10-Q 1 yoga-10q_20190331.htm 10-Q yoga-10q_20190331.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 March 31, 2019

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 every Interactive Data File required to be submitted 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 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

 

  

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  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common stock $0.001 par value

 

YOGA

 

The Nasdaq Capital Market

As of May 13, 2019, the registrant had 16,792,085 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Financial Statements

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

17

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

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

Item 6.

Exhibits

27

Exhibit Index

27

Signatures

28

 

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

YogaWorks, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

As of

March 31, 2019

 

 

As of

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,065,077

 

 

$

11,447,318

 

Inventories

 

 

1,089,976

 

 

 

1,148,449

 

Prepaid expenses and other current assets

 

 

1,951,951

 

 

 

936,757

 

Total current assets

 

 

9,107,004

 

 

 

13,532,524

 

Property and equipment, net

 

 

9,967,773

 

 

 

10,225,944

 

Intangible assets, net

 

 

12,560,321

 

 

 

13,291,502

 

Goodwill

 

 

663,954

 

 

 

663,954

 

Other non-current assets

 

 

1,232,685

 

 

 

1,327,775

 

Total assets

 

$

33,531,737

 

 

$

39,041,699

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,573,315

 

 

$

4,905,204

 

Accrued compensation

 

 

1,166,084

 

 

 

1,802,047

 

Deferred revenue

 

 

8,274,505

 

 

 

7,276,578

 

Current portion of deferred rent

 

 

138,702

 

 

 

124,319

 

Total current liabilities

 

 

13,152,606

 

 

 

14,108,148

 

Deferred rent, net of current portion

 

 

4,065,224

 

 

 

3,975,391

 

Total liabilities

 

 

17,217,830

 

 

 

18,083,539

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

16,710,701 issued and 16,608,238 outstanding at March 31, 2019

and 50,000,000 shares authorized, 16,639,586 issued and

16,494,838 outstanding at December 31, 2018

 

 

16,609

 

 

 

16,496

 

Additional paid in capital

 

 

113,615,042

 

 

 

113,260,161

 

Accumulated deficit

 

 

(97,317,744

)

 

 

(92,318,497

)

Total stockholders’ equity

 

 

16,313,907

 

 

 

20,958,160

 

Total liabilities and stockholders’ equity

 

$

33,531,737

 

 

$

39,041,699

 

 

See accompanying notes to condensed consolidated financial statements.

2


 

YogaWorks, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Net revenues

 

$

15,691,274

 

 

$

15,529,813

 

Cost of revenues and operating expenses

 

 

 

 

 

 

 

 

Cost of revenues

 

 

6,144,819

 

 

 

5,923,849

 

Center operations

 

 

6,841,994

 

 

 

6,771,916

 

General and administrative expenses

 

 

4,375,716

 

 

 

4,404,933

 

Depreciation and amortization

 

 

1,499,668

 

 

 

2,378,757

 

Asset impairment

 

 

174,725

 

 

 

 

Total cost of revenues and operating expenses

 

 

19,036,922

 

 

 

19,479,455

 

Loss from operations

 

 

(3,345,648

)

 

 

(3,949,642

)

Interest income, net

 

 

(39,336

)

 

 

(6,130

)

Net loss before income taxes

 

 

(3,306,312

)

 

 

(3,943,512

)

Provision for income taxes

 

 

5,025

 

 

 

17,384

 

Net loss

 

$

(3,311,337

)

 

$

(3,960,896

)

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

   attributable to common stockholders

 

$

(0.20

)

 

$

(0.24

)

Weighted-average number of shares used in

   calculating loss per share attributable to

   common stockholders:

 

 

 

 

 

 

 

 

Basic and diluted common shares

 

 

16,533,349

 

 

 

16,350,026

 

 

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 as of January 1, 2018

 

 

16,332,510

 

 

$

16,333

 

 

$

111,650,415

 

 

$

(57,131,571

)

 

$

54,535,177

 

Vesting of restricted stock units

 

 

56,351

 

 

 

56

 

 

 

(56

)

 

 

 

 

 

 

Repurchase of shares to satisfy tax withholding

 

 

(25,906

)

 

 

(26

)

 

 

(73,610

)

 

