Our emphasis on our mission and values makes our reputation particularly sensitive to allegations of violations of community rules or applicable laws by our members, employees or other people who enter our spaces. While we verify the identity of any individual interested in joining our community, we do not conduct extensive background checks or otherwise extensively vet potential members prior to entering into membership agreements that provide them or their employees access to our locations. If our members, employees or other people violate our policies or engage in illegal or unethical behavior, or are perceived to do so, we may be the subject of negative publicity and our reputation may be harmed. These bad acts may also encourage existing members to leave our locations and make it more difficult for us to recruit new members at that location, which would adversely impact our results of operations for the affected location.
If our pricing and related promotional and marketing plans are not effective, our business and prospects may be negatively affected.
Our business and prospects depend on the impact of pricing and related promotional and marketing plans and our ability to adjust these plans to respond quickly to economic and competitive conditions. If our pricing and related promotional and marketing plans are not successful, or are not as successful as those of competitors, our revenue, membership base and market share could decrease, thereby adversely impacting our results of operations.
We may make decisions consistent with our mission that may reduce our short- or medium-term operating results.
Our mission is integral to everything we do, and many of our strategic and investment decisions are geared toward improving the experience of our members and the attractiveness of our community. While we believe that pursuing these goals will produce benefits to our business in the long-term, these decisions may adversely impact our short- or medium-term operating results and the long-term benefits that we expect to result from these initiatives may not materialize within the timeframe we expect or at all, which could harm our business and financial results.
We may be unable to adequately protect or prevent unauthorized use of our trademarks and other proprietary rights and we may be prevented by third parties from using or registering our trademarks or other intellectual property.
To protect our trademarks and other proprietary rights, we rely and expect to continue to rely on a combination of protective agreements with our employees and third parties (including local or other strategic partners we may do business with), physical and electronic security measures and trademark, copyright, patent and trade secret protection laws. In certain jurisdictions, rights in trademarks are derived from registration of the trademark. We may not have trademark rights in a jurisdiction where our trademarks are not registered, including with respect to any new brands and existing brands associated with new offerings. We have obtained a strategic set of trademark, copyright and patent applications or registrations in the United States and other jurisdictions and have filed, and we expect to file from time to time, additional trademark, copyright and patent applications. Nevertheless, these applications may not proceed to registration or issuance and in any event may not be comprehensive (particularly with respect to non-U.S. jurisdictions), third parties may challenge any trademarks, copyrights or patents issued to or held by us, the agreements (including license agreements with local or other strategic partners) and security measures we have in place may be inadequate or otherwise fail to effectively accomplish their protective purposes, third parties may infringe or misappropriate our intellectual property rights, and we may not be successful in asserting intellectual property rights against third parties. Third parties may also take the position that we are infringing their rights, and we may not be
successful in defending these claims. For example, we have received correspondence from third parties asserting potential claims of trademark infringement with respect to some of our WE names and trademarks. We dispute these assertions. Additionally, we may not be able to enforce or defend our proprietary rights or prevent infringement or misappropriation without substantial expense to us and a significant diversion of management time and attention from our business strategy.
We currently hold various domain names relating to our brand, most importantly wework.com, we.co, wegrow.com and welive.com, as well as several other @we and @wework social media handles. Competitors and others could attempt to capitalize on our brand recognition by using domain names or social media handles similar to those we hold. We may be unable, without significant cost or at all, to maintain or protect our use of domain names and social media handles or prevent third parties from acquiring domain names or social media handles that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights in our domain names.
If the measures we have taken to protect our proprietary rights are inadequate to prevent unauthorized use or misappropriation by third parties or such rights are diminished or we are prevented from using intellectual property due to successful third-party challenges, the value of our brand and other intangible assets may be diminished and our business and results of operations may be adversely affected.
We rely on a combination of proprietary and third-party technology systems to support our business and member experience, and, if these systems experience difficulties, our business, financial condition, results of operations and prospects may be materially adversely affected.
We use a combination of proprietary technology and technology provided by third-party service providers to support our business and our member experience. For example, the WeWork app, which we developed in-house but which incorporates third-party and open source software where appropriate, connects local communities and develops and deepens connections among our members, both at particular spaces and across our global network.
We also use technology of third-party service providers to help manage the daily operations of our business. For example, we rely on our own internal systems as well as those of third-party service providers to process membership payments and other payments from our members.
To the extent we experience difficulties in the operation of technologies and systems we use to manage the daily operations of our business or that we make available to our members, our ability to operate our business, retain existing members and attract new members may be impaired. We may not be able to attract and retain sufficiently skilled and experienced technical or operations personnel and third-party contractors to operate and maintain these technologies and systems, and our current product and service offerings may not continue to be, and new product and service offerings may not be, supported by the applicable third-party service providers on commercially reasonable terms or at all.
Moreover, we may be subject to claims by third parties who maintain that our service providers’ technology infringes the third party’s intellectual property rights. Although our agreements with our third-party service providers often contain indemnities in our favor with respect to these eventualities, we may not be indemnified for these claims or we may not be successful in obtaining indemnification to which we are entitled.
Also, any harm to our members’ personal computers or other devices caused by our software, such as the WeWork app, or other sources of harm, such as hackers or computer viruses, could have an adverse effect on the member experience, our reputation and our results of operations and financial condition.
If our proprietary information and/or data we collect and store, particularly billing and personal data, were to be accessed by unauthorized persons, our reputation, competitive advantage and relationships with our members could be harmed and our business could be materially adversely affected.
We generate significant amounts of proprietary, sensitive and otherwise confidential information relating to our business and operations, and we collect, store and process confidential and personal data regarding our members, including member names and billing data. Our proprietary information and data is maintained on our own systems as well as the systems of third-party service providers.
Similar to other companies, our information technology systems face the threat of cyber-attacks, such as security breaches, phishing scams, malware and denial-of-service attacks. Our systems or the systems of our third-party service providers could experience unauthorized intrusions or inadvertent data breaches, which could result in the exposure or destruction of our proprietary information and/or members’ data.
Because techniques used to obtain unauthorized access to systems or sabotage systems change frequently and may not be known until launched against us or our service providers, we and they may be unable to anticipate these attacks or implement adequate preventative measures. In addition, any party who is able to illicitly obtain identification and password credentials could potentially gain unauthorized access to our systems or the systems of our third-party service providers. If any such event occurs, we may have to spend significant capital and other resources to notify affected individuals, regulators and others as required under applicable law, mitigate the impact of the event and develop and implement protections to prevent future events of that nature from occurring. From time to time, employees make mistakes with respect to security policies that are not always immediately detected by compliance policies and procedures. These can include errors in software implementation or a failure to follow protocols and patch systems. Employee errors, even if promptly discovered and remediated, may disrupt operations or result in unauthorized disclosure of confidential information. We have experienced unauthorized breaches of our systems prior to this offering, which we believe did not have a material effect on our business.
If a data security incident occurs, or is perceived to occur, we may be the subject of negative publicity and the perception of the effectiveness of our security measures and our reputation may be harmed, which could damage our relationships and result in the loss of existing or potential members and adversely affect our results of operations and financial condition. In addition, even if there is no compromise of member information, we could incur significant regulatory fines, be the subject of litigation or face other claims. In addition, our insurance coverage may not be sufficient in type or amount to cover us against claims related to security breaches, cyber-attacks and other related data and system incidents.
Although we expect to become Payment Card Industry Data Security Standard (PCI DSS) compliant in 2019, our practices with respect to this type of information are evolving and do not yet fully comply with that industry standard and other applicable guidelines. Additionally, if new operating rules or interpretations of existing rules are adopted regarding the processing of credit cards that we are unable to comply with, we could lose the ability to give members the option to make electronic payments, which could result in the loss of existing or potential members and adversely affect our business.
Our reputation, competitive advantage, financial position and relationships with our members could be materially harmed if we are unable to comply with complex and evolving data protection laws and regulations, and the costs and resources required to achieve compliance may have a materially adverse impact on our business.
The collection, protection and use of personal data are governed by privacy laws and regulations enacted in the United States, Europe, Asia and other jurisdictions around the world in which we operate. These laws and regulations continue to evolve and may be inconsistent from one jurisdiction to another. Compliance with applicable privacy laws and regulations may increase our costs of doing business and adversely impact our ability to conduct our business and market our solutions, products and services to our members and potential members.
