Category: IPO Insights & Trends

The management of Wadia-group controlled GoAir is in a huddle these days, finalising its plan to raise about Rs 1,500-Rs 2,000 crore through an initial public offer (IPO). While the idea may not be new, for the airline has been toying with it at least since 2015, it has gathered momentum at a time when the Indian aviation sector is dealing with tepid growth in air travel and volatile crude oil prices.

Further, investors’ sentiment has also taken a hit in the past two months. Consider this: the benchmark S&P BSE Sensex had gained around 10 per cent between January and June 2019. The gains, however, are down to just over 3 per cent year-to-date (YTD).

That apart, volatility in the equity market saw the fund mobilisation, during the first half of the calendar year 2019 (H1CY19) via IPO route, hit a four-year low. Analysts have attributed the tepid H1CY19 to the overall market sentiment. Besides, the overall economic scenario has kept companies at bay from raising fresh capital, they say.

Given this backdrop, budget carrier GoAir’s plan to raise funds via IPO does raise concerns over its timing, route, and success. That said, even though the public listing has been tepid in 2019, it maybe the best for the aviation sector, experts say.

“While the Qualified Institutional Investors (QIP) route is available only to already-listed companies, Private Equity (PE) investors target returns over a specific period of time, which is not possible in the aviation sector,” says Mark Martin, founder and CEO of Martin Consulting LLC.

Typically, PE investors eye an investment return of 25 per cent over three-five years, which is not possible in the aviation sector given the uncertainties. Airlines need a gestation period of at least 10-15 years, experts say.

IS IPO THE RIGHT STRATEGY?

An IPO at this juncture, analysts feel, may open expansion routes for GoAir, which hasn’t truly reaped benefits of the vacuum created by Jet Airways.

“It hardly took nine-10 slots of Jet, probably, due to lack of funds… The vacuum that has been created in the market is an opportune time for the airline to expand,” says AK Prabhakar, head of research, IDBI Capital.

The airline has doubled its fleet size in less than two years from just 25 planes in its fleet till November 2007. In July, it added 50th aircraft in the fleet.

At the bourses, stocks of airlines have done fairly well than the benchmark indices. Budget carriers SpiceJet and IndiGo airlines have outperformed the frontline S&P BSE Sensex over the last one year. While the former grew 66 per cent, the latter gained 51 per cent. In comparison, the Sensex has declined 3 per cent during the same period. Beleaguered Jet Airways, however, has tumbled 88 per cent during the period under review.

STRONG FUNDAMENTALS-WEAK MANAGEMENT

Fundamentally, the airline is on a strong footing and has consistently registered growth in profit and operating revenue for the past six years. For the 2017-18, the airline logged a net profit of Rs 295 crore and had a revenue of Rs 4,672 crore, data show.

Strong fundamentals, including low crude oil prices, stable air-travel demand, and a range-bound rupee, analysts believe, make a strong case for the airline’s expansion.

According to Directorate General of Civil Aviation (DGCA) data, the airline has consistently increased its market share between Q4FY19 and Q1FY20. It held a market share of 9.2 per cent at the end of March 2019, which stands at 11 per cent, as of June 2019.

“GoAir has good yields and EBITDAR figures has pending orders for more than 140 aircraft, and has the ability to fill the vacuum created by Jet Airways,” says Gagan Dixit, vice-president for institutional equities at Elara Capital.

KEY RISKS

Instability in management, however, remains a concern. The airline has no chief executive officer (CEO) as of now, but recently inducted a chief financial officer (CFO), a vice president, and heads for network planning, to focus on international operations, revenue management and flight operations.

So far, there has been no official communication from the airline confirming the listing, but media reports suggest that the LCC is looking to appoint bankers for its IPO. According to reports, the airline is expected to soon issue a Draft Red Herring Prospectus (DRHP) with an issue price in the range of Rs 700-Rs 1,200 per share.

Dixit of Elara Capital says the airline should go public before state-owned Air India is privatised as investors’ appetite is likely to reduce after this. Martin advises the airline to get listed by the third quarter (October-December) of FY20.