 

 

 

 

(73,636

)

Stock-based compensation

 

 

 

 

 

 

 

 

452,176

 

 

 

 

 

 

452,176

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,960,896

)

 

 

(3,960,896

)

Balance as of March 31, 2018

 

 

16,362,955

 

 

$

16,363

 

 

$

112,028,925

 

 

$

(61,092,467

)

 

$

50,952,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2019

 

 

16,494,838

 

 

$

16,496

 

 

$

113,260,161

 

 

$

(92,318,497

)

 

$

20,958,160

 

Vesting of restricted stock units

 

 

139,287

 

 

 

139

 

 

 

(139

)

 

 

 

 

 

 

Repurchase of shares to satisfy tax withholding

 

 

(25,887

)

 

 

(26

)

 

 

(14,664

)

 

 

 

 

 

(14,690

)

Stock-based compensation

 

 

 

 

 

 

 

 

369,684

 

 

 

 

 

 

369,684

 

Impact of Adopting Topic 606

 

 

 

 

 

 

 

 

 

 

 

(1,687,910

)

 

 

(1,687,910

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,311,337

)

 

 

(3,311,337

)

Balance as of March 31, 2019

 

 

16,608,238

 

 

$

16,609

 

 

$

113,615,042

 

 

$

(97,317,744

)

 

$

16,313,907

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

YogaWorks, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(3,311,337

)

 

$

(3,960,896

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,499,668

 

 

 

2,378,757

 

Asset impairment

 

 

174,725

 

 

 

 

Deferred tax

 

 

 

 

 

14,748

 

Stock-based compensation expense

 

 

369,684

 

 

 

452,176

 

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

 

 

 

 

 

 

 

 

Tenant improvement allowances received

 

 

289,260

 

 

 

 

Inventories

 

 

58,473

 

 

 

(32,671

)

Prepaid expenses and other current assets

 

 

(1,304,454

)

 

 

(79,209

)

Other non-current assets

 

 

95,090

 

 

 

(63,963

)

Accounts payable and accrued expenses

 

 

(1,331,889

)

 

 

(720,731

)

Accrued compensation

 

 

(635,963

)

 

 

(841,809

)

Deferred revenue

 

 

(689,983

)

 

 

194,940

 

Deferred rent and other non-current liabilities

 

 

104,216

 

 

 

(4,671

)

Net cash used in operating activities

 

 

(4,682,510

)

 

 

(2,663,329

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property, equipment, and intangible assets

 

 

(685,041

)

 

 

(425,901

)

Net cash used in investing activities

 

 

(685,041

)

 

 

(425,901

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repurchase of shares to satisfy tax withholding

 

 

(14,690

)

 

 

(73,636

)

Acquisition earnout and holdback payments

 

 

 

 

 

(617,042

)

Net cash used in financing activities

 

 

(14,690

)

 

 

(690,678

)

Decrease in cash and cash equivalents

 

 

(5,382,241

)

 

 

(3,779,908

)

Cash and cash equivalents, beginning of period

 

 

11,447,318

 

 

 

22,095,216

 

Cash and cash equivalents, end of period

 

$

6,065,077

 

 

$

18,315,308

 

 

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 subsidiaries (collectively referred to as “we”, “us”, “our”, and the “Company”) are primarily engaged in operating yoga studios. Our Company was formerly known as YWX Holdings, Inc. and we changed our name to YogaWorks, Inc. on April 10, 2017. We operate under the brand names YogaWorks, Yoga Tree and certain other local brands for a period of time following the acquisition of studios. We primarily offer yoga classes, workshops, teacher training programs, and yoga-related retail merchandise across our studios. In addition to our studio locations, we offer online yoga instruction and programming through our MyYogaWorks.com web platform, which provides subscribers with a highly curated library of over 1,200 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 were 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.

On May 3, 2019, our Company’s securities were transferred from the Nasdaq Global Market to the Nasdaq Capital Market.