For example, we are subject to the European Union’s General Data Protection Regulation (“GDPR”) in a number of jurisdictions. The GDPR imposes significant obligations, and compliance with these obligations depends in part on how particular regulators apply and interpret them. If we fail to comply with the GDPR, or if regulators assert we have failed to comply with the GDPR, it may lead to regulatory enforcement actions, which can result in monetary penalties of up to 4% of worldwide revenue, private lawsuits and/or reputational damage. Further, any U.K. exit from the European Union will increase uncertainty regarding applicable laws and regulations pending more clarity on the terms of that exit.
Additionally, in June 2018, California passed the California Consumer Privacy Act (“CCPA”), which provides new data privacy rights for consumers and new operational requirements for companies, effective in 2020. The CCPA creates a private right of action that could lead to consumer class actions and other litigation against us, with statutory damages of up to $750 per violation. The California Attorney General will also maintain authority to enforce the CCPA and will be permitted to seek civil penalties for intentional violations of the CCPA of up to $7,500 per violation. Other U.S. states and the U.S. Congress are in the process of considering legislation similar to California’s legislation. If we fail to comply
with the CCPA or other federal or state data protection laws, or if regulators or plaintiffs assert we have failed to comply with them, it may lead to regulatory enforcement actions, private lawsuits and/or reputational damage.
We are also subject to China’s Cybersecurity Law, which took effect in 2017. China’s Cybersecurity Law and its implementing regulations lay out requirements on cybersecurity, data localization and data protection, subjecting many previously under-regulated or unregulated activities to government scrutiny under provisions that have not yet been subject to public interpretation by enforcement authorities. Likewise, in Canada we are subject to Canada’s Personal Information and Protection of Electronic Documents Act (“PIPEDA”). PIPEDA provides Canadian residents with privacy protections and sets out rules for how companies may collect, use and disclose personal information in the course of commercial activities. The costs of compliance with, and other burdens imposed by, these and other international data privacy and security laws may limit the use and adoption of our solutions, products and services and could have a materially adverse impact on our business. Any failure or perceived failure by us or third-party service providers to comply with international data privacy and security laws may lead to regulatory enforcement actions, fines, private lawsuits or reputational damage.
Our future success depends in large part on the continued service of Adam Neumann, our Co-Founder and Chief Executive Officer, which cannot be ensured or guaranteed.
Adam Neumann, our Co-Founder and Chief Executive Officer, is critical to our operations. Adam has been key to setting our vision, strategic direction and execution priorities. We have no employment agreement in place with Adam, and there can be no assurance that Adam will continue to work for us or serve our interests in any capacity. If Adam does not continue to serve as our Chief Executive Officer, it could have a material adverse effect on our business.
We plan to continue expanding our business into markets outside the United States, which will subject us to risks associated with operating in foreign jurisdictions.
Expanding our operations into markets outside the United States has been an important part of our growth strategy. For the six months ended June 30, 2019, 56% of our revenue was attributable to our operations in the United States and 44% of our revenue was attributable to our operations elsewhere, compared with 62% and 38% for the six months ended June 30, 2018. We expect to continue to expand our operations in markets outside the United States in the coming years.
While we have already expanded our operations to a number of non-U.S. markets, the success of our expansion into additional non-U.S. markets will depend on our ability to attract local members. The solutions, products and services we offer may not appeal to potential members in all markets in the same way it appeals to our members in markets where we currently operate. In addition, local competitors may have a substantial competitive advantage over us in a given market because of their greater understanding of, and focus on, individuals and organizations in that market, as well as their more established local infrastructure and brands. We may also be unable to hire, train, retain and manage the personnel we require in order to manage our international operations effectively, on a timely basis or at all, which may limit our growth in these markets. Further, we may experience variability in the terms of our leases (including rent per square foot) and in our capital expenditures as we move into new markets.
Operating in international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that may be different from and incremental to those that we face in the United States, including:
Finally, continued expansion in markets outside the United States will require significant financial and other investments. These investments include property sourcing and leasing, marketing to attract and retain new members, developing localized infrastructure and services, developing relationships with local partners and third-party service providers, further developing corporate capabilities able to support operations in multiple countries, and potentially entering into strategic transactions with or even acquiring companies based outside the United States and integrating those companies with our existing operations. If we continue to invest substantial time and resources to expand our operations outside the United States, but cannot manage these risks effectively, the costs of doing business in those markets, including the investment of management attention, may be prohibitive, or our expenses may increase disproportionately to the revenue generated in those markets.
As we continue to grow our global platform in new markets, certain metrics may be impacted by the geographic mix of our platform. For example, average revenue per WeWork membership has declined as we have expanded internationally into lower-priced markets, which is a trend we expect could continue in the near-term. Also, our overall contribution margin percentage may decline as certain lower margin markets, including markets with a larger target member population such as China, Latin America and Southeast Asia become a larger portion of our portfolio. Our contribution margin metrics may also be impacted by the speed at which we can open locations and stabilize occupancy at those locations as well as the average revenue per WeWork membership that we generate.
We face risks arising from strategic transactions such as acquisitions and investments that we evaluate, pursue and undertake.
From time to time, we evaluate potential strategic acquisition or investment opportunities, and from time to time we pursue and undertake certain of those opportunities. We have expanded rapidly, including through acquisitions of companies engaged in a variety of businesses, including Meetup (an online platform that brings people together offline) and Flatiron School (a software programming education platform). We plan to continue to pursue and complete acquisitions or investments, some of which may be material and may not create the value that we expect. We also plan to continue or accelerate investments in real estate vehicles, including as we grow our ARK real estate acquisition and management platform.
Any transactions that we enter into could be material to our financial condition and results of operations. We have limited experience in completing and integrating major acquisitions. The process of acquiring and integrating another company or technology could create unforeseen operating difficulties and expenditures and could entail unforeseen liabilities that are not recoverable under the relevant transaction agreements or otherwise.
The integration of acquisitions involves a number of significant risks which may include but are not limited to:
If we are unable to successfully complete and integrate our strategic acquisitions in a timely manner, our business, growth strategies and results of operations could be adversely affected.
We have entered into certain agreements that may limit our ability to directly acquire ownership interests in properties, and our control and joint ownership of certain properties with third-party investors may create conflicts of interest.
We hold an ownership interest in ARK, our real estate acquisition and management platform, through our majority ownership of the general partner and manager entities that manage the activities of real estate acquisition vehicles managed or sponsored by ARK. In connection with the formation of ARK, we agreed that ARK would be the exclusive general partner and investment manager for any real estate acquisition vehicles managed by, or otherwise affiliated with, The We Company and its controlled affiliates and associated persons. We also agreed to make commercial real estate and other real estate-related investment opportunities that meet ARK’s mandate available to ARK on a first-look basis, with certain limited exceptions. Because of these requirements, which are in effect at least until there are no real estate acquisition vehicles managed or sponsored by ARK that are actively deploying capital, we may be required to acquire ownership interests in properties through ARK that we otherwise could have acquired through one of our operating subsidiaries, which may prevent us from realizing the full benefit of certain attractive real estate opportunities.
Additionally, ARK focuses on acquiring, developing and managing properties that ARK believes would benefit from our occupancy or involvement, and we expect a subsidiary of The We Company to occupy or be involved with a meaningful portion of the properties acquired by real estate acquisition vehicles managed or sponsored by ARK. Our ownership interest in ARK may create situations where our interests with respect to the exercise of ARK’s management rights in respect of its owned assets, as well as ARK’s duties to limited partners or similar members in real estate acquisition vehicles managed or sponsored by ARK, may be in conflict with our own independent economic interests as a tenant and operator of our locations. For example, conflicts may arise in connection with decisions regarding the structure and terms of the leases entered into between us and ARK, tenant improvement allowances, or guarantee or termination provisions. Conflicts of interest may also arise in connection with the exercise of contractual remedies under such leases, such as treatment of events of default.
Our ownership interest in ARK may impact our financial condition and results of operations.
ARK’s financial performance is significantly correlated with the activities of real estate acquisition vehicles managed or sponsored by ARK, and a significant portion of any income to ARK is expected to be received, if at all, at the end of the holding period for one or more given assets or the term of one or more given real estate acquisition vehicles. In addition, a broad range of events or circumstances could cause any real estate acquisition vehicle managed or sponsored by ARK to fail to meet its objectives. In light of the long-dated and uncertain nature of any income to ARK, ARK’s financial performance may be more variable than we expect, both from period to period and overall. Accordingly, because of our ownership interest in ARK, ARK’s performance and activities, including the nature and timing of ARK transactions, may affect the comparability of our financial condition and results of operations from period to period, in each case to the extent required to be directly included in our consolidated financial statements in accordance with GAAP. For additional information regarding the ownership structure of ARK, see “Business—Our Organizational Structure—ARK”.