Source: Ipo Search Results
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Quick Take

SpringWorks Therapeutics (SWTX) has filed to raise gross proceeds of $115 million from a U.S. IPO, according to an S-1 registration statement.

The firm is focused on the development and commercialization of treatments for rare diseases.

SWTX is a mid-stage biopharma with two commercial collaborations for its earlier-stage pipeline.

I’ll provide an update when we learn more IPO details from management.

Company & Technology

Stamford, Connecticut-based SpringWorks was founded in 2017 and focuses on the acquisition, development, and commercialization of treatments for rare diseases and cancer.

Management is headed by CEO and Director Saqib Islam, who has been with the firm since inception and was previously Chief Business Officer at Moderna Therapeutics.

SpringWorks’ lead drug candidate is Nirogacestat, an oral small molecule gamma-secretase inhibitor [GSI], currently in development for the treatment of desmoid tumors.

Desmoid tumors occur rarely and are often debilitating as they disfigure soft tissue for which there are currently no therapies approved by the US FDA, according to management.

Below is a brief overview video of Lara Sullivan, company founder, discussing gamma-secretase inhibitors and desmoid tumors:

Source: CheckRare

SWTX licensed nirogacestat from Pfizer (PFE) in August 2017, and the FDA has since granted the compound Orphan Drug Designation and Fast Track Designation for this indication.

In May 2019, the firm announced the initiation of the ‘DeFi’ trial, which is a potentially-registrational Phase 3 clinical trial of the company’s lead drug candidate for patients with desmoid tumors.

Below is the current status of the company’s drug development pipeline:

Source: Company registration statement

Investors in SpringWorks include OrbiMed, Bain Capital, LifeArc, Perceptive Advisors, Boxer Capital (LON:TAVI), HBM Healthcare Investments (SWX:HBMN), BVF Partners, Surveyor Capital, Samsara BioCapital, ArrowMark Partners, as well as other institutional investors. Source: Crunchbase, company registration statement

Market & Competition

According to a recent market research report by Market Research Future, the global desmoid tumors market is projected to grow at a CAGR of 4.5% between 2017 and 2023.

The main factors driving forecasted market growth are the rising demand for effective chemotherapy treatments, high unmet clinical needs of current treatments, as well as an increase in research and development investment.

According to the US National Library of Medicine, desmoid tumors’ rate of occurrence is estimated at 1 to 2 per 500,000 people globally, while nearly 900 to 1,500 new cases are registered annually in the US.

Currently, utilized practices and medicines for desmoid tumor treatment include anti-inflammatories, chemotherapies, hormone therapies, and surgeries among others, while various other agents under development, such as Angiogenesis inhibitors.

Major competitors that provide or are developing desmoid tumor treatments include:

• Ayala Pharmaceuticals
• Bayer (OTCPK:BAYRY)
• Cellestia Biotech
• Iterion Therapeutics
• Array BioPharma (NASDAQ:ARRY)
• AstraZeneca (AZN)
• Daiichi Sankyo (OTCPK:DSKYF) (OTCPK:DSNKY) (TYO:4568)
• Exelixis (EXEL)
• F. Hoffmann-La Roche (OTCQX:RHHBY)(SWX:ROG)
• Infixion Bioscience
• NFlection Therapeutics

Source: Sentieo

Financial Status

SpringWorks’ recent financial results are typical of clinical-stage biopharma firms in that they feature no revenue and significant R&D and G&A expenses associated with the firm’s pipeline.

Below are the company’s financial results since inception (Audited PCAOB for full years):

Source: Company registration statement

As of June 30, 2019, the company had $185.3 million in cash and $11.0 million in total liabilities. (Unaudited, interim).

IPO Details

SWTX intends to raise $115 million in gross proceeds from an IPO of its common stock, although the final figure may differ.

