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EX-31.1 - EX-31.1 - YogaWorks, Inc.yoga-ex311_178.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, 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 September 22, 2017, the registrant had 16,403,378 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

14

Item 4.

Controls and Procedures

22

PART II.

OTHER INFORMATION

23

Item 1.

Legal Proceedings

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.

Defaults Upon Senior Securities

23

Item 4.

Mine Safety Disclosures

23

Item 5.

Other Information

23

Item 6.

Exhibits

24

Exhibit Index

24

Signatures

25

 

 

 

 


 

YogaWorks, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

As of

June 30, 2017

 

 

As of

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,547,025

 

 

$

1,912,421

 

Inventories, net

 

 

878,589

 

 

 

948,194

 

Prepaid expenses and other current assets

 

 

1,913,317

 

 

 

1,318,137

 

Total current assets

 

 

6,338,931

 

 

 

4,178,752

 

Property and equipment, net

 

 

7,653,492

 

 

 

8,552,674

 

Intangible assets, net

 

 

22,654,589

 

 

 

25,654,823

 

Goodwill

 

 

17,746,570

 

 

 

17,746,570

 

Other non-current assets

 

 

1,057,299

 

 

 

1,015,079

 

Total assets

 

$

55,450,881

 

 

$

57,147,898

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,807,265

 

 

$

1,162,675

 

Accrued compensation

 

 

1,399,703

 

 

 

1,504,034

 

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

 

 

6,537,007

 

 

 

418,750

 

Deferred revenue

 

 

5,101,146

 

 

 

4,593,076

 

Convertible note due to related party

 

 

3,267,905

 

 

 

 

Current portion of deferred rent

 

 

124,817

 

 

 

192,569

 

Total current liabilities

 

 

18,237,843

 

 

 

7,871,104

 

Deferred rent, net of current portion

 

 

2,599,932

 

 

 

2,471,734

 

Deferred tax liability

 

 

104,401

 

 

 

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

 

 

20,942,176

 

 

 

28,387,286

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

Redeemable preferred stock, Redeemed and converted as of June 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 7)

 

 

 

 

 

61,392,824

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

Common stock at June 30, 2017, $0.001 par value; 14,131,017 shares

   authorized and 8,909,078 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 6)

 

 

8,909

 

 

 

75

 

Additional paid in capital

 

 

75,259,516

 

 

 

67,187

 

Accumulated deficit

 

 

(40,759,720

)

 

 

(32,699,474

)

Total stockholders’ equity (deficit)

 

 

34,508,705

 

 

 

(32,632,212

)

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

 

$

55,450,881

 

 

$

57,147,898

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net revenues

 

$

12,493,461

 

 

$

13,330,076

 

 

$

26,483,555

 

 

$

28,421,723

 

Cost of revenues and operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

4,805,637

 

 

 

5,283,949

 

 

 

9,934,389

 

 

 

10,602,309

 

Center operations

 

 

5,583,228

 

 

 

5,532,241

 

 

 

11,269,866

 

 

 

11,094,949

 

General and administrative expenses

 

 

4,094,443

 

 

 

2,725,056

 

 

 

7,104,829

 

 

 

5,903,352

 

Depreciation and amortization

 

 

2,167,877

 

 

 

2,227,145

 

 

 

4,369,462

 

 

 

4,407,562

 

Total cost of revenues and operating

   expenses

 

 

16,651,185

 

 

 

15,768,391

 

 

 

32,678,546

 

 

 

32,008,172

 

Loss from operations

 

 

(4,157,724

)

 

 

(2,438,315

)

 

 

(6,194,991

)

 

 

(3,586,449

)

Interest expense, net

 

 

248,874

 

 

 

390,265

 

 

 

810,506

 

 

 

781,181

 

Net loss before provision

   for income taxes

 

 

(4,406,598

)

 

 

(2,828,580

)

 

 

(7,005,497

)

 

 

(4,367,630

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

41,107

 

 

 

3,882

 

 

 

59,006

 

 

 

10,625

 

Net loss

 

 

(4,447,705

)

 

 

(2,832,462

)

 

 

(7,064,503

)

 

 

(4,378,255

)

Less preferred rights dividend on redeemable

   preferred stock

 

 

 

 

 

(1,153,557

)

 

 

(995,743

)

 

 

(2,284,556

)

Net loss attributable to common

   stockholders

 

$

(4,447,705

)

 

$

(3,986,019

)

 

$

(8,060,246

)

 

$

(6,662,811

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

   attributable to common stockholders

 

