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As filed with the Securities and Exchange Commission on July 10, 2017

Registration No. 333-218950

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

YogaWorks, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7299   47-1219105
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification Number)

5780 Uplander Way

Culver City, California 90230

(310) 664-6470

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Rosanna McCollough

Chief Executive Officer

YogaWorks, Inc.

5780 Uplander Way

Culver City, California 90230

(310) 664-6470

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

Steven B. Stokdyk, Esq.

Latham & Watkins LLP

355 South Grand Avenue

Los Angeles, California 90071

(213) 485-1234

 

Kurt Donnell, Esq.

Executive Vice President and General Counsel

YogaWorks, Inc.

5780 Uplander Way

Culver City, California 90230

(310) 664-6470

 

Christopher C. Paci, Esq.

Ann Lawrence, Esq.

DLA Piper LLP (US)

1251 Avenue of the Americas

New York, NY 10020

(212) 335-4500

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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

 

Large accelerated filer       Accelerated filer 
Non-accelerated filer  (Do not check if a smaller reporting company)     

Smaller 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 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities
to be Registered
  Amount to be
Registered(1)
  Proposed Maximum
Offering Price
Per Share
    Proposed Maximum  
Aggregate Offering
Price
 

Amount of

Registration Fee(2)

Common Stock, par value $0.001 per share

  5,750,000   $14.00   $80,500,000.00   $9,330.00

 

 

(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes offering price of any additional shares that the underwriters have the option to purchase.
(2) The registrant previously paid $8,664.00 of this amount in connection with a prior filing of its Registration Statement.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JULY 10, 2017

PRELIMINARY PROSPECTUS

 

 

5,000,000 Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of shares of common stock of YogaWorks, Inc. We are offering 5,000,000 shares of our common stock. We estimate that the initial public offering price per share will be between $12.00 and $14.00. For a detailed description of our common stock, see the section entitled “Description of Capital Stock”.

Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock on The NASDAQ Global Market under the symbol “YOGA”.

Great Hill Equity Partners V, L.P., Great Hill Investors, LLC and their affiliated companies, which we refer to collectively as “Great Hill Partners,” or controlling stockholder, has indicated an interest in purchasing up to $10.0 million in shares of our common stock in this offering, which we refer to as the “Great Hill Shares”, at the initial public offering price. However, as indications of interest are not binding agreements to purchase, the underwriters may elect to sell more, less or no shares in this offering to Great Hill Partners, and Great Hill Partners may elect to purchase more, less or no shares in this offering.

We are an “emerging growth company” as defined under federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements. See “Prospectus Summary – Implication of Being an Emerging Growth Company”. We will also be a “controlled company” under the corporate governance standards for NASDAQ listed companies and will be exempt from certain corporate governance requirements of the rules. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock”.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 21.

 

 

 

     Per Share      Total  

Initial Public Offering Price

   $               $           

Underwriting Discount(1)

   $      $  

Proceeds Before Expenses

   $      $  

(1) See “Underwriting”.

We have granted the underwriters an option for a period of 30 days following the date of this prospectus to purchase up to an additional 750,000 shares of common stock solely to cover overallotments, if any, at the initial public offering price, less the underwriting discount.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on or about            , 2017 through the book-entry facilities of The Depository Trust Company.

 

 

 

Cowen   Stephens Inc.   Guggenheim Securities

 

Roth Capital Partners   Imperial Capital

 

 

Prospectus dated            , 2017


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LOGO

 

Diverse, High-Quality Yoga Classes for Everybody Uplifting Local Community Empowered Personal Journey Teaching Authority Since 1990 Complementary Digital Offering


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     21  

Special Note Regarding Forward-Looking Statements

     43  

Use of Proceeds

     45  

Dividend Policy

     46  

Capitalization

     47  

Dilution

     49  

Selected Consolidated Financial and Other Data

     52  

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

     57  

Business

     76  

Management

     98  

Executive Compensation

     107  

Certain Relationships and Related Party Transactions

     120  

Principal Stockholders

     122  

Description of Capital Stock

     124  

Shares Eligible for Future Sale

     128  

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     131  

Underwriting

     135  

Legal Matters

     142  

Experts

     142  

Where You Can Find Additional Information

     142  

Index to Consolidated Financial Statements

     F-1  

 

 

We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

Persons who come into possession of this prospectus and any such free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

Trademarks, Trade Names and Service Marks

YogaWorks, MyYogaWorks, Yoga Tree and our other registered or common law trademarks, service marks or trade names appearing in this prospectus are the property of YogaWorks, Inc. or one of its subsidiaries. Other trademarks, service marks or trade names appearing in this prospectus are the property of their owners. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this prospectus.

