Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
WeWork is the leading global flexible workspace provider, serving a membership base of businesses large and small through our network of 779 locations, including 622 Consolidated Locations (as defined in the section entitled "Key Performance Indicators") , around the world as of December 2022. With our global footprint, we have worked to establish ourselves as the preeminent brand within the space-as-a-service category by combining best-in-class locations and design with member-first hospitality and exceptional community experiences. Since new management was instituted in 2020, we immediately began to execute a strategic plan to transform our business. With a more efficient operating model and cost conscious mindset, moving forward we expect to pursue profitable growth and focus on the digitization of our real estate in order to enhance our product offerings, and expand and diversify our membership base, while continuously meeting the growing demand for flexibility.
WeWork’s core business offering provides flexibility across space, time and cost. Whether users are looking for a dedicated desk, a private office or a fully customized floor, our members have the flexibility to choose the amount of space they need and scale with us as their businesses grow. Members also have the optionality to choose the type of membership that works for them, with a range of flexible offerings that provide access to space on a monthly subscription basis, through a multi-year membership agreement or on a pay-as-you-go basis. Additionally, a WeWork membership provides members with portability of cost, giving our members the flexibility to move part or all of an existing commitment to a new market, region or country.
Membership agreements provide our members with access to space along with certain baseline amenities and services, such as private phone booths, internet, high-speed business printers and copiers, mail and packaging handling, front desk services, 24/7 building access, unique common areas and daily enhanced cleaning for no additional cost.
Beyond the amenities offered, we believe that our community team is what sets us apart from other space providers in the industry. With a member-first mindset, our community teams provide an exceptional level of hospitality by not only overseeing onsite operations and supporting day-to-day needs, but also focusing on cultivating meaningful relationships with and between our members to deliver a premium experience.
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By providing all of the overhead services required to find and operate office space, WeWork significantly reduces the complexity and cost of leasing real estate to a simplified membership model.
In the wake of the COVID-19 pandemic, we accelerated our efforts to digitize our real estate offering through the launch of the WeWork All Access and WeWork On Demand products (collectively, "WeWork Access"). WeWork All Access is a monthly subscription-based model that provides members with access to book space at any participating WeWork location within their home country. Through WeWork All Access, members can book dedicated desks, conference rooms and private offices right from their phones – enabling users to choose when, where and how they work. WeWork On Demand provides users pay-as-you-go access to book individual workspace or conference rooms at nearby WeWork locations, giving members the flexibility to book individual workspace by the hour or conference rooms by the day on the WeWork On Demand mobile app.
Key Performance Indicators
To evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions, we rely on our financial results prepared in accordance with GAAP, non-GAAP measures, and the following key performance indicators.
For certain key performance indicators, the amounts we present are based on whether the indicator relates to a location for which the revenues and expenses of the location are consolidated within our results of operations ("Consolidated Locations") or whether the indicator relates to a location for which the revenues and expenses are not consolidated within our results of operations, but for which we are entitled to a management fee for our advisory services ("Unconsolidated Locations"). As of December 31, 2022, our locations in India, the Greater China region, Israel, and certain Common Desk Inc. ("Common Desk") locations under management agreements are our only Unconsolidated Locations.
Unless otherwise noted, we present our key performance indicators as an aggregation of Consolidated Locations and Unconsolidated Locations ("Systemwide Locations"). As presented in this Form 10-K, certain amounts, percentages and other figures have been subject to rounding adjustments. Accordingly, figures shown as totals, dollars or percentage amounts of changes may not represent the arithmetic summation or calculation of the figures that precede them. Any totals of key performance indicators presented as of a period end reflect the count as of the first day of the last month in the period. First-of-the-month counts are used because the economics of those counts generally impact the results for that monthly period, and most move-ins and openings occur on the first day of the month.
Workstation Capacity
Workstation capacity represents the estimated number of workstations available at total open locations.
Workstation capacity is a key indicator of our scale and our capacity to sell memberships across our network of locations. Our future sales and marketing expenses and capital expenditures will be a function of our efforts to increase workstation capacity. The cost at which we build out our workstations affects our capital expenditures, and the cost at which we acquire memberships and fill our workstations affects our sales and marketing expenses. As of December 2022, we had total workstation capacity of 906 thousand, down less than 1% from 912 thousand as of December 2021, with the decrease as a direct result of the Company's continued operational restructuring efforts to exit leases throughout 2022.
Workstation capacity is presented in this Form 10-K rounded to the nearest thousand. Workstation capacity is based on management’s best estimates of capacity at a location based on our inventory management system and sales layouts and is not meant to represent the actual count of workstations at our locations.
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Memberships
Memberships are the cumulative number of physical memberships, WeWork All Access memberships, and WeMemberships (the latter of which are certain predecessor products). Physical memberships provide access to a workstation and represent the number of memberships from our various product offerings, including our standard dedicated desks, private offices and customized floors. WeWork All Access memberships are monthly memberships providing an individual with access to participating WeWork locations. WeMemberships are legacy products that provide member user login access to the WeWork member network online or through the mobile application as well as access to service offerings and the right to reserve space on an à la carte basis, among other benefits. Each physical membership, WeWork All Access membership, and other legacy memberships is considered to be one membership.
The number of memberships is a key indicator of the adoption of our global membership network, the scale and reach of our network and our ability to fill our locations with members. Memberships also represent monetization opportunities from our current and future service offerings. Memberships are presented in this Form 10-K rounded to the nearest thousand. Memberships can differ from the number of individuals using workspace at our locations for a number of reasons, including members utilizing workspace for fewer individuals than the space was designed to accommodate.
As of December 2022, we had 754 thousand total memberships, an increase of 19% from 635 thousand memberships as of December 2021. This increase in total memberships included a 16% increase in physical memberships and a 54% increase in WeWork All Access and Other Legacy Memberships.
Physical Occupancy Rate
Physical occupancy rates are calculated by dividing physical memberships by workstation capacity in a location. Physical occupancy rates are a way of measuring how full our workspaces are. As of December 2022, our physical occupancy rate was 75%, compared to 65% as of December 2021. The increase in physical occupancy rate was primarily due to a 16% increase in physical memberships as members continue returning to the office.
Physical Membership Average Revenue per Membership
Physical membership monthly average revenue per membership ("ARPM") is calculated by dividing membership and service revenue less WeWork Access revenue and Unconsolidated Locations management fee revenue by Consolidated Locations cumulative physical memberships in the period. For example, a member that is active for ten months of the year would represent ten cumulative physical memberships. Physical membership monthly ARPM is a way of measuring the impact of revenue due to changes in price or rate. For the year ended December 31, 2022, our physical membership monthly ARPM was $481, compared to $487 as of December 31, 2021.
A calculation of Physical Membership Monthly ARPM is set forth below:
(Amounts in millions, except memberships in thousands and ARPM in ones)
Year Ended December 31,
Membership and service revenue
WeWork Access revenue
Unconsolidated Locations management fee revenue
Consolidated Locations Physical Membership and Service revenue
Consolidated Locations cumulative physical memberships
Physical Membership Monthly ARPM
Enterprise Physical Membership Percentage
Enterprise memberships represent memberships attributable to Enterprise Members, which we define as organizations with 500 or more full-time employees. Enterprise Members are strategically important for
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our business as they typically sign membership agreements with longer-term commitments and for multiple solutions, which enhances our revenue visibility.
Enterprise physical membership percentage represents the percentage of our memberships attributable to these organizations. There is no minimum number of workstations that an organization needs to reserve in order to be considered an Enterprise Member. For example, an organization with 700 full-time employees that pays for 50 of its employees to occupy workstations at our locations would be considered one Enterprise Member with 50 memberships. As of December 2022, 46% of our Consolidated Locations physical memberships were attributable to Enterprise Members, down from 47% as of December 2021. For the year ended December 31, 2022, Enterprise Memberships accounted for 46% of membership and service revenue compared to 48% for the year ended December 31, 2021.
Non-GAAP Financial Measures
To evaluate the performance of our business, we rely on both our results of operations prepared in accordance with GAAP as well as certain non-GAAP financial measures, including Adjusted EBITDA, Free Cash Flow, and constant-currency presentation of certain financial measures. These non-GAAP measures, as discussed further below, are not defined or calculated under principles, standards or rules that comprise GAAP. Accordingly, the non-GAAP financial measures we use and refer to should not be viewed as a substitute for financial measures calculated in accordance with GAAP and we encourage you not to rely on any single financial measure to evaluate our business, financial condition, or results of operations. These non-GAAP financial measures are supplemental measures that we believe provide management and our investors with a more detailed understanding of our performance. Our definitions of Adjusted EBITDA, Free Cash Flow, and constant-currency described below are specific to our business and you should not assume that they are comparable to similarly titled financial measures that may be presented by other companies.
Adjusted EBITDA
We supplement our GAAP financial results by evaluating Adjusted EBITDA, which is a non-GAAP measure. We define "Adjusted EBITDA" as net loss before income tax (benefit) provision, interest and other (income) expenses, net, depreciation and amortization, restructuring and other related (gains) costs, impairment expense/(gain on sale) of goodwill, intangibles and other assets, stock-based compensation expense, stock-based payments for services rendered by consultants, change in fair value of contingent consideration liabilities, legal, tax and regulatory reserves or settlements, legal costs incurred by the Company in connection with regulatory investigations and litigation regarding the Company’s 2019 withdrawn initial public offering and the related execution of the SoftBank Transactions, as defined in Note 1 of the Notes to the Consolidated Financial Statements included in this Form 10-K, net of any insurance or other recoveries, and expense related to mergers, acquisitions, divestitures and capital raising activities.
A reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA is set forth below:
Year Ended December 31,
(Amounts in millions)
Net loss (1)
Income tax (benefit) provision (1)
Interest and other (income) expenses, net (1)
Depreciation and amortization (1)
Restructuring and other related (gains) costs (1)
Impairment expense/(gain on sale) of goodwill, intangibles and other assets (1)
Stock-based compensation expense (2)
Other, net (3)
Adjusted EBITDA
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(1) As presented on our Consolidated Statements of Operations.
(2) Represents the non-cash expense of our equity compensation arrangements for employees, directors, and consultants.
(3) Other, net includes the remaining adjustments described above and are included in Selling, general and administrative expenses on the Consolidated Statements of Operations.
When used in conjunction with GAAP financial measures, we believe that Adjusted EBITDA is a useful supplemental measure of operating performance because it facilitates comparisons of historical performance by excluding non-cash items such as stock-based payments, fair market value adjustments and impairment charges and other amounts not directly attributable to our primary operations, such as the impact of restructuring costs, acquisitions, disposals, non-routine investigations, litigation and settlements. Depreciation and amortization relate primarily to the depreciation of our leasehold improvements, equipment and furniture. These capital expenditures are incurred and capitalized subsequent to the commencement of our leases and are depreciated over the lesser of the useful life of the asset or the term of the lease. The initial capital expenditures are assessed by management as an investing activity, and the related depreciation and amortization are non-cash charges that are not considered in management’s assessment of the daily operating performance of our locations. As a result the impact of depreciation and amortization is excluded from our calculation of Adjusted EBITDA. Restructuring and other related (gains) costs relate primarily to the decision to slow growth and terminate leases and are therefore not ordinary course costs directly attributable to the daily operation of our locations. In addition, while the legal costs incurred by the Company in connection with regulatory investigations and litigation regarding the Company’s 2019 withdrawn initial public offering and the related execution of the SoftBank Transactions are cash expenses, these are not expected to be recurring after the matters are resolved and they do not represent expenses necessary for our business operations.
Adjusted EBITDA is also a key metric used internally by our management to evaluate performance and develop internal budgets and forecasts.
Adjusted EBITDA has limitations as an analytical tool, should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP and does not provide a complete understanding of our operating results as a whole. Some of these limitations are:
• it does not reflect changes in, or cash requirements for, our working capital needs;
• it does not reflect our interest expense or the cash requirements necessary to service interest or principal payments on our debt;
• it does not reflect our tax expense or the cash requirements to pay our taxes;
• it does not reflect historical capital expenditures or future requirements for capital expenditures or contractual commitments;
• although stock-based compensation expenses are non-cash charges, we rely on equity compensation to compensate and incentivize employees, directors and certain consultants, and we may continue to do so in the future; and
• although depreciation, amortization and impairments are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and this non-GAAP measure does not reflect any cash requirements for such replacements.
Free Cash Flow
Because of the limitations of Adjusted EBITDA, as noted above, we also supplement our GAAP results by evaluating Free Cash Flow, a non-GAAP measure. We define "Free Cash Flow" as net cash provided by (used in) operating activities less purchases of property, equipment and capitalized software, each as presented in the Company's Consolidated Statements of Cash Flows and calculated in accordance with GAAP.
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The prior years' financial information has been reclassified to conform to the current year presentation for the aggregation of capitalized software of $47 million, $40 million and $23 million during the years ended December 31, 2022, 2021 and 2020, respectively, and purchases of property and equipment into one financial statement line item, "Purchases of property, equipment and capitalized software".
A reconciliation of net cash provided by (used in) operating activities, the most comparable GAAP measure, to Free Cash Flow is set forth below:
Year Ended December 31,
(Amounts in millions)
Net cash provided by (used in) operating activities (1)
Less: Purchases of property, equipment and capitalized software (1)
Free Cash Flow
(1) As presented on our Consolidated Statements of Cash Flows.
Free Cash Flow is both a performance measure and a liquidity measure that we believe provides useful information to management and investors about the amount of cash generated by or used in the business. Free Cash Flow is also a key metric used internally by our management to develop internal budgets, forecasts and performance targets.
Free Cash Flow has limitations as an analytical tool, should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP and does not provide a complete understanding of our results and liquidity as a whole. Some of these limitations are:
• it only includes cash outflows for purchases of property, equipment and capitalized software and not for other investing cash flow activity or financing cash flow activity;
• it is subject to variation between periods as a result of changes in working capital and changes in timing of receipts and disbursements;
• although non-cash GAAP straight-line lease costs are non-cash adjustments, these charges generally reflect amounts we will be required to pay our landlords in cash over the lifetime of our leases; and
• although stock-based compensation expenses are non-cash charges, we rely on equity compensation to compensate and incentivize employees, directors and certain consultants, and we may continue to do so in the future.
Constant-Currency
The U.S. dollar is the functional currency of our consolidated and unconsolidated entities operating in the United States. For our consolidated and unconsolidated entities operating outside of the United States, we generally assign the relevant local currency as the functional currency, as the local currency is generally the principal currency of the economic environment in which the foreign entity primarily generates and expends cash. As exchange rates may fluctuate between periods, revenue and operating expenses, when converted into U.S. dollars, may also fluctuate between periods. During the years ended December 31, 2022 and 2021 our results of operations were primarily impacted by fluctuations in the U.S. dollar-British Pound and U.S. dollar-Euro.
We supplement our GAAP financial results and Adjusted EBITDA by evaluating our results on a constant-currency basis. We believe that the disclosure of our financial results on a constant-currency basis is a useful supplemental measure of operating performance because it facilitates comparisons of historical performance by excluding the effects of foreign currency volatility. We calculate our constant-currency results by translating the prior year functional currency results at the current period actual foreign currency exchange rate. The presentation of financial results on a constant-currency basis should be
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considered in addition to, but not a substitute for, measures of financial performance reported in accordance with GAAP.