$

(0.50

)

 

$

(54.18

)

 

$

(1.66

)

 

$

(91.08

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares used in

   calculating loss per share attributable to

   common stockholders (Note 8):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted common shares

 

 

8,908,188

 

 

 

73,570

 

 

 

4,857,160

 

 

 

73,155

 

 

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 7)

 

 

(10,000

)

 

 

(62,388,567

)

Balance, June 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

 

 

1,499

 

 

 

1

 

 

 

13,799

 

 

 

 

 

 

13,800

 

Stock-based compensation

 

 

 

 

 

 

 

 

825,145

 

 

 

 

 

 

825,145

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,064,503

)

 

 

(7,064,503

)

Balance, June 30, 2017

 

 

8,909,078

 

 

$

8,909

 

 

$

75,259,516

 

 

$

(40,759,720

)

 

$

34,508,705

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


 

YogaWorks, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Six Months Ended

June 30, 2017

 

 

Six Months Ended

June 30, 2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(7,064,503

)

 

$

(4,378,255

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,369,462

 

 

 

4,407,562

 

Deferred tax

 

 

44,865

 

 

 

1,949

 

Paid-in-kind interest expense capitalized to convertible note

 

 

259,087

 

 

 

442,211

 

Change in value of beneficial conversion feature

 

 

147,877

 

 

 

 

Amortization of debt issuance cost

 

 

55,437

 

 

 

55,961

 

Stock-based compensation expense

 

 

825,145

 

 

 

18,508

 

Changes to operating assets and liabilities

 

 

 

 

 

 

 

 

Inventories

 

 

69,605

 

 

 

186,135

 

Prepaid expenses and other current assets

 

 

(595,180

)

 

 

(354,312

)

Other non-current assets

 

 

(42,220

)

 

 

(28,948

)

Accounts payable and accrued expenses

 

 

644,590

 

 

 

(567,307

)

Accrued compensation

 

 

(104,331

)

 

 

410,674

 

Deferred revenue

 

 

508,070

 

 

 

(891,192

)

Deferred rent and other non-current liabilities

 

 

60,446

 

 

 

246,945

 

Net cash used in operating activities

 

 

(821,650

)

 

 

(450,069

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property, equipment, and intangible assets

 

 

(470,046

)

 

 

(1,502,488

)

Tenant improvement allowances received

 

 

 

 

 

762,365

 

Net cash used in investing activities

 

 

(470,046

)

 

 

(740,123

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

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 provided by financing activities

 

 

2,926,300

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

 

1,634,604

 

 

 

(1,190,192

)

Cash and cash equivalents, beginning of period

 

 

1,912,421

 

 

 

3,772,605

 

Cash and cash equivalents, end of period

 

$

3,547,025

 

 

$

2,582,413

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

Interest paid

 

$

277,151

 

 

$

283,111

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

 

 

 

Dividends on preferred redeemable stock accrued

 

$

995,743

 

 

$

2,284,556

 

Paid-in-kind interest expense capitalized convertible note

 

 

259,087

 

 

 

442,211

 

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 building and operating yoga studios. Our Company was formerly known as YWX Holdings, Inc. and changed our name to YogaWorks, Inc. on April 10, 2017. We operate under the brand name YogaWorks and Yoga Tree and 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 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 $2.1 million. Certain IPO- related costs at June 30, 2017 of $0.5 million were recorded as prepaid expenses and other current assets and were subsequently reclassified to additional paid-in capital.

Markets

We operate in regional markets across the U.S. As a result of the clustering of the 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, 2017, we owned and operated 50 yoga studios in 6 regional markets. The following table illustrates the studio locations by regional market:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 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

 

 

42

%

 

17

 

 

42

%

 

17

 

 

41

%

 

17

 

 

41

%

Orange County (California)(3)

 

4

 

 

8

%

 

5

 

 

8

%

 

4

 

 

8

%

 

5

 

 

8

%

New York City

 

5

 

 

14

%

 

5

 

 

14

%

 

5

 

 

14

%

 

5

 

 

14

%

Northern California

 

13

 

 

25

%

 

13

 

 

25

%

 

13

 

 

25

%

 

13

 

 

26

%

Boston(3)

 

3

 

 

3

%

 

2

 

 

3

%

 

3

 

 

4

%

 

2

 

 

3

%

Baltimore/Washington D.C.

