WeWork convinced a skeptical SEC to let it use a wonky metric that tested accounting rules. Here are 58 pages of letters showing how the coworking company changed the agency’s mind.

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  • Business Insider obtained 58 pages of correspondence between the SEC and WeWork about the coworking company’s IPO filing and questions or concerns the agency had about the document.
  • One crucial piece of the back-and-forth centered on the company’s use of a non-GAAP financial metric.
  • The SEC originally asked WeWork to “remove disclosure of this measure throughout your registration statement.”
  • After pushback from WeWork’s lawyers, including a former chief of the same SEC division asking the company to scrap the metric, the agency relented and allowed the company to continue using the metric after it made some changes. 
  • Click here for more BI Prime stories.

When WeWork first released the documents for its initial-public-offering filing in mid-August, investors, analysts, and journalists zeroed in on a creative financial metric the company was using to show the performance of each location. 

Dubbed the contribution margin after an earlier and quite similar metric called community-adjusted EBITDA was universally panned, it departed from general accepted accounting principles (GAAP, in accounting speak) in how it accounted for lease costs.

The metric was intended to reflect the true timing of revenue and costs associated with the real-estate leases, according to the company. The figure was positive when key GAAP numbers were in the red. 

It turns out the Securities and Exchange Commission had concerns about the metric. In a nine-page letter to then-CEO Adam Neumann dated August 30, the SEC’s division of corporation finance raised numerous issues and concluded one section with the words: “Please remove disclosure of this measure throughout your registration statement.”

After the company offered to change the disclosure as long as it could keep the metric, the agency relented. A subsequent letter from the SEC asked WeWork to clarify some elements and change its name to reflect its purpose as a location profitability metric but otherwise allowed it.

WeWork now uses something called “location contribution margin,” which includes straight-line lease costs, according to an October 11 presentation. The exclusion of those lease costs was one of the SEC’s chief gripes.

Business Insider got the documents through a Freedom of Information Act request that was initially denied before a successful appeal. The Wall Street Journal first reported on some of this in November, but we’re making all 58 pages of correspondence between the company and the SEC available here for the first time.

A WeWork spokesperson declined to comment for this story, as did a spokesperson for Neumann. The SEC declined to comment. 

The correspondence is interesting because it came after WeWork had publicly revealed its filing, suggesting the company thought it had successfully answered the bulk of the SEC’s questions.

The company had filed an S-1 confidentially in December 2018, meaning draft revisions were shielded from broader view. Because of the JOBS Act behind the confidential filing process, Business Insider has not been able to secure any of the correspondence between when the company filed confidentially and when the S-1 was made public in mid-August. 

The lengthy and dense letters show a back-and-forth over a figure that was critical to WeWork selling itself. Comment letters from the SEC are often part of the S-1 process — but what was unusual here is that so much still needed to be worked out and that an SEC accountant would go on to publicly slam the issue. 

At a December accounting conference months after WeWork shelved its offering, Patrick Gilmore, a senior SEC accountant, chided an unnamed subleasing company over its use of contribution margin. The company had used its own “tailored” way of calculating the number — even though its gross margin, a comparable “official” number, was negative, he said. “It was eye-opening.” (The SEC’s August 30 letter cited the gross margin specifically.)

The company spent a lot of space in its SEC filing justifying its use of contribution margin, he said in December, and if simply explaining why a company is using a metric is that complex, “you probably want to rethink that measure.”

The SEC’s August 30 letter took a more measured tone, specifically raising four points with respect to the use of the metric. On September 5, WeWork lawyers Cravath Swaine & Moore LLP pushed back in a letter signed by John White, who once led the SEC division he was now communicating with. It came a day after other lawyers at Skadden Arps addressed the agency’s comments on everything but that metric and a related point.

Below, we’ve presented both group’s comments about the contribution margin point by point to make it easier to understand how the company successfully countered the agency’s argument. The contribution margin stayed in WeWork’s IPO prospectus all the way through the company’s official cancellation of the offering in September.

Each excerpt contains a link to the source documents.

SEC (August 30):“The measure ‘Contribution Margin excluding non-cash GAAP straight-line lease cost’ ignores the recognition principles prescribed by ASC 842, specifically paragraph 2025-6, resulting in a performance measure that excludes a material aspect of your lease costs and primary cost of sales.” Link.

Cravath (September 5):“The Company understands from conversations with the Staff that this could be considered misleading in violation of the principle enunciated in the Staff’s Non-GAAP Compliance and Disclosure Interpretation 100.01. The Company respectfully disagrees, however, and would note, respectfully, that whether a non-GAAP financial measure is misleading is ultimately a legal determination which must be informed both by Supreme Court and other judicial precedent and by Commission rules and guidance relating to materiality.” Link.

SEC (August 30):“We understand from your disclosure on page 82 that there will be periods during which your non-GAAP measure will include revenues from leasing certain properties without the related lease costs. In this regard, we note that the average rent free period for your lease arrangements is nine months, with some leases containing provisions for significantly longer periods of free rent. We also note that the same property may start generating revenue as early as five months after your date of possession.” Link.