No existing shareholders have indicated an interest to purchase shares of the IPO, although I would expect to see this element in future filings.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

to fund our ongoing Phase 3 DeFi trial of nirogacestat in patients with desmoid tumors and, if the results from this trial are favorable, to file for regulatory approval in the United States and select international markets;

to fund our upcoming Phase 2b ReNeu trial of mirdametinib in patients with NF1-PN and, if the results from this trial are favorable, to file for regulatory approval in the United States and select international markets;

to fund our ongoing Phase 1b trial of mirdametinib and lifirafenib and, if initial results are favorable, to fund additional expansion cohorts;

to further develop our lead product candidates as standalone or combination therapies in new oncology and rare disease indications; and

the remainder, if any, for working capital, general corporate purposes and to continue building our clinical development, medical affairs and commercial infrastructure to support the advancement of our product candidates.

Management’s presentation of the company roadshow is not yet available.

Listed underwriters of the IPO are JPMorgan, Goldman Sachs, Cowen, and Wedbush PacGrow.

Commentary

SpringWorks seeks public capital to fund its Phase 3 and Phase 2 trials for its lead candidates.

Its lead candidate for the treatment of desmoid tumors is already in Phase 3 trials.

The IPO net proceeds, combined with the firm’s existing cash resources, should position SWTX well for reaching its next milestones with ample resources.

The market opportunity for the treatment of desmoid tumors is growing moderately and is difficult to determine the exact size; the firm faces significant market competition.

SWTX has developed two commercial collaborations – BeiGene (NASDAQ:BGNE) and GlaxoSmithKline (GSK), although the programs for those two partnerships are still in Phase 1 safety trial stages.

Management’s assumptions about valuation will be important as will existing investor support or lack of support for the IPO.

I’ll provide an update when we learn more IPO details.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The boutique investment banks have started preparatory work on the offering, according to the sources, who asked to remain anonymous. The banks are expected to play a key role in the listing, including in the selection of underwriters and listing venues, as well as working to ensure Aramco can secure its valuation expectations.

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There are about 14 companies undergoing privatisation in 2019.

Singapore’s IPO market will remain unsteady in the years ahead as the number of delistings in SGX continue to outnumber the volume of new listings, according to a Fitch Solutions report. This further builds on the IPO scene’s underwhelming performance in 2018.

As a result, the number of listed companies in the nation has declined for each full-year period since 2013 onwards through to the end of 2018, with expectations that the delisting trend will only gain further momentum.

“[W]e forecast the continuation of a worrying trend which is seeing a steady flow of public-to-private delisting deals on the Singapore Stock Exchange (SGX). This is bad news for both the IPO arena and local ECM more broadly,” the report stated.

Separately, DBS Group Holdings stated that there are about 14 companies undergoing privatisation this year. Bloomberg research points to aircraft maintenance firm SIA Engineering, event producer and promoter Unusual, engineering plastics producer Fu Yu Corporation, high-tech capital and consumer equipment service provider Frencken Group and luxury watch retailer The Hour Glass as potential delisting candidates before year-end.

“Meanwhile, we point to the climate of low valuations as largely to blame: the STI is trading at one-year forward price-to-book ratio of 1.05 compared with 1.34 for the MSCI Asean Index, according to Bloomberg data accurate to August 12 2019. SGX data also show that equity flows are heading in a similar direction too, with institutional investors net selling -$981.7b during the month of July,” the report noted.

As an attempt to make the number of delistings grow slower, SGX has revised its rules on the delisting process to make it “less favourable, rather than stop them completely.” 

Under the new laws, companies looking to voluntary delist will now have to pay a higher premium to get a deal completed; receive the approval of 75% of shares held by independent shareholders; and gain the approval of the appointed independent financial advisor (IFA) that they are both ‘reasonable’ and ‘fair’.

Singapore’s IPO market is starting to rebound from its 2018 performance as IPO deals in YTD climbed to $1.54b (US$1.11b) from nine IPO deals, surpassing share sales of $1.27b (US$920m) raised from 24 floats in the previous year, the report cited data from Zephyr.

“Whilst the STI’s 2019 performance appears impressive at first glance, zooming out from the headline numbers suggests that the rebound has merely come from a low base to return to more historically average levels. In our view, the same can be said for new listing activity in the SGX,” Fitch Solutions explained.