The following table sets forth the constant-currency impact of foreign exchange for certain financial measures on the Company’s Consolidated Results of Operations and Adjusted EBITDA for the years ended December 31, 2022 and 2021:
Year Ended December 31,
Change
Change
(Amounts in millions, except percentages)
Actual Currency
Actual Currency
FX Impact
Actual Currency
Constant Currency
Revenue
Expenses:
Location operating expenses—cost of revenue (1)
Pre-opening location expenses
Selling, general and administrative expenses (2)
Restructuring and other related (gains) costs
Impairment expense/(gain on sale) of goodwill, intangibles and other assets
Depreciation and amortization
Total expenses
Loss from operations
Adjusted EBITDA (3)
(1) Exclusive of depreciation and amortization shown separately on the Depreciation and amortization line in the amount of $602 million and $672 million for the years ended December 31, 2022 and 2021, respectively.
(2) Includes cost of revenue in the amount of $35 million and $91 million during the years ended December 31, 2022 and 2021, respectively.
(3) See section entitled " Key Performance Indicators — Non-GAAP Financial Measures — Adjusted EBITDA " for a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA.
The following table sets forth the constant-currency impact of foreign exchange for certain financial measures on the Company’s Consolidated Results of Operations and Adjusted EBITDA for the years ended December 31, 2021 and 2020:
Year Ended December 31,
Change
Change
(Amounts in millions, except percentages)
Actual Currency
Actual Currency
FX Impact
Actual Currency
Constant Currency
Revenue
Expenses:
Location operating expenses—cost of revenue (1)
Pre-opening location expenses
Selling, general and administrative expenses (2)
Restructuring and other related (gains) costs
Impairment expense/(gain on sale) of goodwill, intangibles and other assets
Depreciation and amortization
Total expenses
Loss from operations
Adjusted EBITDA (3)
(1) Exclusive of depreciation and amortization shown separately on the Depreciation and amortization line in the amount of $672 million and $715 million for the years ended December 31, 2021 and 2020, respectively.
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(2) Includes cost of revenue in the amount of $91 million and $249 million during the years ended December 31, 2021 and 2020, respectively.
(3) See section entitled " Key Performance Indicators — Non-GAAP Financial Measures — Adjusted EBITDA " for a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA.
Key Factors Affecting the Comparability of Our Results
Foreign Currency Translation
As a global company, the comparability of our results of operations may be impacted by fluctuations in the foreign currency exchange rates used to translate our financial results to the U.S. dollar in countries where the U.S. dollar is not the functional currency. As the U.S. dollar strengthens relative to the functional currencies of our international operations, our international revenues will be unfavorably impacted, and as the U.S. dollar weakens relative to other functional currencies our international revenues will be favorably impacted.
See section above entitled " Key Performance Indicators — Non-GAAP Financial Measures — Constant Currency " for more information on how we supplement our financial results by evaluating them on a constant currency basis.
Restructuring, Impairments and Asset Dispositions
In September 2019, we commenced an operational restructuring program to improve our financial position and refocus on our core space-as-a-service business, establishing an expected path to profitable growth.
During the year ended December 31, 2021, we were successful in achieving a 37% reduction totaling $594 million in total costs associated with Selling, general and administrative expenses as compared to the year ended December 31, 2020. During the year ended December 31, 2022, we achieved an additional 27% reduction totaling $276 million compared to the year ended December 31, 2021. During the year ended December 31, 2022, we terminated leases associated with a total of 35 previously opened locations and 5 pre-open locations compared to 98 previously opened locations and 8 pre-open locations terminated during the year ended December 31, 2021, bringing the total terminations since the beginning of the restructuring to 252.
In conjunction with the efforts to right-size our real estate portfolio, the Company has also successfully amended over 500 leases for a combination of partial terminations to reduce our leased space, rent reductions, rent deferrals, offsets for tenant improvement allowances and other strategic changes. These amendments and full and partial lease terminations have resulted in an estimated reduction of approximately $10.7 billion in total future undiscounted fixed minimum lease cost payments that were scheduled to be paid over the life of the original executed lease agreements, including changes to the obligations of ChinaCo which occurred during the period it was consolidated.
Management is continuing to evaluate our real estate portfolio in connection with our ongoing restructuring efforts and expects to exit additional leases over the remainder of the restructuring period. The Company anticipates that there may be additional impairment, restructuring and related costs during 2023, consisting primarily of lease termination charges, other exit costs and costs related to ceased use buildings, as the Company is still in the process of finalizing its operational restructuring plans.
In connection with our operational restructuring program, and our refocus on our core space-as-a-service offering, we were successful in the disposition of certain non-core operations in 2020 including:
• Flatiron, acquired in 2017, was sold in August 2020;
• SpaceIQ, a workplace management software platform acquired in 2019, was sold in May 2020;
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• Meetup, a web-based platform that brings people together for face to face interactions acquired in 2017, was sold in March 2020, with the Company retaining a 9% noncontrolling equity interest, accounted for as an equity method investment;
• Managed by Q, a workplace management platform acquired in 2019, was sold in March 2020;
• The 424 Fifth Venture (see Note 10 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further details) real estate investment, acquired in 2019, was sold in March 2020; and
• Teem, a software-as-a-service workplace management solution acquired in 2018, was sold in January 2020.
There were no dispositions during the years ended December 31, 2022 or 2021. Revenue generated prior to the disposition of the non-core offerings listed above is recorded in Other Revenue during the year ended December 31, 2020.
As of December 31, 2022, we believe that the positive changes we have made and our focused business plan with enhanced cost discipline will set the stage for our future success as we continue to increase our membership offerings and expand our footprint strategically through flexible and capital light growth alternatives .
As the Company continues to execute on its operational restructuring program and experiences the benefits of our efforts to create a leaner, more efficient organization, results may be less comparable period over period.
See Note 5 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information regarding our restructuring activities and impairment.
COVID-19 and Impact on our Business
In late 2019, an outbreak of COVID-19 had emerged and by March 11, 2020, the World Health Organization declared COVID-19 a pandemic. Since that time, COVID-19 has resulted in various governments imposing numerous restrictions, including travel bans, quarantines, stay-at-home orders, social distancing requirements and mandatory closure of “non-essential” businesses.
The Company had been adversely impacted by member churn, non-payment (or delayed payment) from members or members seeking payment concessions or deferrals or cancellations as a result of the COVID-19 pandemic. Throughout 2020, Consolidated Locations physical memberships declined from 584 thousand as of December 2019, including 59 thousand physical memberships in ChinaCo prior to the ChinaCo Deconsolidation (discussed below), to 387 thousand as of December 2020. In 2021, Consolidated Locations physical memberships further declined to 378 thousand as of March 2021, and started to rebound in the second quarter of 2021 resulting in 469 thousand Consolidated Locations physical memberships as of December 2021. These changes in physical memberships negatively affected our results of operations throughout 2020 and 2021. In order to retain our members, we offered additional discounts or deferrals that negatively impacted our net loss, net cash provided by (used in) operating activities, Adjusted EBITDA and Free Cash Flow. The physical monthly ARPM declined from $503 to $487 during the years ended December 31, 2020 and December 31, 2021, respectively. Although we have experienced indicators of recovery from the COVID-19 pandemic through the increase in physical memberships to 547 thousand as of December 2022, the physical monthly ARPM during the year ended December 31, 2022, declined slightly to $481 which is mainly attributable to the foreign currency impact on revenue as shown above in section entitled "— Key Performance Indicators — Constant Currency".
The Company is continuing to actively monitor its accounts receivable balances in response to the COVID-19 pandemic and ceased recording revenue on certain existing contracts where collectability is
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not probable. During the year ended December 31, 2022, there were no significant additions or recoveries on such contracts.
In the wake of the onset of the COVID-19 pandemic, we accelerated our efforts to digitize our real estate offering through the launch of the WeWork Access products.
ChinaCo Deconsolidation
In September 2020, the shareholders of ChinaCo executed a restructuring and Series A subscription agreement (the "ChinaCo Agreement"). Pursuant to the ChinaCo Agreement, among other things, the rights of the ChinaCo shareholders were amended such that upon the Initial Investment Closing, WeWork no longer retained the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and as a result, WeWork was no longer the primary beneficiary of ChinaCo and ChinaCo was deconsolidated from the Company's Consolidated Financial Statements on October 2, 2020 (the "ChinaCo Deconsolidation"). As such, the Company's consolidated results of operations for the year ended December 31, 2020 include nine months of consolidated ChinaCo revenue and expense activity. Beginning on October 2, 2020, our remaining 21.6% ordinary share investment, valued at $26 million upon the ChinaCo Deconsolidation, is accounted for as an unconsolidated equity method investment.
During the fourth quarter of 2020, the Company recorded a loss on the ChinaCo Deconsolidation of $153 million included in impairment/(gain on sale) of goodwill, intangibles and other assets in the consolidated statement of operations. During the first quarter of 2021, the Company discontinued applying the equity method on the ChinaCo investment when the carrying amount was reduced to zero, resulting in a loss of $29 million included in equity method investments in the Consolidated Statements of Operations.
See also Note 10 and Note 13 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for defined terms and additional details regarding the ChinaCo Agreement and the ChinaCo Deconsolidation, and discontinuation of applying the equity method, respectively.
Components of Results of Operations
We assess the performance of our locations differently based on whether the revenues and expenses of the location are consolidated within our results of operations, which we refer to as Consolidated Locations, or whether the revenues and expenses of the location are not consolidated within our results of operations but for which we are entitled to a management fee for our services, such as locations (“IndiaCo locations,” "ChinaCo locations," "Israel locations," and certain Common Desk locations, and collectively, Unconsolidated Locations) operated by WeWork India Services Private Limited, TBP, Ampa, and Common Desk, respectively. Beginning with the fourth quarter of 2020, ChinaCo locations are included in Unconsolidated Locations. Prior to and during the nine months ended September 30, 2020, ChinaCo locations were included in Consolidated Locations. The term “locations” includes only Consolidated Locations when used in the sections entitled “—Components of Results of Operations" and "—Comparison of the years ended December 31, 2022, 2021 and 2020” but includes both Consolidated Locations and Unconsolidated Locations when used elsewhere in this Form 10-K.
Revenue
Revenue includes membership and service revenue as well as other revenue as described below.
Membership revenue represents membership fees, net of discounts from sales of physical memberships ("WeWork Membership revenue") and membership fees, net of discounts from sales of WeWork All Access Memberships, WeWork On Demand and WeMemberships (collectively, "WeWork Access revenue"). We derive a significant majority of our revenue from recurring membership fees. The price of each membership varies based on the type of workplace solution selected by the member, the geographic location of the space occupied, and any monthly allowances for business services, such as conference room reservations and printing or copying allotments, that are included in the base membership fee. All
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memberships include access to our community through the WeWork app. Membership revenue is recognized monthly, on a ratable basis, over the life of the agreement, as access to space is provided. From time to time, members may terminate long term membership agreements for an early termination fee. The early termination fees are recognized as a component of Membership revenue and is amortized over the remaining duration of the membership agreement.
Service revenue primarily includes additional billings to members for ancillary business services in excess of the monthly allowances mentioned above. Services offered to members include access to conference rooms, printing, photocopies, initial set-up fees, phone and IT services, parking fees and other services.
Service revenue also includes commissions we earn from third-party service providers. We offer access to a variety of business and other services to our members, often at exclusive rates, and receive a percentage of the sale when one of our members purchases a service from a third party. These services range from business services to lifestyle perks. Service revenue also includes any management fee income for services provided to IndiaCo locations, ChinaCo locations, Israel locations (subsequent to the franchise agreement on June 1, 2021), and certain Common Desk locations. Service revenue is recognized on a monthly basis as the services are provided.
Service revenue does not include any revenue recognized related to other non-core offerings not related to our space-as-a-service offering.
Other revenue primarily includes our former Powered by We design and development services in which we offered on-site office management that provides integrated design, construction and space management services.
Design and development services performed are recognized as revenue over time based on a percentage of contract costs incurred to date compared to the total estimated contract cost. The Company identifies only the specific costs incurred that contribute to the Company’s progress in satisfying the performance obligation. Contracts are generally segmented between types of services, such as consulting contracts, design and construction contracts, and operate contracts. Revenues related to each respective type of contract are recognized as or when the respective performance obligations are satisfied. When total cost estimates for these types of arrangements exceed revenues in a fixed-price arrangement, the estimated losses are recognized immediately.
Other revenue also includes revenue generated from various other non-core offerings, not directly related to the revenue we earn under our membership agreements through which we provide space-as-a-service. For example, the revenue generated by the following during the periods prior to their disposition or wind down during the year ended December 31, 2020, are all classified as other revenue: Flatiron, Meetup, SpaceIQ, Managed by Q, Teem, Prolific, Waltz and WeGrow (collectively, our "non-core operations" or "non-core offerings"). See the section entitled "—Key Factors Affecting Comparability of Our Results—Restructuring, Impairment, and Asset Dispositions" above.
Also included in other revenue is other management and advisory fees earned. Other revenues are generally recognized over time, on a monthly basis, as the services are performed.
Location Operating Expenses
Location operating expenses include the day-to-day costs of operating an open location and exclude pre-opening costs, depreciation and amortization and general sales and marketing, which are separately recorded.
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Lease Cost
Our most significant location operating expense is lease cost. Lease cost is recognized on a straight-line basis over the life of the lease term in accordance with GAAP based on the following three key components:
• Lease cost contractually paid or payable represents cash payments due for base and contingent rent, common area maintenance amounts and real estate taxes payable under the Company’s lease agreements, recorded on an accrual basis of accounting, regardless of the timing of when such amounts were actually paid.
• Amortization of lease incentives represents the amortization of amounts received or receivable for tenant improvement allowances and broker commissions (collectively, “lease incentives”), amortized on a straight-line basis over the terms of our leases.
• Non-cash GAAP straight-line lease cost represents the adjustment required under GAAP to recognize the impact of "free rent" periods and lease cost escalation clauses on a straight-line basis over the term of the lease. Non-cash GAAP straight-line lease cost also includes the amortization of capitalized initial direct costs associated with obtaining a lease.
Other Location Operating Expenses
Other location operating expenses typically include utilities, ongoing repairs and maintenance, cleaning expenses, office expenses, security expenses, credit card processing fees and food and beverage costs. Location operating expenses also include personnel and related costs for the teams managing our community operations, including member relations, new member sales and member retention and facilities management.
Pre-Opening Location Expenses
Pre-opening location expenses include all expenses incurred while a location is not open for members. The primary components of pre-opening location expenses are lease cost expense, including our share of tenancy costs (including real estate and related taxes and common area maintenance charges), utilities, cleaning, personnel and related expenses and other costs incurred prior to generating revenue. Personnel expenses are included in pre-opening location expenses as we staff our locations prior to their opening to help ensure a smooth opening and a successful member move-in experience. Pre-opening location expenses also consist of expenses incurred during the period in which a workspace location has been closed for member operations and all members have been relocated to a new workspace location, prior to management's decision to enter negotiations to terminate a lease.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses consist primarily of personnel and stock-based compensation expenses related to our corporate employees, technology, consulting, legal and other professional services expenses, and costs for our corporate offices, such as costs associated with our billings, collections, purchasing and accounts payable functions. Also included in SG&A expenses are general sales and marketing efforts, including advertising costs, member referral fees, and costs associated with strategic marketing events, and various other costs we incur to manage and support our business.
