yoga-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____  to ____

Commission File Number: 001-38151

 

YogaWorks, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

47-1219105

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

5780 Uplander Way

Culver City, CA 90230

(Address of principal executive offices)

Registrant’s telephone number, including area code: (310) 664-6470

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 14, 2017, the registrant had 16,418,318 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Redeemable Preferred Stock

4

 

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

PART II.

OTHER INFORMATION

25

Item 1.

Legal Proceedings

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

25

Item 4.

Mine Safety Disclosures

25

Item 5.

Other Information

25

Item 6.

Exhibits

26

Exhibit Index

26

Signatures

27

 

 

 

 


 

YogaWorks, Inc.

Condensed Consolidated Balance Sheets

 

 

 

As of

September 30, 2017

 

 

As of

December 31, 2016

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,990,950

 

 

$

1,912,421

 

Inventories, net

 

 

914,187

 

 

 

948,194

 

Prepaid expenses and other current assets

 

 

679,902

 

 

 

1,318,137

 

Total current assets

 

 

31,585,039

 

 

 

4,178,752

 

Property and equipment, net

 

 

7,925,979

 

 

 

8,552,674

 

Intangible assets, net

 

 

21,568,438

 

 

 

25,654,823

 

Goodwill

 

 

17,781,671

 

 

 

17,746,570

 

Other non-current assets

 

 

1,091,768

 

 

 

1,015,079

 

Total assets

 

$

79,952,895

 

 

$

57,147,898

 

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable Preferred Stock and Stockholders’ Equity/(Deficit)

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,990,457

 

 

$

1,162,675

 

Accrued compensation

 

 

1,503,394

 

 

 

1,504,034

 

Current portion of long-term debt, net of debt issuance costs

 

 

 

 

 

418,750

 

Deferred revenue

 

 

5,345,773

 

 

 

4,593,076

 

Current portion of deferred rent

 

 

128,555

 

 

 

192,569

 

Total current liabilities

 

 

10,968,179

 

 

 

7,871,104

 

Deferred rent, net of current portion

 

 

2,629,833

 

 

 

2,471,734

 

Deferred tax liability

 

 

73,442

 

 

 

59,536

 

Convertible note due to related party

 

 

 

 

 

11,634,592

 

Long-term debt, net of current portion and debt issuance costs

 

 

 

 

 

6,350,320

 

Total liabilities

 

 

13,671,454

 

 

 

28,387,286

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

Redeemable preferred stock, Redeemed and converted as of September 30,

   2017. $0.001 par value; 10,000 shares authorized, issued and outstanding at

   December 31, 2016; Liquidation Preference $61,392,824 at

   December 31, 2016 (Note 8)

 

 

 

 

 

61,392,824

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Common stock at September 30, 2017, $0.001 par value; 50,000,000 shares

   authorized and 16,409,719 shares issued and outstanding and $0.001

   par value; 100,000 shares authorized and 74,559 shares issued and

   outstanding at December 31, 2016 (Note 7)

 

 

16,410

 

 

 

75

 

Additional paid-in capital

 

 

111,615,610

 

 

 

67,187

 

Accumulated deficit

 

 

(45,350,579

)

 

 

(32,699,474

)

Total stockholders’ equity (deficit)

 

 

66,281,441

 

 

 

(32,632,212

)

Total liabilities, redeemable preferred stock, and stockholders’ equity (deficit)

 

$

79,952,895

 

 

$

57,147,898

 

 

See accompanying notes to condensed consolidated financial statements.  

2


 

YogaWorks, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net revenues

 

$

13,518,513

 

 

$

13,494,703

 

 

$

40,002,033

 

 

$

41,916,425

 

Cost of revenues and operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

5,153,324

 

 

 

4,943,303

 

 

 

15,087,713

 

 

 

15,545,611

 

Center operations

 

 

5,732,994

 

 

 

5,735,187

 

 

 

17,002,858

 

 

 

16,830,135

 

General and administrative expenses

 

 

4,556,887

 

 

 

2,572,095

 

 

 

11,661,716

 

 

 

8,475,448

 

Depreciation and amortization

 

 

2,161,126

 

 

 

2,249,999

 

 

 

6,530,589

 

 

 

6,657,561

 

Total cost of revenues and operating

   expenses

 

 

17,604,331

 

 

 

15,500,584

 

 

 

50,282,876

 

 

 

47,508,755

 

Loss from operations

 

 

(4,085,818

)

 

 

(2,005,881

)

 

 

(10,280,843

)

 

 

(5,592,330

)

Interest expense, net

 

 

532,939

 

 

 

398,766

 

 

 

1,343,445

 

 

 

1,179,947

 

Net loss before income taxes

 

 

