yoga-10q_20180630.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 June 30, 2018

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 July 31, 2018, the registrant had 16,466,526 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 Stockholders’ Equity

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

16

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 (Unaudited)

 

 

 

As of

June 30, 2018

 

 

As of

December 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,465,549

 

 

$

22,095,216

 

Inventories

 

 

1,222,960

 

 

 

1,212,608

 

Prepaid expenses and other current assets

 

 

2,075,346

 

 

 

1,145,067

 

Total current assets

 

 

18,763,855

 

 

 

24,452,891

 

Property and equipment, net

 

 

9,856,627

 

 

 

10,418,203

 

Intangible assets, net

 

 

19,442,521

 

 

 

22,142,275

 

Goodwill

 

 

10,782,063

 

 

 

12,768,773

 

Other non-current assets

 

 

1,314,362

 

 

 

1,224,179

 

Total assets

 

$

60,159,428

 

 

$

71,006,321

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,452,232

 

 

$

3,794,569

 

Accrued compensation

 

 

1,735,092

 

 

 

1,947,134

 

Deferred revenue

 

 

7,545,300

 

 

 

7,187,948

 

Current portion of deferred rent

 

 

106,802

 

 

 

122,607

 

Total current liabilities

 

 

11,839,426

 

 

 

13,052,258

 

Deferred rent, net of current portion

 

 

3,517,807

 

 

 

3,418,886

 

Deferred tax liability

 

 

12,641

 

 

 

 

Total liabilities

 

 

15,369,874

 

 

 

16,471,144

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock $0.001 par value; 50,000,000 shares authorized,

16,595,513 issued and 16,460,501 outstanding at June 30, 2018

and 50,000,000 shares authorized, 16,435,505 issued and

16,332,510 outstanding at December 31, 2017

 

 

16,461

 

 

 

16,333

 

Additional paid in capital

 

 

112,516,233

 

 

 

111,650,415

 

Accumulated deficit

 

 

(67,743,140

)

 

 

(57,131,571

)

Total stockholders’ equity

 

 

44,789,554

 

 

 

54,535,177

 

Total liabilities and stockholders’ equity

 

$

60,159,428

 

 

$

71,006,321

 

 

See accompanying notes to condensed consolidated financial statements.  

2


 

YogaWorks, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenues

 

$

14,870,362

 

 

$

12,493,461

 

 

$

30,400,175

 

 

$

26,483,555

 

Cost of revenues and operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

5,755,974

 

 

 

4,805,637

 

 

 

11,679,823

 

 

 

9,934,389

 

Center operations

 

 

7,061,573

 

 

 

5,583,228

 

 

 

13,833,489

 

 

 

11,269,866

 

General and administrative expenses

 

 

4,054,012

 

 

 

4,094,443

 

 

 

8,458,945

 

 

 

7,104,829

 

Depreciation and amortization

 

 

2,218,271

 

 

 

2,167,877

 

 

 

4,597,028

 

 

 

4,369,462

 

Goodwill impairment

 

 

2,474,819

 

 

 

 

 

 

2,474,819

 

 

 

 

Total cost of revenues and operating

   expenses

 

 

21,564,649

 

 

 

16,651,185

 

 

 

41,044,104

 

 

 

32,678,546

 

Loss from operations

 

 

(6,694,287

)

 

 

(4,157,724

)

 

 

(10,643,929

)

 

 

(6,194,991

)

Interest (income) expense, net

 

 

(44,142

)

 

 

248,874

 

 

 

(50,272

)

 

 

810,506

 

Net loss before provision

   for income taxes

 

 

(6,650,145

)

 

 

(4,406,598

)

 

 

(10,593,657

)

 

 

(7,005,497

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

528

 

 

 

41,107

 

 

 

17,912

 

 

 

59,006

 

Net loss

 

 

(6,650,673

)

 

 

(4,447,705

)

 

 

(10,611,569

)

 

 

(7,064,503

)

Less preferred rights dividend on redeemable

   preferred stock

 

 

 

 

 

 

 

 

 

 

 

(995,743

)

Net loss attributable to common

   stockholders

 

$

(6,650,673

)

 

$

(4,447,705

)

 

$

(10,611,569

)

 

$

(8,060,246

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

   attributable to common stockholders

 

$

(0.41

)

 

$

(0.50

)

 

$

(0.65

)

 

$

(1.66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares used in

   calculating loss per share attributable to

   common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted common shares

 

 

16,382,505

 

 

 

8,908,188

 

 

 

16,367,796

 

 

 

4,857,160

 

 

See accompanying notes to condensed consolidated financial statements.