Market, Industry and Other Data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on reports from various sources. Because this information

 

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involves a number of assumptions and limitations, you are cautioned not to give undue weight to such information. The content of the sources, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein. Certain statements in this prospectus regarding market and industry data of the yoga industry is based on information from the 2016 Yoga in America Study conducted by Yoga Journal and Yoga Alliance. Yoga Alliance is a non-profit association of yoga schools and teachers dedicated to the promotion of yoga education and training, of which we are a paying member. The 2016 Yoga in America study conducted by Yoga Journal and Yoga Alliance is referred to throughout this prospectus as the 2016 Yoga in America Study.

In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section captioned “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us.

 

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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus before making an investment decision. Unless the context otherwise requires, the terms “YogaWorks,” “the Company,” “we,” “us” and “our” refer to YogaWorks, Inc. and its consolidated subsidiaries and the term “Great Hill Partners” refers collectively to Great Hill Equity Partners V, L.P., Great Hill Investors, LLC and their affiliated companies.

Our Mission

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.

YogaWorks for Everybody

We are one of the largest and fastest growing providers of high quality yoga instruction in the U.S., with almost 3 million student visits in 2016 and 50 company-owned studios as well as our Internet-based digital media service, MyYogaWorks.com. YogaWorks is the only national, multi-discipline yoga instruction company, and our highly recognizable brand is present in six geographically dispersed U.S. markets—Los Angeles, Orange County (California), New York City, Northern California, Boston and Baltimore/Washington D.C. Our teachers taught more than 180,000 classes in our conveniently located studios and attracted more than 225,000 students in 2016. Since 1990, we have offered the YogaWorks teacher training program, which we believe is the gold standard within the yoga community and respected across the globe for instructing teachers on how to teach yoga to a broad population of students. We believe our YogaWorks teacher training program extends our brand beyond our current six markets and that many of our 11,000 graduates serve as ambassadors of the YogaWorks brand and help us identify new markets.

We strive to make yoga accessible to everyone and offer a lifestyle approach that can be applied on and off the mat. We help people improve their physical and mental well-being through the 5,000 year old tradition of yoga, which we practice as a community-oriented experience. Our classes are designed to safely challenge practitioners of all levels, making yoga accessible to a diverse population ranging from beginners and casual practitioners to seasoned yogis and professional athletes. We are told some students find yoga to be the only form of exercise they need or wish to do. Others enjoy how yoga complements their other exercise routines, as yoga can enhance performance and reduce injuries by helping people stretch to increase flexibility, strength, balance and focus.

Our student experience centers on three key benefits:

Connection: Our first goal is to help our students connect their bodies with their minds. In fact, the word “yoga” means to unite or join. We offer our students a variety of class options ranging from rigorous physical exertion to classes that provide a deep stretch that is low-impact. Each class requires a student to connect breathing with movement, necessitating tremendous focus. This concentration, in turn, helps our students to tune out their worries, cares and distractions. We believe that healthy physical strengthening and stretching

 



 

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combined with meditation can lead to a feeling of centered positivity and relief from stress that so many seek.

Community: Our open and inviting atmosphere fosters a supportive environment so that students can work toward their fitness and mindfulness goals and meet others with similar interests. Our inviting studios and inclusive, non-judgmental approach provide a non-intimidating environment to make students feel accepted and respected when walking through our doors. While each studio has a unique look and feel, all of our studios are unified by a common brand, community-oriented mission, value system and focus on quality teaching and welcoming customer service.