SG&A expenses also include cost of goods sold in connection with our former Powered by We on-site office design, development and management solutions and the costs of services or goods sold related to our various other non-core offerings described above in the periods prior to their disposition or wind down.
Also included are corporate design, development, warehousing, logistics and real estate costs and expenses incurred researching and pursuing new markets, solutions and services, and other expenses related to the Company's growth and global expansion incurred during periods when the Company was
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focused on expansion. These costs include non-capitalized personnel and related expenses for our development, design, product, research, real estate, growth talent acquisition, mergers and acquisitions, legal, technology research and development teams and related professional fees and other expenses incurred such as growth related recruiting fees, employee relocation costs, due diligence, integration costs, transaction costs, contingent consideration fair value adjustments relating to acquisitions, write-off of previously capitalized costs for which the Company is no longer moving forward with the lease or project and other routine asset impairments and write-offs.
We expect that overall SG&A expenses will decrease as a percentage of revenue over time as we continue to execute on our operational restructuring plans aimed to enhance our operating efficiency and leverage the historical investments in people and technology that we have made to support the growth of our global community.
Restructuring and Other Related (Gains) Costs and Impairment Expense/(Gain on Sale) of Goodwill, Intangibles and Other Assets
See the section entitled " — Key Factors Affecting Comparability of Our Results—Restructuring and Impairments" above for details surrounding the components of these financial statement line items.
Depreciation and Amortization Expense
Depreciation and amortization primarily relates to the depreciation expense recorded on our property and equipment, the most significant component of which are the leasehold improvements made to our real estate portfolio.
Interest and Other Income (Expense)
Interest and other income (expense) is comprised of interest income, interest expense, earnings from equity method and other investments, foreign currency gain (loss), and gain (loss) from change in fair value of warrant liabilities.
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Consolidated Results of Operations
The following table sets forth the Company’s Consolidated Results of Operations and other key metrics for the years ended December 31, 2022, 2021 and 2020:
(Amounts in millions)
Year Ended December 31,
Consolidated Statements of Operations information:
Revenue:
Consolidated Locations membership and service revenue
Unconsolidated Locations management fee revenue
Other revenue
Total revenue
Expenses:
Location operating expenses—cost of revenue (1)
Pre-opening location expenses
Selling, general and administrative expenses (2)
Restructuring and other related (gains) costs
Impairment expense/(gain on sale) of goodwill, intangibles and other assets
Depreciation and amortization
Total expenses
Loss from operations
Interest and other income (expense), net
Pre-tax loss
Income tax benefit (provision)
Net loss
Noncontrolling interests
Net loss attributable to WeWork Inc.
(1) Exclusive of depreciation and amortization shown separately on the depreciation and amortization line in the amount of $602 million, $672 million and $715 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(2) Includes cost of revenue in the amount of $35 million, $91 million and $249 million during the years ended December 31, 2022, 2021 and 2020, respectively.
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Other key performance indicators (in thousands, except for percentages):
December 31,
Consolidated Locations
Workstation Capacity
Physical Memberships
All Access and Other Legacy Memberships
Memberships (1)
Physical Occupancy Rate
Enterprise Physical Membership Percentage
Unconsolidated Locations
Workstation Capacity
Physical Memberships
All Access and Other Legacy Memberships
Memberships
Physical Occupancy Rate
Systemwide Locations
Workstation Capacity
Physical Memberships
All Access and Other Legacy Memberships
Memberships (1)
Physical Occupancy Rate
(1) Consolidated Locations and Systemwide Locations Memberships include WeMemberships of 2 thousand, 3 thousand and 6 thousand as of December 2022, 2021 and 2020, respectively. WeMemberships are legacy products that provide member user login access to the WeWork member network online or through the mobile application as well as access to service offerings and the right to reserve space on an à la carte basis, among other benefits.
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Consolidated Results of Operations as a Percentage of Revenue
The following table sets forth our Consolidated Statements of Operations information as a percentage of revenue for the years ended December 31, 2022, 2021 and 2020:
Year Ended December 31,
Revenue
Expenses:
Location operating expenses—cost of revenue (1)
Pre-opening location expenses
Selling, general and administrative expenses (1)
Restructuring and other related (gains) costs
Impairment expense/(gain on sale) of goodwill, intangibles and other assets
Depreciation and amortization
Total operating expenses
Loss from operations
Interest and other income (expense), net
Pre-tax loss
Income tax benefit (provision)
Net loss
Noncontrolling interests
Net loss attributable to WeWork Inc.
(1) Exclusive of depreciation and amortization shown separately on the depreciation and amortization line.
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Comparison of the years ended December 31, 2022, 2021 and 2020
Revenue
Comparison of the years ended December 31, 2022 and 2021
Year Ended December 31,
Change
(Amounts in million, except percentages)
Physical membership and service revenue
WeWork Access revenue
Total membership and service revenue
Other revenue
Total revenue
Foreign currency impact
Constant-currency total revenue
Total revenue increased $675 million and 26%, or 33% on a constant-currency basis. This increase was primarily driven by total membership and service revenue, which increased $734 million to $3,201 million for the year ended December 31, 2022, from $2,467 million for the year ended December 31, 2021. The increase in membership and service revenue was primarily driven by a 17% increase in physical memberships to approximately 547 thousand physical memberships as of December 2022 from approximately 469 thousand physical memberships as of December 2021, resulting in monthly average physical memberships increasing 28% to approximately 521 thousand for the year ended December 31, 2022 from approximately 408 thousand monthly average physical memberships for the year ended December 31, 2021. Physical membership monthly ARPM has remained consistent for the years ended December 31, 2022 and 2021, which is mainly attributable to the negative foreign currency impact seen above. See section below entitled "Quarterly Results of Operations" for the physical memberships as of each sequential quarterly period.
In response to the COVID-19 pandemic affecting physical memberships and related revenues, we continue to focus our efforts on digitizing our real estate offering through WeWork All Access and WeWork On Demand, which has resulted in an increase of All Access memberships to approximately 70 thousand as of December 2022 from approximately 45 thousand as of December 2021. The increase in WeWork All Access memberships also resulted in an increase of our WeWork Access revenue to $178 million during the year ended December 31, 2022 from $71 million during the year ended December 31, 2021. See section above entitled "Key Factors Affecting the Comparability of Our Results - COVID-19 and Impact on our Business" for further details on COVID-19.
The increases in revenue discussed above were partially offset by a 57% decrease in other revenue to $44 million for the year ended December 31, 2022, from $103 million for the year ended December 31, 2021. This decrease was primarily driven by the decrease in revenue to $23 million from $69 million for the years ended December 31, 2022 and 2021, respectively, related to the 424 Fifth Property development agreement, which reached substantial completion during the three months ended June 30, 2022. See Note 19 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information on the development agreement.
See Note 19 and Note 28 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional details on remaining revenue commitments and geographic concentration of revenue, respectively.
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Comparison of the years ended December 31, 2021 and 2020
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Physical membership and service revenue
WeWork Access revenue
Total membership and service revenue
Other revenue
Total revenue
Foreign currency impact
Constant-currency total revenue
ChinaCo included in consolidated results:
ChinaCo Membership and service revenue
ChinaCo Other revenue
Total revenue excluding ChinaCo
Total revenue decreased $846 million primarily driven by membership and service revenue, which decreased $666 million to $2,467 million for the year ended December 31, 2021, from $3,133 million for the year ended December 31, 2020. The decrease in membership and service revenue was primarily driven by a 21% decrease in monthly average physical memberships to approximately 408 thousand for the year ended December 31, 2021 from approximately 518 thousand monthly average physical memberships for the year ended December 31, 2020. We also continued to offer COVID-19 related discounts to retain our members, decreasing the average revenue per physical member by 3% from for the year ended December 31, 2021 compared to the year ended December 31, 2020. Throughout 2021, the Company reached settlement agreements with members on certain contracts in which we ceased recognizing revenue for where we deemed collectability was not probable previously and recognized revenue related to these recoveries of approximately $19 million during the year ended December 31, 2021. For additional information, see the section entitled "Key Factors Affecting the Comparability of Our Results—COVID-19 and Impact on our Business" above. In response to the COVID-19 pandemic and the decline in average physical memberships during the year ended December 31, 2021, we accelerated our efforts to digitize our real estate offering through the launch of the WeWork All Access and WeWork On Demand products in 2021, attributing to $71 million of revenue during the year ended December 31, 2021.
Included in net decreases in membership and service revenue discussed above was a decrease of approximately $204 million in membership and service revenue related to ChinaCo. ChinaCo was deconsolidated as of October 2, 2020 and therefore contributed to consolidated membership and service revenue for nine months during the year ended December 31, 2020 but not during the same period in 2021.
Additionally, there was a 64% decrease in other revenue, which decreased to $103 million for the year ended December 31, 2021, from $283 million for the year ended December 31, 2020. This $180 million decrease primarily related to a $122 million decrease in revenue generated from our Powered by We solution, primarily Powered by We development services. Included within 2021 Powered by We development services is approximately $69 million related to a development project scheduled to be completed during 2022. There was also a $48 million decrease in other revenue primarily due to the sale of non-core ventures that were sold in 2020 as a result of our plan to refocus on our core space-as-a-service business. The remaining $10 million net decrease is related to decreases in revenue from various other offerings, of which $2 million related to ChinaCo revenue.
See Note 19 and Note 28 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional details on remaining revenue commitments and geographic concentration of revenue, respectively.
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Location Operating Expenses
Comparison of the years ended December 31, 2022 and 2021
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Location operating expenses
Impact of foreign exchange
Constant-currency location operating expenses
Location operating expenses decreased $171 million and 6%, or 1% on a constant-currency basis. This decrease was due primarily to continued lease terminations and a decline in real estate operating lease costs primarily as a result of COVID-19 and related cost cutting strategies. As a percentage of total revenue, location operating expenses for the year ended December 31, 2022 decreased by 30 percentage points to 90% compared to 120% for the year ended December 31, 2021. The decrease in location operating expenses as a percentage of total revenue is attributed to both our continued cost cutting strategies compounded by a period over period increase in revenue discussed above.
The Company terminated leases associated with a total of 35 previously open locations and 5 pre-open locations during the year ended December 31, 2022 and 98 previously open locations and 8 pre-open locations during the year ended December 31, 2021. The location decreases were partially offset by the opening of 36 locations and acquired 4 Consolidated Locations as part of the Common Desk acquisition during the year ended December 31, 2022 and the opening of 30 locations during the year ended December 31, 2021. During the year ended December 31, 2022, the Company also successfully amended over 70 leases which include partial terminations to reduce our leased space, rent reductions, rent deferrals, offsets for tenant improvement allowances and other strategic changes.
Our most significant location operating expense is real estate operating lease cost, which includes the following components and changes:
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Lease cost contractually paid or payable
Non-cash GAAP straight-line lease cost
Amortization of lease incentives
Total real estate operating lease cost
The following table includes the components of real estate operating lease cost included in location operating expenses as a percentage of membership revenue:
Year Ended December 31,
Change %
Lease cost contractually paid or payable
Non-cash GAAP straight-line lease cost
Amortization of lease incentives
Total real estate operating lease cost
The $126 million decrease in non-cash GAAP straight-line lease cost was driven by continued lease terminations during the year ended December 31, 2022, decreases in lease cost escalations and the end of free rent periods. The decrease in non-cash GAAP straight-line lease cost is also attributed to the decrease in our weighted average remaining lease term. The impact of straight-lining lease cost typically increases straight-line lease cost adjustments in the first half of the life of a lease, when lease cost recorded in accordance with GAAP exceeds cash payments made, and then decreases lease cost in the
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second half of the life of the lease, when lease cost is less than the cash payments required. The impact of straight-lining of lease cost nets to zero over the life of a lease.
The $60 million decrease in lease cost contractually paid or payable was generally due to continued lease terminations and partially offset by amendments during the year ended December 31, 2022.
The $13 million decrease in amortization of lease incentives benefit was primarily due to locations that incurred amortization of lease incentive benefits during the year ended December 31, 2021 no longer incurring amortization during the year ended December 31, 2022 due to the lease terminations discussed above.
The remaining net decrease in all other location operating expenses consisted of decreases related to bad debt expense, stock-based compensation and parking expense. These decreases were offset by an increase in consumables, operating costs and utilities during the year ended December 31, 2022, driven by an increase in physical occupancy to 75% as of December 2022 from 63% as of December 2021.
Comparison of the years ended December 31, 2021 and 2020
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Location operating expenses
Impact of foreign exchange
Constant-currency location operating expenses
ChinaCo included in consolidated results:
ChinaCo location operating expenses
Total location operating expenses excluding ChinaCo
Location operating expenses decreased $458 million due primarily to a decrease of approximately $266 million in location operating expenses related to ChinaCo. ChinaCo was deconsolidated as of October 2, 2020 and therefore contributed to consolidated location operating expenses during the year ended December 31, 2020 but not during the same period in 2021. The remaining $192 million decrease was primarily due to decline in office expenses, payroll, consulting fees and physical occupancy, including real estate operating lease costs primarily as a result of COVID-19 and cost cutting strategies. As a percentage of total revenue, location operating expenses for the year ended December 31, 2021 increased by 16 percentage points to 120% compared to 104% for the year ended December 31, 2020. The increase in location operating expenses as a percentage of total revenue was primarily impacted by the overall decline in average revenue, discussed above.
During the year ended December 31, 2021, the Company terminated leases associated with a total of 98 previously open locations. Management is continuing to evaluate our real estate portfolio in connection with its ongoing restructuring efforts and may exit additional leases during 2022. The location decreases were partially offset by the opening of 30 locations during the year ended December 31, 2021, of which, 5 were previously placed back into pre-open and re-opened during the year ended December 31, 2021.
During the year ended December 31, 2021, the Company also successfully amended over 230 leases for a combination of partial terminations to reduce our leased space, rent reductions, rent deferrals, offsets for tenant improvement allowances and other strategic changes.
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Our most significant location operating expense is real estate operating lease cost, which includes the following components and changes:
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Lease cost contractually paid or payable
Non-cash GAAP straight-line lease cost
Amortization of lease incentives
Total real estate operating lease cost
The following table includes the components of real estate operating lease cost included in location operating expenses as a percentage of membership revenue:
Year Ended December 31,
Change %
Lease cost contractually paid or payable
Non-cash GAAP straight-line lease cost
Amortization of lease incentives
Total real estate operating lease cost
The $107 million decrease in lease cost contractually paid or payable was generally due to continued lease terminations during the year ended December 31, 2021, and the ChinaCo Deconsolidation in 2020.
The $149 million decrease in non-cash GAAP straight-line lease cost was driven by continued lease terminations during the year ended December 31, 2021, the ChinaCo Deconsolidation in 2020, decreases in lease cost escalations and the end of free rent periods. The impact of straight-lining lease cost typically increases straight-line lease cost adjustments in the first half of the life of a lease, when lease cost recorded in accordance with GAAP exceeds cash payments made, and then decreases lease cost in the second half of the life of the lease when lease cost is less than the cash payments required. The impact of straight-lining of lease cost nets to zero over the life of a lease.
The $18 million decrease in amortization of lease incentives benefit was primarily due to locations that incurred amortization of lease incentive benefits during the year ended December 31, 2020 no longer incurring amortization during the year ended December 31, 2021 mainly through lease terminations.