          

 

3


 

YogaWorks, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2017

 

 

16,332,510

 

 

$

16,333

 

 

$

111,650,415

 

 

$

(57,131,571

)

 

$

54,535,177

 

Vesting of restricted stock units

 

 

160,533

 

 

 

161

 

 

 

(161

)

 

 

 

 

 

 

Repurchase of shares to satisfy tax withholding

 

 

(32,542

)

 

 

(33

)

 

 

(83,630

)

 

 

 

 

 

(83,663

)

Stock-based compensation

 

 

 

 

 

 

 

 

949,609

 

 

 

 

 

 

949,609

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,611,569

)

 

 

(10,611,569

)

Balance, June 30, 2018

 

 

16,460,501

 

 

$

16,461

 

 

$

112,516,233

 

 

$

(67,743,140

)

 

$

44,789,554

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

YogaWorks, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(10,611,569

)

 

$

(7,064,503

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,597,028

 

 

 

4,369,462

 

Goodwill impairment

 

 

2,474,819

 

 

 

 

Deferred tax

 

 

12,641

 

 

 

44,865

 

Paid-in-kind interest expense capitalized to convertible note

 

 

 

 

 

259,087

 

Beneficial conversion feature

 

 

 

 

 

147,877

 

Amortization of debt issuance cost

 

 

 

 

 

55,437

 

Stock-based compensation expense

 

 

949,609

 

 

 

825,145

 

Changes to operating assets and liabilities

 

 

 

 

 

 

 

 

Tenant improvement allowances received

 

 

47,530

 

 

 

 

Inventories

 

 

(6,386

)

 

 

69,605

 

Prepaid expenses and other current assets

 

 

(930,279

)

 

 

(595,180

)

Other non-current assets

 

 

(52,751

)

 

 

(42,220

)

Accounts payable and accrued expenses

 

 

(857,643

)

 

 

644,590

 

Accrued compensation

 

 

(212,042

)

 

 

(104,331

)

Deferred revenue

 

 

2,739

 

 

 

508,070

 

Deferred rent and other non-current liabilities

 

 

35,586

 

 

 

60,446

 

Net cash used in operating activities

 

 

(4,550,718

)

 

 

(821,650

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property, equipment, and intangible assets

 

 

(629,662

)

 

 

(470,046

)

Acquisition earnout and holdback payments

 

 

(643,694

)

 

 

 

Cash paid for acquisitions, net of earnouts

 

 

(721,930

)

 

 

 

Net cash used in investing activities

 

 

(1,995,286

)

 

 

(470,046

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repurchase of shares to satisfy tax withholding

 

 

(83,663

)

 

 

 

Principal payment on term loans

 

 

 

 

 

(87,500

)

Principal payment on subordinated notes

 

 

 

 

 

(200,000

)

Proceeds from issuance of convertible note

 

 

 

 

 

3,200,000

 

Proceeds from issuance of common stock

 

 

 

 

 

13,800

 

Net cash (used in) provided by financing activities

 

 

(83,663

)

 

 

2,926,300

 

Increase (decrease) in cash and cash equivalents

 

 

(6,629,667

)

 

 

1,634,604

 

Cash and cash equivalents, beginning of period

 

 

22,095,216

 

 

 

1,912,421

 

Cash and cash equivalents, end of period

 

$

15,465,549

 

 

$

3,547,025

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

Interest paid

 

$

 

 

$

277,151

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchase consideration liabilities related to acquisitions

 

$

159,000

 

 

$

 

Financing activities

 

 

 

 

 

 

 

 

Dividends on preferred redeemable stock accrued

 

 

 

 

 

995,743

 

Paid-in-kind interest expense capitalized convertible note

 

 

 

 

 

259,087

 

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.  

5


 

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 subsidiary Yoga Works, Inc., a California corporation (together referred to as “we”, “us”, “our”, and the “Company”), are primarily engaged in operating yoga studios. YogaWorks, Inc. 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 1,100 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 our 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 $2.6 million. Certain IPO-related costs of $5.1 million were recorded as a reduction to additional paid-in capital in 2017.