Additionally, although we do not generally expect this to be the case, investments through real estate acquisition vehicles managed or sponsored by ARK may require that we directly incur or guarantee debt, which we expect will typically be through loans secured by assets or properties that ARK acquires. For example, an entity in which we hold an interest has incurred a secured loan to purchase certain property in New York City, which we have leased from that entity. The secured loan is recourse to The We Company in certain limited circumstances, and The We Company also provided performance guarantees relating to the development of that property. See “Description of Indebtedness—424 Fifth Venture Loans”.
Our business will suffer if we are unable to hire, develop, retain and motivate highly skilled and dedicated team members to support our mission.
We strive to attract and motivate team members who share a dedication to the member community and our vision, but we may not be successful in doing so. Our success depends on our ability to identify, hire, develop, motivate, retain and integrate highly qualified personnel dedicated to our mission for all areas of our business. Our U.S.-based team members, including most of our senior management, work for us on an at-will basis. Other companies, including competitors, may be successful in recruiting and hiring team members away from us, and it may be difficult for us to find suitable replacements on a timely basis, on competitive terms or at all. If we are unable to effectively manage our hiring needs or successfully integrate new hires, our employee morale, productivity and retention could suffer, which could adversely affect our business, financial condition and results of operations. Additionally, the success of each of our new and existing locations depends on our ability to hire and retain dedicated community managers and community team members. As we enter new geographic markets and launch new solutions, products and services, we may experience difficulty attracting employees in the areas we require who are dedicated to our mission.
We may not be able to compete effectively with others.
Our WeWork space-as-a-service offering has few barriers to entry. While we consider ourselves to be a leader in the space-as-a-service sector, with core competencies in finding, building, filling and running new locations, our reported success may encourage people to launch competing flexible workspace offerings. If new companies decide to launch competing solutions in the markets in which we operate, or if any existing competitors obtain a large-scale capital investment, we may face increased competition for members.
In addition, some of the business services we offer or plan to offer are provided by one or more large, national or international companies, as well as by regional and local companies of varying sizes and resources, some of which may have accumulated substantial goodwill in their markets. Some of our competitors may also be better capitalized than we are, have access to better lease terms than we do, have operations in more jurisdictions than we do or be able or willing to provide services at a lower price than we are. Our inability to compete effectively in growing or maintaining our membership base could hinder our growth or adversely impact our operating results.
Our limited operating history and evolving business make it difficult to evaluate our current business and future prospects.
Our limited operating history and the growth of our business make it difficult to accurately assess our future prospects. It may not be possible to discern fully the economic and other business trends that we are subject to. Elements of our business strategy are new and subject to ongoing development as our operations mature. In addition, it may be difficult to evaluate our business because there are few other companies that offer the same or a similar range of solutions, products and services as we do.
Certain of the measures we use to evaluate our financial and operating performance are subject to inherent challenges in measurement and may be impacted by subjective determinations and not necessarily by changes in our business.
We track certain operational metrics, including key performance indicators such as memberships, workstation capacity and enterprise membership percentage, with internal systems and tools that are not independently verified by any third party. Certain of our operational metrics are also based on assumptions or estimates of future events. In particular, the tenant improvement reimbursement amounts used to calculate net capex per workstation added represent the full
tenant improvement allowances in our leases with landlords, rather than the amounts we have collected from landlords or submitted for reimbursement. Similarly, the number of workstations in our open locations, pre-open locations and pipeline locations is compiled from a number of data sources depending on the phase of the location within the lifecycle that we attribute to our locations. For open locations, workstation capacity for shared workspace offerings, which account for a subset of our standard workspace solutions, is estimated on a location-by-location basis by our community managers based on demand and the characteristics and distinct local personality of the relevant community, and a community manager at a given location may choose to change workstation capacity at any time. Meanwhile, for pre-opening and pipeline locations, workstation capacity is estimated by our real estate and design teams based on our building information modeling software, and includes estimated workstation capacity for locations that are the subject of a draft term sheet or lease that may not result in a signed lease agreement or an open location.
While the metrics presented in this prospectus are based on what we believe to be reasonable assumptions and estimates, our internal systems and tools have a number of limitations, and our methodologies for tracking these metrics may change over time. In addition, limitations or errors with respect to how we measure data or with respect to the data that we measure may affect our understanding of certain details of our business, which could affect our long-term strategies. If the internal systems and tools we use to track these metrics understate or overstate performance or contain algorithmic or other technical errors, the data we report may not be accurate. If investors do not perceive our operating metrics to be accurate, or if we discover material inaccuracies with respect to these figures, our reputation may be significantly harmed, and our results of operations and financial condition could be adversely affected.
Our committed revenue backlog and run-rate revenue may not be indicative of future revenues and target contribution margin percentage may not be indicative of our future contribution margin.
Committed revenue backlog as of a given date represents total non-cancelable contractual commitments, net of discounts, remaining under agreements entered into as of such date, which we expect will be recognized as revenue subsequent to such date. For membership agreements with month-to-month commitments commencing in a future month, the contractual commitment recorded within committed revenue backlog is one month of revenue. Existing month-to-month membership agreements are not included in the calculation of committed revenue backlog. Almost all of our committed revenue backlog is attributable to membership agreements relating to our WeWork space-as-a-service offering. Revenue reflected in our committed revenue backlog may be affected by unexpected cancellations or renegotiations. Committed revenue backlog is not necessarily indicative of future earnings or revenues and we may not ultimately realize our committed revenue backlog.
Run-rate revenue for a given period represents our revenue recognized in accordance with GAAP for the last month of such period multiplied by 12. We view run-rate revenue as an operating metric, and it is not intended to be a replacement or forecast of revenue in accordance with GAAP. Run-rate revenue is not necessarily indicative of future revenues, and we may not ultimately realize levels of revenue in line with or above our run-rate revenue.
Our target contribution margin percentage for any given location over the course of a 15-year lease is 30%. Since the impact of straight-lining of lease costs nets to zero over the lifetime of a lease, our target contribution margin reflects zero impact from straight-lining of lease costs. We view this as an internal target. Target contribution margin percentage is not intended to be a forecast of the actual contribution margin percentage that we expect to achieve on a consolidated basis. We may not realize a contribution margin percentage, for either a given location or on a consolidated basis, in line with our target contribution margin percentage presented in this prospectus.
If our employees were to engage in a strike or other work stoppage or interruption, our business, results of operations, financial condition and liquidity could be materially adversely affected.
Although we believe that our relations with our employees are good, if disputes with our employees arise, or if our workers engage in a strike or other work stoppage or interruption, we could experience a significant disruption of, or inefficiencies in, our operations or incur higher labor costs, which could have a material adverse effect on our business, results of operations, financial condition and liquidity. In addition, some of our employees outside of the United States are represented or may seek to be represented by a labor union or workers’ council.
We may be subject to litigation and other legal proceedings which could adversely affect our business, financial condition and results of operations.
We have in the past been, are currently and may in the future become involved in private actions, class actions, investigations and various other legal proceedings, including from members, employees, commercial partners, third-party license holders, competitors and government agencies, among others. With respect to employees, we face and could in the future face a wide variety of claims, including discrimination (for example, based on gender, age, race or religious affiliation), sexual harassment, privacy, labor and employment, ERISA and disability claims. Often these cases raise complex factual and legal issues, and the result of any such litigation, investigations and legal proceedings are inherently unpredictable. Claims against us, whether meritorious or not, could require significant amounts of management time and corporate resources to defend, could result in significant media coverage and negative publicity, and could be harmful to our reputation and our brand. If any of these legal proceedings were to be determined adversely to us, or if we were to enter into settlement arrangements, we could be exposed to monetary damages or be forced to change the way in which we operate our business, which could have an adverse effect on our business, financial condition, results of operations and cash flows.
Our business could be adversely affected by natural disasters, public health crises, political crises or other unexpected events for which we may not be sufficiently insured.
Natural disasters and other adverse weather and climate conditions, public health crises, political crises, terrorist attacks, war and other political instability or other unexpected events could disrupt our operations, damage one or more of our locations, or prevent short- or long-term access to one or more of our locations. Many of our spaces are located in the vicinity of disaster zones, including flood zones in New York City and potentially active earthquake faults in the San Francisco Bay Area and Mexico City. Many of our locations are concentrated in metropolitan areas or located in or near prominent buildings, which may be the target of terrorist or other attacks. Although we carry comprehensive liability, fire, extended coverage and business interruption insurance with respect to all of our consolidated locations, there are certain types of losses that we do not insure against because they are either uninsurable or not insurable on commercially reasonable terms. Should an uninsured event or a loss in excess of our insured limits occur, we could lose some or all of the capital invested in, and anticipated future revenues from, the affected locations, and we may nevertheless continue to be subject to obligations related to those locations.