The remaining net decrease in all other location operating expenses consisted of decreases related to bad debt expense, cleaning expenses, the purchase of COVID-19 prevention supplies during 2020, and other office expenses as a result of a reduction in the use of certain locations during the year ended December 31, 2021 as a result of COVID-19. Additionally, the decrease was also due to the reductions in operating costs as a result of the Company's efforts to create a more efficient organization, including payroll and consulting expenses. These were offset by an increase in repairs and maintenance, utilities and other various operating costs during the year ended December 31, 2021.
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Pre-Opening Location Expenses
Comparison of the years ended December 31, 2022 and 2021
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Pre-opening location expenses
Impact of foreign exchange
Constant-currency pre-opening location expenses
Pre-opening location expenses decreased $38 million to $121 million, primarily as a result of a net decrease in lease costs from location openings and terminating leases at locations that were previously closed for member operations.
Our most significant pre-opening location expense is real estate operating lease cost for the period before a location is open for member operations, which includes the following components and changes:
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Lease cost contractually paid or payable
Non-cash GAAP straight-line lease cost
Amortization of lease incentives
Total pre-opening location real estate operating lease cost
Comparison of the years ended December 31, 2021 and 2020
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Pre-opening location expenses
Impact of foreign exchange
Constant-currency pre-opening location expenses
ChinaCo included in consolidated results:
ChinaCo pre-opening location expenses
Total pre-opening location expenses excluding ChinaCo
Pre-opening location expenses decreased $114 million to $159 million, primarily as a result of the Company's decision in the fourth quarter of 2019 and first half of 2020 to decelerate the growth rate of our platform and to focus on increasing the profitability of our existing portfolio of locations. During the years ended December 31, 2021 and 2020, there was an average of approximately 60 and 115 locations where we had taken possession of the new leased spaces but the location had not yet opened for member operations, respectively. Included in the 60 pre-open locations was an average of approximately 15 locations that were closed for member operations and all members have been relocated to a new workspace location during the year ended December 31, 2021, but management has not yet ceased use of the building.
Included in the net decreases discussed above was a decrease of approximately $13 million in pre-opening expenses related to ChinaCo. ChinaCo was deconsolidated as of October 2, 2020 and therefore contributed to consolidated pre-opening expenses for nine months during the year ended December 31, 2020 but none during the year ended December 31, 2021.
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Our most significant pre-opening location expense is real estate operating lease cost for the period before a location is open for member operations, which includes the following components and changes:
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Lease cost contractually paid or payable
Non-cash GAAP straight-line lease cost
Amortization of lease incentives
Total pre-opening location real estate operating lease cost
The $19 million decrease in lease cost contractually paid or payable was generally the result of the decrease in the number of pre-opening locations described above.
The $111 million decrease in non-cash GAAP straight-line lease cost is primarily driven by the decrease in pre-opening locations and fewer free rent periods associated with our pre-opening locations as described above. During the year ended December 31, 2021 and 2020, lease cost recorded in accordance with GAAP exceeded cash payments required to be made. As the number of pre-opening locations at the end of each period has decreased as described above, so too have non-cash GAAP straight-line lease costs relating to those pre-open locations. The impact of straight-lining of lease cost nets to zero over the life of a lease.
The $20 million decrease in amortization of lease incentives benefit was driven by the decrease in pre-opening locations discussed above.
Selling, General and Administrative Expenses
Comparison of the years ended December 31, 2022 and 2021
Year ended December 31,
Change
(Amounts in millions, except percentages)
Selling, general and administrative expenses
Impact of foreign currency
Constant-currency selling, general and administrative expenses
SG&A expenses decreased $276 million and 27%, or 25% on a constant-currency basis, to $735 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. As a percentage of total revenue, SG&A expenses decreased by 16 percentage points to 23% for the year ended December 31, 2022, compared to 39% for the year ended December 31, 2021, driven primarily by our continued focus on our goal of creating a leaner, more efficient organization. During the year ended December 31, 2022, compared to the year ended December 31, 2021, there were decreases of $75 million in cost of revenue attributable to non-core businesses that have been, or are being, wound down as the Company has refocused on its core space-as-a-service. This decrease is partly related to the 424 Fifth Property development agreement which reached substantial completion during the three months ended June 30, 2022. See Note 19 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information on the development agreement. As a result of slowing our growth, continued focus on creating a leaner, more efficient organization and our recent reduction in workforce, there was a $66 million decrease in employee compensation and benefits expenses; and a $52 million decrease of stock-based compensation. Additionally there was a $48 million decrease due to legal, tax and regulatory reserves or settlements.
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Comparison of the years ended December 31, 2021 and 2020
Year ended December 31,
Change
(Amounts in millions, except percentages)
Selling, general and administrative expenses
Impact of foreign exchange
Constant-currency selling, general and administrative expenses
ChinaCo included in consolidated results:
ChinaCo selling, general and administrative
expenses
Total selling, general and administrative expenses excluding ChinaCo
SG&A expenses decreased $594 million to $1.0 billion for the year ended December 31, 2021, from the year ended December 31, 2020. Included in the $594 million decrease is a $69 million decrease in SG&A expenses related to ChinaCo. ChinaCo was deconsolidated as of October 2, 2020 and therefore contributed to consolidated SG&A expenses for nine months during the year ended December 31, 2020 but none during the year ended December 31, 2021. As a percentage of total revenue, SG&A expenses decreased by 8 percentage points to 39% for the year ended December 31, 2021, compared to 47% for the year ended December 31, 2020, driven primarily by our decision during the fourth quarter of 2019 and into 2020 to slow our growth and focus on our goal of creating a leaner, more efficient organization resulting in reductions in headcount, including a $310 million decrease in employee compensation and benefits expenses, professional fees and other expenses. In addition, as a result of the temporary business interruption caused by the COVID-19 pandemic, the Company was proactive in taking steps to delay or reduce spending in areas such as marketing with a steady increase in marketing costs during the year ended December 31, 2021 but an overall decrease of $29 million in advertising and promotional expenses compared to the year ended December 31, 2020. We also incurred fewer variable sales costs that are driven by our portfolio stabilization throughout 2021 and increased expense management, specifically on broker agreements during the year ended December 31, 2021, such as member referral fees which declined by $29 million during year ended December 31, 2021.
Included in the decrease in SG&A expenses was a $158 million decrease in cost of revenue attributable to our former Powered by We solution and non-core businesses that were sold or wound down as the Company has refocused on its core space-as-a-service offering.
Partially offsetting the increases discussed above included an increase of $53 million of stock-based compensation for the year ended December 31, 2021, compared to the year end December 31, 2020.
Restructuring and other related (gains) costs
Comparison of the years ended December 31, 2022 and 2021
Year ended December 31,
Change
(Amounts in millions, except percentages)
Restructuring and other related (gains) costs
Impact of foreign exchange
Constant-currency restructuring and other related (gains) costs
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Restructuring and other related (gains) costs decreased $634 million to $(200) million for the year ended December 31, 2022, primarily due to a $526 million decrease in employee termination costs, including the following transactions:
Year ended December 31,
Change
(Amounts in millions, except percentages)
Excess value paid from a principal shareholder to We Holding LLC and the fair value of stock purchased in connection with the Settlement Agreement (Note 5 and Note 24)
Modification of WeWork Partnership Profits Interest Units in connection with the Settlement Agreement (Note 5 and Note 24)
Other employee termination costs
Total employee termination costs
The decrease in restructuring and other related (gains) costs was also due to a $73 million decrease in costs related to ceased use buildings and a $17 million decrease in legal and other exit costs. There was also an $18 million increase in gains on terminated leases associated with a total of 35 previously open locations and 5 pre-open locations during the year ended December 31, 2022. Management is continuing to evaluate the Company's real estate portfolio in connection with its ongoing restructuring efforts and expects to exit additional leases.
For additional information on restructuring and other related (gains) costs, see Note 5 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K and " —Key Factors Affecting Comparability of Our Results—Restructuring and Impairments " above.
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Comparison of the years ended December 31, 2021 and 2020
Year ended December 31,
Change
(Amounts in millions, except percentages)
Restructuring and other related (gains) costs
Impact of foreign exchange
Constant-currency restructuring and other related (gains) costs
Restructuring and other related (gains) costs increased $227 million to $434 million for the year ended December 31, 2021, primarily due to a $366 million increase in employee termination costs, including the following transactions:
Year ended December 31,
Change
(Amounts in millions, except percentages)
Excess amount paid from a principal shareholder to We Holding LLC and the fair value of stock purchased in connection with the Settlement Agreement (Note 5 and Note 24)
Modification of WeWork Partnership Profits Interest Units in connection with the Settlement Agreement (Note 5 and Note 24)
Other employee termination costs
Total employee termination costs
The restructuring cost increase was also due to $140 million increase in costs related to ceased use buildings.
Restructuring and other related (gains) costs was offset by a $274 million increase to gains on terminated leases associated with a total of 98 previously open locations and a $6 million decrease in legal and other exit costs. Management is continuing to evaluate our real estate portfolio in connection with its ongoing restructuring efforts and may exit additional leases during 2022.
For additional information on Restructuring and other related (gains) costs, see Note 5 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K and " —Key Factors Affecting Comparability of Our Results—Restructuring and Impairments " above.
Impairment expense/(gain on sale) of goodwill, intangibles and other assets
Comparison of the years ended December 31, 2022 and 2021
Year ended December 31,
Change
(Amounts in millions, except percentages)
Impairment expense/(gain on sale) of goodwill, intangibles and other assets
Impact of foreign exchange
Constant-currency Impairment expense/(gain on sale) of goodwill, intangibles and other assets
In connection with the operational restructuring program and related changes in the Company's leasing plans discussed above and the impacts on our operations from certain macroeconomic events such as COVID-19 , the conflict between Russia and Ukraine, potential economic recession, rising interest rates, and/or inflation, the Company has recorded impairment expenses on our long-lived assets. Impairment expense/(gain on sale) of goodwill, intangibles and other assets decreased $245 million to $625 million for the year ended December 31, 2022 and included the following components:
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Year ended December 31,
Change
(Amounts in millions)
Impairment and write-off of long-lived assets associated with restructuring
Impairment expense, other
Impairment of intangible assets
Gain on sale of assets
Total
Due to uncertainty surrounding the Company's intent to complete certain software projects as a result of unforeseen delays and cost overruns, the Company concluded in the fourth quarter of 2022 that there was an impairment of such capitalized software related intangible assets. The Company recorded impairment charges and other write-offs of certain intangible assets, impairing such assets to a carrying value of zero, for impairment charges of $36 million for the year ended December 31, 2022.
For additional information on impairments, see Note 5 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K and " —Key Factors Affecting Comparability of Our Results—Restructuring and Impairments " above.
Comparison of the years ended December 31, 2021 and 2020
Year ended December 31,
Change
(Amounts in millions, except percentages)
Impairment expense/(gain on sale) of goodwill, intangibles and other assets
Impact of foreign exchange
Constant-currency Impairment expense/(gain on sale) of goodwill, intangibles and other assets
In connection with the operational restructuring program and related changes in the Company's leasing plans and planned or completed disposition or wind down of certain non-core operations and projects, and the impacts of COVID-19 on our operations, the Company has also recorded various other non-routine write-offs, impairments and gains on sale of goodwill, intangibles and various other long-lived assets. Impairments/(gain on sale) of goodwill, intangibles and other assets decreased $486 million to $870 million for the year ended December 31, 2021 and included the following components in year:
Year ended December 31,
(Amounts in millions)
Impairment and write-off of long-lived assets associated with restructuring
Impairment of long-lived assets primarily associated with COVID-19
Gain on sale of assets
Loss on ChinaCo Deconsolidation
Impairment of assets held for sale
Total
For additional information on impairments, see Note 5 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K and " —Key Factors Affecting Comparability of Our Results—Restructuring and Impairments " above.
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Depreciation and Amortization Expense
Comparison of the years ended December 31, 2022 and 2021
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Depreciation and amortization expense
Impact of foreign exchange
Constant-currency depreciation and amortization expense
Depreciation and amortization expense decreased $68 million and 10%, or 6% on a constant-currency basis, and for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily driven by a decrease in depreciable assets as a result of the decrease in the number of our Consolidated Locations and workstation capacity and impairment expenses incurred throughout 2021 and into 2022.
Comparison of the years ended December 31, 2021 and 2020
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Depreciation and amortization expense
Impact of foreign exchange
Constant-currency depreciation and amortization expense
Depreciation and amortization expense decreased $70 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by a $39 million decrease related to the ChinaCo Deconsolidation. The remaining decrease in depreciation and amortization expense is due to the decrease in number of our Consolidated Locations and workstation capacity throughout 2021.
Interest and Other Income (Expense), Net
Comparison of the years ended December 31, 2022 and 2021
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Income (loss) from equity method investments
Interest expense
Interest income
Foreign currency gain (loss)
Gain (loss) on change in fair value of warrant liabilities
Interest and other income (expense), net
Interest and other income (expense), net increased $233 million to $(698) million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily driven by a $354 million increase on net gain due to the change in fair value of warrant liabilities due to a $343 million loss on the SoftBank Senior Unsecured Notes Warrant and 2020 LC Facility Warrant during the year ended December 31, 2021. During the year ended December 31, 2022, the Private Warrants were the only warrant liabilities outstanding, with an initial fair value at issuance of $18 million. The warrant liabilities are remeasured each reporting date to fair value through their exercise dates, with such adjustments driven by changes in the Company's stock price. See Note 16 and Note 18 of the notes to
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the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further details on the Private and Public Warrants, and the fair value measurement of the Private Warrants, respectively.
Interest expense increased by $61 million, driven primarily by a $58 million increase from the accelerated amortization of deferred financing costs in connection with the amendments to the Credit Agreement. See Note 26 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information on the Credit Agreement.
Foreign currency losses increased by $51 million during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily driven by the foreign currency denominated intercompany transactions that are not of a long-term investment nature as a result of our prior international expansion and currency fluctuations against the U.S. dollar. The $185 million foreign currency loss during the year ended December 31, 2022 was primarily impacted by fluctuations in the U.S. dollar-British Pound and U.S. dollar-Euro.
Comparison of the years ended December 31, 2021 and 2020
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Income (loss) from equity method investments
Interest expense
Interest income
Foreign currency gain (loss)
Gain (loss) on change in fair value of related party financial instruments
Loss on extinguishment of debt
Interest and other income (expense), net
Interest and other income (expense), net decreased $1.5 billion to $(931) million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was primarily driven by a $1.2 billion decrease on net gain due to the change in fair value of related party financial instruments. The related party financial instruments are remeasured to fair value through their exercise dates, with such adjustments driven by changes in the Company's stock price. See Note 18 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further details on these related party financial instruments.
Foreign currency gains decreased by $283 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily driven by decrease in the foreign currency denominated intercompany transactions that are not of a long-term investment nature as a result of our prior international expansion and currency fluctuations against the dollar. The $134 million foreign currency loss during the year ended December 31, 2021 was primarily impacted by fluctuations in the U.S. dollar-Euro, U.S. dollar-British Pound, U.S. dollar-Mexican Peso, and U.S. dollar-South Korean Won exchange rates.
Interest expense increased by $124 million primarily due to a $84 million increase in interest expense due to the increased principal balance of the 5.00% Senior Notes, and a $32 million increase in deferred financing costs related to the 5.00% Senior Notes and the Credit Agreement and related amendment .
During the year ended December 31, 2020 the Company recognized a $77 million loss on extinguishment of debt due to the extinguishment of certain other loans as a result of principal prepayments, with no comparable activity during the year ended December 31, 2021.