Cravath (September 5):“The Company wishes to respectfully point out that while some locations may earn revenue for a short period of time during which there are no related lease costs, the limited period of time in which this occurs is only a one-time period toward the beginning of the opening of a new location.” Link.

SEC (August 30):“Your measure excludes the straight-line aspect of lease cost, while including the benefit related to lease incentives.” Link.

Cravath (September 5):“The Company respectfully submits that the Registration Statement is fully transparent about its treatment of lease incentives and contains robust disclosure regarding the treatment of the benefit related to lease incentives and why those amounts are not adjusted out of the Company’s two Contribution Margin non-GAAP measures. … The Company believes that including the impact of amortization of lease incentives also helps it compare the performance of locations across its portfolio, as in some cases— particularly in certain non-U.S. jurisdictions where the Company is opening new locations—the Company has not always been able to negotiate a tenant improvement allowance into the terms of its leases.” Link.

SEC (August 30):“On page 72, you characterize Contribution Margin as a measure of unit economics or non-GAAP gross profit. Your current disclosure does not include a presentation of the most directly comparable financial measure, gross profit, calculated and presented in accordance with GAAP. Gross profit should contemplate all cost of sales per Rule 503 of Regulation S-X including, but not limited to pre-opening costs, depreciation or amortization expense associated with leasehold improvements, equipment and furniture, which are an integral part of your customer offerings.” Link.

Cravath (September 5):“The Company respectfully advises the Staff that it has revised the disclosure on page 74 of the Registration Statement to remove reference to the term non-GAAP gross profit in response to the Staff’s comment. Contribution Margin is a measure of non-GAAP unit economics (not of gross profit) and the Company does not present gross profit on its consolidated statement of operations [link]. … Accordingly … the Company views loss from operations as the most directly comparable financial measure calculated in accordance with GAAP as presented on the Company’s consolidated statement of operations. The Company thus provides reconciliations of its Contribution Margin non-GAAP measures to loss from operations as presented on its consolidated statement of operations.” Link.

Lastly, the SEC concluded by asking WeWork and Neumann to “Please remove disclosure of this measure throughout your registration statement.”

The lawyers answered the broad point, citing the items above and telling agency staffers that their interpretation of the agency’s regulations weren’t necessarily correct. 

Cravath (September 5):“In light of the Company’s desire to find a course forward, the Company proposes for your consideration a revision to the Company’s future disclosures of Contribution Margin to present only Contribution Margin including non-cash GAAP straight-line lease cost and then to provide the amount and description of non-cash GAAP straight-line lease cost impact immediately next to such measure, and to not present Contribution Margin excluding non-cash GAAP straight-line lease cost (as shown in the attached changed pages removing Contribution Margin excluding non-cash GAAP straight-line lease cost), while otherwise leaving the calculation and presentation of Contribution Margin as reflected in the Registration Statement being filed today. If such an approach would address your concerns and allow the Company to move forward, the Company will include a revised presentation reflecting such an approach in the next amendment to the Registration Statement.” Link.

One week after receiving Cravath’s response, on September 11 the SEC appeared to concede on the contribution margin, dropping its demand to remove mention of the metric and instead offering five suggestions of how to frame it in the document. The agency asked the company to change its name and to remove the qualifying language that the company had proposed. Link. 

In its initial letter, the agency also took issue with other elements of WeWork’s filing, including its decision to group the underwriters in a circle rather than the customary lineup, its various membership levels, and a chart that seemed to suggest that some locations broke even before they were open to members. The lawyer responses here are from Skadden Arps, another firm hired by WeWork.

SEC (August 30):“Please highlight the lead or managing underwriter(s) as required by Item 501(b)(8)(i) of Regulation S-K.” Link.

Skadden (September 4):“As discussed with the Staff on August 30, 2019, the Company respectfully advises the Staff that the underwriters highlighted on the cover page of the prospectus are the lead underwriters for the offering.” Link.

SEC (August 30):“We note the chart on page 5 depicting a timeline for your locations. Your chart seems to indicate that your locations ‘breakeven’ prior to the location opening for members. Please revise to make clear the number or percentage of your mature locations that are profitable and operate on a cash flow positive basis.” Link.

Skadden (September 4):“The Company respectfully advises the Staff that is has revised the disclosure on pages 4, 81, and 134 to address the Staff’s comments and has removed the chart to which Staff’s comment referred.” Link.

SEC (August 30):“In this regard, it appears you have several categories of membership types. In order to give investors more insight and understanding of your business, disclose your various membership types and the revenue associated with each membership type. For each membership type, disclose the average length of their contractual commitments.” Link.

Skadden (September 4):“The Company respectfully advises the Staff that it has revised the disclosure on page 70 to address the Staff’s comment. As disclosed on page 70, the Company has only two types of memberships: WeWork memberships and on-demand memberships.” Link.

Read the entire 58 pages at this link.

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