Fitch Solutions noted that 2018 was an exceptionally slow year for floats and saw just four deals which raised over $138.5m (US$100m). The largest deal was the proposed US$245.4m float of an unknown stake in power distribution holding company Summit Power International. The deal failed to reach the market as it was postponed having cited a lack of demand from equity capital market (ECM) investors for non-real estate investment trust (REIT) listings on the SGX.

In H1, the two notable deals involved ARA US Hospitality Trust and Eagle Hospitality REIT. ARA US Hospitality Trust is the first listed US hospitality trust on the local bourse, which priced its stapled securities at $1.19 (US$0.88) apiece, whilst Eagle Hospitality REIT’s 580.56 million securities were offered at $1.06 (US$0.78) apiece. In addition, Prime US Real Estate Investment Trust’s IPO deal also went above $138.5m (US$100m) with a $408.54m (US$294.98m) float.

As all three deals are comprised of REITS and Summit Power is a non-REIT, Fitch noted that ECM investors are starting to lose appetite with non-REIT deals. 

“Such deals suggest that the SGX remains a go-to fundraising source for the Singaporean REIT sector, which continues to ranks as the biggest in Asia (excluding Japan). We note that there are 42 REITs and property trusts active in Singapore at the time of writing, with a combined market capitalisation of $90b representing a substantial portion of the real estate market,” Fitch solutions continued. 

Furthermore, ECM investors continue to receive support from the government as well, citing MAS’ decision way back 2015 when they decided to cut 60% leverage limit for REITs that retain a credit rating, which would subsequently be subject to the same limit as other REITs.

MAS added that it would raise the leverage limit for all REITs to 45% of the total assets, up from 35%. Furthermore, it increased the limit on property developments by 15-25% of a REIT’s assets to allow for more operational flexibility. 

Source: Ipo Search Results
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Deals and Financings

China’s Chipscreen Bio (SHA: 688321) gained a huge 367% in its first trading session following its IPO on the Shanghai STAR exchange, giving the company a market cap of $4.2 billion. When the first 25 STAR Board IPOs hit the market last month, the average gain was 140%, which was considered a huge jump. Chipscreen’s gain was 2.5 times larger. Chipscreen develops small molecule drugs for cancer, diabetes, endocrine and autoimmune diseases. It priced its IPO 27% above its original target and raised $148 million, an amount that now seems charmingly quaint.

Nanjing Frontier Biotechnologies was approved to stage a $285 million IPO on the Shanghai STAR Exchange. Frontier has a China approved treatment for HIV, and it is developing another HIV treatment that it in-licensed from the Rockefeller University of New York City. Founded in 2002 by returnees, Frontier has developed a long-acting peptide drug discovery-development platform that is designed to transform any peptide drug into a long-acting agent. Frontier is developing its own drugs, but it also offers its platform to outside companies to develop long-acting formulations.

Beijing Baicare Biotech closed a $9 million B financing that was led by Sinopharm Capital and included the company’s existing shareholders. Formed in 2013, Baicare makes automated nucleic acid detection devices for clinical use using microfluidic chips and gene detection technology. The company offers a program to detect pathogenic bacteria and another to assess antibiotic/drug resistance that guides doctors toward more effective treatments. Because of its stature, Sinopharm will be able to help Baicare increase its visibility in the clinical diagnostic field.

Stemirna Therapeutics, a Shanghai RNA biopharma, raised nearly $14 million in a Series A financing. Founded in 2016 by a group of returning PhDs from MD Anderson Cancer Center in Houston, the company uses its proprietary Core Shell Structure Platform for mRNA Vaccines (LPP/mRNA) to discover new drug candidates. Currently, Stemirna is developing more than a dozen mRNA drug projects that are either mRNA personalized cancer vaccines or vaccines for infectious disease, protein defects or genetic diseases. The company claims to be the first and only platform-based mRNA R&D enterprise in China.