(4,618,757

)

 

 

(2,404,647

)

 

 

(11,624,288

)

 

 

(6,772,277

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Benefit from) provision for income taxes

 

 

(27,933

)

 

 

17,764

 

 

 

31,074

 

 

 

28,389

 

Net loss

 

 

(4,590,824

)

 

 

(2,422,411

)

 

 

(11,655,362

)

 

 

(6,800,666

)

Less preferred rights dividend on redeemable

   preferred stock

 

 

 

 

 

(1,189,494

)

 

 

(995,743

)

 

 

(3,474,049

)

Net loss attributable to common

   stockholders

 

$

(4,590,824

)

 

$

(3,611,905

)

 

$

(12,651,105

)

 

$

(10,274,715

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

   attributable to common stockholders

 

$

(0.37

)

 

$

(48.61

)

 

$

(1.51

)

 

$

(140.56

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares used in

   calculating loss per share attributable to

   common stockholders (Note 9):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted common shares

 

 

12,574,523

 

 

 

74,305

 

 

 

8,363,916

 

 

 

73,096

 

 

See accompanying notes to condensed consolidated financial statements.

          

3


 

YogaWorks, Inc.

Condensed Consolidated Statements of Redeemable Preferred Stock (Unaudited)

 

 

 

Redeemable Preferred Stock

 

 

 

Shares

 

 

Amount

 

Balance, December 31, 2016

 

 

10,000

 

 

$

61,392,824

 

Preferred rights dividend on redeemable preferred stock

 

 

 

 

 

995,743

 

Redeemed and preferred stock conversion (Note 8)

 

 

(10,000

)

 

 

(62,388,567

)

Balance, September 30, 2017

 

 

 

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

YogaWorks, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Deficit

 

 

Total

Stockholders’

Equity (Deficit)

 

Balance, December 31, 2016

 

 

74,559

 

 

$

75

 

 

$

67,187

 

 

$

(32,699,474

)

 

$

(32,632,212

)

Conversion of redeemable preferred stock

 

 

7,425,388

 

 

 

7,425

 

 

 

62,381,142

 

 

 

 

 

 

62,388,567

 

Conversion of convertible note

 

 

1,407,632

 

 

 

1,408

 

 

 

11,824,366

 

 

 

 

 

 

11,825,774

 

Beneficial conversion feature

 

 

 

 

 

 

 

 

147,877

 

 

 

 

 

 

147,877

 

Redeemable preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

(995,743

)

 

 

(995,743

)

Issuance of common stock, net of underwriting

   discounts and offering costs

 

 

7,502,140

 

 

 

7,502

 

 

 

35,075,786

 

 

 

 

 

 

35,083,288

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,119,252

 

 

 

 

 

 

2,119,252

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,655,362

)

 

 

(11,655,362

)

Balance, September 30, 2017

 

 

16,409,719

 

 

$

16,410

 

 

$

111,615,610

 

 

$

(45,350,579

)

 

$

66,281,441

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

YogaWorks, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(11,655,362

)

 

$

(6,800,666

)

Adjustments to reconcile net loss to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,530,589

 

 

 

6,657,561

 

Deferred tax

 

 

13,906

 

 

 

17,399

 

Paid-in-kind interest expense capitalized to convertible note

 

 

291,585

 

 

 

669,886

 

Change in value of beneficial conversion feature

 

 

147,877

 

 

 

 

Amortization of debt issuance cost

 

 

69,164

 

 

 

83,941

 

Debt issuance cost written-off

 

 

318,016

 

 

 

 

Stock-based compensation expense

 

 

2,119,252

 

 

 

21,036

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

 

 

 

Inventories

 

 

47,575

 

 

 

150,857

 

Prepaid expenses and other current assets

 

 

656,902

 

 

 

143,627

 

Other non-current assets

 

 

(76,689

)

 

 

(28,948

)

Accounts payable and accrued expenses

 

 

2,707,751

 

 

 

(473,831

)

Accrued compensation

 

 

(640

)

 

 

143,530

 

Deferred revenue

 

 

391,885

 

 

 

(1,071,824

)

Deferred rent and other non-current liabilities

 

 

94,085

 

 

 

307,842

 

Net cash provided by (used in) operating activities

 

 

1,655,896

 

 

 

(179,590

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property, equipment, and intangible assets

 

 

(958,602

)

 

 

(1,967,510

)

Acquisitions

 

 

(445,400

)

 

 

 

Tenant improvement allowances received

 

 

 

 

 

1,139,653

 

Net cash used in investing activities

 

 

(1,404,002

)

 

 

(827,857

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Principal payment on term loans

 

 

(6,956,250

)

 

 

 

Principal payment on convertible note

 

 