The loss from equity method investments decreased $27 million during the year ended December 31, 2021 compared to the year ended December 31, 2020. This decrease was primarily due to equity pick-ups to earnings and gains on sale of equity method investments partially offset by the Company's loss on
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its investment in ChinaCo and credit losses related to available-for-sale debt securities. See Note 13 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further details on equity method and other investments.
Income Tax Benefit (Provision)
Comparison of the years ended December 31, 2022 and 2021
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Income tax benefit (provision)
There was a $3 million net increase for the year ended December 31, 2022, compared to the year ended December 31, 2021, which was primarily due to the increase in current income tax expense in jurisdictions without net operating losses and withholding tax accruals partially offset by the release in valuation allowance.
Our effective income tax rate during the year ended December 31, 2022 and 2021 was lower than the U.S. federal statutory rate primarily due to the effect of certain non-deductible permanent differences, the effect of our operating in jurisdictions with various statutory tax rates, and valuation allowances. For additional information, see Note 21 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K .
Comparison of the years ended December 31, 2021 and 2020
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Income tax benefit (provision)
There was a $17 million net decrease in the tax provision for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to the deconsolidation of ChinaCo in 2020, rate changes in certain non-US jurisdictions and lower withholding taxes paid. This was partially offset by additional valuation allowance recorded during year ended December 31, 2021.
Our effective income tax rate during the years ended December 31, 2021 and 2020 was lower than the U.S. federal statutory rate primarily due to the effect of certain non-deductible permanent differences, the effect of our operating in jurisdictions with various statutory tax rates, and valuation allowances. For additional information, see Note 21 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K .
Net Loss Attributable to Noncontrolling Interests
During 2017 through 2022, various consolidated subsidiaries issued equity to other parties in exchange for cash as more fully described in Note 10 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K. As we have the power to direct the activities of these entities that most significantly impact their economic performance and the right to receive benefits that could potentially be significant to these entities, they remain our consolidated subsidiaries, and the interests owned by the other investors and the net income or loss and comprehensive income or loss attributable to the other investors are reflected as noncontrolling interests on our Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Comprehensive Loss, respectively.
The increase in the net loss attributable to noncontrolling interests from year ended December 31, 2021 to the year ended December 31, 2022 of $68 million, is primarily due to the issuance of noncontrolling
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interests of LatamCo in September 2021 and conversion of WeWork Partnership Profits Interest Units into WeWork Partnership Class A common units (discussed below).
In October 2021, Mr. Neumann converted 19,896,032 vested WeWork Partnership Profits Interest Units into WeWork Partnership Class A common units. As a result of the 2.72% ownership of the WeWork Partnership during the year ended December 31, 2022, the Company allocated a loss of $56 million through noncontrolling interests, as compared to $16 million for the year ended December 31, 2021.
See Note 13 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for discussion of the Company’s non-consolidated VIEs.
The decrease in the net loss attributable to noncontrolling interests from the year ended December 31, 2021, as compared to the year ended December 31, 2020 of $512 million is primarily due to our decision during the fourth quarter of 2019 and first half of 2020 to slow our growth and focus on our goal of creating a leaner, more efficient organization. Included during the year ended December 31, 2020, were increases in net losses incurred by the JapanCo, ChinaCo (prior to the ChinaCo Deconsolidation), and PacificCo (prior to the PacificCo Roll-up), while during the year ended December 31, 2021, only JapanCo and LatamCo were included, as PacificCo became wholly owned and ChinaCo was deconsolidated.
Net Loss Attributable to WeWork Inc.
As a result of the factors described above, we recorded a net loss attributable to WeWork Inc. of $(2.0) billion for the year ended December 31, 2022 compared to $(4.4) billion and $(3.1) billion for the years ended December 31, 2021 and 2020, respectively.
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Quarterly Results of Operations
The following table sets forth certain unaudited financial and operating information for the quarterly periods presented and certain non-GAAP financial measures. The quarterly information includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the information presented. This information should be read in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere in this Form 10-K.
Three Months Ended
(Amounts in millions, except ARPM in ones)
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
December 31,
Revenue:
Consolidated Locations membership and service revenue
Unconsolidated Locations management fee revenue and cost reimbursement revenue
Other revenue
Total revenue
Expenses:
Location operating expenses—cost of revenue (1)
Pre-opening location expenses
Selling, general and administrative expenses (1)
Restructuring and other related (gains) costs
Impairment expense/(gain on sale) of goodwill, intangibles and other assets
Depreciation and amortization
Total expenses
Loss from operations
Interest and other income (expense), net
Pre-tax loss
Income taxes benefit (provision)
Net loss
Net loss attributable to noncontrolling interests
Net loss attributable to WeWork Inc.
Adjusted EBITDA (2)
Net cash provided by (used in) operating activities
Less: Purchases of property, equipment and capitalized software
Free Cash Flow (3)
Physical Membership Monthly ARPM (4)
(1) Exclusive of depreciation and amortization shown separately on the depreciation and amortization line.
(2) Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA is set forth below:
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Three Months Ended
(Amounts in millions)
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
December 31,
Net loss
Income tax (benefit) provision
Interest and other (income) expense
Depreciation and amortization
Restructuring and other related (gains) costs
Impairment expense/(gain on sale) of goodwill, intangibles and other assets
Stock-based compensation expense
Other, net
Adjusted EBITDA
(3) Free Cash Flow is a non-GAAP financial measure. A reconciliation of Free Cash Flow to net cash provided by (used in) operating activities is presented in the table above.
(4) A calculation of Physical Membership Monthly ARPM, an operating metric, is set forth below:
Three Months Ended
(Amounts in millions, except memberships in thousands, and ARPM in ones)
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
December 31,
Membership and service revenue
WeWork Access revenue
Unconsolidated Locations management fee revenue
Consolidated Locations Physical Membership and Service revenue
Consolidated Locations cumulative physical memberships
Physical Membership Monthly ARPM
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Other key performance indicators (in thousands, except for revenue in millions and percentages):
December 31,
September 30,
June 30,
March 31,
December 31,
September 30,
June 30,
March 31,
December 31,
Consolidated Locations
Membership and service revenues
Workstation Capacity
Physical Memberships
All Access and Other Legacy Memberships
Memberships
Physical Occupancy Rate
Enterprise Physical Membership Percentage
Unconsolidated Locations
Membership and service revenues (1)
Workstation Capacity
Physical Memberships
All Access and Other Legacy Memberships
Memberships
Physical Occupancy Rate
Systemwide Locations
Membership and service revenues (2)
Workstation Capacity
Physical Memberships
All Access and Other Legacy Memberships
Memberships
Physical Occupancy Rate
(1) Unconsolidated membership and service revenues represents the results of Unconsolidated Locations that typically generate ongoing management fees for the Company at a rate of 2.75-4.00% of applicable revenue.
(2) Systemwide Location membership and service revenues represents the results of all locations regardless of ownership.
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Liquidity and Capital Resources
Until we consummate the Transactions (if consummated), we expect that our principal sources of funds to meet our short-term and long-term liquidity requirements for working capital, expenses, capital expenditures, lease security, other investments and repurchases or repayments of outstanding indebtedness and other liabilities will include:
• Cash on hand of $287 million of cash and cash equivalents as of December 31, 2022, of which $61 million is held by our consolidated VIEs that will be used first to settle obligations of the VIEs and is also subject to the restrictions, including with respect to declaring dividends, as discussed below;
• The ability to draw up to $250 million in Secured Notes under the Secured NPA. As of December 31, 2022, $500 million of Secured Notes remained available to be drawn, of which $250 million was drawn by us in January 2023, and which remaining $250 million may be drawn by us as follows: subject to the terms of the Secured NPA and subject to the following schedule: (i) a draw request of $50 million which may be made no earlier than April 1, 2023; (ii) a subsequent draw request of no more than $75 million which may be made no earlier than May 1, 2023; (iii) another subsequent draw request of no more than $75 million which may be made no earlier than June 1, 2023; and, if applicable, (iv) a draw request of $50 million thereafter; and
• The $960 million Senior LC Tranche (which decreased from $1.25 billion in February 2023) and the $470 million Junior LC Tranche (which increased from $350 million in February 2023). Upon the effectiveness of the Sixth Amendment to the Credit Agreement, the additional $120 million letter of credit under the Junior LC Tranche was issued and drawn in full for the benefit of the Company.
In March 2023, the Company entered into a series of agreements related to the Transactions. Pursuant to such agreements, the applicable parties have agreed to support, approve, implement and enter into definitive documents covering the following transactions, among other things: (i) certain offers to exchange all of the outstanding 7.875% Senior Notes and 5.00% Senior Notes, Series II, for a combination of newly issued New Second Lien Notes, New Third Lien Notes and shares of Class A Common Stock, as applicable, and the concurrent issuance of $500 million in aggregate principal amount of New First Lien Notes, (ii) the exchange of all of the outstanding 5.00% Senior Notes, Series I, for a combination of newly issued New Second Lien Exchangeable Notes, New Third Lien Exchangeable Notes and shares of Class A Common Stock, as applicable, to an affiliate of SBG, (iii) the rollover of $300 million of the $500 million commitment from SVF II under the Secured NPA to purchase Secured Notes, including $250 million in aggregate principal amount of Secured Notes currently outstanding, into $300 million of New First Lien Notes, which, at the Company’s option, would be issued to SVF II in full and outstanding at the closing of the Transactions or issuable to SVF II from time to time in whole or in part pursuant to a new note purchase agreement and (iv) the issuance of 35 million shares of Class A Common Stock in a private placement at a purchase price of $1.15 per share at the closing of the Transactions and up to $175 million of New First Lien Notes issuable from time to time at the Company’s option pursuant to a new note purchase agreement to a third party investor. See “ Item 1. Business––The Transactions .” In the event that we are unable to complete the Transactions or otherwise raise sufficient alternative fundings on acceptable terms, we may be required to delay, limit or curtail our operations or otherwise impede our business strategy, which may have a material adverse effect on our business, operating results, financial condition, long-term prospects and would impact our ability to continue as a going concern. See “Risk Factors––Risks Relating to the Company’s Financial Condition––The Company has a history of operating losses and negative cash flow and failure to fully consummate the Transactions could have a material adverse effect on the Company's business, operating results, financial condition, liquidity and long-term prospects."
The Company's strategic plan used for evaluating liquidity includes limited future growth initiatives, such as signing new leases, and continued execution of our operational restructuring program. The actual
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timing at which we may achieve profitability and positive cash flow from operations depends on a variety of factors, including the occupancy of our locations, the rates we are able to charge, the success of our cost efficiency efforts, economic and competitive conditions in the markets where we operate, general macroeconomic conditions, the pace at which we choose to grow and our ability to add new members and new products and services to our platform.
Alternate long-term growth plans may require raising additional capital. The Company regularly evaluates alternatives for efficiently funding our operations and/or refinancing our existing indebtedness and paying any related accrued interests, premiums and fees, which may include, among other things, issuance of additional equity or debt financing and other opportunistic financing transactions, subject to prevailing market conditions and other considerations. Our future financing requirements and the future financing requirements of our consolidated VIEs will depend on many factors, including the number of new locations to be opened, our net member retention rate, the timing and extent of spending to support the development of our platform, the expansion of our sales and marketing activities and potential investments in, or acquisitions of, businesses or technologies. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. In addition, the incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that restrict our operations.
The Company's liquidity forecasts are based upon continued execution of its operational restructuring program and also includes management's best estimate of the currently evolving macroeconomic landscape, including a potential economic recession, rising interest rates, inflation, and the slower than expected recovery in certain markets from the impact that the COVID-19 pandemic. These factors may continue to have an impact on WeWork's business and its liquidity needs; however, the extent to which the Company's future results and liquidity needs are further affected will largely depend on the delays in location openings, our members' renewal of their membership agreements, the effect on demand for WeWork memberships, any permanent shifts in working from home and the Company's ongoing lease negotiations with its landlords, among others. WeWork believes continued execution of its operational restructuring program and its current liquidity position will be sufficient to help it alleviate the continued near-term uncertainty and meet near-term requirements. Its assessment assumes a continued growth in its revenues and occupancy. If the Company does not experience a continued recovery consistent with its projected timing, additional capital sources may be required, the timing and source of which are uncertain. There is no assurance the Company will be successful in securing additional sources of financing if and when needed.
During the year ended December 31, 2022, our primary sources of cash were from membership receipts and the Junior LC Tranche draw. Our primary uses of cash included fixed operating lease cost and capital expenditures associated with the design and build-out of our spaces. We have also incurred costs related to our operational restructuring including lease termination fees, legal fees and other exit costs. Cash payments of restructuring liabilities, net totaled $213 million during the year ended December 31, 2022. Pre-opening location expenses, SG&A expenses and cash payments made for acquisitions and investments have also historically included large discretionary uses of cash which can and have been scaled back to the extent needed based on our future cash needs. We also may elect to repurchase or retire amounts of our outstanding debt for cash, through open market repurchases or privately negotiated transactions with certain of our debt holders, although there is no assurance we will do so.
We believe our sources of liquidity described above and in more detail below, including the consummation in full of the Transactions, will be sufficient to meet our obligations as of December 31, 2022 over the next 12 months from the date of this Form 10-K.
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Consolidated Variable Interest Entities ("VIEs")
As of December 31, 2022, our consolidated VIEs held the following, in each case after intercompany eliminations:
December 31, 2022
(Amounts in millions)
SBG JVs (1)
Other VIEs (2)
Cash and cash equivalents
Restricted cash
Total assets
Total liabilities
Redeemable stock issued by VIEs
Total net assets (3)
(1) The “SBG JVs” as of December 31, 2022 include only JapanCo and LatamCo. As of December 31, 2022, JapanCo and LatamCo were prohibited from declaring dividends (including to us) without approval of an affiliate of SoftBank Group Capital Limited. As a result, any net assets of JapanCo and LatamCo would be considered restricted net assets to the Company as of December 31, 2022. The net assets of the SBG JVs include membership interest in JapanCo issued to affiliates of SBG with liquidation preferences totaling $500 million as of December 31, 2022 and ordinary shares in LatamCo totaling $80 million as of December 31, 2022 that are redeemable upon the occurrence of event that is not solely within the control of the company. After reducing the net assets of the SBG JVs by the liquidation preference associated with such membership interest and redeemable ordinary shares, the remaining net assets of the SBG JVs is negative as of December 31, 2022.
(2) "Other VIEs” includes the WeCap Manager and WeCap Holdings Partnership.
(3) Total net assets represents total assets less total liabilities and redeemable stock issued by VIEs after the total assets and total liabilities have both been reduced to remove amounts that eliminate in consolidation.
Based on the terms of the arrangements as of December 31, 2022, the assets of our consolidated VIEs will be used first to settle obligations of the VIEs. Remaining assets may then 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. Other than the restrictions relating to our SBG JVs discussed in note (1) to the table above, third-party approval for the distribution of available net assets is not required for any of our consolidated VIEs as of December 31, 2022. See the section entitled "— 7.875% Senior Notes " below for a discussion on additional restrictions on the net assets of WeWork Companies LLC.
As of December 31, 2022, creditors of our consolidated VIEs do not have recourse against the general credit of the Company except with respect to certain lease guarantees we have provided to landlords of our consolidated VIEs, which guarantees totaled $11 million as of December 31, 2022. In addition, as of December 31, 2022, the Company also continues to guarantee $4 million of lease obligations of ChinaCo.