Vapo Health, a China medical device company specializing in nebulizers, completed a Series A financing led by CCB International. Although the specific amount was not disclosed, it was reported to be in the “millions of dollars” range. Vapo offers a nano-scale atomized micro-hole technology to ensure consistent particle size. Formed in 2015, the company launched its first product in 2018. Vapo is already one of the top three dealers in Germany and Italy and exports its products to 14 countries, especially EU and US markets. Vapo is located in Kunshan, Jiangsu Province.

Qiyu Biotechnology, a Shanghai startup located in Zhangjiang Hi-Tech Park, completed a Series A round that raised “tens of millions of RMB” from Jundu Investment and Wosheng Capital. These proceeds are earmarked to support the pre-clinical development of the company’s large molecule candidates. Established in 2017, Qiyu is developing novel candidates to treat difficult cancers, autoimmune diseases and metabolic diseases for China and aboard. The company is a product of Zhangjiang’s Viva International Incubator.

Trials and Approvals

ASLAN Pharmaceuticals (NSDQ: ASLN, TPEx:6497) of Singapore provided an update on the progress of its three clinical-stage oncology and immunology candidates:

• The company signed up K-MASTER to run a 400 patient South Korean Phase Ib/II trial of its lead drug, varlitinib, in patients with metastatic gastric cancer.
• ASLAN003 started a four-arm Phase II clinical trial for advanced relapsed/refractory acute myeloid leukemia.
• ASLAN acquired global rights to ASLAN004 for all indications from CSL in a $780 million deal. Previously, ASLAN had global rights only for asthma.

DelMar Pharmaceuticals (NASDAQ:DMPI) of Vancouver and Menlo Park reported early results from its China Phase II trial of VAL-083 as a first line treatment for glioblastoma multiforme. VAL-083 is being administered along with radiation to patients with newly-diagnosed, MGMT-unmethylated GBM. Among the first 17 patients who have had three post-treatment examinations, 53% showed a complete response and 41% had stable disease. Only one of the 17 has died. The trial is being conducted in collaboration with Guangxi Wuzhou Pharma, DelMar’s China partner.

Bio-Thera Solutions of Guangzhou began a China Phase I trial to examine the pharmacokinetics and safety of its BAT2506, a proposed biosimilar to Simponi (golimumab), a Janssen (NYSE:JNJ) treatment for arthritis/ulcerative colitis. The comparison trial is a randomized, double-blind, two-arm, parallel group study that will enroll approximately 182 healthy volunteers. Each volunteer will receive a single subcutaneous dose of either BAT2506 or Simponi. Bio-Thera develops novel drugs and biosimilars for cancer, autoimmune and cardiovascular diseases. Its other arthritis biosimilars mimic AbbVie’s (NYSE:ABBV) Humira and Genentech’s RoActemra.

Shanghai’s Zai Lab (NASDAQ:ZLAB) announced its electric field treatment for cancer, Tumor Treating Fields, was designated an Innovative Medical Device in China, which accelerates the approval process. Zai in-licensed greater China rights to the product from Novocare last year, and launched the product in Hong Kong in December as a treatment for glioblastoma multiform under the name Optune. Optune uses electric fields tuned to specific frequencies to disrupt cancer cell division, inhibiting tumor growth and inducing cancer cell death.

Disclosure: None

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Source: Ipo Search Results
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Quick Take

The We Company (WE), also known as WeWork, has filed to raise $1.0 billion in an IPO of its Class A shares, according to an S-1 registration statement.

The firm provides office-space-as-a-service for individuals and companies in hundreds of cities worldwide.

WE has grown sharply but is generating high operating losses and cash burn. The firm has never faced an economic downturn, the odds of which appear to be increasing.

I’ll provide a final opinion when we learn more IPO details.

Company & Technology

New York-based We was founded in 2010 to re-lease modified office space with additional amenities to individuals and businesses seeking services better tailored to their needs.

Management is headed by co-founder and CEO Adam Neumann, who was previously co-founder of Green Desk and Egg Baby.

Rebekah Neumann is the Chief Brand and Impact Officer and CEO of subsidiary WeGrow. She is the wife of Adam Neumann.