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 March 31, 2019, we owned and operated 68 yoga studios in nine regional markets. The following table illustrates the studio locations by regional market:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Regional Market

 

Number of

Studios(1)

 

Percentage of

Net Revenues(2)

 

 

Number of

Studios(1)

 

Percentage of

Net Revenues(2)

 

Los Angeles

 

17

 

 

33

%

 

17

 

 

34

%

Orange County (California)

 

4

 

 

6

%

 

4

 

 

6

%

Northern California

 

13

 

 

23

%

 

13

 

 

23

%

Houston

 

7

 

 

8

%

 

7

 

 

8

%

Atlanta

 

4

 

 

3

%

 

4

 

 

4

%

Washington, D.C.

 

6

 

 

5

%

 

6

 

 

5

%

Baltimore

 

7

 

 

7

%

 

7

 

 

6

%

New York City(3)

 

4

 

 

9

%

 

5

 

 

11

%

Boston(4)

 

6

 

 

6

%

 

3

 

 

3

%

Total Studios

 

68

 

 

 

 

 

66

 

 

 

 

 

 

(1)

Number of studios as of March 31, 2019 and 2018.

 

(2)

For the three months ended March 31, 2019 and 2018. 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)

One New York City studio was closed in the fourth quarter of 2018.

 

(4)

Reflects five Boston area studios acquired in the second quarter of 2018 and two Boston area studios that closed in the third quarter of 2018 and first quarter of 2019.

6


 

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.

Liquidity and Going Concern

We have a history of operating losses and an accumulated deficit of $97.3 million as of March 31, 2019. In addition, we had negative working capital of $4.0 and $0.6 million at March 31, 2019 and December 31, 2018, respectively. As disclosed in our most recent Annual Report on Form 10-K, the Company needs additional financing to fund its operations. These conditions raise substantial doubt about our ability to continue as a going concern. Historically, we have satisfied our liquidity needs primarily through cash generated from financing activities. Our principal liquidity needs include cash used for operations (such as rent and labor costs), acquisitions, capital expenditures for the development of new studios and other capital expenditures necessary to improve existing studios, primarily leasehold improvements and additional furniture and fixtures.

The accompanying interim unaudited financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty. At May 14, 2019, the Company is in the process of obtaining additional financing. The Company may sell additional equity, issue debt securities or obtain a credit facility. However, the Company may not be able to secure such financing in a timely manner or on favorable terms. Without additional funds, the Company may choose to delay or reduce its operating or investment expenditures which may have a material adverse effect on operations.

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, 2018 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 March 27, 2019 (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, 2018 and the related notes thereto included in the 10-K.

Effective January 1, 2019, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as discussed further in Note 2. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with this new standard with results for reporting periods beginning after January 1, 2019 presented under ASU No. 2014-09, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

The Company has corrected an immaterial misstatement in the March 31, 2018 Statement of Cash Flows. The Company has reclassified $617,042 of cash paid related to acquisition holdback and earnouts from investing activities to financing activities. There was no impact on the cash flow from operating activities or net change in total cash flows.

 

2.Summary of Significant Accounting Policies

Except for changes to the Company’s revenue recognition policy, there have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 27, 2019. See below for additional accounting policy and transition disclosures.

In June 2018, the Financial Accounting Standards Board (“FASB”) issued 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 was effective for fiscal years beginning after December 15, 2018. We adopted this ASU as of January 1, 2019 noting no material impact to the consolidated financial statements.

7


 

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. This ASU was effective for fiscal years beginning after December 15, 2018. We adopted this ASU as of January 1, 2019 noting no material impact to the consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). This ASU supersedes the revenue recognition requirements in ASU Topic 605, Revenue Recognition, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Subsequently, the FASB issued several standards related to ASU 2014-09 (collectively, the “New Revenue Standard”), including the most recent ASU, ASU 2017-14, Income Statement - Reporting Comprehensive Income (“Topic 220”), Revenue Recognition (“Topic 605”), and Topic 606, which was issued in November 2017.

We adopted the requirements of Topic 606 utilizing the modified retrospective method of transition to contracts as of January 1, 2019. The accumulated deficit balance was increased; thus, stockholders’ equity was decreased by $1.7 million as of January 1, 2019 due to the cumulative impact of adopting Topic 606. The impact was primarily related to:

 

$1.7 million increase in deferred revenue related to the Company’s loyalty program. Topic 606 requires us to allocate and defer a portion of revenue attributable to loyalty points earned. The deferred revenue on the loyalty program is recognized as revenue upon redemption of the points or upon breakage. Previously, the Company was recognizing loyalty points under the incremental cost method.