Economic and political instability and potential unfavorable changes in laws and regulations in international markets could adversely affect our results of operations and financial condition.
Our business may be affected by political instability and potential unfavorable changes in laws and regulations in international markets in which we operate. For example, the United Kingdom’s anticipated exit from the European Union, known as “Brexit,” could impact our operations in the United Kingdom in the short term through volatility in the British Pound as the United Kingdom negotiates its anticipated exit from the European Union. In the longer term, any impact from Brexit on our operations in the United Kingdom will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. Additionally, there are concerns regarding potential changes in the future relationship between the United States and various other countries, most significantly China, with respect to trade policies, treaties, government regulations and tariffs. It remains unclear how the United States or foreign governments will act with respect to tariffs, international trade agreements and policies. The implementation by China or other countries of higher tariffs, capital controls, new adverse trade policies or other barriers to entry could have an adverse impact on our business, financial condition and results of operations.
Risks Relating to Our Financial Condition
Our indebtedness and other obligations could adversely affect our financial condition and liquidity.
Concurrently with the closing of this offering, we expect to enter into a new senior secured credit facility (the “2019 Credit Facility”) providing for senior secured financing of up to $6.0 billion, consisting of a three-year letter of credit reimbursement facility (the “2019 Letter of Credit Facility”) in the aggregate amount of $2.0 billion and a delayed draw term loan facility (the “Delayed Draw Term Facility”) in the aggregate principal amount of up to $4.0 billion. Subject to compliance with the covenants in our other debt agreements, to the extent then applicable, and the satisfaction of certain conditions, the Delayed Draw Term Facility will be available from the closing date of the 2019 Credit Facility
until June 30, 2022. However, (1) prior to receipt of financial statements for the three months ended June 30, 2020, only $1.0 billion of the Delayed Draw Term Facility will be available, (2) upon receipt of financial statements for the three months ended June 30, 2020, an additional $1.5 billion of the Delayed Draw Term Facility will become available and (3) upon receipt of financial statements for the year ended December 31, 2020, the remaining $1.5 billion of the Delayed Draw Term Facility will become available. Currently, the indenture governing the senior notes would restrict our ability to draw the second and third tranches of the Delayed Draw Term Facility described above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments—Debt Financing Transactions”.
In addition, we had existing consolidated long-term debt of $1,342.7 million as of June 30, 2019, including $669.0 million outstanding principal amount of our 7.875% senior notes due 2025 (the “senior notes”) and amounts under the 424 Fifth Venture Loans described in “Description of Indebtedness”, which loans are obligations of the 424 Fifth Venture but are recourse to us in certain limited circumstances.
Our high level of debt could have important consequences, including the following:
Subject to the limits contained in the indenture governing the senior notes, the credit agreement that will govern the 2019 Credit Facility and our other debt agreements and obligations, we will also be able to incur substantial additional debt, lease obligations and other obligations from time to time. If we do so, the risks related to our high level of debt could intensify.
We may not be able to generate sufficient cash to service all of our indebtedness and other obligations and may be forced to take other actions to satisfy our obligations, which may not be successful.
Our ability to make scheduled payments or refinance our obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness and to pay our lease obligations.
If our cash flows and capital resources are insufficient to fund our obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness and other obligations. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt obligations. The agreements that govern our indebtedness restrict our ability to dispose of certain assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or certain types of equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any obligations then due. See “Description of Indebtedness”.
In addition, we conduct a substantial portion of our operations through our subsidiaries. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, debt repayment or otherwise. In the event that our subsidiaries are unable to generate sufficient cash flow, we may be unable to make required principal and interest payments on our indebtedness.
If we cannot make scheduled payments on our debt, we will be in default and, as a result, lenders under any of our existing and future indebtedness could declare all outstanding principal and interest to be due and payable, the lenders under our debt instruments could terminate their commitments to issue letters of credit or fund amounts under the Delayed Draw Term Facility, our secured lenders could foreclose against the assets securing such borrowings and we could be forced into bankruptcy or liquidation.
In addition, as of June 30, 2019, we had future undiscounted minimum lease cost payment obligations under signed operating and finance leases of $47.2 billion, and if we are unable to service our obligations under the lease agreements for particular properties, we may be forced to vacate those properties or pay compensatory or consequential damages to the landlord, which could adversely affect our business, reputation and prospects. See “—Risks Relating to Our Business—The long-term and fixed-cost nature of our leases may limit our operating flexibility and could adversely affect our liquidity and results of operations”.
In addition, our $2.5 billion in cash and cash equivalents as of June 30, 2019 included cash and cash equivalents of $535.8 million of our consolidated variable interest entities (“VIEs”), which will be used first to settle obligations of the VIE. Remaining assets may only be distributed to the VIEs’ owners, including us, subject to the liquidation preferences of certain noncontrolling interest holders and any other preferential distribution provisions contained within the operating agreements of the relevant VIEs. In addition to these amounts, we had restricted cash of $575.6 million as of June 30, 2019, which primarily consist of amounts provided to the applicable lenders to secure letters of credit issued under our bank facilities to support leases entered into by certain of our subsidiaries. Under the 2019 Letter of Credit Facility that we expect to enter into concurrently with the closing of this offering, we will be required to deposit cash collateral in an amount equal to the face amount of letters of credit issued under the facility. Accordingly, we expect our restricted cash supporting letters of credit to increase following the closing of this offering.
We may require additional capital, which may not be available on terms acceptable to us or at all.
We incurred net losses in the years ended December 31, 2016, 2017 and 2018 and in the six months ended June 30, 2018 and 2019, and we do not intend to achieve positive GAAP net income for the foreseeable future. As a result, we may require additional financing. Our future financing requirements will depend on many factors, including the number of new locations to be opened, our net membership retention rate, the timing and extent of spending to support the development of our platform, our ability to reduce capital expenditures, the expansion of our sales and marketing activities and potential investments in, or acquisitions of, businesses or technologies. Our ability to obtain financing will depend on, among other things, our development efforts, business plans, operating performance, investor demand and the condition of the capital markets at the time we seek financing. To the extent we use available funds or are unable to draw under our Delayed Draw Term Facility, we may need to raise additional funds, which may not be available to us on favorable terms when required, or at all. In the event that we are unable to obtain additional financing on favorable terms, our interest expense and principal repayment requirements could increase significantly, which could harm our business, revenue and financial results.
The terms of our indebtedness restrict our current and future operations, particularly our ability to respond to changes or take certain actions.
The credit agreement governing the 2019 Credit Facility will contain, and the indenture that governs the senior notes contains, a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to incur indebtedness (including guarantee obligations), incur liens, enter into mergers or consolidations, dispose of assets, pay dividends, make acquisitions and make investments, loans and advances.
The 2019 Credit Facility will also require us to comply with certain minimum contribution margin, liquidity and net cash flow financial covenants and will require us to deposit cash collateral in an amount equal to the face amount of letters of credit issued under the facility. Although the 2019 Credit Facility will permit us to incur additional indebtedness, the 2019 Credit Facility will limit the amount of indebtedness that we can incur. In particular, the 2019 Credit Facility will require that the net cash proceeds of indebtedness under a specified asset-securitization facility basket be deposited into escrow for the benefit of the lenders under the 2019 Credit Facility or that undrawn commitments under the Delayed Draw Term Facility be cancelled in an equivalent amount, and the 2019 Credit Facility will otherwise limit additional secured indebtedness to specified fixed baskets.
These restrictions may affect our ability to grow in accordance with our strategy, limit our ability to raise additional debt or equity financing to operate our business, including during economic or business downturns, and limit our ability to compete effectively or take advantage of new business opportunities.
We incur significant costs related to the development of our workspaces, which we may be unable to recover in a timely manner or at all.
At each of our locations, we create beautiful workspaces that make our members feel welcome and at home. Development of a workspace for members typically takes several months from the date we take possession of the space under the relevant lease to the opening date. During this time, we incur substantial upfront costs without recognizing any revenues from the space. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Growth and New Market Development Expenses” for a description of these costs.
To the extent that our members (in particular enterprise members) require configured solutions, we generally enter into multi-year membership agreements to help offset any increased upfront costs related to the development of these workspaces. In addition, as we go forward, we intend to continue to finance upfront development costs by attempting to secure tenant improvement allowances from landlords, focusing on management agreements and other partnerships under which the landlord pays in whole or in part for the build-out costs, and securing funding through capital markets and other financing transactions. We expect the capital expenditures associated with the development of our workspaces to continue to be one of the primary costs of our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”. If we are unable to complete our development and construction activities for any reason, including an inability to secure adequate funding, or conditions in the real estate market or the broader economy change in ways that are unfavorable, we may be unable to recover these costs in a timely manner or at all.