(3,300,403

)

 

 

 

Principal payment on subordinated notes

 

 

(200,000

)

 

 

 

Proceeds from issuance of common stock, net of underwriting discounts and

   offering costs

 

 

35,083,288

 

 

 

 

Proceeds from issuance of convertible note

 

 

3,200,000

 

 

 

 

Net cash provided by financing activities

 

 

27,826,635

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

28,078,529

 

 

 

(1,007,447

)

Cash and cash equivalents, beginning of period

 

 

1,912,421

 

 

 

3,772,605

 

Cash and cash equivalents, end of period

 

$

29,990,950

 

 

$

2,765,158

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

Interest paid

 

$

516,694

 

 

$

426,222

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

 

 

 

Dividends on preferred redeemable stock accrued

 

$

995,743

 

 

$

3,474,049

 

Paid-in-kind interest expense capitalized convertible note

 

 

291,585

 

 

 

669,886

 

Purchase consideration liabilities related to acquisitions

 

 

120,031

 

 

 

 

Conversion of convertible notes to equity

 

 

11,825,774

 

 

 

 

Conversion of preferred redeemable stock to equity

 

 

62,388,567

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


 

YogaWorks, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.Organization and Basis of Presentation

General

YogaWorks, Inc., a Delaware corporation, and its wholly-owned subsidiaries (collectively referred to as “we”, “us”, “our”, and the “Company”) are primarily engaged in operating yoga studios. Our Company was formerly known as YWX Holdings, Inc. and we changed our name to YogaWorks, Inc. on April 10, 2017. We operate under the brand names YogaWorks, Yoga Tree and certain other local brands for a period of time following the acquisition of studios. We primarily offer yoga classes, workshops, teacher training programs, and yoga-related retail merchandise across our studios. In addition to our studio locations, we offer online yoga instruction and programming through our MyYogaWorks.com web platform, which provides subscribers with a highly curated library of over 1,000 yoga classes.

Initial Public Offering

On August 16, 2017, we completed our initial public offering (“IPO”) whereby we sold 7,300,000 shares of our common stock (“Common Stock”) registered at a price of $5.50 per share. Our shares of Common Stock are traded on the NASDAQ Global Market. We received proceeds from our IPO of $37.6 million after deducting underwriters' discounts and commissions of $2.5 million, but before deducting offering costs of $2.1 million. Certain IPO-related costs at September 30, 2017 of $2.6 million were recorded as a reduction to additional paid-in capital.

Markets

We operate in regional markets across the United States (“U.S.”). As a result of the clustering of our studios in key geographic markets, and the flexibility offered to students to use different studios in a regional market, we do not report net revenues on an individual studio basis or report same studio sales. We prefer to analyze financial results on a regional market basis. Given the focus on acquisitions, we may acquire studios in an existing regional market to capture more regional market share, which may take some market share from our existing studios.

As of September 30, 2017, we owned and operated 53 yoga studios in 6 regional markets. The following table illustrates the studio locations by regional market:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Regional Market

 

Number of

Studios(1)

 

Percentage of

Net Revenues(2)

 

 

Number of

Studios(1)

 

Percentage of

Net Revenues(2)

 

 

Number of

Studios(1)

 

Percentage of

Net Revenues(2)

 

 

Number of

Studios(1)

 

Percentage of

Net Revenues(2)

 

Los Angeles

 

17

 

 

41

%

 

17

 

 

42

%

 

17

 

 

42

%

 

17

 

 

41

%

Orange County (California)(3)

 

4

 

 

8

%

 

4

 

 

9

%

 

4

 

 

8

%

 

4

 

 

9

%

New York City

 

5

 

 

12

%

 

5

 

 

13

%

 

5

 

 

13

%

 

5

 

 

14

%

Northern California

 

13

 

 

26

%

 

13

 

 

25

%

 

13

 

 

25

%

 

13

 

 

26

%

Boston(3)

 

3

 

 

4

%

 

2

 

 

3

%

 

3

 

 

4

%

 

2

 

 

3

%

Baltimore/Washington D.C.(3)

 

11

 

 

9

%

 

8

 

 

8

%

 

11

 

 

8

%

 

8

 

 

7

%

Total studios

 

53

 

 

 

 

 

49

 

 

 

 

 

53

 

 

 

 

 

49

 

 

 

 

 

 

(1)

Number of studios as of the end of the period.

 

(2)

For the three and nine months ended September 30. Assumes that any net revenues for teacher training, workshops and MyYogaWorks.com for such period are allocated to the regional markets on a proportional basis based on the market’s share of total studio net revenues for such period.

 

(3)

Reflects closure of one studio in Orange County (California) in the third quarter of 2016, one studio opening in Boston in the first quarter of 2017 and three studios acquired in the Baltimore/Washington D.C. region in the third quarter of 2017.