We do not expect distributions from our consolidated VIEs or unconsolidated investments to be a significant source of liquidity and our assessment of our ability to meet our capital requirements over the next 12 months does not assume that we will receive distributions from those entities.
Sources of Liquidity
As of December 31, 2022, we had $22 million of principal debt maturing within the next 12 months and our total debt consisted of the following:
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Maturity
Year
Interest
Rate
Outstanding Principal Balance
(Amounts in millions, except percentages)
5.00% Senior Notes
7.875% Senior Notes
Junior LC Tranche (1)
Other Loans
Total debt, excluding deferred financing costs
(1) As of December 31, 2022, the reimbursement obligations under the Junior LC Tranche bear interest at the Term SOFR Rate with a floor of 0.75%, plus 6.50%, as further described below.
For further information on our debt, please see Note 17 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
7.875% Senior Notes
In April 2018, we issued $702 million in aggregate principal amount of 7.875% Senior Notes (the "7.875% Senior Notes") in a private offering. The 7.875% Senior Notes will mature on May 1, 2025 and bear interest at 7.875% per annum, payable semi-annually in cash. We received gross proceeds of $702 million from the issuance of the 7.875% Senior Notes. As of December 31, 2022, $669 million in aggregate principal amount of 7.875% Senior Notes remains outstanding.
The indenture that governs the 7.875% Senior Notes (the “Unsecured Indenture”) restricts us from incurring indebtedness or liens or making certain investments or distributions, subject to a number of exceptions. Certain of these exceptions included in the Unsecured Indenture are subject to us having Minimum Growth-Adjusted EBITDA (as defined in the Unsecured Indenture) for the most recent four consecutive fiscal quarters. For incurrences in fiscal years ending December 31, 2022-2025, the Minimum Growth-Adjusted EBITDA required for the immediately preceding four consecutive fiscal quarters is $2.0 billion. For the four quarters ended December 31, 2022, the Company's Minimum Growth-Adjusted EBITDA, as calculated in accordance with the Unsecured Indenture, was less than the $2.0 billion requirement effective as of January 1, 2022. As a result, we were restricted in our ability to incur certain new indebtedness in certain circumstances, unless such Minimum Growth-Adjusted EBITDA increases above the threshold required. The restrictions of the Unsecured Indenture do not impact our ability to access the unfunded commitments pursuant to the Secured NPA.
Subsequent to the Company's July 2019 legal entity reorganization, WeWork Companies LLC (the “Issuer”), a wholly-owned subsidiary of the Company, and WW Co-Obligor Inc., a wholly-owned subsidiary of the Issuer (the “Co-Obligor” and, together with the Issuer, the “Issuers”) became co-issuers of the 7.875% Senior Notes. The 7.875% Senior Notes are also fully and unconditionally guaranteed by the Company and certain of the Issuer’s subsidiaries. The Company and the other subsidiaries that sit above the Issuer in our legal structure are holding companies that conduct substantially all of their business operations through the Issuer. As of December 31, 2022, based on the covenants and other restrictions of the Unsecured Indenture, the Issuer is restricted in its ability to transfer funds by loans, advances or dividends to the Company and, as a result, all of the net assets of the Issuer are considered restricted net assets of the Company. See " Supplementary Information — Consolidating Balance Sheet" included in Part II, Item 8 of this Form 10-K for additional details regarding the net assets of the Issuer.
For the year ended December 31, 2022, our non-guarantor subsidiaries represented approximately 57% of our total revenue, approximately 26% of loss from operations, and approximately 30% of our Adjusted EBITDA (as defined in the Unsecured Indenture). As of December 31, 2022, our non-guarantor subsidiaries represented approximately 48% of our total assets, and had $0.8 billion of total liabilities, including trade payables but excluding intercompany liabilities and lease obligations.
5.00% Senior Notes
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On December 27, 2019, the Issuer, the Co-Obligor and StarBright WW LP (the “Notes Purchaser”), an affiliate of SBG, entered into the Master Senior Unsecured Notes Note Purchase Agreement (as amended, waived or otherwise modified from time to time, the “Unsecured NPA”), pursuant to which the Notes Purchaser agreed to purchase from the Issuers up to $2.2 billion of 5.00% Senior Notes due 2025 (the “5.00% Senior Notes”). Starting on July 10, 2020, the Issuers issued and sold $2.2 billion of 5.00% Senior Notes in multiple closings to the Notes Purchaser and entered into a Senior Notes Indenture, dated as of July 10, 2020 (the “Original Unsecured Indenture”), by and among the Issuers, the guarantors party thereto, and U.S. Bank Trust Company, National Association (as successor trustee). As of December 31, 2022, an aggregate principal amount of $2.2 billion of 5.00% Senior Notes were issued and none remained available for draw under the Unsecured NPA. The 5.00% Senior Notes will mature on July 10, 2025 and bear interest at 5.00% per annum, payable semi-annually in cash. However, because the associated warrants obligate the Company to issue shares in the future, the implied interest rate upon closing was approximately 11.69%.
Pursuant to the Unsecured NPA, the Notes Purchaser may notify the Issuer that it intends to engage an investment bank or investment banks to offer and sell all or a portion of the 5.00% Senior Notes outstanding to third-party investors in a private placement. On December 16, 2021, following the Notes Purchaser’s exercise of its resale rights under the Unsecured NPA, the Issuers amended and restated the Original Unsecured Indenture (as so amended, the “A&R Unsecured Indenture”) to subdivide the 5.00% Senior Notes into two series, one of which consisted of $550 million in aggregate principal amount of 5.00% Senior Notes due 2025, Series II (the "5.00% Senior Notes, Series II"), and the other consisted of the remaining $1.65 billion in aggregate principal amount of 5.00% Senior Notes due 2025, Series I (the "5.00% Senior Notes, Series I"), and the Notes Purchaser (through certain initial purchasers) resold the 5.00% Senior Notes due 2025, Series II, to qualified investors in a private offering exempt from registration under the Securities Act. The 5.00% Senior Notes, Series I, remain held by the Notes Purchaser. The A&R Unsecured Indenture contains negative covenants that are substantially similar to those included in the Unsecured Indenture, as further described above.
Secured Notes
The Issuers are party to that certain Amended and Restated Master Senior Secured Notes Note Purchase Agreement, dated as of October 20, 2021, as amended by Amendment No. 1, dated as of December 16, 2021, and Amendment No. 2, dated as of November 9, 2022 (as further amended, waived or otherwise modified from time to time, “Secured NPA”), with SVF II, pursuant to which SVF II agreed to purchase from the Issuers up to $500 million of Senior Secured Notes due 2025 (the “Secured Notes”), with a scheduled step down to approximately $446 million in February 2024.
The Secured NPA allows the Issuers to issue and sell to SVF II every 30 days up to the maximum remaining capacity of Secured Notes available thereunder, with minimum draws of $50 million. Pursuant to the Secured NPA, SVF II may notify the Issuer that it intends to engage an investment bank or investment banks to offer and sell all or a portion of the Secured Notes outstanding or to be issued in connection with a draw notice to third-party investors in a private placement. In addition, pursuant to the Secured NPA, as thereafter modified, the Issuer is required to pay SVF II a commitment fee of $10 million (2.00% of the $500 million commitment available under the Secured NPA), to be paid in quarterly installments beginning on January 10, 2024. Following the entry into the Transaction Support Agreement (as defined herein) in March 2023, the Company may draw upon the remaining $250 million in aggregate principal of Secured Notes, each draw subject to the terms of the Secured NPA, subject to the following schedule: (i) a draw request of $50 million which may be made no earlier than April 1, 2023; (ii) a subsequent draw request of no more than $75 million which may be made no earlier than May 1, 2023; (iii) another subsequent draw request of no more than $75 million which may be made no earlier than June 1, 2023; and if applicable, (iv) a draw request of $50 million thereafter.
As of December 31, 2022, no draw notices had been delivered pursuant to the Secured NPA and no Secured Notes were outstanding. In January 2023, the Issuers issued and sold $250 million of Secured Notes to SVF II under the Secured NPA and entered into a Senior Secured Notes Indenture, dated as of
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January 3, 2023 (the “Secured Indenture”), by and among the Issuers, the guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee and collateral agent. The Secured Notes will mature on March 15, 2025 and bear interest (i) until February 15, 2024, at 7.50% per annum, payable semi-annually in cash, and (ii) from and after February 15, 2024 and until maturity, at 11.00% per annum, payable in-kind. The Secured Indenture contains negative covenants that are substantially similar to those included in the Unsecured Indenture, as further described above, subject to certain changes to reflect existing commitments and indebtedness outstanding at the time of entry into the Secured Indenture.
Credit Agreement
The Company is party to the that certain Credit Agreement, dated as of December 27, 2019 (as amended or otherwise modified from time to time, including by that certain Sixth Amendment to the Credit Agreement, dated as of February 15, 2023 (the “Sixth Amendment to the Credit Agreement”), the “Credit Agreement”). As of December 31, 2022, the Credit Agreement provided for a $1.25 billion senior tranche letter of credit facility (the “Senior LC Tranche”), which decreased to $960 million in February 2023 in connection with the Sixth Amendment and is scheduled to terminate in March 2025, and a $350 million junior tranche letter of credit facility (the “Junior LC Tranche”), which increased to $470 million in February 2023 in connection with the Sixth Amendment and is scheduled to terminate in March 2025. As of December 31, 2022, $1.1 billion of standby letters of credit were outstanding under the Senior LC Facility, of which none were drawn. As of December 31, 2022, there was $21 million in remaining letter of credit availability under the Senior LC Facility.
In connection with the reduction of the Senior LC Tranche capacity in February 2023, the Company funded $136 million of cash collateral. Upon effectiveness of the Sixth Amendment to the Credit Agreement, $1.1 billion of standby letters of credit were outstanding under the Senior LC Facility, of which none were drawn. In addition, as of the Sixth Amendment to the Credit Agreement, approximately $100 million of contingent obligations in respect of letters of credit issued under the Senior LC Facility are required to be cash collateralized, in the amount of 105% of the stated amount thereof.
On May 10, 2022, the Company and the other parties thereto entered into the Fourth Amendment to the Credit Agreement (the "Fourth Amendment to the Credit Agreement") pursuant to which the then existing facilities under the Credit Agreement were amended and subdivided into a $1.25 billion Senior LC Tranche, which was scheduled to decrease to $1.05 billion in February 2023, and the $350 million Junior LC Tranche. The letter of credit under the Junior LC Tranche was issued and drawn for the benefit of WeWork Companies LLC in full upon effectiveness of the Fourth Amendment to the Credit Agreement. At the time of entry into the Fourth Amendment to the Credit Agreement, the termination date of the Junior LC Tranche was November 30, 2023 and the termination date of the Senior LC Tranche was February 9, 2024. Following the entry into the Fourth Amendment to the Credit Agreement, the reimbursement obligations under the Junior LC Tranche bore interest at the Term SOFR Rate (as defined in the Credit Agreement), with a floor of 0.75%, plus 6.50%, with an option to convert all or a portion of the outstanding obligations to the ABR (as defined in the Fourth Amendment to the Credit Agreement) plus 5.50% on or after August 10, 2022.As a result of the Fourth Amendment to the Credit Agreement, the reimbursement obligations under the Junior LC Tranche were voluntarily repayable at any time, subject to a prepayment fee such that the minimum return to the letter of credit participants under the Junior LC Tranche on the Junior LC Tranche reimbursement obligations was an amount equal to the sum of 6.50% (the Applicable Margin of the Junior LC Tranche reimbursement obligations) and 2.00% of the total principal amount of the Junior LC Tranche reimbursement obligations, as set forth in the Fourth Amendment to the Credit Agreement. Obligations of WeWork Companies LLC and its restricted subsidiaries under the Junior LC Tranche are subordinated in right of payment to the obligations under the Senior LC Tranche to the extent of the value of the collateral securing such obligations.
In December 2022, the Company and the other parties thereto entered into the Fifth Amendment to the Credit Agreement (the "Fifth Amendment to the Credit Agreement") to, among other things, (i) extend the termination date of the Senior LC Tranche to March 14, 2025, (ii) replace SBG with SVF II as an obligor
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with respect to the Senior LC Tranche and (iii) reduce the Senior LC Tranche to $1.1 billion, with a subsequent automatic decrease to $930 million on February 10, 2023. The reimbursement obligations under the Senior LC Tranche were amended to an amount equal to the sum of (i) 6.00% - 6.75%, based on the relevant Rating Level Period (as defined in the Fifth Amendment to the Credit Agreement), and (ii) 2.00% of the total principal amount of the Senior LC Tranche reimbursement obligations, as set forth in the Fifth Amendment to the Credit Agreement. The Fifth Amendment to the Credit Agreement provided for the resignation of SBG as the obligor and assumption by SVF II of all of SBG's obligations with respect to the Senior LC Tranche. The Fifth Amendment to the Credit Agreement provided that the total senior letter of credit tranche commitments may be increased to an amount not to exceed $1.25 billion until February 10, 2023 and $1.05 billion thereafter with additional commitments. The Fifth Amendment to the Credit Agreement also provides that if letter of credit reimbursements under the senior letter of credit tranche are made by SVF II, the commitments in respect of the senior letter of credit tranche will be reduced by a corresponding amount.
In February 2023, the Company and the other parties thereto entered into the Sixth Amendment to the Credit Agreement. Pursuant to the Sixth Amendment to the Credit Agreement, among other things, (i) the Junior LC Tranche was increased by $120 million to $470 million, (ii) the termination date of the Junior LC Tranche was extended from November 30, 2023 to March 7, 2025, (iii) the interest margin applicable to the Junior LC Tranche was increased from 6.50% to 9.90% for reimbursement obligations, and (iv) the Senior LC Tranche was increased from $930 million to $960 million. The additional $120 million letter of credit under the Junior LC Tranche was issued and drawn for the benefit of WeWork Companies LLC in full upon effectiveness of the Sixth Amendment to the Credit Agreement. The reimbursement obligations under the Junior LC Tranche remain voluntarily repayable at any time, subject to a prepayment fee in connection with prepayments made during the 18 months following the date of the Sixth Amendment to the Credit Agreement, in the amount of the net present value of interest that would have accrued on such amounts prepaid from the prepayment date to the date that is 18 months following the date of the Sixth Amendment to the Credit Agreement, discounted by the Federal Funds Effective Rate (as defined in the Credit Agreement).
During the years ended December 31, 2022 and 2021, the Company recognized $20 million and none, respectively, in interest expense in connection with the Junior LC Tranche.
The Senior LC Tranche and Junior LC Tranche are guaranteed by substantially all of the domestic wholly-owned subsidiaries of WeWork Companies LLC (collectively the “Guarantors”) and are secured by substantially all the assets of WeWork Companies LLC and the Guarantors, in each case, subject to customary exceptions.
Certain of our outstanding letters of credit under the Senior LC Tranche include annual renewal provisions under which the issuing banks can elect not to renew a letter of credit if the next annual renewal extends the LC period beyond March 14, 2025, the current termination date of the Senior LC Tranche. If a letter of credit is not renewed, the landlord may elect to draw the existing letter of credit before it expires, in which case either WeWork or SVF II would be obligated to repay the issuing bank immediately (after application of any Cash Collateral as defined in and pursuant to the terms of the Credit Agreement). The Company intends to extend the maturity of the Senior LC Tranche such that there are no material payments under these renewal provisions. The Company has not yet agreed to any final terms for any such extension and its execution and terms are uncertain and subject to change. The Company cannot give any assurances that any such extension will be completed on acceptable terms, or at all.