Investors in the company include the founder, Benchmark Capital, J.P. Morgan, Softbank entities, and numerous venture capital firms and individual investors.

Below is a brief WeWork marketing video

Source: WeWork

The company says it has ‘over 528 locations in 111 cities across 29 countries… 527,000 memberships represent global enterprises across multiple industries, including 38% of the Global Fortune 500,’ as the map shows below:

Customer Acquisition

The company obtains customer through online advertising, word of mouth, and direct outreach to larger organizations.

WE seeks to ‘strategically cluster’ its locations within a city in order to efficiently increase its brand awareness as well as generate economies of scale for more efficient operations.

Sales and marketing expenses as a percentage of total revenue have stabilized at 20.8% as revenues have increased, as the figures below indicate:

Sales & Marketing	Expenses vs. Revenue
Period	Percentage
To June 30, 2019	20.8%
2018	20.8%
2017	16.2%

Source: Company registration statement

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend in the same period in the previous year, was 5.5x in the most recent six-month period, as shown in the table below:

Sales & Marketing	Efficiency Rate
Period	Multiple
To June 30, 2019	5.5
2018	6.5

Source: Company registration statement

Average Revenue per Member dropped 4.6% in 2018 versus 2017, per the table below:

Average Revenue Per	Membership
Period	ARPS	Variance
2018	$4,543.02	-4.6%
2017	$4,763.46

Source: Company registration statement

The firm’s membership net retention rate for the year ended December 1, 2018, was 119%. We don’t know what the actual dollar-based retention rate, so we can’t compare ‘apples to apples’ in terms of that important subscription-based metric.

Market & Competition

The global office space market is competitive and highly fragmented.

Furthermore, the co-working space in major cities is fragmented with numerous local competitors.

Demand for office space is highly localized, and given WE’s global coverage in major cities, direct competitors that provide similar services at its scale are not evident at this time.

According to a 2019 coworking market study, the number of co-working spaces worldwide is expected to reach 25,968, an increase of $42 from 2019, as shown in the chart below:

New coworking space formation will account for 65% of the growth, while expansion of existing boutique locations and chains will represent 35% of growth, per the estimate.

Notably, coworking growth per capita is forecasted to be highest in smaller, entrepreneurial countries such as Luxembourg, Singapore, Ireland, and New Zealand.

Financial Performance

WE’s recent financial results can be summarized as follows:

• Growing top-line revenue, but slightly decelerating

• Increased gross profit, but also decelerating growth

• Growing gross margin

• Increased operating losses but reduced negative operating margin

• High and increasing cash used in operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
To June 30, 2019	$ 1,535,420,000	101.0%
2018	$ 1,821,751,000	105.6%
2017	$ 886,004,000
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
To June 30, 2019	$ 221,290,000	158.0%
2018	$ 193,834,000	178.7%
2017	$ 69,545,000
Gross Margin
Period	Gross Margin
To June 30, 2019	14.41%
2018	10.64%
2017	7.85%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
To June 30, 2019	$ (1,369,450,000)	-89.2%
2018	$ (1,690,999,000)	-92.8%
2017	$ (931,834,000)	-105.2%
Net Income (Loss)
Period	Net Income (Loss)
To June 30, 2019	$ (689,676,000)
2018	$ (1,610,792,000)
2017	$ (883,994,000)
Cash Flow From Operations
Period	Cash Flow From Operations
To June 30, 2019	$ (198,711,000)
2018	$ (176,729,000)
2017	$ 243,992,000

Source: Company registration statement

As of June 30, 2019, the company had $2.5 billion in cash and $24.6 billion in total liabilities.

Free cash flow during the twelve months ended June 30, 2019, was a negative ($2.9 billion).

IPO Details

WE intends to raise $1 billion from the sale of Class A shares, although the final figure may differ from this likely placeholder amount.

Class A shareholders will be entitled to one vote per share and Class B and Class C shareholders will be entitled to twenty votes per share.