 

$0.1 million reduction in deferred revenue related to class packages. Topic 606 requires us to recognize revenue upon redemption of the class packages for a class or upon breakage. The expected breakage amount is recognized as revenue in proportion to the pattern of rights exercised by the customer. Previously, class packages were recognized as revenue based on aggregate use pattern and breakage was recognized upon expiration of the class packages.

 

$0.1 million increase in deferred revenue related to paid in full memberships. Due to the Company’s general cancellation policy in its membership agreement, under Topic 606 the contract duration ends when the stand-ready obligation is revoked, regardless of the contract’s stated contractual term. As such, revenue is recognized on a daily basis over the membership period. Previously, revenue was recognized ratably over the contract duration.

 

The adoption had no impact to net cash provided by or used in operating, investing or financing activities in the Company’s Condensed Consolidated Statements of Cash Flows.

Impact of New Standard on Financial Statement Line Items

The following tables summarize the effect of the adoption of Topic 606 on the Company’s select line items, included in the unaudited condensed consolidated financial statements as of and for the quarter ended March 31, 2019, as if the previous accounting was in effect.

 

Condensed Consolidated Balance Sheets

 

 

As of March 31, 2019

 

 

 

As Reported

(ASC 606)

 

 

Impacts of

Adoption

 

 

Without

Adoption

(ASC 605)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

$

8,274,505

 

 

$

(1,388,904

)

 

$

6,885,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(97,317,744

)

 

 

1,388,904

 

 

 

(95,928,840

)

8


 

 

Condensed Consolidated Statements of Operations

 

 

Three Months Ended March 31, 2019

 

 

 

As Reported

(ASC 606)

 

 

Impacts of

Adoption

 

 

Without Adoption

(ASC 605)

 

Net revenues

 

$

15,691,274

 

 

$

(299,006

)

 

$

15,392,268

 

Cost of revenues and operating expenses

 

 

19,036,922

 

 

 

 

 

 

19,036,922

 

Loss from Operations

 

 

(3,345,648

)

 

 

(299,006

)

 

 

(3,644,654

)

Interest income, net

 

 

(39,336

)

 

 

 

 

 

(39,336

)

Net loss before income taxes

 

 

(3,306,312

)

 

 

(299,006

)

 

 

(3,605,318

)

Provision for income taxes

 

 

5,025

 

 

 

 

 

 

5,025

 

Net Loss

 

$

(3,311,337

)

 

$

(299,006

)

 

$

(3,610,343

)

 

Summary of Significant Accounting Policies

Revenue Recognition after the adoption of Topic 606 beginning January 1, 2019

Our Company generates revenues primarily from the sale of yoga classes, workshops, teacher training programs and yoga-related retail merchandise, net of discounts, refunds and returns at the time they are granted. Membership, class package, workshop and teacher training revenues are generally paid in advance.

Classes and workshops

Classes are principally sold in two formats—class packages and memberships. Workshops are sold as a single class or as a class pack. Class packages are based on a fixed number of classes, while memberships provide unlimited classes over a certain time period. Class package revenue is recognized when the performance obligation is satisfied upon transfer of a promised service to a student or upon the redemption of a class pack for a class or upon breakage. The expected breakage amount is recognized as revenue in proportion to the pattern of rights exercised by the student. Memberships are offered to students in varying lengths. Membership revenue is recognized on a daily basis during the membership period.

Teacher Training and Workshops

Customers are offered teacher training and workshops in varying program formats and lengths. Revenue is recognized on a straight-line basis over the event period.

MyYogaworks.com Subscription

Subscription Revenue is recognized on a straight-line basis during the subscription period.

Loyalty Program

Revenue on its loyalty program is recognized when the performance obligation is satisfied upon the redemption of the loyalty points for retail products or classes, or upon breakage. Loyalty Points earned are valued at their relative standalone selling price that is calculated using the redemption value method adjusted to reflect the likelihood that some points will not be redeemed or breakage.