The Company/SBG Reimbursement Agreement
In connection with the Credit Agreement, WeWork Companies LLC also entered into a reimbursement agreement, dated as of February 10, 2020 (as amended, the "Company/SBG Reimbursement Agreement"), with SBG pursuant to which (i) SBG agreed to pay substantially all of the fees and expenses payable in connection with the Credit Agreement, (ii) the Company agreed to reimburse SBG for certain of such fees and expenses (including fronting fees up to an amount 0.125% on the undrawn
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and unexpired amount of the letters of credit, plus any fronting fees in excess of 0.415% on the undrawn and unexpired amount of the letters of credit) as well as to pay SBG a fee of 5.475% on the amount of all outstanding letters of credit and (iii) the Guarantors agreed to guarantee the obligations of WeWork Companies LLC under the Company/SBG Reimbursement Agreement. In December 2021, the Company/SBG Reimbursement Agreement was amended following the entry into the Amended Credit Support Letter to, among other things, change the fees payable by WeWork Companies LLC to SBG to (i) 2.875% of the face amount of letters of credit issued under the Credit Agreement (drawn and undrawn), payable quarterly in arrears, plus (ii) the amount of any issuance fees payable on the outstanding amounts under the Credit Agreement, which as of December 31, 2021, was equal to 2.6% of the face amount of letters of credit issued under the Senior LC Facility (drawn and undrawn). In May 2022, in connection with the Fourth Amendment to the Credit Agreement, the Company/SBG Reimbursement Agreement was amended to clarify that the payment obligations of certain fees and expenses in respect of the Junior LC Tranche related to the Fourth Amendment to the Credit Agreement are the responsibility of the Company and not SBG, as described above.
In December 2022, the Company, SBG and SVF II entered into an Amended and Restated Reimbursement Agreement (as further amended or otherwise modified from time to time, the "A&R Reimbursement Agreement"), which amended and restated the Company/SBG Reimbursement Agreement, to, among other things, (i) substitute SVF II instead of SBG with respect to the Senior LC Tranche, (ii) retain SBG's role with respect to the Junior LC Tranche and (iii) amend the fees payable by the Company such that no fees will be owed to SVF II in respect of the senior letter of credit issued through February 10, 2024 and thereafter fees will accrue at 7.045% of the face amount of the Senior LC Tranche, compounding quarterly and payable at the earlier of March 14, 2025 and termination or acceleration of the Senior LC Tranche.
In February 2023, the Company, SBG and SVF II entered into the First Amendment to the A&R Reimbursement Agreement to, among other things, substitute SVF II instead of SBG with respect to the Junior LC Tranche and adjust the Company's reimbursement rights and obligations to each party accordingly. In addition the amendment modified the fees payable by the Company under the A&R Reimbursement Agreement, such that no fee would be owed to SVF II in respect of the Junior LC Tranche through November 30, 2023 and thereafter fees would accrue at 6.5% of the aggregate reimbursement obligations thereunder, compounding quarterly and payable at the earlier of March 7, 2025 and termination or acceleration of the Junior LC Tranche.
LC Debt Facility
In May 2021, the Company entered into a loan agreement with a third party to raise up to $350 million of cash in exchange for letters of credit issued from the LC Facility (the “LC Debt Facility”). The third party will issue a series of discount notes to investors of varying short term (1-6 month) maturities and make a matching discount loan to WeWork Companies LLC. WeWork Companies LLC will pay the 5.475% issuance fee on the letter of credit, the 0.125% fronting fee on the letter of credit and the interest on the discount note. At maturity, the Company has the option, based on prevailing market conditions and liquidity needs, to roll the loan to a new maturity or pay off the loan at par. No loans drawn under the LC Debt Facility can have maturity dates that extend beyond the termination date of the Senior LC Facility.
In connection with the Merger Agreement, the Company agreed to not enter into loan facilities utilizing the LC Debt Facility without consent from SBG. In May 2021, the Company entered into a letter agreement with SBG pursuant to which SBG consented to the LC Debt Facility and the Company agreed to certain restrictions that will apply to the LC Debt Facility, including that (i) until such time as no amounts remain undrawn by the Company under the $2.2 billion 5.00% Senior Notes, amounts issued under the LC Debt Facility will not exceed $100 million, (ii) the Company would repay all amounts outstanding under the LC Debt Facility within 30 days after the closing of the Business Combination, and (iii) the prior written consent of SBG will be required for the first draw under the LC Debt Facility that occurs after closing of the Business Combination.
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Bank Facilities
In February 2020, in conjunction with the availability of the initial facility under the Credit Agreement, our 2019 Credit Facility and 2019 LC Facility (each as defined below) were terminated. As of December 31, 2022, $6 million remains outstanding in a letter of credit issued under the 2019 LC Facility and is secured by a new letter of credit issued under the Senior LC Tranche.
Other Letter of Credit Arrangements
The Company has also entered into various other letter of credit arrangements, the purpose of which is to guarantee payment under certain leases entered into by JapanCo and other fully owned subsidiaries. There was $3 million of standby letters of credit outstanding under these other arrangements that are secured by $3 million of restricted cash at December 31, 2022.
Uses of Cash
Contractual Obligations
The following table sets forth certain contractual obligations as of December 31, 2022 and the timing and effect that such obligations are expected to have on our liquidity and capital requirements in future periods:
(Amounts in millions)
2028 and beyond
Total
Non-cancelable operating lease commitments (1)
Finance lease commitments, including interest
Construction commitments (2)
Asset retirement obligations (3)
Debt obligations, including interest (4)
5.00% Senior Notes (5)
Warrant liabilities (6)
Total
(1) Future undiscounted fixed minimum lease cost payments for non-cancelable operating leases, inclusive of escalation clauses and exclusive of lease incentive receivables and contingent lease cost payments, that have initial or remaining lease terms in excess of one year as of December 31, 2022. Excludes an additional $0.5 billion relating to executed non-cancelable leases that have not yet commenced as of December 31, 2022. See Note 20 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional details.
(2) In the ordinary course of our business, we enter into certain agreements to purchase construction and related contracting services related to the build-outs of our locations that are enforceable and legally binding and that specify all significant terms and the approximate timing of the purchase transaction. Our purchase orders are based on current needs and are fulfilled by the vendors as needed in accordance with our construction schedule.
(3) Certain lease agreements contain provisions that require us to remove leasehold improvements at the end of the lease term. When such an obligation exists, we record an asset retirement obligation at the inception of the lease at its estimated fair value. These obligations are recorded as liabilities on our Consolidated Balance Sheets as of December 31, 2022.
(4) Primarily represents principal and interest payments on 7.875% Senior Notes, LC Debt Facility and other loans as of December 31, 2022.
(5) Primarily represents principal and interest payments on 5.00% Senior Notes as of December 31, 2022.
(6) Represents the fair value as of December 31, 2022, of the Company's obligation to deliver 7,773,333 shares in respect of the Company’s outstanding Private Placement Warrants, as defined and as further described in Note 16 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
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Lease Obligations
The future undiscounted fixed minimum lease cost payment obligations under operating and finance leases signed as of December 31, 2022 were $27.9 billion. A majority of our leases are held by individual special purpose subsidiaries, and as of December 31, 2022, the total security packages provided by the Company and its subsidiaries in respect of these lease obligations was approximately $4.0 billion in the form of corporate guarantees, outstanding standby letters of credit, cash security deposits to landlords and surety bonds issued, representing less than 15% of future undiscounted minimum lease cost payment obligations. In addition, individual property lease security obligations on any given lease typically decrease over the life of the lease, although we may continue to enter into new leases in the ordinary course of our business.
Capital Expenditures and Tenant Improvement Allowances
Capital expenditures are primarily for the design and build-out of our spaces, and include leasehold improvements, equipment and furniture. Our leases often contain provisions regarding tenant improvement allowances, which are contractual rights to reimbursements paid by landlords for a portion of the costs we incur in designing and developing our workspaces. Tenant improvement allowances are reflected in the Consolidated Financial Statements upon lease commencement as our practice and intent is to spend up to or more than the full amount of the tenant improvement allowance that is contractually provided under the terms of the contract.
Over the course of a typical lease with tenant improvement allowances, we incur certain capital expenditures that we expect to be reimbursed by the landlords pursuant to provisions in our leases providing for tenant improvement allowances but for which we have not yet satisfied all conditions for reimbursement and, therefore, the landlords have not been billed at the time of such capital expenditures. Thus, while such receivables are reflected in our Consolidated Financial Statements upon lease commencement, the timing of the achievement of the applicable milestones and billing of landlords will impact when reimbursements for tenant improvement allowances will be received, which may impact the timing of our cash flows.
We monitor gross and net capital expenditures, which are primarily associated with our leasehold improvements, to evaluate our liquidity and workstation development efforts. We define net capital expenditures as the gross purchases of property, equipment and capitalized software, as reported in “cash flows from investing activities” in the Consolidated Statements of Cash Flows, less cash collected from landlords for tenant improvement allowances. While cash received for tenant improvement allowances is reported as “cash flows from operating activities” in the Consolidated Statements of Cash Flows, we consider cash received for tenant improvement allowances to be a reduction against our gross capital expenditures in the calculation of net capital expenditures.
As the payments received from landlords for tenant improvement allowances are generally received after certain project milestones are completed, payments received from landlords presented in the table below are not directly related to the cash outflows reported for the capital expenditures reported.
The table below shows our gross and net capital expenditures for the periods presented:
(Amounts in millions)
Year Ended December 31,
Gross capital expenditures
Cash collected for tenant improvement allowances
Net capital expenditures
Our ability to negotiate lease terms that include significant tenant improvement allowances has been and may continue to be impacted by our expansion into markets where such allowances may be less common. Our capital expenditures have also been and may continue to be impacted by our focus on
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enterprise members, who generally require more customization than a traditional workspace, resulting in higher build-out costs. However, we expect any increase in build-out costs resulting from expansion of configured solutions for our growing enterprise member base to be offset by increases in committed revenue, as enterprise members often sign membership agreements with longer terms and for a greater number of memberships than our other members. Future decisions to enter into long-term revenue-sharing agreements with building owners, rather than more standard fixed lease arrangements, may also impact future cash inflows relating to tenant improvement allowances and cash outflows relating to capital expenditures.
In the ordinary course of our business, we enter into certain agreements to purchase construction and related contracting services related to the build-outs of our operating locations that are enforceable, legally binding, and that specify all significant terms and the approximate timing of the purchase transaction. Our purchase orders are based on current needs and are fulfilled by the vendors as needed in accordance with our construction schedule. As of December 31, 2022, we have issued approximately $60 million in such outstanding construction commitments. As of December 31, 2022, we also had a total of $178 million in lease incentive receivables, recorded as a reduction of our long-term lease obligations on our Consolidated Balance Sheets. Of the total $178 million lease incentive receivable, $181 million was accrued at the commencement of the respective lease but unbilled as of December 31, 2022.
Summary of Cash Flows
Comparison of the years ended December 31, 2022 and 2021
A summary of our cash flows from operating, investing and financing activities for the years ended December 31, 2022 and 2021 is presented in the following table:
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effects of exchange rate changes
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash - Beginning of period
Cash, cash equivalents and restricted cash - End of period
Operating Cash Flows
Cash used in operating activities consists primarily of the revenue we generate from our members and the tenant improvement allowances we receive offset by rent, real estate taxes, common area maintenance and other operating costs. In addition, uses of cash from operating activities consist of employee compensation and benefits, professional fees, advertising, office supplies, utilities, cleaning, consumables, and repairs and maintenance related payments as well as member referral fees and various other costs of running our business.
The $1,179 million decrease in net cash used in operating activities from the year ended December 31, 2022 compared to the year ended December 31, 2021, was primarily attributable to the increase in total revenues of $675 million due to the continued impact of COVID-19 in 2021 and recovery during the year ended December 31, 2022. The decrease in net cash used in operating activities was also attributed to net savings achieved for the year ended December 31, 2022 through the continuation of our operational
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restructuring program and progress towards our efforts to create a more efficient organization which drove a decrease in location operating expenses, pre-opening location operating expenses, and selling, general and administrative expenses. Net cash used in operating activities also decreased due to a $211 million decrease in restructuring liability net payments, and a $44 million increase in distributions from equity method investments. The decrease in net cash used in operating activities was partially offset by $242 million decrease in cash received for operating lease incentives - tenant improvement allowances and $51 million increase in cash paid for interest.
Included in our cash flow from operating activities was $102 million of cash used by consolidated VIEs for the year ended December 31, 2022, compared to $113 million of cash used by consolidated VIEs for the year ended December 31, 2021.
Investing Cash Flows
The $53 million decrease in net cash used in investing activities from the year ended December 31, 2022 compared to the year ended December 31, 2021, was primarily due to $31 million increase in proceeds from asset divestitures and sale of investments and $19 million decrease in contributions to investments. The decrease in net cash used in investing activities also included $18 million in cash proceeds received as distributions from investments during the year ended December 31, 2022 compared to none during the year ended December 31, 2021. This decrease in net cash used in investing activities was partially offset by the net cash paid of $9 million for the acquisition of Common Desk during the year ended December 31, 2022.
Financing Cash Flows
The $1,941 million decrease in net cash provided by financing activities for the year ended December 31, 2022 compared to the year ended December 31, 2021, was primarily due to $1,209 million and $1,000 million in proceeds received from the Business Combination and PIPE financing, net of issuance costs paid, and draws on the 5.00% Senior Notes, respectively, during the year ended December 31, 2021 with no comparable activity during the year ended December 31, 2022. The decrease in net cash provided by financing activities also included $19 million decrease in additions to members' service retainers, net of refunds to members' service retainers and debt and equity issuance costs of $21 million during the year ended December 31, 2022. The decreases in cash flows provided by financing activities was partially offset by $350 million reduction of repayments of debt, net of proceeds from issuance of debt.
Comparison of the years ended December 31, 2021 and 2020
A summary of our cash flows from operating, investing and financing activities for the years ended December 31, 2021 and 2020 is presented in the following table:
Year Ended December 31,
Change
(Amounts in millions, except percentages)
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effects of exchange rate changes
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash - Beginning of period
Cash, cash equivalents and restricted cash - End of period
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Operating Cash Flows
Cash used in operating activities consists primarily of the revenue we generate from our members and the tenant improvement allowances we receive offset by rent, real estate taxes, common area maintenance and other operating costs. In addition, uses of cash from operating activities consist of employee compensation and benefits, professional fees, advertising, office supplies, warehousing, utilities, cleaning, consumables, and repairs and maintenance related payments as well as member referral fees and various other costs of running our business.
The $1.1 billion increase in net cash used in operating activities from the year ended December 31, 2021 compared to the year ended December 31, 2020, was primarily attributable to the decrease in total revenues of $846 million due to the continued impact of COVID-19 in 2021. The increase in net cash used in operating activities was also driven by a decrease of $928 million in tenant improvement allowances received during the year ended December 31, 2021. The increase was partially offset by net savings achieved for the year ended December 31, 2021 through the continuation of our operational restructuring program and progress towards our efforts to create a leaner, more efficient organization which drove a decrease in location operating expenses, pre-opening location expenses, and SG&A expenses of $957 million, net of $239 million decrease in non-cash lease costs and $30 million increase in Adjusted EBITDA addbacks discussed above in "— Key Performance Indicators — Adjusted EBITDA ". Also partially offsetting the increase in net cash used in operating activities is a decrease of $45 million in cash payments made on restructuring liabilities.