Multiple classes of stock are a way for management to retain voting control of the company even after losing an economic majority, and the S&P 500 Index no longer admits firms with multiple classes of stock into its index.

Management says it will use the net proceeds from the IPO as follows:

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.

Management’s presentation of the company roadshow is not currently available.

Listed bookrunners of the IPO are J.P. Morgan, Goldman Sachs, BofA Securities, Barclays Capital, Citigroup Global Markets, Credit Suisse Securities, HSBC Securities, UBS Securities, and Wells Fargo Securities.

Commentary

WE hopes the public investment capital market will be willing to bankroll its continued losses while providing no details about what it intends to do with the IPO capital.

The company’s financials show a firm that is expanding quickly across major cities worldwide, but generating tremendous operating losses.

Additionally, WE is on track to burn $400 million in cash from operations in 2019, based on its first half results.

Sales and marketing expenses as a percentage of total revenue are relatively stable and average revenue per member dropped slightly in 2018 versus 2017.

The firm’s stated membership retention rate of 119% is a positive signal as it indicates negative net churn, but the company didn’t provide the dollar-based retention rate, so we don’t have meaningful visibility into how the membership retention relates to actual revenue retention, a key metric of the efficiency of a subscription-based revenue model.

The market opportunity for the firm’s approach to creating improved office spaces designed for specific amenities and community appears to be growing significantly, but the company faces diffuse competition due to the fragmented nature of local real estate markets.

WE has an edge over smaller competitors for its enterprise customer base since it can provide a single account for increasingly global enterprises seeking an integrated vendor that can serve office needs over many locales.

WE will be under significant pressure to float its shares at or above the previous $47 billion private market valuation, if only to avoid any possible anti-dilution terms.

Interested prospective investors will need to carefully gauge whether the firm’s proposed valuation is ‘priced for perfection,’ especially in light of softening global economic indicators.

WE has not experienced an economic recession since its founding, and management doesn’t appear to have built the company for a significant margin of error in case of a downturn.

In the event of a recession, its funding costs can’t get much lower, so the firm would need to shutter poorly-performing locations and potentially sharply reduce its growth plans.

Investors should factor in the possibility of a negative economic period ahead and the potentially significant effects on the real estate space-as-a-service firm.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Ipo Search Results
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(Bloomberg Opinion)—I get paid to write words for a living, and I am nearly at a loss for words about WeWork Cos.

The company on Wednesday released the financial paperwork for its planned initial public offering of stock. The company is in many respects what people thought it was, although I don’t think we knew the half of it. WeWork is an office subleasing company on steroids, with a complicated corporate structure topped by a single person, Chief Executive Officer Adam Neumann, who has unusual measures of control or influence over the company.

Yes, WeWork is growing swiftly and posting heavy losses. That was not a surprise. What surprised me, at least, is the numbers behind those losses. Last year, WeWork’s filing shows, it recorded $1.7 billion in revenue from rent and service fees charged to people and companies subleasing office space from the company. That was double the revenue from tenants in 2017, and the revenue figure is on pace to increase at about the same rate this year.

That’s the kind of growth that gets investors justifiably excited, and they may be willing to overlook eye-watering losses as WeWork grabs for bigger chunks of the huge but fragmented commercial leasing market. But look at how WeWork is generating its losses.

Razor Thin

Last year in buildings that WeWork had up and running, the company recorded $1.5 billion in lease payments to landlords, plus costs for employees, utilities, real estate taxes, office cleaning, repairs and other expenses. That means WeWork’s revenue from operational office locations is scarcely higher than expenses for those locations — not including anything the company is paying for fixing up new locations that aren’t open yet, or costs for employees not working on operating office buildings.

It’s standard practice for WeWork and other office leasing companies to give tenants breaks on rent for a while, and no doubt that is driving up WeWork’s costs for its workspace locations related to the revenue it’s bringing in from the buildings. But WeWork’s numbers belie the notion that the company is simply incurring losses for funding its expansion.