Our development activities are also subject to cost and schedule overruns as a result of many factors, some of which are beyond our control and ability to foresee, including increases in the cost of materials and labor. In addition, while many of our existing leases provide for reimbursement by the landlord or building owner of a portion of the construction and development expenses we incur, our landlords or building owners may not reimburse us for these expenses in a timely manner and we may not continue to be granted these provisions in future leases that we negotiate. Our ability to negotiate lease terms that include significant tenant improvement allowances has been and is expected to continue to be impacted by our expansion into markets where such allowances are less common. To be eligible for reimbursement of these development expenses, we are also required to compile invoices, lien releases and other paperwork from our contractors, which is a time-consuming process that requires the cooperation of third parties whom we do not control. We may make errors in pursuing these reimbursement entitlements in accordance with the strict requirements of the landlords or building owners we deal with. In addition, we are subject to counterparty risk with respect to these landlords and building owners.
Changes to accounting rules or regulations and our assumptions, estimates and judgments may adversely affect the reporting of our business, our financial condition and our results of operations.
The consolidated financial statements included elsewhere in this prospectus are prepared in accordance with U.S. GAAP. New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. For example, in February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), codified as ASC 842, Leases. This update requires a lessee to recognize on its balance sheet right-of-use assets and lease liabilities for any leases with a lease term of more than twelve months.
Long-term leases are our primary means of securing real estate to deliver space-as-a-service to our members. We have early adopted ASC 842 in connection with the preparation of our financial statements as of and for the six months ended June 30, 2019. We applied the modified retrospective adoption method, and such financial statements reflect the adoption of ASC 842 as of January 1, 2019. However, our financial statements as of and for the year ended December 31, 2018 and prior periods were not restated and, as a result, may not be comparable. The adoption of ASC 842 had a material impact on our consolidated balance sheet. We had lease right-of-use assets, net totaling approximately $15 billion and lease obligations totaling approximately $18 billion included on our interim condensed consolidated balance sheet as of June 30, 2019. See Note 2 to the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus for additional details regarding the impact of the adoption of ASC 842. Other future changes to accounting rules or regulations could also have a material adverse effect on the reporting of our business, financial condition and results of operations.
Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our results of operations. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for judgments about the carrying values of assets, liabilities and equity, as well as the amount of revenue and expenses that are not readily apparent from other sources. Our financial condition and results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions.
Fluctuations in exchange rates may adversely affect us.
Our international businesses typically earn revenue and incur expenses in local currencies, primarily the British Pound, Euro and Chinese Yuan. For example, we earned approximately 44%, 41%, and 31% of our revenues from subsidiaries whose functional currency is not the U.S. dollar for the six months ended June 30, 2019 and the years ended December 31, 2018 and 2017, respectively. Because our consolidated financial statements are reported in U.S. dollars, we are exposed to currency translation risk when we translate the financial results of our consolidated non-U.S. subsidiaries from their local currency into U.S. dollars. As foreign currency exchange rates change, translation of the statements of operations of our international businesses into U.S. dollars affects period-over-period comparability of our operating results. Any strengthening of the U.S. dollar against one or more of these currencies could materially adversely affect our business, financial condition and results of operations.
Risks Relating to Laws and Regulations Affecting Our Business
Our extensive foreign operations and contacts with landlords and other parties in a variety of countries subject us to risks under U.S. and other anti-corruption laws, as well as applicable export controls and economic sanctions.
Under the Foreign Corrupt Practices Act (the “FCPA”) and similar anti-corruption laws and local laws prohibiting certain corrupt payments to government officials or agents, we may become liable for the actions of our directors, officers, employees, agents or other strategic or local partners or representatives over whom we may have little actual control. We are continuously engaged in sourcing and negotiating new locations around the world, and certain of the landlords, real estate agents or other parties with whom we interact may be government officials or agents, even without our knowledge. As we increase our international sales and business operations, our contacts with foreign public officials, and therefore our potential exposure to liability under laws such as the FCPA, are likely to increase.
Additionally, as we pursue our growth strategy of entering into joint ventures, revenue-sharing arrangements and other partnerships with local partners in non-U.S. jurisdictions, our use of intermediaries, and therefore our potential exposure to liability under laws such as the FCPA, are likely to increase.
Similarly, our international sales and business operations expose us to potential liability under a wide variety of U.S. and international laws and regulations relating to economic sanctions and export control, such as those administered by the U.S. Office of Foreign Assets Control. Failure to comply with these laws and regulations could result in substantial fines, sanctions, civil or criminal penalties, competitive or reputational harm, litigation or regulatory action and other consequences that might adversely affect our results of operations and our financial condition.
Our business is subject to a variety of U.S. and non-U.S. laws, many of which are evolving and could limit or otherwise negatively affect our ability to operate our business.
Laws and regulations are continuously evolving, and compliance is costly and can require changes to our business practices and significant management time and effort. It is not always clear how existing laws apply to our business model. We strive to comply with all applicable laws, but the scope and interpretation of the laws that are or may be applicable to us is often uncertain and may conflict across jurisdictions.
Existing local building codes and regulations, and any future changes to these codes or regulations, may increase our development costs or delay the development of our workspaces.
Our development activities are subject to local, state and federal laws, as well as the oversight and regulation in accordance with local building codes and regulations relating to building design, construction, safety, environmental protection and related matters. We are responsible for complying with the requirements of individual jurisdictions and
must ensure that our development activities comply with varying standards by jurisdiction. Any existing or new government regulations or ordinances that relate to our development activities may result in significant additional expenses to us and, as a result, might adversely affect our results of operations.
Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and therefore our financial condition and results of operations.
As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political and other conditions, and significant judgment is required in applying the relevant provisions of tax law.
If such changes were to be adopted or if the tax authorities in the jurisdictions where we operate were to challenge our application of relevant provisions of applicable tax laws, our financial condition and results of operations could be adversely affected.
Failure by certain of our subsidiaries in complying with laws and regulations applicable to investment platforms, including the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), could result in substantial harm to our reputation and results of operations.
Certain of our subsidiaries are subject to laws and regulations applicable to investment platforms, including those applicable to investment advisers under the Advisers Act. The Advisers Act imposes numerous obligations and duties on registered investment advisers, including record-keeping, operating and marketing requirements, disclosure obligations and prohibitions on self-dealing. The failure of any of these subsidiaries to comply with the Advisers Act could cause the SEC to institute proceedings and impose sanctions for violations, including censure, or to terminate the registration of our subsidiaries as investment advisers or prohibit them from serving as an investment adviser to SEC-registered funds. Similarly, these subsidiaries rely on exemptions from various requirements of ERISA to the extent these subsidiaries receive investments by benefit plan investors. The failure of our relevant subsidiaries to comply with these laws and regulations could irreparably harm our reputation or lead to litigation or regulatory or other legal proceedings, any of which could harm our results of operations.
Risks Relating to Our Organizational Structure
Our only material assets are our indirect interests in the We Company Partnership, and we are accordingly dependent upon distributions from the We Company Partnership to pay dividends and taxes and other expenses.
The We Company is a holding company and has no material assets other than an indirect general partner interest and indirect limited partner interests in the We Company Partnership. The We Company has no independent means of generating revenue. We intend to cause our subsidiaries (including the We Company Partnership) to make distributions in an amount sufficient to cover all applicable taxes and other expenses payable and dividends, if any, declared by us. The agreements governing our bank facilities and the indenture governing our senior notes impose, and the agreement governing the 2019 Credit Facility will impose, certain restrictions on distributions by WeWork Companies LLC to us, and may limit our ability to pay cash dividends. The terms of any credit agreements or other borrowing arrangements we or our subsidiaries enter into in the future may impose similar restrictions. To the extent that The We Company needs funds, and any of our direct or indirect subsidiaries is restricted from making such distributions under these debt agreements or applicable law or regulation, or is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition.