We operate in a number of regional operating segments; however, we meet the aggregation criteria of Accounting Standards Codification (“ASC”) 280, “Segment Reporting” and therefore report as one reportable segment. Our chief executive officer, who is our chief operating decision maker, determines our strategy and makes operating decisions for our regional operating segments, and assesses performance and allocates resources based on performance of our regional operating segments. We derive revenue from the sale of yoga classes, workshops, teacher training programs and yoga-related retail merchandise.

7


 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared by us in accordance with U.S. generally accepted accounting principles (“GAAP”), for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, normal recurring adjustments considered necessary for a fair presentation have been reflected in these condensed consolidated financial statements.

The consolidated balance sheet as of December 31, 2016 has been derived from the audited financial statements for the fiscal year then ended included in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on August 11, 2017 (the “Prospectus”), but does not include all of the information and notes required by GAAP for complete financial statements. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements as of and for the fiscal year ended December 31, 2016 and the related notes thereto included in the Prospectus.

There have been no significant changes in our accounting policies from those disclosed in the Prospectus filed with the SEC on August 11, 2017.

 

 

2.Recent Accounting Pronouncements

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have availed ourselves of this exemption from new or revised accounting standards. The effective dates of the recent accounting pronouncements noted below reflect the private company transition date.

In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this ASU will provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This ASU is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted and the standard should be applied prospectively. Our Company is currently evaluating the impact of this ASU on the financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019 including interim periods within that reporting period, with early adoption permitted. We are in the process of evaluating the impact of this accounting standards update on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in ASU Topic 605, Revenue Recognition, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Topic 606 is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method. We are in the process of evaluating the impact of this accounting standards update on our consolidated financial statements.

 

3.Acquisitions

 

Our Company uses acquisitions as our primary strategy to grow our market share, quickly gain students and build on the operating momentum of the acquired businesses. We completed two acquisitions during the quarter ended September 30, 2017, paying total consideration of $445,400, excluding deferred payments including earnouts, holdbacks and indemnification claims. On August 28, 2017, we acquired Tranquil Space (two studios), one in Arlington, Virginia, and one in Washington, D.C. and on September 26, 2017 we acquired Pure Prana Yoga Studio (one studio) in Alexandria, Virginia. The acquisitions were accounted for as a business acquisition in accordance with ASC 805, Business Combinations (“ASC 805”). Under the acquisition method of accounting, the total purchase price was allocated to the net tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. Any excess amount paid over identifiable assets is recorded as goodwill. The associated goodwill is deductible for tax purposes. The process for estimating the fair values of the acquired studios involves the use of significant estimates and assumptions, including estimating average industry purchase price multiple and estimating future cash flows.

 

The condensed consolidated statement of operations since the date of each acquisition through September 30, 2017 and the condensed consolidated balance sheet as of September 30, 2017 include the results of operations and the acquired assets and assumed liabilities related to all 2017 acquisitions. For the nine months ended September 30, 2017, these acquisitions contributed

8


 

$88,477 to our Company’s revenues. Net income contributed by these acquisitions was not separately identifiable due to our integration activities and the impact of corporate-level expenses and is impracticable to provide. Acquisition-related costs, including legal fees and all related professional fees, were expensed.

 

The total purchase price consideration was allocated to the acquired assets and liabilities as follows:

 

 

 

Amount

 

Inventories

 

$

13,568

 

Prepaid expenses and current other assets

 

 

18,667

 

Property and equipment

 

 

468,892

 

Intangible assets

 

 

390,015

 

Goodwill

 

 

35,101

 

Total assets acquired

 

 

926,243

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

120,031

 

Deferred revenue

 

 

360,812

 

Total liabilities assumed

 

 

480,843

 

 

 

 

 

 

Net assets acquired

 

$

445,400

 

 

The purchase price allocations are preliminary and are based on information existing at the acquisition dates. Accordingly, the purchase price allocations are subject to change. These acquisitions are not material to our Company's results of operations, individually or in the aggregate. As a result, no pro forma financial information is provided.

 

 

4.Property and Equipment

The major classes of property and equipment are as follows:

 

 

 

As of

September 30, 2017

 

 

As of

December 31, 2016

 

Computer equipment and purchased software

 

$

1,117,057

 

 

$

1,070,769

 

Furniture and fixtures

 

 

3,566,300

 

 

 

3,383,360

 

Leasehold improvements

 

 

21,726,037

 

 

 

21,073,627

 

Other equipment

 

 

619,640

 

 

 

184,747

 

Construction-in-progress

 

 

 

 

 

22,201

 

Total property and equipment

 

 

27,029,034

 

 

 

25,734,704

 

Less accumulated depreciation and amortization

 

 

(19,103,055

)

 

 

(17,182,030

)

 

 

$

7,925,979

 

 

$

8,552,674

 

 

Depreciation and amortization expense includes property and equipment, leasehold improvements and purchased software. We incurred depreciation expense of $648,820 and $690,768 for the three months ended September 30, 2017 and 2016, respectively, and $1,921,025 and $1,970,198 for the nine months ended September 30, 2017 and 2016, respectively.