The company right now is eking out a slim base profit simply from the revenue it takes in minus the bare minimum costs to run its buildings. The revenue for each WeWork tenant also is declining. WeWork attributes the decline to its expansion into countries with lower standard prices for tenants and to discounts it dangles to persuade tenants to sign longer-term subleases.

The financial disclosures make it clear that WeWork — which, it should be said, is a commerce office leasing company and not truly a tech company — shares the hallmarks of Uber Technologies Inc. and other high-profile young technology startups.

At this point in WeWork’s life, it’s tough to assess whether the company is economically viable in the long term. Its growth is overwhelming, but it’s not clear that it got there in a sustainable way. This company is a leap of faith, as are many of the young tech-ish companies hitting the stock market. Many of them have done poorly as public market stocks.

Unicorns Gored

The WeWork leap of faith rests, in part, on the ability of the company’s management to take advantage of the shake-up it started in the commercial office leasing business. And there are red flags about how WeWork is structured and operated. I am not joking when I say that the typically rote IPO filing section about transactions involving a company’s CEO or other insiders is astonishing for WeWork.

A glimpse at those disclosures: Rebekah Neumann — the CEO’s wife and a company co-founder — is one of two or three people who would pick a successor if Adam Neumann dies or is incapacitated. It has already been reported that Neumann has personally owned at least parts of a handful of office buildings that WeWork leasesand that he has taken out hundreds of millions of dollars in loans secured, in part, by his holdings of WeWork stock. And as previously reported, WeWork recently created a complex partnership structure that pays out profits to Neumann and others in a setup that minimizes their individual tax payments.

At least two members of Adam Neumann’s family, other than his wife, have done work for the company, including promotional work for a WeWork awards events for which the company’s biggest outside shareholder has paid tens of millions of dollars to fund. Neumann controls the company and has more tied up in its future success that anyone on Earth, but the board this year gave him options on tens of millions of shares of stock that were linked in part to WeWork’s stock market value increasing as high as $90 billion, then recently canceled most of those options and gave him an instrument tied to WeWork’s future profits.

In short, everything about WeWork is utterly odd. It is a real estate company valued like a tech company. It is a young company with questionable economics that has committed to paying tens of billions of dollars in future years for office building leases. This is a company whose intricate relationships with its chief executive requires 10 pages of disclosures. And this may be the first time I’ve seen an IPO filing with a section titled “Expected Resilience in a Downturn.”

WeWork may be the most magical creature in the last decade of richly valued “unicorn” startups that are attempting to bust up established industries. Its ambition is ambitious even by unicorn standards. So are its growth, losses, potential conflicts of interest and financial gymnastics. Succeed or fail, at least WeWork is not boring.

To contact the author of this story: Shira Ovide at [email protected].

To contact the editor responsible for this story: Daniel Niemi at [email protected].

WeWork has ditched the much-maligned “community adjusted Ebitda” metric, which attempted to isolate the revenue and costs from only the operational WeWork locations. The metric was in the first few draftsof WeWork’s IPO paperwork to the SEC, and it’s still there in spirit if not in name. WeWork now prefers a profit metric it calls “Contribution margin excludingnon-cashGAAP straight-line lease cost.”

Under some circumstances, she can pick the other two people on this three-person CEO selection committee.

WeWork recently created an investment vehicle, called ARK, that will buy stakes in buildings in which WeWork is a major tenant. The IPO filing said ARK would manage Adam Neumann’s interest in 10 commercial properties he owns, including four that are leased by WeWork.

Bonus disclosures: If Adam Neumann does not donate at least $1 billion in cash, property or stock to charity in the next 10 years, his voting rights get cut in half. The company has periodically lent money to Adam Neumann or companies he controls, and one of his affiliated companies recently sold WeWork-related trademarks to the company. The IPO filing says that “Adam is a unique leader who has proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator.”

Neumann swapped out a portion of those options the company valued at more than $360 million in a complicated transaction with the company that gave him a financial instrument tied to future WeWork profits.

WeWork’s ability to withstand a recession or a real estate sector collapse is an open question, so I suppose credit the company for tackling this risk head-on.

© 2019 Bloomberg L.P.

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