 

8

 

 

8

%

 

8

 

 

8

%

 

8

 

 

8

%

 

8

 

 

8

%

Total Studios

 

50

 

 

 

 

 

50

 

 

 

 

 

50

 

 

 

 

 

50

 

 

 

 

 

 

(1)

Number of studios as of the end of the period.

 

(2)

For the three and six months ended June 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 and one studio opening in Boston in the first 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 for recent accounting pronouncements noted below reflects the private company transition dates.

In May 2017, the Financial Accounting Standards Board (“FASB”) issued 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.

 

 

3.Property and Equipment

The major classes of property and equipment are as follows:

 

 

 

As of

June 30, 2017

 

 

As of

December 31, 2016

 

Computer equipment and purchased software

 

$

1,081,771

 

 

$

1,070,769

 

Furniture and fixtures

 

 

3,442,860

 

 

 

3,383,360

 

Leasehold improvements

 

 

21,366,601

 

 

 

21,073,627

 

Other equipment

 

 

216,497

 

 

 

184,747

 

Construction-in-progress

 

 

 

 

 

22,201

 

Total property and equipment

 

 

26,107,729

 

 

 

25,734,704

 

Less accumulated depreciation and amortization

 

 

(18,454,237

)

 

 

(17,182,030

)

 

 

$

7,653,492

 

 

$

8,552,674

 

 

Depreciation and amortization expense includes property and equipment, leasehold improvements and purchased software. We incurred depreciation expense of $633,842 and $666,917 for the three months ended June 30, 2017 and 2016, respectively, and $1,294,644 and $1,279,430 for the six months ended June 30, 2017 and 2016, respectively.

 

 

4.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 the Common Stock, in the amount of $25,000 for the three months ended June 30, 2017 and 2016, respectively, and $50,000 for the six months ended June 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 Common Stock at a conversion price of $8.40 per share of Common Stock (see Note 5).  In connection with the IPO, the convertible notes were repaid in full.

 

8


 

5.Debt

Long-term debt, net of debt issuance costs, consists of the following:

 

 

 

As of

June 30, 2017

 

 

As of

December 31, 2016

 

Term loan matures on July 26, 2020. Outstanding borrowings

   bear interest annually at LIBOR plus 8% as of

   June 30, 2017

 

$

6,868,750

 

 

$

6,956,250

 

Subordinated notes matured and paid on February 8, 2017.

   Outstanding borrowings bear interest annually at the

   applicable federal rate of 1%

 

 

 

 

 

200,000

 

Total long-term debt, excluding debt issuance costs

 

 

6,868,750

 

 

 

7,156,250

 

Debt issuance costs, net of accumulated amortization

 

 

(331,743

)

 

 

(387,180

)

Total long-term debt, net of debt issuance costs

 

 

6,537,007

 

 

 

6,769,070

 

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

 

 

(6,537,007

)

 

 

(418,750

)

Long-term debt, net of current portion and debt

   issuance costs

 

$

 

 

$

6,350,320

 

 

Term Loans

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.

Financing from Great Hill Partners

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 are convertible, at the option of the holder, into shares of Common Stock at a conversion rate of $8.40 per share of Common Stock. The New Convertible Notes consist 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 has a maturity date of March 27, 2018 and bears 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 June 30, 2017 and 2016 related to the aggregate amount of outstanding indebtedness under the Deerpath Facility, and was $156,183 and $141,555. In addition, PIK interest expense under the convertible promissory notes was $65,061 and $220,729 for the three months ended June 30, 2017 and 2016, respectively.

 

 

6.Common Stock

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, 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

9


 

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 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 of Directors 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.

 

 

7.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.

 

 

8.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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator for basic and diluted loss per share

   attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,447,705

)

 

$

(2,832,462

)

 

$

(7,064,503

)

 

$

(4,378,255

)

Dividend attributable to participating

   securities

 

 

 

 

 

(1,153,557

)

 

 

(995,743

)

 

 

(2,284,556

)

Net loss attributable to YogaWorks, Inc.

   common stockholders

 

$

(4,447,705

)

 

$

(3,986,019

)

 

$

(8,060,246

)

 

$

(6,662,811

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average outstanding shares of

   common stock

 

 

8,908,188

 

 

 

73,570

 

 

 

4,857,160

 

 

 

73,155

 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity incentive plans

 

 

 

 

 

 

 

 

 

 

 

 

Convertible debt

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents

 

 

8,908,188

 

 

 

73,570

 

 

 

4,857,160

 

 

 

73,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common

   stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

$

(0.50

)

 

$

(54.18

)

 

$

(1.66

)

 

$

(91.08

)

For the quarters ended June 30, 2017, and 2016, there were outstanding options to purchase 1,289,007 and 673 shares of Common Stock outstanding, respectively, which were excluded from the computation of diluted loss per share because it would be anti-dilutive.