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 June 30, 2018, we owned and operated 71 yoga studios in nine regional markets. The following table illustrates the studio locations by regional market:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

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

 

 

34

%

 

17

 

 

 

42

%

 

17

 

 

34

%

 

17

 

 

 

41

%

Orange County (California)

 

4

 

 

6

%

 

4

 

 

 

8

%

 

4

 

 

6

%

 

4

 

 

 

8

%

Northern California

 

13

 

 

21

%

 

13

 

 

 

25

%

 

13

 

 

22

%

 

13

 

 

 

25

%

Houston(3)

 

7

 

 

9

%

 

 

 

 

 

 

 

7

 

 

9

%

 

 

 

 

 

 

Atlanta(3)

 

4

 

 

5

%

 

 

 

 

 

 

 

4

 

 

4

%

 

 

 

 

 

 

Washington, D.C.(4)

 

6

 

 

4

%

 

1

 

 

 

1

%

 

6

 

 

4

%

 

1

 

 

 

1

%

Baltimore(4)

 

7

 

 

6

%

 

7

 

 

 

7

%

 

7

 

 

6

%

 

7

 

 

 

7

%

New York City

 

5

 

 

10

%

 

5

 

 

 

14

%

 

5

 

 

11

%

 

5

 

 

 

14

%

Boston(5)

 

8

 

 

5

%

 

3

 

 

 

3

%

 

8

 

 

4

%

 

3

 

 

 

4

%

Total Studios

 

71

 

 

 

 

 

50

 

 

 

 

 

 

71

 

 

 

 

 

50

 

 

 

 

 

 

6


 

 

(1)

Number of studios as of June 30, 2018 and 2017.

 

(2)

For the three and six months ended June 30, 2018 and 2017. 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 seven Houston area studios acquired in October 2017 and four Atlanta area studios acquired in November 2017.

 

(4)

Reflects five Washington, D.C./Baltimore-area studios acquired in the second half of 2017. The regions were then split into two separate areas as a result of the acquisitions.

 

(5)

Reflects five Boston area studios acquired in the second quarter of 2018.

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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared 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, 2017 has been derived from the audited financial statements for the fiscal year then ended included in our Annual Report on Form 10-K filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on April 3, 2018 (the “10-K”), 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, 2017 and the related notes thereto included in the 10-K.

There have been no significant changes in our accounting policies from those disclosed in the 10-K.

 

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 June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this ASU provide guidance on accounting for share-based payment transactions for acquiring goods and services from nonemployees. This ASU is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. We are evaluating the impact of implementing this update on our consolidated financial statements.

In May 2017, the 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 was effective for fiscal years beginning after December 15, 2017. We adopted this ASU as of January 1, 2018 noting no material impact to the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this ASU provide a robust framework to use in determining when a set of assets and activities is a business. This ASU is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted and the standard should be applied prospectively. We early adopted this ASU as of January 9, 2018 and this standard was applied on all acquisitions during the second quarter of 2018 (See Note 3).

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are evaluating the impact of implementing this update on our consolidated financial statements.

7


 

In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. This update addresses the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. This ASU was effective for fiscal years beginning after December 15, 2017. We adopted this ASU as of January 1, 2018 noting no material impact to the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Although early adoption is permitted, we anticipate adopting these provisions in the first quarter of 2020. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We had $51.2 million of operating lease obligations as of December 31, 2017, and upon adoption of this standard we will record a ROU asset and lease liability equal to the present value of these leases, which will have a material impact on the consolidated balance sheet. However, the recognition of lease expense in the consolidated statement of operations is not expected to change from the current methodology.

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 our Company in fiscal years beginning after December 15, 2018, with early adoption permitted. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method. Our Company primarily generates revenues by selling yoga classes in the form of memberships or class packages. Our implementation efforts included the identification of revenue streams within the scope of the guidance, evaluation of the revenue contracts and existing revenue recognition policies. We anticipate that we will adopt the new standard on January 1, 2019 and our evaluation remains preliminary because we are still in the process of evaluating the impact.