If The We Company were deemed an “investment company” under the Investment Company Act of 1940 (the “1940 Act”) as a result of its ownership of the We Company Partnership, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
A person may be deemed to be an “investment company” for purposes of the 1940 Act if it owns investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items), absent an applicable exemption. The We Company has no material assets other than its interest in the We Company Partnership. Through its interests in the general partner of the We Company Partnership, The We Company generally
has control over all of the affairs and decision making of the We Company Partnership. Furthermore, the general partner of the We Company Partnership cannot be removed as general partner of the We Company Partnership without the approval of The We Company. On the basis of The We Company’s control over the We Company Partnership, we believe that the indirect interest of The We Company in the We Company Partnership is not an “investment security” within the meaning of the 1940 Act. If The We Company were to cease participation in the management of the We Company Partnership, however, its interest in the We Company Partnership could be deemed an “investment security,” which could result in The We Company being required to register as an investment company under the 1940 Act and becoming subject to the registration and other requirements of the 1940 Act.
The 1940 Act and the rules thereunder contain detailed parameters for the organization and operations of investment companies. Among other things, the 1940 Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, prohibit the issuance of stock options and impose certain governance requirements. We intend to conduct our operations so that The We Company will not be deemed to be an investment company under the 1940 Act. However, if anything were to happen which would require The We Company to register as an investment company under the 1940 Act, requirements imposed by the 1940 Act, including limitations on our capital structure, ability to transact business with affiliates and ability to compensate key employees, could make it impractical for us to continue our business as currently conducted, impair the agreements and arrangements between and among The We Company, the We Company Partnership, members of our management team and related entities (including WE Holdings LLC) or any combination thereof and materially adversely affect our business, financial condition and results of operations.
Risks Relating to This Offering and Ownership of Our Class A Common Stock
The multiple-class structure of our common stock has the effect of concentrating voting control with holders of our high-vote stock and limiting your ability to influence corporate matters.
Shares of our Class B common stock and Class C common stock have twenty votes per share, whereas shares of our Class A common stock being offered by us in this offering have one vote per share. When this offering is completed, our outstanding high-vote stock will represent % of the total voting power of our outstanding capital stock (or % of the total voting power of our outstanding capital stock if the underwriters exercise in full their option to purchase additional shares of our Class A common stock). Due to the twenty-to-one voting ratio between our high-vote stock and Class A common stock, the holders of our high-vote stock collectively will continue to control a majority of the combined voting power of our capital stock, until such time that the aggregate number of outstanding shares of Class B common stock and Class C common stock owned by Adam and certain of his permitted transferees represents less than 5% of the aggregate number of then-outstanding shares of Class A common stock, Class B common stock and Class C common stock. In addition, in the event of his death, the shares of high-vote stock that Adam owns will transfer to the persons or entities that he designates. In the event the designated persons or entities are permitted transferees (as defined in the certificate of incorporation), such shares of high-vote stock will not be subject to automatic conversion. Holders of shares of our high-vote stock will be able to significantly influence matters submitted to our stockholders for approval, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction. This concentrated control will significantly limit your ability to influence corporate matters. In addition, if in the future we issue additional shares of high-vote stock, which carry twenty votes per share, holders of shares of Class A common stock carrying one vote per share will have their voting interests diluted disproportionate to their economic dilution.
Future transfers by holders of our Class B common stock will generally result in those shares converting to Class A common stock, and transfers of partnership interests in the We Company Partnership will generally result in nineteen twentieths of the corresponding shares of our Class C common stock being cancelled, in each case subject to certain exceptions including (i) transfers to affiliates (including immediate family members), (ii) transfers to other holders of Class B common stock, (iii) transfers by certain entities controlled by our co-founders to their partners, members or stockholders, (iv) transfers of membership or other ownership interests in WE Holdings LLC to affiliates (including immediate family members) or to another stockholder, employee or former employee of The We Company, (v) transfers to certain qualified charitable organizations and (vi) transfers approved by our board of directors. The conversion of Class B common stock to Class A common stock over time, while increasing the absolute voting power of holders of our Class A common stock, may have the effect of increasing the relative voting power of those holders of
Class B common stock who retain their shares in the long term. As a result, the relative voting power of holders of Class A common stock may remain limited for a significant period of time. See “Description of Capital Stock” for descriptions of our Class A common stock, Class B common stock and Class C common stock and the rights associated with each.
Adam Neumann will control a majority of our voting stock upon completion of this offering.
Following the completion of this offering, as a result of his share ownership, together with his voting arrangements with certain stockholders, Adam Neumann, our Co-Founder and Chief Executive Officer, will be able to exercise voting control with respect to an aggregate of shares of our Class A common stock, shares of our Class B common stock and shares of our Class C common stock representing approximately % of the total voting power of our outstanding capital stock (or approximately % of the total voting power of our outstanding capital stock if the underwriters exercise in full their option to purchase additional shares of our Class A common stock). As a result, Adam will continue to have the ability to control significant corporate activities, including:
Adam’s voting control will limit the ability of other stockholders to influence corporate activities and, as a result, we may take actions that stockholders other than Adam do not view as beneficial. Adam’s voting control may also inhibit transactions involving a change of control of The We Company, including transactions in which you as a holder of our Class A common stock might otherwise receive a premium for your shares. As a stockholder, even a controlling stockholder, Adam is entitled to vote his shares, and shares over which he has voting control as a result of voting arrangements, in his own interests, which may not be the same as, or may conflict with, the interests of our other stockholders. For a description of the voting arrangements affecting our capital stock, see “Description of Capital Stock—Voting Arrangements”.
Further, following the completion of this offering, SoftBank entities will beneficially own shares of our Class A common stock representing approximately % of the total voting power of our outstanding capital stock (or approximately % of the total voting power of our outstanding capital stock if the underwriters exercise in full their option to purchase additional shares of our Class A common stock). In addition, SoftBank entities are expected to acquire additional shares of our Class A common stock upon the exercise of the 2019 warrant, which is scheduled for April 2020. Therefore, even if Adam were to sell a significant number of his shares of our voting stock, the voting power of our outstanding capital stock may continue to be significantly concentrated and the ability of others to influence our corporate matters may continue to be significantly limited.
We are a “controlled company” as defined in the rules, and are able to rely on exemptions from certain corporate governance requirements that provide protection to stockholders of companies that are not controlled companies.
Upon completion of this offering, Adam Neumann will own or control more than 50% of the total voting power of our capital stock and, as such, we will be a controlled company under the rules of the . As a controlled company, we may take advantage of exemptions under the rules of the with respect to certain corporate governance requirements, such as the requirement that we have a compensation committee and nominating and corporate governance committee composed entirely of independent directors.
For so long as we are a controlled company, you will not have the same protections afforded to stockholders of companies that are subject to these and all of the other corporate governance requirements of the rules of the .
The difference in the voting rights of our Class A common stock and high-vote stock may harm the value and liquidity of our Class A common stock.
The difference in the voting rights of our Class A common stock and high-vote stock could harm the value of our Class A common stock to the extent that any investor or potential future purchaser of our Class A common stock ascribes value to the right of holders of our high-vote stock to twenty votes per share of high-vote stock. The existence of multiple classes of common stock could also result in less liquidity for our Class A common stock than if there were only one class of our common stock.
Our multiple-class structure may depress the trading price of our Class A common stock.
Our multiple-class structure may result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indexes. S&P Dow Jones and FTSE Russell have announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500. These changes exclude companies with multiple classes of shares of common stock from being added to these indices. In addition, several stockholder advisory firms have announced their opposition to the use of multiple- class structures. As a result, the multiple-class structure of our common stock may prevent the inclusion of our Class A common stock in these indices and may cause stockholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our Class A common stock. Any actions or publications by stockholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.
Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.
The initial public offering price of our Class A common stock is substantially higher than the pro forma net tangible book value per share of our Class A common stock outstanding prior to this offering. Therefore, if you purchase our Class A common stock in this offering, you will incur an immediate substantial dilution of $ in pro forma net tangible book value per share from the price you paid (calculated based on the assumed initial public offering price of $ per share, which represents the midpoint of the estimated offering price range set forth on the cover of this prospectus). For additional information about the dilution that you will experience immediately upon completion of this offering, see “Dilution”.
There has been no prior public market for our Class A common stock, the price of our Class A common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.
Prior to this offering, there has been no public market for shares of our Class A common stock. The initial public offering price of our Class A common stock was determined through negotiation between us and the underwriters. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our Class A common stock following completion of this offering. In addition, the market price of our Class A common stock following completion of this offering may be higher or lower than the initial public offering price. The market price of our Class A common stock following completion of this offering will depend on a number of factors, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose part of your investment in our Class A common stock since you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of our Class A common stock include the following:
The stock markets have experienced extreme volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our Class A common stock. In the past, following periods of volatility in the market price of a company’s securities, class action litigation has often been instituted against the company. Any litigation of this type brought against us could result in substantial costs and a diversion of management’s attention and resources.