Included in our cash flow from operating activities was $113 million of cash used by consolidated VIEs for the year ended December 31, 2021, compared to $36 million of cash used by consolidated VIEs for the year ended December 31, 2020.
Investing Cash Flows
The $97 million decrease in net cash used in investing activities from the year ended December 31, 2021 compared to the year ended December 31, 2020, was primarily due to $1.1 billion decrease in cash paid for purchases of property and equipment, a $72 million decrease in contributions to investments, and a decrease in the net cash deconsolidated totaling $54 million in connection with the October 2020 ChinaCo Deconsolidation. This decrease in net cash used in investing activities was partially offset by the divestiture proceeds of $1.2 billion received during the year ended December 31, 2020, primarily related to the sale of the 424 Fifth Property held by the 424 Fifth Venture and also including proceeds from the sale of Meetup, Managed by Q, Teem, SpaceIQ, Flatiron, and certain non-core corporate equipment, compared to no divestitures during the year ended December 31, 2021.
Financing Cash Flows
The $2.4 billion net increase in cash flows provided by financing activities for the year ended December 31, 2021 compared to the year ended December 31, 2020, was primarily due to $1.2 billion of proceeds from Business Combination and PIPE financing, net of issuance costs paid. Also included in the increase in cash flows provided by financing activities is an $813 million debt repayment and $320 million distribution to noncontrolling interest holders during the year ended December 31, 2020, both primarily related to the sale of the 424 Fifth Property, with no comparable activity during the year ended December 31, 2021. These increases in cash flows provided by financing activities for the year ended December 31, 2021 compared to the year ended December 31, 2020, were partially offset by a $200 million decrease in proceeds received from draws on the 5.00% Senior Notes.
Off-Balance Sheet Arrangements
Except for certain letters of credit and surety bonds entered into as security under the terms of several of our leases, our unconsolidated investments, and the unrecorded construction and other commitments set forth above, we did not have any off-balance sheet arrangements as of December 31, 2022. Our
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unconsolidated investments are discussed in Note 13 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Critical Accounting Estimates, Significant Accounting Policies and New Accounting Standards
The accompanying Consolidated Financial Statements are prepared in accordance with U.S. GAAP applicable to a going concern. This presentation contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described below. The Consolidated Financial Statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern. In connection with the preparation of the Consolidated Financial Statements pursuant to ASC 250-40, Presentation of Financial Statements — Going Concern (“ASC 250-40”) , management evaluated whether there are conditions and events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these Consolidated Financial Statements are issued. As further discussed in Note 2 to the Consolidated Financial Statements, our losses and projected cash needs, combined with our current liquidity level, initially raised substantial doubt about the Company’s ability to continue as a going concern. Management’s plan to improve the Company’s liquidity and successfully alleviate the substantial doubt includes (1) restructuring existing debt and raising additional capital and, (2) taking additional operational restructuring actions furthering the plan that commenced following a change in leadership in 2020. Management believes that the expected impact on our liquidity and cash flows resulting from Management’s plan are sufficient to enable the Company to meet its obligations for at least twelve months from the issuance date and alleviate the conditions that initially raised substantial doubt about the Company's ability to continue as a going concern.
Our preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting policy estimate to be critical if: (1) we must make assumptions that were uncertain when the estimate was made; and (2) changes in the estimate, or selection of a different estimate methodology could have a material effect on our consolidated results of operations or financial condition. While we believe that our estimates, assumptions and judgments are reasonable, they are based on information available when the estimate or assumption was made. Actual results may differ significantly. Additionally, changes in our assumptions, estimates or assessments due to unforeseen events or otherwise could have a material impact on our financial position or results of operations.
This includes the net operating income assumptions in the Company's long-lived asset impairment testing, the timing of capital expenditures and fair value measurement changes for assets and liabilities that the Company measures at fair value and its assessment of its ability to continue to meet its obligations as they come due.
The Company's net operating assumptions and liquidity forecasts are based upon continued execution of its operational restructuring program and also includes management's best estimate of the currently evolving macroeconomic landscape, including a potential economic recession, rising interest rates, inflation, and the slower than expected recovery in certain markets from the impact that the COVID-19 pandemic. These factors may continue to have an impact on WeWork's business and its liquidity needs; however, the extent to which the Company's future results and liquidity needs are further affected will largely depend on the delays in location openings, our members' renewal of their membership agreements, the effect on demand for WeWork memberships, any permanent shifts in working from home and the Company's ongoing lease negotiations with its landlords, among others.
The critical accounting estimates, assumptions and judgments that we believe to have the most significant impact on our Consolidated Financial Statements are described below. See Note 2 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K f or additional
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information related to critical accounting estimates and significant accounting policies, including details of recent accounting pronouncements that were adopted and not yet adopted as of December 31, 2022.
Leases
At lease commencement, we recognize a lease obligation and corresponding right-of-use asset based on the initial present value of the fixed lease payments using our incremental borrowing rates for our population of leases. The incremental borrowing rate represents the rate of interest we would have to pay to borrow over a similar term, and with a similar security, in a similar economic environment, an amount equal to the fixed lease payments. The commencement date is the date we take initial possession or control of the leased premise or asset, which is generally when we enter the leased premises and begin to make improvements in preparation for its intended use.
Our leases do not provide a readily determinable implicit discount rate. Therefore, management estimates the incremental borrowing rate used to discount the lease payments based on the information available at lease commencement. We utilized a model consistent with the credit quality for our outstanding debt instruments to estimate our specific incremental borrowing rates that align with applicable lease terms.
Renewal options are typically solely at our discretion and are only included within the lease obligation and right-of-use asset when we are reasonably certain that the renewal options would be exercised.
Variable lease payments that depend on an index or rate are included in lease payments and are measured using the prevailing index or rate at lease inception or the measurement date. Changes to the index or rate are recognized in the period of change.
We evaluate our right-of-use assets for recoverability when events or changes in circumstances indicate that the asset may have been impaired. In evaluating an asset for recoverability, we consider the future cash flows expected to result from the continued use of the asset and the eventual disposition of the asset. If the sum of the expected future cash flows, on an undiscounted basis, is less than the carrying amount of the asset, an impairment loss equal to the excess of the carrying amount over the fair value of the asset is recognized.
Asset Retirement Obligations
Certain lease agreements contain provisions that require us to remove leasehold improvements at the end of the lease term. When such an obligation exists, we record an asset retirement obligation at the inception of the lease at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the leasehold improvements and depreciated over their useful lives. The asset retirement obligation is accreted to its estimated future value as interest expense using the effective-interest rate method.
Impairment of Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the assets acquired less liabilities assumed in connection with the acquisition. Goodwill is not amortized, but instead is tested for impairment at least annually in the fourth quarter of each year as of October 1 at each reporting unit level, or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired, and is required to be written down when impaired.
The guidance for goodwill impairment testing begins with an optional qualitative assessment to determine whether it is more likely than not that goodwill is impaired. The Company is not required to perform a quantitative impairment test unless it is determined, based on the results of the qualitative assessment, that it is more likely than not that goodwill is impaired. The quantitative impairment test is prepared at the reporting unit level. In performing the impairment test, management compares the estimated fair values of the applicable reporting units to their aggregate carrying values, including goodwill. If the carrying amounts of a reporting unit including goodwill were to exceed the fair value of the reporting unit, an
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impairment loss is recognized within our Consolidated Statements of Operations in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
The process of evaluating goodwill for impairment requires judgments and assumptions to be made to determine the fair value of the reporting unit, including discounted cash flow calculations, assumptions market participants would make in valuing each reporting unit and the level of the Company’s own share price. We completed our annual assessment of goodwill in the October 2022 and determined that there was no impairment of goodwill.
An unfavorable change in our expectations for the financial performance of our reporting unit, particularly long-term growth and profitability, would reduce the fair value of our reporting unit. The currently evolving macroeconomic landscape, including a potential economic recession, rising interest rates, and/or inflation, could result in slower than expected growth as companies and individuals may defer returning back to the office until a future time or consider remote and hybrid office space strategies. This continued impact may have a negative impact to the valuation assumptions which may reduce the fair value of our reporting unit. Should such events occur and it becomes more likely than not that a reporting unit’s fair value has fallen below its carrying value, we will perform an interim goodwill impairment test(s), in addition to the annual impairment test. Future impairment tests may result in a goodwill impairment, depending on the outcome of the quantitative impairment test. We would include goodwill impairment charges in impairment expense/(gain on sale) of goodwill, intangibles and other assets in the accompanying Consolidated Statements of Operations.
Impairment of Long‑Lived Assets
Long‑lived assets, including property and equipment, right-of-use assets, capitalized software, and other finite-lived intangible assets, are evaluated for recoverability when events or changes in circumstances indicate that the asset may have been impaired. In evaluating an asset for recoverability, the Company considers the future cash flows expected to result from the continued use of the asset and the eventual disposition of the asset. If the sum of the expected future cash flows, on an undiscounted basis, is less than the carrying amount of the asset, an impairment loss equal to the excess of the carrying amount over the fair value of the asset is recognized.
In connection with operational restructuring program described in Note 5 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K and related changes in the Company's leasing plans and planned or completed disposition of certain non-core operations, as well as the impact to the Company's business as a result of COVID-19, the Company has also recorded various other non-routine write-offs, impairments and gains on sale of goodwill, intangibles and various other assets. These non-routine charges totaled $625 million, $870 million, and $1,356 million during the years ended December 31, 2022, 2021, and 2020, respectively, and are included as impairment expense/(gain on sale) of goodwill, intangibles and other assets in the accompanying Consolidated Statements of Operations.
An unfavorable change in our expectations for the financial performance of our long-lived assets, particularly the expected future cash flows either a result of a potential termination or impact of the currently evolving macroeconomic landscape, would reduce the fair value of our long-lived assets. We will perform quarterly long-lived asset impairment tests and future impairment tests may result in a further impairment. We would include goodwill impairment charges in impairment expense/(gain on sale) of goodwill, intangibles and other assets in the accompanying Consolidated Statements of Operations.
Income Taxes, Deferred Taxes and Valuation Allowance
The Company accounts for income taxes under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
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are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the tax rates are enacted. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain. As of December 31, 2022, the Company had a deferred tax assets of $8.4 billion, partially offset by a valuation allowance of $6.0 billion and deferred tax liabilities of $2.3 billion.
We evaluate the realizability of our deferred tax assets and establish a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset may not be realized. The Company has recorded a full valuation allowance on its net deferred tax assets in most jurisdictions, however in certain jurisdictions, the Company did not record a valuation allowance where the Company had profitable operations, or the Company recorded only a partial valuation allowance due to the existence of deferred tax liabilities that will partially offset the Company’s deferred tax assets in future years. As of December 31, 2022, we concluded, based on the weight of all available positive and negative evidence, that a portion of our deferred tax assets are not more likely than not to be realized. As such a valuation allowance in the amount of $6.0 billion has been recognized on the Company’s deferred tax assets. The net change in valuation allowance for 2022 was an increase of $0.3 billion.
See Note 21 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional details regarding income taxes.
Stock-based Compensation
Stock-based compensation expense attributable to equity awards granted to employees and non-employees is measured at the grant date based on the fair value of the award. For employee awards, the expense is recognized on a straight-line basis over the requisite service period for awards that actually vest, which is generally the period from the grant date to the end of the vesting period. For non-employee awards, the expense for awards that actually vest is recognized based on when the goods or services are provided.
We expect to continue to grant stock-based awards in the future, and, to the extent that we do, our stock-based compensation expense recognized in future periods will likely continue to represent a significant expense.
We estimate the fair value of stock option awards granted using the Black-Scholes-Merton option pricing formula (the “Black-Scholes Model”) and a single option award approach. This model requires various significant judgmental assumptions in order to derive a final fair value determination for each type of award, including the expected term, expected volatility, expected dividend yield, risk-free interest rate, and fair value of our stock on the date of grant. The expected option term for options granted is calculated using the “simplified method.” This election was made based on the lack of sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The simplified method defines the expected term as the average of the contractual term and the vesting period. Estimated volatility is based on similar entities whose stock is publicly traded. We use the historical volatilities of similar entities due to the lack of sufficient historical data for our common stock price. Dividend yields are based on our history and expected future actions. The risk-free interest rate is based on the yield curve of a zero coupon U.S. Treasury bond on the date the stock option award was granted with a maturity equal to the expected term of the stock option award. All grants of stock options generally have an exercise price equal to or greater than the fair market value of such common stock on the date of grant.
The Company estimated the fair value of the WeWork Partnerships Profits Interest Units awards in connection with the modification of the original stock options using the Hull-White model and a binomial lattice model in order to apply appropriate weight and consideration of the associated distribution threshold and catch-up base amount. The Hull-White model requires similar judgmental assumptions as the Black-Scholes Model used for valuing the Company's options.
Because there has historically been no public market for our stock, the fair value of our equity has historically been approved by our board of directors or the compensation committee thereof as of the date
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stock-based awards were granted. In estimating the fair value of stock, we use the assistance of a third-party valuation specialist and considered factors we believe are material to the valuation process, including but not limited to, the price at which recent equity was issued by us to independent third parties or transacted between third parties, actual and projected financial results, risks, prospects, economic and market conditions, and estimates of weighted average cost of capital. We believe the combination of these factors provides an appropriate estimate of our expected fair value and reflects the best estimate of the fair value of our common stock at each grant date.
Subsequent to executing the Merger Agreement through the Business Combination (as defined in Note 1 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K ), we determined the value of our common stock based on the observable daily closing price of BXAC's stock (ticker symbol "BOWX") multiplied by the exchange ratio in effect for such transaction date. Subsequent to the Business Combination, we determined the value of our common stock based on the observable daily closing price of WeWork's stock (ticker symbol "WE").
We have elected to recognize forfeitures of stock-based awards as they occur. Recognition of any compensation expense relating to stock grants that vest contingent on the completion of an initial public offering or "Acquisition" (as defined in the 2015 Plan detailed in Note 24 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K) as deferred until the consummation of such offering or Acquisition. These performance-based vesting conditions (based upon the occurrence of a liquidity event (as defined in the 2015 Plan and related award agreements) were deemed satisfied upon the closing of the Business Combination.
Other Fair Value Measurements
Other critical accounting estimates include the valuation of our warrant liabilities which are remeasured to fair value on a recurring basis, with the corresponding gain or loss included in our gain (loss) from change in fair value of warrant liabilities. The warrant liabilities as of December 31, 2022, were valued using the level 2 input of the fair value of our public warrants traded on the NYSE under the ticker "WEWS".
See Note 18 of the notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional details regarding fair value measurements.
Consolidation and Variable Interest Entities
We are required to consolidate entities deemed to be VIEs in which we are the primary beneficiary. We are considered to be the primary beneficiary of a VIE when we have (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or receive benefits that could potentially be significant to the VIE.
Revenue Recognition
We recognize revenue under the five-step model required under ASC 606, which requires us to identify the relevant contract with the member, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations identified and recognize revenue when (or as) each performance obligation is satisfied.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our members to make required payments. If the financial condition of a specific member were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances may be required.
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