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 June 30, 2018, paying total consideration of $721,930, excluding earnouts of $159,000. On April 30, 2018, we acquired Prana Power Yoga (three studios) and on May 24, 2018, we acquired Inner Strength Yoga Studios (two studios) all in the Boston area. 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 June 30, 2018 and the condensed consolidated balance sheet as of June 30, 2018 include the results of operations and the acquired assets and assumed liabilities related to all 2018 acquisitions. For the three months ended June 30, 2018, these acquisitions contributed $150,166 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. There were no acquisitions in six months ended June 30, 2017.

 

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

 

 

Amount

 

Inventories

 

$

3,966

 

Property and equipment

 

 

410,060

 

Intangible assets

 

 

295,976

 

Goodwill

 

 

488,109

 

Other non-current assets

 

 

37,432

 

Total assets acquired

 

 

1,235,543

 

 

 

 

 

 

Deferred revenue

 

 

354,613

 

Total liabilities assumed

 

 

354,613

 

 

 

 

 

 

Net assets acquired

 

$

880,930

 

8


 

 

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

June 30, 2018

 

 

As of

December 31, 2017

 

Computer equipment and purchased software

 

$

1,232,305

 

 

$

1,130,653

 

Furniture and fixtures

 

 

3,755,408

 

 

 

3,633,677

 

Leasehold improvements

 

 

26,109,939

 

 

 

25,367,841

 

Other equipment

 

 

192,970

 

 

 

174,885

 

Construction-in-progress

 

 

30,863

 

 

 

 

Total property and equipment

 

 

31,321,485

 

 

 

30,307,056

 

Less accumulated depreciation and amortization

 

 

(21,464,858

)

 

 

(19,888,853

)

 

 

$

9,856,627

 

 

$

10,418,203

 

 

We incurred depreciation expense of $753,884 and $633,842 for the three months ended June 30, 2018 and 2017, respectively, and $1,576,005 and $1,294,644 for the six months ended June 30, 2018 and 2017, respectively, which is included in depreciation and amortization expense in the Statement of Operations.

 

 

5. Goodwill

The changes in the carrying amount of goodwill are as follows:

 

 

 

As of

June 30, 2018

 

 

As of

December 31, 2017

 

Goodwill, beginning of period

 

$

12,768,773

 

 

$

17,746,570

 

Goodwill acquired during the year

 

 

488,109

 

 

 

2,510,602

 

Total goodwill

 

 

13,256,882

 

 

 

20,257,172

 

Less impairment

 

 

(2,474,819

)

 

 

(7,488,399

)

Goodwill, end of period

 

$

10,782,063

 

 

$

12,768,773

 

In the second quarter of 2018, our Company performed a goodwill impairment test which found goodwill to be impaired primarily due to the continued decrease in the Company’s market capitalization. We recorded an impairment to goodwill of $2.5 million and $7.5 million in the second quarter of 2018 and fourth quarter of 2017, respectively.

 

During the quarter ended June 30, 2018, we completed two acquisitions which resulted in the addition of $0.5 million in goodwill (See Note 3).

 

6.Deferred Revenue

 

The following is a reconciliation of the changes in deferred revenue for the three months and six months ended June 30, 2018 and 2017:

 

 

 

For the three months ended June 30,

 

 

For the six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Deferred revenue at beginning of period

 

$

7,382,888

 

 

$

4,478,318

 

 

$

7,187,948

 

 

$

4,593,076

 

Cash receipts before deferred revenue

 

 

14,686,356

 

 

 

13,109,905

 

 

 

30,475,200

 

 

 

27,025,298

 

Net revenue for the period

 

 

(14,870,362

)

 

 

(12,493,461

)

 

 

(30,400,175

)

 

 

(26,483,555

)

Deferred revenue from acquisitions

 

 

354,613

 

 

 

-

 

 

 

354,613

 

 

 

-

 

Change in gift card liabilities

 

 

(8,195

)

 

 

6,384

 

 

 

(72,286

)

 

 

(33,673

)

Deferred revenue at end of period

 

$

7,545,300

 

 

$

5,101,146

 

 

$

7,545,300

 

 

$

5,101,146

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9


 

 

7.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 June 30, 2017 and $50,000 for the six months ended June 30, 2017. In connection with our IPO, the Expense Reimbursement Agreement that we entered into with Great Hill Partners was terminated.

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 price of $8.40 per share (see Note 8). In connection with the IPO, the New Convertible Notes were repaid in full.