Retail

Revenue for retail merchandise is recognized at the time of sale when the customer receives and pays for the merchandise at the stores. Taxes collected from the customer are recorded on a net basis. Sales returns by customers for yoga-related retail merchandise sales have historically not been material. Our Company sells gift cards to our customers. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which we operate. We recognize income from gift cards when redeemed by the customer or upon breakage.

Revenue Recognition prior to the adoption of Topic 606 on January 1, 2019

Our Company generates revenues primarily from the sale of yoga classes, workshops, teacher training programs and yoga-related retail merchandise, net of discounts, refunds and returns at the time they are granted. Yoga classes are principally sold in two formats—class packages and memberships. Class packages are based on a fixed number of classes, while memberships provide unlimited classes over a certain time period. Membership, class package, workshop and teacher training revenues are generally paid in

9


 

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. The deferred revenue balance is reduced by refunds in the reporting period which results in less revenue recognized over the service term than originally anticipated.

Revenue for retail merchandise is recognized at the time of sale when the customer receives and pays for the merchandise at the stores. Taxes collected from the customer are recorded on a net basis. Sales returns by customers for yoga-related retail merchandise sales have historically not been material. Our Company sells gift cards to our customers. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of the jurisdictions in which we operate. We recognize income from gift cards when redeemed by the customer or upon breakage. Gift cards that do not have activity for 2 years have a remote probability of being redeemed and are considered breakage.

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 August 2018, the FASB issued ASU 2018-15 Intangibles – Goodwill and Other – Internal – Use Software (Subtopic 350-40). The amendments in this ASU provide guidance on the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. We are evaluating the impact of implementing this update on our consolidated financial statements.

In July 2018, the FASB issued ASU 2018-10, Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted Improvements, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders’ equity. ASU 2018-11 provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842. 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. ASU 2018-11, ASU 2018-10, and ASU 2016-02 (collectively, “the new lease standards”) 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 $51.3 million of operating lease obligations as of March 31, 2019, 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.

3.Acquisitions

 

Our Company uses acquisitions as one of our strategies to grow our market share, quickly gain students and build on the operating momentum of the acquired businesses. No acquisitions were made in the three months ended March 31, 2019. We completed two acquisitions in 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 March 31, 2019 and the condensed consolidated balance sheet as of March 31, 2019 include the results of operations and the acquired assets and assumed liabilities related to all 2018 acquisitions. For the three months ended March 31, 2019, these acquisitions contributed $430,888 to our Company’s revenues. Net income contributed by these acquisitions was not separately identifiable due to our integration activities and

10


 

the impact of corporate-level expenses and is impracticable to provide. Acquisition-related costs, including legal fees and all related professional fees, were expensed.

 

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

 

 

 

Amount

 

Inventories

 

$

3,966

 

Property and equipment

 

 

670,060

 

Intangible assets

 

 

52,976

 

Goodwill

 

 

549,000

 

Other non-current assets

 

 

37,432

 

Total assets acquired

 

 

1,313,434

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

159,000

 

Deferred revenue

 

 

354,613

 

Deferred rent

 

 

77,891

 

Total liabilities assumed

 

 

591,504

 

 

 

 

 

 

Net assets acquired

 

$

721,930

 

 

 

4.Property and Equipment

The major classes of property and equipment are as follows:

 

 

 

As of

March 31, 2019

 

 

As of

December 31, 2018

 

Computer equipment and purchased software

 

$

678,778

 

 

$

670,022

 

Furniture and fixtures

 

 

2,886,475

 

 

 

2,744,580

 

Leasehold improvements

 

 

27,702,804

 

 

 

26,792,887

 

Other equipment

 

 

220,092

 

 

 

213,546

 

Construction-in-progress

 

 

511,561

 

 

 

1,075,634

 

Total property and equipment

 

 

31,999,710

 

 

 

31,496,669

 

Less accumulated depreciation and amortization

 

 

(22,031,937

)

 

 

(21,270,725

)

 

 

$

9,967,773

 

 

$

10,225,944

 

 

Depreciation and amortization expenses include property and equipment, leasehold improvements and purchased software. We incurred depreciation expense of $761,212 and $831,843 for the three months ended March 31, 2019 and 2018, respectively.

