Leaked financials for flex-office firm Knotel show wide losses, $84 million in unpaid bills, and a shrinking cash pile

Knotel’s finances were in a tough position well before the pandemic hit, and now, the flexible-office company is stretched even thinner. 

Until recently, New York-based Knotel was one of the fastest-growing brands in the booming coworking and flexible-space field, emerging as a chief competitor to WeWork. 

Knotel said it raised $400 million last August at a $1 billion valuation. The company, which has locations in 16 cities across the US, Europe, Asia, and South America, oversaw 5 million square feet of space in January, CEO Amol Sarva told Quartz.

The coronavirus pandemic upended the sector as small businesses, startups, and entrepreneurs that flooded into flexible workspaces in recent years have shed those locations or stopped paying rent, leaving companies such as Knotel with less cash flow to pay landlords.

The company’s first-quarter 2020 and full-year 2019 financial statements, seen by Business Insider, revealed net losses as well as less cash compared to the end of 2019. 

• Knotel lost $49 million in the first quarter of 2020, according to an income statement seen by Business Insider. And its net loss was nearly $223 million for 2019, according to a full-year, unaudited income statement.
• The company had slightly less than $36 million in the bank at the end of the first quarter. That was down from $51 million in the bank that Knotel reported at the end of 2019, according to an unaudited balance sheet. 
• It reported total current assets, which include cash, accounts receivable, and other items, at $110 million at the end of the first quarter of 2020.
• Its total current liabilities, meanwhile, were $238 million. That includes nearly $84 million in accounts payable at the end of the first quarter. 
• Its total liabilities, both short term and long term, were nearly $23 million more than its total assets at the end of the first quarter. 

The company also breaks out credit-card liabilities on its balance sheet. That was $314,401 at the end of 2019, though $99,843 of that was credited back to the balance sheet by the end of the first quarter. 

Knotel’s executives have still been projecting optimism inside the company. One current employee, who is not authorized to speak to the media, said the company’s 2020 target for annualized recurring revenue is $360 million. 

Knotel has said publicly that it had $350 million in annual revenue lined up at the start of 2020. According to internal documents reported on in April by Business Insider, the company had $335 million in annual revenue signed on near the end of the fourth quarter of 2019, $80 million short of its $422 million internal forecast.

Last quarter, Knotel recorded a $6.6 million gross profit on $74 million of revenue. In 2019, the company’s cost of sales dwarfed the $159 million of income it brought in, leaving a $24 million loss on a gross basis. 

In a statement, Knotel spokesman Mousa Ackall disputed the numbers, but did not specify which were inaccurate:

“We share a lot about our performance and will share more after Q2. The numbers in your email partly match what we have publicly shared, but the rest are not correct. We did have a solid Q1, and Q2 so far still has us tracking to be profitable around year-end.” 

Knotel had shared selected financial information in a “2019 Year in Review” blog post. 

The company has said publicly that it has raised $550 million in total investor equity since its inception, with $80 million in debt financing.

In May, Business Insider reported that Knotel had sourced surety bonds from insurance startup Rhino that cover the hefty security deposits due for two of its office leases if Knotel abandons the commitments. But Rhino did not disclose to reinsurer Knight Re that its cofounder and CEO is the younger brother of Amol Sarva, the CEO of Knotel, raising a potential conflict of interest. 

Read more: Knotel and insurance startup Rhino didn’t disclose its CEOs were brothers when it struck a complex financial deal. Now a key partner could be on the hook as Knotel scrambles to pay bills, slashes staff, and plans to shed portions of its portfolio.

Vendor bills adding up

Knotel’s bills had been stacking up months before the pandemic, including to key brokerages like CBRE and Cushman & Wakefield, Business Insider reported in April .

At the end of the first quarter, Knotel owed $84 million to vendors, compared with $57 million at the end of 2019, according to the documents seen by Business Insider. 

The company’s cost-cutting measures include a major workforce reduction in March — laying off 30% of workers and furloughing 20% – and it had been working with landlords to give back 20% of its portfolio. 

A Knotel source had told Business Insider that the company’s legal and finance teams were “combing through the leases to see where we can stop paying rent” so that the company could fund its payroll. 

The source, who spoke on condition of anonymity because they were not authorized to speak with the media, said Knotel considered payments to vendors, general contractors, and brokers its last priority, with those payments likely to be deferred for three to six months or longer. 

Knotel’s peers, including WeWork, are also negotiating with landlords and other groups as they face a cash crunch from members who can’t or choose not to pay monthly bills for spaces they can’t use. WeWork has laid off hundreds of staff, and Industrious and Convene likewise furloughed or laid off employees in April. 

In April, 10 real estate experts told Business Insider that in the short term, flex-space operators will feel a pinch as employees stay home, and some companies will likely go out of business or consolidate.

In the long term, though, the flex-space industry may see an uptick from employers who don’t want to commit to traditional, long-term leases and who want more outsourced office management. 

Read more: 

• WeWork’s US head of real estate is leaving the coworking giant as the firm works through a major turnaround attempt
• IBM is ditching a big WeWork office in NYC, revealing the risks of the popular flex-space model as the pandemic prompts Blue Chip companies to rethink real estate

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