Lindows goes for an IPO - a detailed look

Lindows proposes to sell $57.5 million worth of shares in its initial offering. The company will be using WR Hambrecht's "OpenIPO" process, which seeks to price the stock at the highest level the market will bear via an auction process. Other companies which have used this method include Salon and Andover.Net (which is now OSDN and part of VA Software).

So what is Lindows? From the filing:

The company states that, as computers get cheaper, the cost of Windows becomes more predominant, especially for desktop systems. Price pressures, they say, will cause manufacturers and consumers to look more seriously at Linux. And Lindows, of course, hopes to have the version of Linux which is best suited to this market.

A big part of the Lindows plan is to get its distribution installed widely in a short period of time. The company is targeting small computer manufacturers, offering them a "low cost" licensing program. There is also a deal with Seagate, which is pre-installing Linspire on some of its drives. Remember, ten years ago, how you could buy disks with Linux preinstalled? That market is back, it would seem.

How does Lindows plan to use the money?

In other words, the day Lindows goes public will be a good day for Michael Robertson. Lindows says it may also use some of the money for acquisitions.

Lindows has to disclose its financial state as part of this offering, of course. The company, it turns out, brought in all of $63,131 in 2002, but that jumped up to just over $2 million in 2003. Even so, Lindows managed to lose over $4 million that year. As of the end of 2003, the company had $250,000 in the bank, a "working capital" figure of $-1.8 million, and $4.7 million in debt. How that figure squares with the $10 million owed to Mr. Robertson (and earning 10% interest) is not entirely clear.

From the obligatory "scary risk factors" section:

• They just might run into some financial problems when trying to compete directly with Microsoft for desktop sales.

• "We have not demonstrated the success of our open source software business model, which gives our customers the right to freely copy and distribute some of the software in our operating system and in the applications we develop and distribute. There is uncertainty in connection with open source business models, particularly as to whether or not businesses based on open source software can operate profitably."

• Customers may not go for a model based on service and license fees.

• Their Japanese distributions are handled by Livedoor, which, having just acquired Turbolinux, may lose interest in Lindows. Livedoor was responsible for 11% of the company's 2003 revenue.

• Third-party applications for Linux may not be forthcoming.

• "We have received an audit report from our independent auditors containing an explanatory paragraph stating that our historical losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern."

• The trademark fight with Microsoft could yet sink them. They are also, it appears, in a court battle with their insurance carrier over whether the costs of the Microsoft litigation are covered.

Lindows claims a little over 250,000 installed systems. How do they know?

Among other things, Lindows learns who sold you the system when the "light up" occurs. These end-user systems generated some 1.7 million in revenue in 2003.

The company has spent some $1.4 million in legal fights with Microsoft. It has extracted most of that back from its insurance carrier through lawsuits, but that case is still outstanding. If things go badly, Lindows may have to repay the insurance carrier, which would hurt. There are still outstanding Microsoft suits in Spain, Canada, and France, and a fight in South Africa would appear to be in the works. Lindows has also sued Xandros, as it turns out. It would appear that Lindows loaned Xandros $750,000 which has not been repaid.

As of the end of March, Lindows has 62 employees, 38 of whom are software engineers. The CEO is Michael Robertson, of course, who, under a new agreement, is to be paid $410,000 per year, plus bonuses. Mr. Robertson owns something over 48 million shares of the company - 81% of the total. The number of shares to be sold in the IPO has not yet been specified, but it seems clear that Mr. Robertson will remain in possession of a majority of the outstanding shares. The next biggest holder is the "Burcham Community Property Trust," which is controlled by the parents of Mr. Robertson's wife. Kevin Carmony, the company's president, holds 3 million shares.

The aggregate message from this filing is clear: Lindows is trying to go public now because it very much needs the money. The company has large debts, a series of ongoing legal battles, and a need for money to carry its business plan forward. If the IPO fails, Lindows will have to come up with another source of funds in a hurry, or, as its accountants warn, its "ability to continue as a going concern" will be very much in doubt. Someday there will be a thriving market around desktop Linux, and Lindows may, indeed, be well positioned to profit in that market. Getting there will be a challenge, however.