 

 

5.Related Party

We paid expense reimbursement fees to an affiliate of Great Hill Equity Partners, V, L.P. and Great Hill Investors, LLC (collectively, “Great Hill Partners” or “GHP”), the owners of a majority of our Common Stock, in the amount of $25,000 for the three months ended September 30, 2017 and 2016, respectively, and $75,000 for the nine months ended September 30, 2017 and 2016, respectively. In connection with our IPO, the Expense Reimbursement Agreement with Great Hill Partners was terminated by the parties.

On March 27, 2017, we issued new convertible notes to Great Hill Partners, in the aggregate principal amount of $3.2 million, which are convertible, at the option of the holder, into shares of our Common Stock at a conversion price of $8.40 per share (see Note 7).  In connection with the IPO, the convertible notes were repaid in full.

 

9


 

6.Debt

Long-term Debt

In July 2015, we obtained a 5-year $20 million senior secured term loan facility with Deerpath Funding LP (the “Deerpath Facility”). We borrowed $5 million in July 2015 (the “Initial Term Loan”), and had the ability, upon meeting certain conditions, to borrow up to an additional $15 million. Borrowings under the Deerpath Facility carried an annual interest rate of LIBOR + 7%. The proceeds from the Initial Term Loan were used to pay all of the outstanding indebtedness under our credit facility with a previous lender.

In December 2015, we borrowed an additional $2 million under the Deerpath Facility for general corporate purposes, thereby increasing the principal amount of the loans and reducing the incremental borrowing availability under the Deerpath Facility, in each case, by an equivalent amount. As of June 30, 2017, there remained $13.1 million of incremental borrowing capacity under the Deerpath Facility. On August 16, 2017, in connection with the consummation of our IPO, the Deerpath Facility was repaid in full and immediately cancelled thereafter.

As of September 30, 2016, the long-term debt balance was zero and as of December 31, 2016, long-term debt, net of debt issuance costs, consists of the following:

 

 

 

As of

December 31, 2016

 

Term loan paid on August 16, 2017.

 

$

6,956,250

 

Subordinated notes matured and paid on February 8, 2017

 

 

200,000

 

Total long-term debt, excluding debt issuance costs

 

 

7,156,250

 

Debt issuance costs, net of accumulated amortization

 

 

(387,180

)

Total long-term debt, net of debt issuance costs

 

 

6,769,070

 

Current portion of long-term debt, net of debt issuance costs

 

 

(418,750

)

Long-term debt, net of current portion and debt

   issuance costs

 

$

6,350,320

 

Convertible Note Due to Related Party

On March 27, 2017, we issued new convertible notes (the “New Convertible Notes”) to Great Hill Partners, in the aggregate principal amount of $3.2 million, which were convertible, at the option of the holder, into shares of our Common Stock at a conversion rate of $8.40 per share. The New Convertible Notes consisted of a Subordinated Convertible Promissory Note, dated March 27, 2017, made by us in favor of Great Hill Equity Partners V, L.P., in the principal amount of $3,189,350, and a Subordinated Convertible Promissory Note, dated March 27, 2017, made by us in favor of Great Hill Investors, LLC, in the principal amount of $10,650. Each New Convertible Note had a maturity date of March 27, 2018 and bore interest at an annual rate of 8%. On August 16, 2017, in connection with the consummation of our IPO, the New Convertible Notes were repaid in full.

Interest expense for the three months ended September 30, 2017 and 2016 related to the aggregate amount of outstanding indebtedness under the Deerpath Facility was $168,698 and $143,111, respectively. For the nine months ended September 30, 2017 and 2016, interest expense was $516,694 and $426,222, respectively. In addition, interest expense under the convertible promissory notes was $32,498 and $227,674 for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016 interest expense was $439,572 and $669,886, respectively.

 

 

7.Common Stock

Initial Public Offering

On August 16, 2017, we completed our IPO whereby we sold 7,300,000 shares of our Common Stock registered at a price of $5.50 per share. We received proceeds from our IPO of $37.6 million after deducting underwriters' discounts and commissions of $2.5 million, but before deducting offering costs of $2.1 million.