During the first quarter of 2019, we recorded an impairment charge of $174,725 to the property and equipment for one of our studios that was closed in the first quarter of 2019.

 

 

5. Goodwill

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

 

 

 

As of

March 31, 2019

 

 

As of

December 31, 2018

 

Goodwill, beginning of period

 

$

663,954

 

 

$

12,768,773

 

Goodwill acquired in 2018 (See Note 3)

 

 

 

 

 

352,000

 

Goodwill acquired in 2017 (See Note 3)

 

 

 

 

 

197,000

 

Total goodwill

 

 

663,954

 

 

 

13,317,773

 

Less impairment

 

 

 

 

 

(12,653,819

)

Goodwill, end of period

 

$

663,954

 

 

$

663,954

 

 

11


 

We performed a goodwill impairment test during 2018 that was triggered by the continued decrease in the Company’s market capitalization. We recorded an impairment to goodwill of $12.7 million in 2018. During the first quarter of 2019, we performed an interim goodwill impairment test and no impairment was noted.

 

6.Deferred Revenue

 

The following is a reconciliation of the changes in deferred revenue for the three months ended March 31, 2019 and 2018:

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Deferred revenue at beginning of period

 

$

7,276,578

 

 

$

7,187,948

 

Cash receipts before deferred revenue

 

 

14,992,029

 

 

 

15,788,844

 

Net revenue for the period

 

 

(15,691,274

)

 

 

(15,529,813

)

Deferred revenue from loyalty program

 

 

1,687,910

 

 

 

 

Change in gift card liabilities

 

 

9,262

 

 

 

(64,091

)

Deferred revenue at end of period

 

$

8,274,505

 

 

$

7,382,888

 

 

 

 

 

 

 

 

 

 

 

7.Related Party

Convertible Note Due to Related Party

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

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.

There were no other related party transactions during the three-month period ended March 31, 2019.

 

8.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

12


 

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

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

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

 

9.Loss per Share Attributable to Common Stockholders

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

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Numerator for basic and diluted loss per share

   attributable to common stockholders:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,311,337

)

 

$

(3,960,896

)

Dividend attributable to participating securities

 

 

 

 

 

 

Net loss attributable to YogaWorks, Inc. common stockholders

 

$

(3,311,337

)

 

$

(3,960,896

)

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted-average outstanding shares of common stock

 

 

16,533,349

 

 

 

16,350,026

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.20

)

 

$

(0.24

)

For the period ended March 31, 2019, and 2018, there were outstanding options to purchase 3,083,753 and 1,621,877 shares of Common Stock outstanding, respectively, which were excluded from the computation of diluted loss per share because it would be anti-dilutive.

 

13


 

10.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 March 31, 2019, 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) 3,904,580, 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, which increases for 2018 and 2019 are reflected in the amount above, 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 March 31, 2019, 1,111,094 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, 2018

 

 

1,382,152

 

 

$

7.28

 

 

 

8.37

 

 

$

 

Granted

 

 

1,807,572

 

 

 

0.58

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(105,971

)

 

 

8.28

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

 

3,083,753

 

 

 

3.26

 

 

 

8.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2019

 

 

1,259,913

 

 

 

6.13

 

 

 

7.85

 

 

 

 

 

 

(1)

Based on our Company’s closing stock price of $0.92 on March 29, 2019.

 

Unamortized stock-based compensation expense relating to stock options was $0.8 million at March 31, 2019, which is expected to be recognized over a weighted-average period of 2.3 years.

Valuation

 

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

14


 

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

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Fair value of common stock

 

$

0.28

 

 

$

2.78

 

Exercise price of common stock option

 

 

0.28

 

 

$

2.78

 

Risk-free interest rate

 

 

2.50

%

 

 

2.38

%

Expected term (in years)

 

 

5.66

 

 

 

6.05

 

Dividend yield

 

 

0.00

%

 

 

0.00

%

Expected volatility

 

 

49

%

 

 

49

%

 

 

Restricted Stock Units

Our Company granted 67,500 Restricted Stock Units (“RSU”) to our Company’s officers during the three months ended March 31, 2019. All RSU grants vest on the satisfaction of only a service-based condition. As of March 31, 2019, there were 424,560 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 $0.7 million at March 31, 2019, which is expected to be recognized as expense over the weighted-average period of 1.3 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 or grant date and the earlier to occur of the first anniversary of the grant date or the annual meeting of stockholders, respectively.

