UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended June 30, 2017

OR

For the transition period from ____  to ____

Commission File Number: 001-38151

 

YogaWorks, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

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.

 

 

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.

 

 

 

 

 

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Table of Contents

 

 

 

 

 

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YogaWorks, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.  

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YogaWorks, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

          

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YogaWorks, Inc.

Condensed Consolidated Statements of Redeemable Preferred Stock (Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

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YogaWorks, Inc.

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

 

 

See accompanying notes to condensed consolidated financial statements.

 

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YogaWorks, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements.

 

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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:

 

 

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.

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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:

 

 

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.

 

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5.Debt

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

 

 

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

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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):

 

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.

 

 

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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:

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.

 

 

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:

 

 

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

 

 

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.

 

 

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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.

 

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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.