 

Conversion of Amended and Restated 2015 GHP convertible promissory notes and Redeemable Preferred Stock

On March 24, 2017, we engaged in a series of transactions to convert certain of our outstanding indebtedness and all of the outstanding Redeemable Preferred Stock into shares of Common Stock.

The aggregate amount of principal and accrued interest under that certain Second Amended and Restated Subordinated Convertible Promissory Note made by us in favor of Great Hill Equity Partners V, L.P., dated March 24, 2017, and that certain Second Amended and Restated Subordinated Convertible Promissory Note made by us in favor of Great Hill Investors, LLC, dated March 24,

10


 

2017 (collectively, the “Amended and Restated 2015 GHP Convertible Promissory Notes”), was converted into 1,407,632 shares of Common Stock based on the conversion price per share of Common Stock as set forth in such notes of $8.40. Concurrently, all of the outstanding shares of Redeemable Preferred Stock were converted into shares of Common Stock, with the number of shares of Common Stock issuable upon such conversion computed by dividing the Preferred Share Liquidation Preference per share by a conversion price per share of Common Stock of $8.40, resulting in 7,426,169 newly issued shares of Common Stock. Immediately after the conversion of the Amended and Restated 2015 GHP Convertible Promissory Notes and the Redeemable Preferred Stock into shares of Common Stock, we effected a 1-for-10 reverse stock split of the Common Stock. Accordingly, except as otherwise indicated, all share and per share amounts have been adjusted to reflect the 1-for-10 reverse stock split as though it had occurred at the beginning of the initial period presented. In connection with the foregoing transactions, we also increased our total number of shares of authorized Common Stock to 14,131,017 shares.

Following the 1-for-10 reverse stock split, our Board of Directors (“Board”) amended our 2014 Stock Option and Grant Plan to increase the shares of Common Stock reserved for issuance thereunder to 1,695,484. In addition, our Board approved the grant of options to purchase 1,425,641 shares of Common Stock to certain employees and consultants.

On July 14, 2017, we effectuated a 1-for-1.333520 reverse stock split (the “1-for- 1.333520 Reverse Split”). Under the terms of the 1-for-1.333520 Reverse Split, each share of Common Stock, issued and outstanding as of such effective date, was automatically reclassified and split into 0.749895 shares of Common Stock, without any further action by the stockholders. Fractional shares were rounded down to the nearest whole share. Accordingly, except as otherwise indicated, all share and per share amounts have been adjusted to reflect the 1-for-1.333520 Reverse Split for all periods presented.

 

 

8.Preferred Stock

Redeemable Preferred Stock

On March 24, 2017, we engaged in a series of transactions to convert certain of our outstanding indebtedness and all of the outstanding Redeemable Preferred Stock into shares of Common Stock. Because Great Hill Equity Partners, V, L.P. and Great Hill Investors, LLC held all of the Redeemable Preferred Stock and owned a substantial majority of the Common Stock both before and after the conversion of the Redeemable Preferred Stock on March 24, 2017, there is no impact on earnings per share as a result of this conversion.

 

 

9.Loss per Share Attributable to Common Stockholders

The components of basic and diluted loss per share attributable to common stockholders are as follows (in thousands, except share and per share data):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator for basic and diluted loss per share

   attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,590,824

)

 

$

(2,422,411

)

 

$

(11,655,362

)

 

$

(6,800,666

)

Dividend attributable to participating

   securities

 

 

 

 

 

(1,189,494

)

 

 

(995,743

)

 

 

(3,474,049

)

Net loss attributable to YogaWorks, Inc.

   common stockholders

 

$

(4,590,824

)

 

$

(3,611,905

)

 

$

(12,651,105

)

 

$

(10,274,715

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average outstanding shares of

   common stock

 

 

12,574,523

 

 

 

74,305

 

 

 

8,363,916

 

 

 

73,096

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity incentive plans

 

 

 

 

 

 

 

 

 

 

 

 

Convertible debt

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents

 

 

12,574,523

 

 

 

74,305

 

 

 

8,363,916

 

 

 

73,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.37

)

 

$

(48.61

)

 

$

(1.51

)

 

$

(140.56

)

As of September 30, 2017, and 2016, there were outstanding options to purchase 1,527,768 and 433 shares of Common Stock outstanding, respectively, which were excluded from the computation of diluted loss per share because it would be anti-dilutive.

11


 

 

 

10.Accounting for Stock-Based Compensation

Common Stock Options and Grants

2014 Plan

In July 2014, our Company adopted the 2014 Stock Option and Grant Plan (“2014 Plan”). Upon adoption of the 2014 Plan, the maximum aggregate number of shares issuable thereunder was 7,499 shares post reverse split. In March 12, 2017, our Board amended the 2014 Plan to increase the shares of Common Stock reserved for issuance thereunder to 1,695,484. As of September 30, 2017, no shares were issuable under the 2014 Plan.