Our quarterly operating results may fluctuate, which could cause our stock price to decline.
Our quarterly operating results may fluctuate for a variety of reasons, many of which are beyond our control, including:
The occurrence of any one of the events contemplated above, or the cumulative effect of the occurrence of one or more of such factors, could cause our quarterly results to fluctuate significantly. As a result, quarterly comparisons of results may not be meaningful, and you should not rely on the historical results of one quarter as an indication of future performance, and interim period results are not necessarily indicative of the results for the full year.
An active trading market for our Class A common stock may never develop or be sustained.
We intend to apply to list our Class A common stock on the under the symbol “WE”. However, we cannot assure you that an active trading market for our Class A common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our Class A common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of our Class A common stock when desired or the prices that you may obtain for your shares. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies using our shares as consideration.
If equity research analysts publish unfavorable commentary or downgrade our Class A common stock, the price and trading volume of our Class A common stock could decline.
The trading market for our Class A common stock could be affected by whether equity research analysts publish research or reports about us and our business. We cannot predict at this time whether any research analysts will
publish research and reports on us and our Class A common stock. If one or more equity analysts do cover us and our Class A common stock and publish research reports about us, the price or trading volume of our Class A common stock could decline if one or more securities analysts downgrade our Class A common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
If our involvement in online news articles published about the Company were held to be in violation of the Securities Act, we could be required to repurchase securities sold in this offering. You should rely only on statements made in this prospectus in determining whether to purchase our shares.
In May 2019, Axios and Business Insider published online news articles that included quotes from Adam Neumann, our Co-Founder and Chief Executive Officer, and Artie Minson, our Co-President and Chief Financial Officer, regarding our business strategy and results. In addition to these articles, there has been substantial additional press coverage regarding our business and this offering during the offering process, including coverage of the timing of this offering, the underwriters involved in this offering and the “analyst day” that we hosted in connection with this offering as well as coverage of our concurrent debt financing.
In making your investment decision, you should only rely on the information contained in this prospectus. Articles and other press coverage about our company present information in isolation and do not contain all of the information included in this prospectus, including the risks and uncertainties described in this section. You should carefully evaluate all of the information included in this prospectus.
We do not believe that our involvement in the May 2019 online news articles or other news articles constitutes a violation of Section 5 of the Securities Act. However, if our involvement were held by a court to be in violation of the Securities Act, we could be required to repurchase the shares sold to purchasers in this offering at the original purchase price, plus statutory interest from the date of purchase, for a period of one year following the date of the violation. We would contest vigorously any claim that a violation of the Securities Act occurred and could incur considerable expense in contesting any such claim.
Although we ceased to be an “emerging growth company”, we can continue to take advantage of certain reduced disclosure requirements in this registration statement, which may make our Class A common stock less attractive to investors.
We ceased to be an emerging growth company as defined in the JOBS Act on December 31, 2018. However, because we ceased to be an emerging growth company after we confidentially submitted our registration statement related to this offering to the SEC, we will be treated as an emerging growth company for certain purposes until the earlier of the date on which we complete this offering and December 31, 2019. As such, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including reduced disclosure obligations regarding the provision of selected financial data and executive compensation arrangements. We cannot predict if investors will find our Class A common stock less attractive because we have relied on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be less demand for our Class A common stock and the price that some investors are willing to pay for our Class A common stock may decrease.
We will incur increased costs and regulatory burden and devote substantial management time as a result of being a public company.
Prior to this offering, we were not subject to the continuous disclosure requirements of U.S. securities laws and the rules, regulations and policies of the . As a public company, we will incur increased legal, accounting and other costs not incurred as a private company. We will be subject to, among other things, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the corporate governance requirements found in the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and related rules and regulations of the SEC, as well as the rules and regulations implemented by the . We expect that compliance with these requirements will increase our legal, accounting and financial compliance costs and will make some activities more difficult, time-consuming and costly. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents may require our management and other
personnel to divert attention from operational and other business matters to devote substantial time to these public company requirements, which could adversely affect our business, financial condition and results of operations.
As a public company, we will be obligated to maintain an effective system of disclosure controls and internal controls over financial reporting that is compliant with Section 404 of the Sarbanes-Oxley Act. Our current internal control systems and procedures may not prove to be adequate to support our rapid growth. Any failure of our internal systems, controls and procedures could have an adverse effect on our stated results of operations and harm our reputation.
Pursuant to Section 404 of the Sarbanes-Oxley Act (“Section 404”) and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, our management will be required to report on the effectiveness of our disclosure controls and internal control over financial reporting, and our auditor will be required to deliver an attestation report on the effectiveness of our disclosure controls and internal control over financial reporting, starting with the second annual report that we file with the SEC after the completion of this offering. Because we are not currently required to comply with Section 404, we are not currently required to make an assessment of the effectiveness of our internal controls, or to deliver a report that assesses the effectiveness of our internal control over financial reporting. We have not yet determined whether our existing internal controls over financial reporting are compliant with Section 404. This process will require the investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions. Management’s assessment of our internal control systems and procedures may identify weaknesses and conditions that need to be addressed or other matters that may raise concerns for investors. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate. Additionally, any actual or perceived weakness or condition that needs to be addressed in our internal control systems may have an adverse impact on our business.
Irrespective of compliance with Section 404, as we mature, we will need to further develop our internal control systems and procedures to keep pace with our rapid growth and we are currently working to improve our controls. Our current controls and any new controls that we develop may become inadequate because, among other reasons, they may not keep pace with our growth or the conditions in our business may change. We are in the process of developing and implementing an enterprise risk management framework, but this development and implementation may not proceed smoothly or on our projected timetable, and this framework may not fully protect us against operational risks and losses.
We have made, and will continue to make, changes to our financial management control systems and other areas to manage our obligations as a public company, including corporate governance, corporate controls, disclosure controls and procedures and financial reporting and accounting systems. However, these and other measures that we might take may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis. If we fail to maintain effective systems, controls and procedures, including disclosure controls and internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations and prevent fraud could be adversely impacted. We may also experience higher than anticipated operating expenses, as well as higher independent auditor fees, during and after the implementation of these changes.
If we are unable to implement any of the changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and results of operations. Additionally, we do not expect that our internal control systems, even if timely and well established, will prevent all errors and all fraud. Internal control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.
Our management will have broad discretion over the use of the proceeds we receive from this offering and might not use them effectively, which could affect our results of operations and cause our share price to decline.
Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply our net proceeds from this offering in ways that increase the value of your investment. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You may not agree with the decision of our management and will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.
Future sales, or the perception of future sales, of our Class A common stock may depress the price of our Class A common stock.
The market price of our Class A common stock could decline significantly as a result of sales of a large number of shares of our stock in the market after this offering. The perception that these sales might occur could depress the market price of Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
Upon completion of this offering, we will have outstanding shares of common stock (or shares if the underwriters exercise in full their option to purchase additional shares of our Class A common stock). The shares of Class A common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of Class A common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.
In connection with this offering, we, each of our executive officers and directors and holders of substantially all of our Class A common stock (including securities convertible into or exchangeable for shares of our Class A common stock) have entered into lock-up agreements under which they have agreed not to sell or otherwise transfer their shares for a period of 180 days after the date of this prospectus, provided that in the case of shares held or beneficially owned by WE Holdings LLC, Adam Neumann or their respective affiliates (other than shares directly held by WE Holdings LLC but indirectly owned by persons other than Adam Neumann, his family and their respective affiliates) and SBWW Cayman, such restrictions will apply until the later of (i) 180 days after the date of this prospectus and (ii) 180 days after the Exercise Date (which, as defined in the 2019 warrant, is April 3, 2020). These lock-up provisions are subject to certain exceptions and may be waived by the representatives of the underwriters at any time. Although we have been advised that there is no present intention to do so, the representatives of the underwriters may, in their sole discretion and without notice, release all or any portion of the shares from the restrictions in any of the lock-up agreements described above. See “Underwriting”.
We have also issued securities in connection with investments or acquisitions, including the issuance of holdback securities as contingent consideration, and may do so again in the future. The number of shares of our capital stock issued in connection with an investment or acquisition could constitute a material portion of the then outstanding shares of our Class A common stock.
In addition, UBS AG, Stamford Branch, JPMorgan Chase Bank, N.A. and Credit Suisse AG, New York Branch, affiliates of the underwriters in this offering, have provided a line of credit of up to $500 million to Adam Neumann, of which approximately $380 million principal amount was outstanding as of July 31, 2019. The line of credit is secured under a security and pledge agreement by a pledge of approximately shares of our Class B common stock beneficially owned by Adam and held through WE Holdings LLC, of which Adam serves as a managing member. The line of credit has a scheduled maturity of September 18, 2020, and may be extended from time to time at the discretion of the lenders.