 

 

10


 

9.Accounting for Stock-Based Compensation

Valuation

To estimate certain expenses and record certain transactions, it is necessary for us to estimate the fair value of our shares of Common Stock. Given the absence of a public trading market for the shares of Common Stock, and in accordance with the American Institute of Certified Public Accountants’ Practice Guide, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation”, our Company exercised reasonable judgment and considered numerous objective and subjective factors to determine our best estimate of the fair value of our shares. Factors considered included:

 

recent equity financings and the related valuations;

 

the estimated present value of our Company’s future cash flows;

 

industry information such as market size and growth;

 

market capitalization of comparable companies and the estimated value of transactions such companies have engaged in; and

 

macroeconomic conditions.

Common Stock Options and Grants

During the quarter ended June 30, 2017, option awards for 18,747 shares of Common Stock were granted under the amended 2014 Stock Option and Grant Plan. With the exception of accelerated options, the 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. Fair value of the common stock is estimated using a generally accepted valuation methodology and the fair value of the options is calculated using the Black-Scholes valuation model. Stock compensation expense of $286,273 and $11,854 was recorded in general and administrative expense for the quarters ended June 30, 2017 and 2016, respectively. Unamortized stock compensation expense amounted to $1,473,449 as of June 30, 2017 and is expected to be expensed ratably over the remaining vesting period.

 

 

 

Shares

 

 

Weighted-

Average

Exercise Price

 

Nonvested at March 31, 2017

 

 

990,079

 

 

$

8.40

 

Granted

 

 

18,747

 

 

 

8.40

 

Vested/Released

 

 

(94,647

)

 

 

8.40

 

Cancelled

 

 

(18,747

)

 

 

8.40

 

Nonvested at June 30, 2017

 

 

895,432

 

 

 

8.40

 

 

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.

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Fair value of common stock

 

$

5.88

 

 

$

9.20

 

 

$

5.88

 

 

$

9.20

 

Exercise Price of common stock option

 

 

8.40

 

 

 

9.20

 

 

 

8.40

 

 

 

9.20

 

Risk-free interest rate

 

 

2.10

%

 

 

2.50

%

 

 

2.10

%

 

 

2.50

%

Expected term (in years)

 

 

5.95

 

 

 

6.25

 

 

 

5.95

 

 

 

6.25

 

Dividend yield

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Expected volatility

 

 

40

%

 

 

44

%

 

 

40

%

 

 

44

%

 

11


 

Stock options as of June 30, 2017, are summarized as follows:

 

Range of exercise

prices

 

Options

Outstanding

 

 

Weighted-

Average

Remaining

Contractual

Life

(in Years)

 

 

Weighted-

Average

Exercise

Price of

Outstanding

Options

 

 

Options

Exercisable

 

 

Weighted-

Average

Exercise

Price of

Exercisable

Options

 

$8.40 - $9.20

 

 

1,289,017

 

 

 

9.73

 

 

$

8.40

 

 

 

393,583

 

 

$

8.40

 

 

On March 24, 2017, our Board of Directors amended the 2014 Stock Option and Grant Plan to increase the shares of Common Stock reserved for issuance thereunder to 1,695,484 shares.

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 the sum of (i) 2,263,213, plus (ii) any shares which, as of the effective date of the 2017 Plan, are subject to awards under the 2014 Plan which are forfeited or lapse 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, and (b) such smaller number of shares as determined by our Board of Directors.

 

 

10.Income Taxes

Our effective income tax rate for the three months ended June 30, 2017 and 2016 was (0.93)% and (0.52)%, 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 June 30, 2017 and 2016 was primarily related to the impact of the valuation allowance and state income taxes.

At June 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 June 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 six months ended June 30, 2017 and for 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. Since 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.

 

 

11.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 June 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.

 

 

12


 

12.Subsequent Events

On July 14, 2017, we effectuated 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 action by the stockholders. Fractional shares were rounded down to the nearest whole share. All share and per share amounts have been restated to reflect the 1-for-1.333520 Reverse Split for all periods presented.