2017 Plan

In connection with our IPO, we adopted the 2017 Incentive Award Plan (the “2017 Plan”), effective as of August 9, 2017. The aggregate number of shares of Common Stock reserved for issuance pursuant to awards granted under the 2017 Plan equals: (i) 2,263,213, plus (ii) any shares which, as of the effective date of the 2017 Plan, subject to awards under the 2014 Plan which forfeited or lapsed unexercised following the effective date of the 2017 Plan, plus (iii) an annual increase on the first day of each calendar year beginning on January 1, 2018 and ending on and including January 1, 2027 equal to the lesser of (a) 5% of the shares outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year, or (b) such smaller number of shares as determined by our Board.

The 2017 Plan permits the grant of incentive stock options, restricted stock, restricted stock units, stock appreciation rights, performance based awards to our employees, directors and consultants. Shares issued pursuant to awards under the 2017 Plan that are settled for cash by our Company or that expire or are forfeited will become available for future grant or sale. Shares used to pay the exercise price of an award or to satisfy the minimum tax withholding obligations related to an award will not be available for future grants under the 2017 Plan. As of September 30, 2017, 1,416,862 shares remained available for issuance under the 2017 Plan.

With the exception of accelerated options, our typical options vest over four years from the grant date, with 25% of the award vesting on the first anniversary of the grant date and the remainder vesting over the next 36 months. Stock compensation expense related to these equity awards was recorded based upon the estimated fair value of the shares amortized over the vesting period.

 

 

 

Shares

 

 

Weighted-

Average

Exercise Price

 

 

Weighted-

Average

Remaining

Contractual

Life

(in Years)

 

 

Aggregate

Intrinsic

Value (1)

 

Outstanding at December 31, 2016

 

 

439

 

 

$

9.20

 

 

 

8.08

 

 

$

 

Granted

 

 

1,698,384

 

 

 

7.80

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(171,055

)

 

 

8.28

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

1,527,768

 

 

 

7.74

 

 

 

9.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2017

 

 

576,144

 

 

 

7.89

 

 

 

9.53

 

 

 

 

  

 

(1)

Based on our Company’s closing stock price of $2.77 on September 30, 2017.

 

Unamortized stock-based compensation expense relating to stock options was $1.9 million at September 30, 2017, which is expected to be recognized over a weighted-average period of 2.3 years.

Valuation

 

We use the Black-Scholes option pricing model to calculate the fair value of each option grant. The expected volatility is based on historical volatility of the stock price of comparable public companies. We estimate the expected term based upon the historical exercise behavior of employees. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. We estimated a zero-forfeiture rate for these stock option grants as the awards have short vesting terms and have a low probability of forfeiture based on the recipients of the stock options.

12


 

The fair values of stock options granted have been estimated utilizing the following assumptions:

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Fair value of common stock

 

$ 4.41 - $ 8.40

 

 

$ 9.20

 

Exercise price of common stock option

 

$ 4.41 - $ 8.40

 

 

$ 9.20

 

Risk-free interest rate

 

1.90% - 2.10%

 

 

 

2.50

%

Expected term (in years)

 

5.91 - 5.95

 

 

 

6.25

 

Dividend yield

 

 

0.00

%

 

 

0.00

%

Expected volatility

 

 

40

%

 

 

44

%

 

Restricted Stock Units

On August 17, 2017, our Company granted 517,357 and 76,361 Restricted Stock Units (“RSUs”) to our officers and Board, respectively. All RSUs grants vest on the satisfaction of only a service based condition. As of September 30, 2017, there were 200,641 RSUs vested and 393,077 shares of our Common Stock issuable upon the vesting of outstanding RSUs. Our Company recognized compensation expense related to RSUs of $1.0 million for the nine months ended September 30, 2017. Unrecognized compensation expenses related to shares of our Common Stock subject to unvested RSUs was $1.7 million at September 30, 2017, which is expected to be recognized as expenses over the weighted-average period of 2.3 years. The service conditions are generally satisfied for the RSUs granted to our officers and Board over four years starting from such person’s hiring date and the earlier to occur of the first anniversary of the grant date or the annual meeting of stockholders, respectively.

For the nine months ended September 30, 2017, our Company withheld 94,342 shares of Common Stock (“Net Settlement”) and remitted $413,584 in cash to meet the related tax withholding requirements on behalf of our officers. We will continue to evaluate the Net Settlement of RSUs that vest in the future.