If the price of our Class A common stock declines to a level that results in a margin call, absent a repayment of the loan, Adam would be required to pledge additional shares of our Class A common stock or cash as collateral. In the case of nonpayment at maturity or another event of default (including but not limited to the borrower’s inability to satisfy a margin call, which must be instituted by the lenders following certain declines in our stock price), the lenders may, in addition to other remedies, exercise their rights under the loan agreement to foreclose on and sell the amount of shares of our Class A common stock into which the shares of Class B common stock pledged by Adam and WE Holdings LLC would be converted upon transfer, provided that no sales of the pledged shares may be made to third parties until 180 days after the date of the prospectus relating to this offering. If shares of our Class A common stock were sold by Adam or the lenders in connection with a margin call, such sales could cause our stock price to decline. See “Underwriting—Relationships with Underwriters” for more information.
We do not expect to declare any dividends for the foreseeable future.
We do not anticipate declaring or paying any dividends on our Class A common stock for the foreseeable future. Instead, we anticipate that all of our future earnings will be retained to support our operations and to finance the growth and development of our business. Consequently, investors may need to rely on sales of their Class A common stock
after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our Class A common stock. Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors. See “Dividend Policy”.
Provisions in our restated certificate of incorporation and amended and restated bylaws or Delaware law may discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our Class A common stock.
Delaware corporate law contains, and our restated certificate of incorporation and amended and restated bylaws will contain, provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous, including the following:
Any provision of our restated certificate of incorporation, our amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock, and could also affect the price that some investors are willing to pay for our Class A common stock.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that reflect our current views with respect to, among other things, future events and our future business, financial condition, results of operations and prospects. These statements are often, but not always, made through the use of words or phrases such as “may”, “should”, “could”, “predict”, “potential”, “believe”, “will likely result”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would” and “outlook”, or the negative version of those words or phrases or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements include, but are not limited to, statements concerning the following:
These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry as well as certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including those described in “Risk Factors” and other cautionary statements included in this prospectus, which you should consider and read carefully. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus, and our future levels of activity and performance, may not occur and actual results could differ materially and adversely from those described or implied in the forward-looking statements. As a result, you should not regard any of these forward-looking statements as a representation or warranty by us or any other person or place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
In addition, statements that contain “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe that this information provides a reasonable basis for these statements, this information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by the cautionary statements contained in this section and elsewhere in this prospectus.
MARKET, INDUSTRY AND OTHER DATA
This prospectus contains information concerning our solutions and our industry, including market size and growth rates of the markets in which we participate, that are based on industry surveys and publications or other publicly available information, other third-party survey data and research reports commissioned by us and our internal sources. This information involves many assumptions and limitations, and you are cautioned not to give undue weight to this information. Industry surveys and publications generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy and completeness of the included information. We have not independently verified this third-party information. Similarly, other third-party survey data and research reports commissioned by us, while believed by us to be reliable, are based on limited sample sizes and have not been independently verified by us.
While we are not aware of any misstatements regarding any industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” sections in this prospectus.
Certain statistical information in this prospectus is based on the 2019 Global Impact Report commissioned by us and produced by us in partnership with HR&A Advisors, of which certain numbers are based on the 2018 WeWork member census. The 2018 WeWork member census was sent via e-mail to WeWork members in October and December of 2018 and received responses from over 18,000 WeWork members. All statistical information in this prospectus based on the 2019 Global Impact Report represents the percentage of members who responded to the 2018 WeWork member census.
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately $ (or $ if the underwriters exercise in full their option to purchase additional shares of our Class A common stock), based on an assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus), less underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock and enable access to the public equity markets for us and our stockholders.
We currently intend to use the net proceeds of this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. Our management will have broad discretion in the application of the net proceeds of this offering, and investors will be relying on the judgment of our management in this regard. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending their use, we intend to invest the net proceeds of this offering in short-term, investment grade, interest-bearing instruments or hold them as cash.
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by $ (or $ if the underwriters exercise in full their option to purchase additional shares of Class A common stock) less underwriting discounts and commissions and estimated offering expenses payable by us, assuming that the number of shares offered by us remains the same. Similarly, each increase (decrease) of one million shares in the number of shares of Class A common stock offered by us would increase (decrease) the net proceeds to us from this offering by $ (or $ if the underwriters exercise in full their option to purchase additional shares of Class A common stock) less underwriting discounts and commissions and estimated offering expenses payable by us, assuming that the initial public offering price remains the same.
We have never declared or paid any dividends on our capital stock. We do not intend to pay dividends on our Class A common stock or our Class B common stock for the foreseeable future. Instead, we anticipate that all of our future earnings will be retained to support our operations and to finance the growth and development of our business. Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including:
The agreements governing our bank facilities and the indenture governing our senior notes impose, and the agreement governing the 2019 Credit Facility will impose, certain restrictions on distributions by WeWork Companies LLC to us, and may limit our ability to pay cash dividends. The terms of any credit agreements or other borrowing arrangements we enter into in the future may also restrict distributions to us and limit our ability to pay cash dividends. See “Description of Indebtedness”.
As a Delaware corporation, we are subject to certain restrictions on the payment of dividends under the Delaware General Corporation Law (the “DGCL”). Generally, a Delaware corporation may only pay dividends either out of surplus or out of the current or the immediately preceding year’s net profits. Surplus is defined as the excess, if any, at any given time, of the total assets of a corporation over its total liabilities and statutory capital. The value of a corporation’s assets can be measured in a number of ways and may not necessarily equal its book value.
The following table shows our cash and cash equivalents and capitalization as of June 30, 2019:
The pro forma and pro forma as adjusted information below is illustrative only, and our cash and cash equivalents and total capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing.
You should read the following table together with “Selected Historical Consolidated Financial and Operating Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of WeWork Companies Inc. and related notes thereto appearing elsewhere in this prospectus.
The number of shares of Class A common stock, Class B common stock and Class C common stock to be outstanding on a pro forma and pro forma as adjusted basis excludes:
The information set forth in the table above also does not give effect to the 2019 warrant. Under the terms of the 2019 warrant, we have the right to receive $1.5 billion on April 3, 2020 in exchange for the issuance of shares of our Class A common stock at a price of $ per share (subject to equitable adjustment in the event of any further stock split, stock dividend, reverse stock split or similar recapitalization event from the closing of this offering through April 3, 2020). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Convertible Note and Warrant Agreements”.
If you invest in our Class A common stock, your ownership interest will be diluted to the extent that the initial public offering price per share of our Class A common stock exceeds the pro forma as adjusted net tangible book value per share of our Class A common stock immediately following the completion of this offering.
Net tangible book value per share is determined as of any date by subtracting our total liabilities from the total book value of our tangible assets (equal to our total assets less intangible assets) and dividing the difference by the number of shares of Class A common stock and Class B common stock deemed to be outstanding as of that date.
Our historical net tangible book value per share as of June 30, 2019 was $ , or $ per share (without giving effect to the consummation of the stock split to be effected on the closing date of this offering). Our pro forma net tangible book value per share as of June 30, 2019 was $ , or $ per share, after giving effect to the IPO-related security conversions and the consummation of the stock split to be effected on the closing date of this offering pursuant to which each share of our capital stock will be reclassified into shares, but not the completion of this offering.
After giving effect to our sale of shares of Class A common stock in this offering at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, less underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of , 2019 would have been $ , or $ per share. This amount reflects an immediate increase in pro forma as adjusted net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $ per share to new investors purchasing shares of Class A common stock in this offering. The following table illustrates this dilution on a per share basis:
The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms determined at the time of pricing of this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) pro forma as adjusted net tangible book value per share immediately following the completion of this offering by $ per share and increase (decrease) the dilution to new investors by $ per share, in each case less underwriting discounts and commissions and estimated offering expenses payable by us, assuming the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same.
If the underwriters exercise in full their option to purchase additional shares of Class A common stock, the pro forma as adjusted net tangible book value immediately following the completion of this offering would be $ per share and the dilution to new investors would be $ per share, in each case assuming an initial public offering price of $ per share, the midpoint of the range set forth on the cover of this prospectus.
The following table summarizes, as of June 30, 2019, on a pro forma as adjusted basis as described above, the difference between existing stockholders and new investors in this offering with respect to the aggregate number of shares of common stock purchased and with respect to the total consideration and the average price per share paid to us by our existing stockholders and to be paid to us by the new investors in this offering.