8.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. Interest expense for the three months and six months ended June 30, 2017 related to the aggregate amount of outstanding indebtedness under the Deerpath Facility was $156,183 and $347,995, respectively. On August 16, 2017, in connection with the consummation of our IPO, the Deerpath Facility was repaid in full and immediately cancelled thereafter.

Convertible Note Due to Related Party

On March 27, 2017, we issued 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%. Interest expense for the three months and six months ended June 30, 2017 was $65,061 and $407,074, respectively. On August 16, 2017, in connection with the consummation of our IPO, the New Convertible Notes were repaid in full.

 

9.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 $2.6 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 Company’s 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, 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 (as defined in the Amended and Restated 2015 GHP Convertible Promissory Notes) 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

10


 

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 in this quarterly report.

 

10.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.

 

11.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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator for basic and diluted loss per share

   attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,650,673

)

 

$

(4,447,705

)

 

$

(10,611,569

)

 

$

(7,064,503

)

Dividend attributable to participating securities

 

 

 

 

 

 

 

 

 

 

 

(995,743

)

Net loss attributable to YogaWorks, Inc. common stockholders

 

$

(6,650,673

)

 

$

(4,447,705

)

 

$

(10,611,569

)

 

$

(8,060,246

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average outstanding shares of common stock

 

 

16,382,505

 

 

 

8,908,188

 

 

 

16,367,796

 

 

 

4,857,160

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.41

)

 

$

(0.50

)

 

$

(0.65

)

 

$

(1.66

)

For the period ended June 30, 2018, and 2017, there were outstanding options to purchase 1,414,720 and 1,289,007 shares of Common Stock outstanding, respectively, which were excluded from the computation of diluted loss per share because it would be anti-dilutive.

 

11


 

12.Accounting for Stock-Based Compensation

2014 Plan

In July 2014, our Company adopted the 2014 Stock Option and Grant Plan (the “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 June 30, 2018, 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 June 30, 2018, 2,107,421 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, 2017

 

 

1,527,768

 

 

$

7.74

 

 

 

9.29

 

 

$

 

Granted

 

 

125,500

 

 

 

2.78

 

 

 

9.92

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(238,548

)

 

 

8.13

 

 

 

 

 

 

 

Outstanding at June 30, 2018

 

 

1,414,720

 

 

 

7.24

 

 

 

8.98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at June 30, 2018

 

 

794,125

 

 

 

7.82

 

 

 

8.79

 

 

 

 

 

 

(1)

Based on our Company’s closing stock price of $1.80 on June 29, 2018.

 

Unamortized stock-based compensation expense relating to stock options was $1.0 million at June 30, 2018, which is expected to be recognized over a weighted-average period of 2.8 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:

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Fair value of common stock

 

$

2.78

 

 

$

5.88

 

Exercise price of common stock option

 

 

2.78

 

 

 

8.40

 

Risk-free interest rate

 

 

2.38

%

 

 

2.10

%

Expected term (in years)

 

 

10.00

 

 

 

5.95

 

Dividend yield

 

 

0.00

%

 

 

0.00

%

Expected volatility

 

 

49

%

 

 

40

%

 

 

Restricted Stock Units

Our Company granted 300,000 Restricted Stock Units (“RSU”) to our Company’s officers during the six months ended June 30, 2018. All RSU grants vest on the satisfaction of only a service-based condition. As of June 30, 2018, there were 445,873 shares of our Common Stock issuable upon the vesting of outstanding RSU. Unrecognized compensation expenses related to shares of our Common Stock subject to unvested RSU was $1.8 million at June 30, 2018, which is expected to be recognized as expense over the weighted-average period of 3.6 years. The service conditions are generally satisfied for the RSU 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 six months ended June 30, 2018, our Company withheld 32,542 shares of Common Stock (“Net Settlement”) and remitted $83,630 in cash to meet the related tax withholding requirements on behalf of our officers. We will continue to evaluate the Net Settlement of RSU that vest in the future.

Stock-Based Compensation Expense

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock-based compensation

 

$

497,433

 

 

$

286,273

 

 

$

949,609

 

 

$

825,145

 

 

 

13.Income Taxes

Our effective income tax rate for the six months ended June 30, 2018 and 2017 was (0.22)% and (0.84)%, 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 six months ended June 30, 2018 and 2017 was primarily related to the impact of the valuation allowance and state income taxes.

The FASB issued ASU 2018-05, Income Taxes (Topic 740): &