Stock-Based Compensation Expense

Our Company recognized stock-based compensation expense related to stock options and RSUs, included in general and administrative expenses as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Stock-based compensation

 

$

1,294,107

 

 

$

2,528

 

 

$

2,119,252

 

 

$

21,036

 

 

 

11.Income Taxes

Our effective income tax rate for the three months ended September 30, 2017 and 2016 was 0.61% and (0.44)%, respectively. Our effective income tax rate is evaluated and adjusted at each interim period as facts and circumstances warrant. The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the three months ended September 30, 2017 and 2016 was primarily related to the impact of the valuation allowance and state income taxes.

At September 30, 2017, we had no unrecognized tax benefits. We believe that there are no uncertain tax positions for which it is reasonably possible that will produce a material effect to the financial statements over the next 12 months. We recognize interest and penalties on taxes, if any, related to unrecognized tax benefits as income tax expense. As of September 30, 2017 and 2016, we had no material uncertain tax positions to be accounted for in the financial statements; accordingly, no interest or penalties on taxes were recognized for the nine months ended September 30, 2017 and for the same period in 2016.

Pursuant to Internal Revenue Code, or IRC, Sections 382 and 383, annual use of our net operating loss carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurred within a three-year period. We have not completed an IRC Section 382 and 383 analysis regarding the limitation of net operating loss carryforwards. As there is a full valuation allowance applied to the deferred taxes, a Section 382 limitation will not have an effect on the deferred taxes or the income tax rate.

We are undergoing an examination of our federal income tax return filed for the 2015 tax year by the Internal Revenue Service. We are currently not under examination by state and local tax authorities.

 

 

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12.Commitments and Contingencies

Legal Matters

On June 5, 2017, a letter was sent to the California Labor & Workforce Development Agency alleging our itemized wage statements did not comply with the California Labor Code, which we refer to herein as the Wage Statement Claim. On August 7, 2017, we agreed to a class wide settlement for a maximum amount of $865,000 with respect to the Wage Statement Claim, which would include settlement of all penalties under the Private Attorneys General Act of 2004 and California Labor Code section 226, attorneys’ fees and costs, class representative enhancements and claims administration fees. The class wide settlement, including the maximum settlement amount of $865,000, remains subject to court approval. As of September 30, 2017, we have reserved for the entire amount under accrued expenses.  In addition to the Wage Statement Claim, from time to time, we may become involved in legal proceedings arising in the ordinary course of business. There can be no assurance with respect to the outcome of any legal proceeding, and we could suffer monetary liability from the outcome of the Wage Statement Claim described above or other claims that may be made in the future that could be material to our results of operations. Other than the Wage Statement Claim, we believe there are no pending lawsuits or claims that may have a material adverse effect on our business, capital resources or results of operations.

 

 

13.Subsequent Events

On October 12, 2017, we acquired two studio locations, one in Fairfax, Virginia, and one in Bethesda, Maryland. On October 17, 2017, we acquired seven studio locations in the Houston, Texas area. On November 13, 2017, we acquired four studios in the Atlanta, Georgia area. With these acquisitions totaling approximately $5.6 million paid, we have 66 studios in Los Angeles, Orange County, Northern California, Houston, New York City, Boston, Baltimore, the Washington, D.C. area and Atlanta.

 

14


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements, including statements based upon or relating to our expectations, estimates, and projections. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.

Investors should read this Quarterly Report on Form 10-Q and the documents we reference in this report and have filed with the SEC, including our final prospectus related to our initial public offering (“IPO”) filed on August 11, 2017, or the Prospectus, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

The following discussion should be read in conjunction with our consolidated financial statements and the related notes, included elsewhere in this Form 10-Q. Unless otherwise indicated, all references in this Form 10-Q to YogaWorks, we, us, our, and our Company refer to YogaWorks, Inc. and our consolidated subsidiaries.

Company Overview

YogaWorks is a healthy lifestyle brand focused on enriching and transforming lives through yoga. We strive to honor and empower our students’ journey toward personal growth and well-being, no matter their age or physical ability, in an inclusive and community-oriented environment. We offer a broad range of yoga disciplines and levels from fast-paced flow to soothing restorative and integrated fitness classes—in order to meet the needs of our broad student base. We operate in a number of regional operating segments with similar economic characteristics and report as one reportable segment.

Key Metrics

Our financial results are primarily driven by the number of yoga studios we operate, the number of student visits to our studios and the number of classes that we conduct at our studios. The following table sets forth our key operating metrics for the periods indicated.

 

 

 

At or For

Three Months Ended September 30,

 

 

At or For

Nine Months Ended September 30,

 

Metric

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Studios (period end)

 

53

 

 

49

 

 

53

 

 

49

 

Student visits(1)

 

 

710,256

 

 

 

720,870

 

 

 

2,176,808

 

 

 

2,265,064