On August 16, 2017, we successfully completed our IPO, pursuant to which we issued and sold 7,300,000 shares of Common Stock at a price of $5.50 per share, resulting in net proceeds of $37.6 million after deducting underwriters' discounts and commissions of $2.5 million, but before deducting offering costs of $2.1 million. In connection with the completion of our IPO, we repaid in full the outstanding balance under the Deerpath Facility and cancelled the Deerpath Facility. We also repaid in full the outstanding balance under the New Convertible Notes and terminated the New Convertible Notes. Also in connection with the completion of our IPO, we and Great Hill Partners agreed to terminate the Expense Reimbursement Agreement between the parties.

We adopted the 2017 Plan, effective as of August 9, 2017.  On August 17, 2017, our Board of Directors authorized the issuance of 517,357 restricted stock units to our officers and 254,016 stock options to employees under the 2017 Plan.

On August 28, 2017, we acquired two studio locations, one in Arlington, Virginia, and one in the Dupont Circle neighborhood of Washington, D.C. With this acquisition, we have 52 studios in Los Angeles, Orange County, Northern California, New York City, Boston, Baltimore, Washington, D.C. and Virginia.

 

13


 

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.

We discuss many of these risks in Part II of this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors” and in other filings we make from time to time with the SEC. Also, 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 June 30,

 

 

At or For Six Months Ended June 30,

 

Metric

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Studios (period end)

 

50

 

 

50

 

 

50

 

 

50

 

Student visits(1)

 

 

705,979

 

 

 

754,595

 

 

 

1,466,686

 

 

 

1,544,272

 

Studio classes(2)

 

 

45,375

 

 

 

46,188

 

 

 

90,529

 

 

 

90,960

 

 

 

(1)

Student visits include each student’s attendance at a class in such period in which a teacher fee was paid for such class.

 

(2)

Studio classes include each completed class held at a studio in such period.

Components of Our Financial Performance

In assessing the financial performance of our business, we consider a variety of financial and operating metrics, including the following:

Net revenues. We derive revenues primarily from conducting yoga classes, both in our studios and through MyYogaWorks.com. We also derive additional revenues from teacher training programs, workshops and the sale of yoga-related retail merchandise. We expect net revenues from teacher training programs, workshops and the sale of yoga-related retail merchandise to generally be

14


 

consistent as a percentage of our total net revenues year-to-year because net revenue from teacher trainings, workshops and retail sales are primarily driven by the same key metrics that drive our yoga class revenue, namely, the number of studios we operate, the number of student visits to our studios and the number of classes we conduct at our studios. Our students generally pay for their visits through membership fees (unlimited classes), multi-class packages (fixed number of classes) and drop-in (single class) purchases. Membership, class package, workshop and teacher training revenues are generally paid in advance. There are primarily two types of memberships, monthly memberships and paid-in-full memberships (for six or twelve months), and revenue is recognized over the membership period. Class package revenue is recognized based on aggregate usage patterns. Workshop and teacher training revenue is deferred until the date of the event or is recognized over the period the event takes place.

Cost of revenues. Cost of revenues consists of direct costs associated with delivering our classes and services, which mainly includes teacher payroll and related expenses, and cost of physical goods sold, such as yoga clothing and accessories. We review our inventory levels of physical goods on an ongoing basis to identify slow-moving yoga merchandise and use retail product markdowns to efficiently sell those retail products. We expect that our newer studios will have higher cost of revenues as a percentage of net revenues as they ramp to maturity.

Center operations. Center operations consist of costs for studio rent, utilities, compensation and benefits for studio staff, sales support staff and management, sales and marketing expenses and certain studio-level general and administrative expenses. We recognize these costs as an expense when incurred.

General and administrative expenses. General and administrative expenses include corporate rent, marketing, office expenses and compensation and benefits costs for regional management and other regional support staff, executive, finance and accounting, human resources, information technology, administration, business development, legal and other support-function personnel. General and administrative expenses also include fees for professional services, insurance and licenses, as well as acquisition-related costs. As we grow our studio operations, we expect our aggregate general and administrative expenses to increase as we hire additional personnel in finance and accounting, human resources and administration to help manage our larger operations.

In connection with studio acquisitions we incur transaction costs. These transaction costs include expenses incurred prior to owning a new studio and primarily consist of legal fees, due diligence expenses, travel and consulting fees. The transaction costs are included in general and administrative expenses and are generally incurred and expensed within 30 days of the closing of the acquisition.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We expect that compliance with the rules and regulations of the Securities and Exchange Commission will increase our legal and financial compliance costs and will make some of our corporate and administrative activities more time consuming and costly. In addition, we expect that our management and other personnel will need to devote substantial time to these public company requirements. In particu