The IPO market is hot again, thanks in part to the successful debuts of companies like Spotify Technology and Dropbox earlier this year. It's within this context that Domo has filed its S-1 Registration Statement with the SEC, hoping to soon go public. Domo is a data analytics start-up that improves the flow of information to facilitate data-driven decision-making by executives. It was founded by Josh James, known for selling Omniture to Adobe nearly a decade ago.
Domo is seeking to raise upwards of $100 million through the offering. Don't touch the stock.
In terms of financials, Domo posted revenue of $108.5 million last fiscal year, which translated into a net loss of $176.6 million. The company has approximately 1,600 customers, which includes 385 larger customers that have over $1 billion in revenue. Domo relies heavily on this subset, which represents nearly half of revenue. However, the company burns through significant amounts of cash, with negative operating cash flow of $148.7 million last fiscal year.
Speaking of cash: Domo is running out of it. The company had just under $72 million at the end of April, and warns investors that if it doesn't come up with more cash in a matter of months, it's going to have to start drastically cutting operating expenses. Moreover, even if the offering successfully fills Domo's coffers, that money would probably only cover another year of operations. From the filing (emphasis added):
While we believe our cash and cash equivalents together with the proceeds of this offering will be sufficient to support our planned operations for at least the next 12 months, these conditions and our financial position without additional capital may affect our ability to meet our projected operating obligations under our current forecast. Management intends to raise additional capital through this offering; however, to the extent additional capital is not obtained through this offering, management will seek other forms of financing. If other equity or debt financing is not available by August 2018, management will then begin to implement plans to significantly reduce operating expenses.
Domo's largest operating expense is sales and marketing, which alone consumed over 100% of revenue last fiscal year ($131.8 million). Total operating expenses last year were $239.4 million.
The company has a credit facility that it entered into in December 2017. Initially, the credit line was good for $80 million, and the company drew $50 million. In April, Domo amended the credit facility to add another $20 million in borrowing capacity, bringing the total available credit to $100 million. The company drew the remaining $50 million that same month, and the facility is now maxed out with no more borrowing available. This credit facility also imposes many restrictive covenants on Domo.
A side of self-dealing
Generally speaking, investors perusing IPO filings should always check out the section for related-party transactions. For Domo, there are numerous yellow flags here.
In 2015, the company entered into a lease agreement with JJ Spud, which despite its name is not in the potato business. JJ Spud is an aircraft leasing company that is controlled by James, and Domo paid JJ Spud $1.8 million from February 2016 through April 2018 to use a private plane.
During the last two fiscal years, Domo also spent about $300,000 per year for catering services from Cubby's Chicago Beef, a local restaurant owned by James and his brother Cubby. There's another $200,000 that was spent during the fiscal year ended in January 2017 at Alice Lane Home Collection, an interior design company that James has a stake in and is run by his other brother Drew.
This isn't the type of money that will make or break the company ($2.6 million over the course of several years), but it does imply that Domo has a culture of self-dealing. Furthermore, the optics couldn't be worse at a time when the company appears to be running out of money.
James controls Domo
Like many founder-led companies, voting power is heavily concentrated with insiders and James specifically. James controls a whopping 91% of all voting power through an LLC called Cocolalla. James is the sole holder of Class A shares, which receive 40 votes per share, while the Class B shares being offered get just one vote per share.
Like many founder-led companies, public investors will have effectively no say in how the business is run or any real recourse due to weak corporate governance.
Domo arigato, Domo private investors
Up until now, Domo has been able to secure capital through private funding, raising nearly $700 million since 2010 -- Domo's biggest private investors are Institutional Venture Partners (IVP), Benchmark Capital, BlackRock, and GGV Capital -- as well as the recent credit facility that has effectively provided all of the cash that currently sits on the balance sheet.
But it has burned through much of that capital through financial mismanagement and a little bit of self-dealing. Public investors should stay away.