For the three months ended March 31, 2019, our Company withheld 25,887 shares of Common Stock (“Net Settlement”) and remitted $14,690 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 March 31,

 

 

 

2019

 

 

2018

 

Stock-based compensation

 

$

369,684

 

 

$

452,176

 

 

 

11.Income Taxes

Our effective income tax rate for the three months ended March 31, 2019 and 2018 was (0.15)% and (0.44)%, respectively. Our effective income tax rate is evaluated and adjusted at each interim period as facts and circumstances warrant. The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the three months ended March 31, 2019 and 2018 was primarily related to the impact of the valuation allowance and state income taxes.

At March 31, 2019, we have 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 March 31, 2019, and 2018, 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 three months ended March 31, 2019 and for the same period in 2018.

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

We are currently not under examination by federal, state and local tax authorities.

 

12.Commitments and Contingencies

Legal Matters

On June 5, 2017, a letter was sent to the California Labor & Workforce Development Agency alleging our itemized wage statements did not comply with the California Labor Code, which we refer to herein as the Wage Statement Claim. On August 7,

15


 

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 entire amount was reserved under accrued expenses as of December 31, 2018. The class wide settlement amount of $865,000 was approved by the court and paid by the Company on January 2, 2019.

On July 2, 2018, a former California employee (“Plaintiff”) filed a complaint against us in the Superior Court of the State of California for the County of Los Angeles (the “Complaint”). Plaintiff’s Complaint was filed pursuant to the California Labor Code purportedly on behalf of all Pilates instructors, yoga instructors and other employees who worked for us in California on a piece-rate basis within the four years preceding the date of the Complaint. The Complaint alleged that certain of our payroll-related practices with respect to California-based employees paid on a piece-rate did not comply with the California Labor Code. On March 21, 2019, we agreed to a class wide settlement for a maximum amount of $1.0 million, which would include settlement of all penalties under the Private Attorneys General Act of 2004 and California Labor Code, attorneys’ fees and costs, class representative enhancements and claims administration fees. As of December 31, 2018, we have reserved for the entire amount under accrued expenses.

Four substantially similar putative class action complaints were filed in the Superior Court of the State of California, County of Los Angeles, captioned Salazar v. YogaWorks, Inc., et al. (filed November 26, 2018); Johnson v. YogaWorks, Inc., et al. (filed December 19, 2018); Lowinger v. YogaWorks, Inc. et al. (filed December 21, 2018); and Mirza v. YogaWorks, Inc., et al. (filed January 17, 2019). These four state court actions were consolidated into the Salazar case by the Court on April 17, 2019 and assigned to Judge Maren Nelson for all purposes. Additionally, two putative class action complaints, substantially similar to the state court securities actions, captioned Cohen v. YogaWorks, Inc., et al. (filed December 27, 2018) and Dellinger v. YogaWorks, Inc., et al. (filed February 8, 2019) were filed in the United States District Court for the District of Central California. These lawsuits were brought by purported stockholders of YogaWorks alleging violations of the Securities Act of 1933 for alleged misstatements and omissions in offering documents related to YogaWorks’ IPO that took place on August 11, 2017. The lawsuits name as defendants YogaWorks, certain of its current and former officers and directors, YogaWorks’ majority shareholder, and certain underwriters of YogaWorks’ IPO. A status conference has been set for the consolidated Salazar matter for June 28, 2019. Pending further order of the court, no response is currently due. On March 21, 2019, the federal court actions were consolidated, and Inter-Local Pension Fund GCC/IBT’s were appointed as Lead Plaintiff. On April 3, 2019, the Court ordered that Lead Plaintiff’s amended complaint is due by May 21, 2019; Defendants’ motion(s) to dismiss is due by July 23, 2019; Plaintiffs’ opposition(s) to the motion(s) to dismiss is due by September 24, 2019; Defendants’ reply/replies in support of their motion(s) to dismiss are due by November 21, 2019; and the hearing on Defendants’ motion(s) to dismiss is set for December 9, 2019 at 1:30 p.m. The outcomes of the legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to YogaWorks’ financial condition, results of operations, and cash flows for a particular period. YogaWorks intends to vigorously defend the claims asserted against it.

In addition to the aforementioned legal matters, from time to time, we are 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 legal matters described above or other claims that could be material to our results of operations.

Other than the aforementioned legal matters, we believe there are no pending lawsuits or claims that may have a material adverse effect on our business, capital resources or results of operations.

 

13.Subsequent Events

 

On May 3, 2019, our Company’s securities were transferred from the Nasdaq Global Market to the Nasdaq Capital Market.

16


 

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

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

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

Investors should read this quarterly report on Form 10-Q and the documents we reference in this report and have filed with the SEC, including our 10-K, 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 the Company refer to YogaWorks, Inc. and our consolidated subsidiary, Yoga Works, Inc.

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 March 31,

 

Metric

 

2019

 

 

2018

 

Studios (period end)

 

 

68

 

 

 

66

 

Student visits(1)

 

 

897,867

 

 

 

918,386

 

Studio classes(2)

 

 

58,832

 

 

 

56,850

 

 

 

(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.

17


 

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 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 as required by GAAP. Workshop and teacher training revenue is deferred until the date of the event or is recognized over the period the event takes place. In addition, social commerce revenue is generated from class package sales through third party channels (i.e. ClassPass and Groupon).

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, as noted above, and are expensed as incurred.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. Compliance with the rules and regulations of the SEC has increased our legal and financial compliance costs and has made some of our corporate and administrative activities more time consuming and costly. In addition, our management and other personnel devote substantial time to these public company requirements. In particular, we incur significant expenses and devote substantial management effort toward ensuring our compliance with the requirements of applicable laws and regulations. In addition, we have hired additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

Pre-Opening Costs. In connection with opening new yoga studios, we incur pre-opening costs. Pre-opening costs include expenses incurred prior to the opening of a new yoga studio and primarily consist of payroll, travel, marketing, teacher training, initial opening supplies and costs of transporting initial retail apparel inventory and fixtures for our studios, as well as occupancy costs incurred from the time of possession of a yoga studio site to the opening of that studio. These pre-opening costs are included in cost of revenues, center operations and general and administrative expenses and are expensed as incurred.

Depreciation and amortization. Depreciation and amortization includes the depreciation of property and equipment, and the amortization expense of leasehold improvements and intangible assets.

Asset impairments. Asset impairments includes an asset impairment of our long-lived assets, finite-lived intangible assets or goodwill recognized in the applicable period. We test for such impairments at least annually, or whenever events or changes in circumstances indicate that an impairment of the applicable asset has occurred.

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RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the dollar variance and percentages of certain items included in our Condensed Consolidated Statements of Operations:

Quarter Ended March 31, 2019 Compared to Quarter Ended March 31, 2018 (Unaudited)

 

 

 

Quarter Ended March 31,

 

 

Variance

 

(in thousands)

 

2019

 

 

2018

 

 

Dollar

 

 

Percent

 

Net revenues

 

$

15,691

 

 

$

15,530

 

 

$

161

 

 

 

1

%

Cost of revenues and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

6,145

 

 

 

5,924

 

 

 

221

 

 

 

4

%

Center operations

 

 

6,842

 

 

 

6,772

 

 

 

70

 

 

 

1

%

General and administrative expenses

 

 

4,376

 

 

 

4,405

 

 

 

(29

)

 

 

(1

%)

Depreciation and amortization

 

 

1,499

 

 

 

2,379

 

 

 

(880

)

 

 

(37

%)

Asset impairment

 

 

174

 

 

 

 

 

 

174

 

 

N/A

 

Total cost of revenues and operating expenses

 

 

19,036

 

 

 

19,480

 

 

 

(444

)

 

 

(2

%)

Loss from operations

 

 

(3,345

)

 

 

(3,950

)

 

 

605

 

 

 

(15

%)

Interest income, net

 

 

(39

)

 

 

(6

)

 

 

(33

)

 

 

550

%

Net loss before income taxes

 

 

(3,306

)

 

 

(3,944

)

 

 

638

 

 

 

(16

%)

Provision for income taxes

 

 

5