Calm: From the moment a student enters our studio, we strive to create a tranquil space. Our practice rooms prepare students for a completely different experience geared towards mind-body balance. The highlight of the YogaWorks experience is the class work, which is designed to help students strengthen their mind and body as well as find a sense of connection with their own center. As an additional benefit, most of our classes end with five to ten minutes of deep relaxation, or savasana, to engender a sense of calm that our students can take back with them to their everyday lives, after leaving our studios.

Since 1990, we have offered our own teacher training program that derives its inspiration from combining three different respected yoga styles to create a unique YogaWorks approach. We believe our teacher training program is respected within the yoga community for training teachers how to tailor and curate classes, have a presence in the room and truly teach rather than focusing on memorizing and repeating rote sequences of postures. More than 11,000 teachers have graduated from our program since its inception.

In addition to our in-studio instruction and teacher training programs, YogaWorks has developed, and markets and sells online subscriptions to, MyYogaWorks.com, an on-demand video library of over 1,000 proprietary instructional classes that allows students to practice yoga anytime, anywhere. We believe our MyYogaWorks.com classes are complementary to our in-studio classes as students can focus on a particular pose, hone a skill or continue their practice between visits. Our video classes are expertly taught by YogaWorks-trained teachers. MyYogaWorks.com streamed almost 700,000 classes to over 18,000 users in more than 145 countries in 2016.

Strong Financial Performance

As a result of our quality class offerings, talented teachers and solid brand reputation, we have achieved a strong historical financial performance. We derive our revenues from multiple sources, including in-studio instruction and retail sales, teacher training, workshops and subscriptions to MyYogaWorks.com. We believe our compelling value proposition to our students, consisting of competitive pricing for high-quality instruction, has also driven our growth throughout a variety of economic cycles and conditions since we were founded in 1987.

Our significant growth is reflected in:

 

  49 studios at December 31, 2016 reflecting a compound annual growth rate, or CAGR of 19.5%, from 24 studios at December 31, 2012 (primarily related to our acquisition of 17 studios in 2015);

 



 

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  2.9 million visits in 2016, reflecting a CAGR of 13.6%, from 1.8 million visits in 2012; and

 

  Net revenues of $55.1 million in 2016, reflecting a CAGR of 10.9%, from $36.4 million in 2012.

 

LOGO

Our recent growth has been driven by our strategy of adding studios primarily through acquisitions and selectively building new studios. Through acquisitions, we believe we can quickly gain students, grow our market share and build on the operating momentum of these acquired businesses. Our acquisition strategy also allows us to immediately gain a strong presence in targeted markets and local communities.

We have developed a multi-factor evaluation system that allows us to quickly assess potential acquisition candidates and continually add qualified new targets to our active outreach process. We have also built an efficient due diligence review workflow, and a proven post-acquisition integration methodology that is designed to facilitate a seamless student, teacher and staff transition to the YogaWorks operating model. In addition, we have a proven history of retaining and improving the student and teacher focus of each studio or chain of studios acquired. Our acquired studios have experienced positive results under our ownership, benefiting from being part of our brand and implementing our best practices.

Our Market Opportunity

Benefits of Yoga

We believe that helping students connect their breathing and movement can yield a powerful result. From increasing strength and flexibility to reduction of stress to clarity of mind, the noted benefits of yoga are many and meaningful. Our students tell us about how calm they feel after class and how they turn to yoga to help them reach their health and wellness goals, manage difficult situations and relieve stress. These benefits are part of the reason that yoga adoption is increasing across all segments of the population, and it is why word-of-mouth is such a major marketing source for us, as students share the benefits of yoga.

Market Awareness, Yoga Participation and Spend

The practice of yoga in the United States is gaining popularity. According to a report published by IBISWorld in November 2016 discussing pilates and yoga studios in the U.S., which is referred to throughout this prospectus as the IBISWorld Report, approximately 37 million Americans practiced yoga in 2016, up from approximately 20 million in 2012, representing 80% growth. According to the Sports Club Advisors, Inc. Industry Snap Shot from April 2016, the number of yoga practitioners is expected to grow to 55.1 million Americans in 2020, representing 50% more participants than 2016. Yoga awareness among Americans has increased from 75% in 2012 to 90% in 2016, according to the 2016 Yoga in America Study. According to the same study, in 2016, yoga practitioners spent over $16 billion on instruction, apparel, equipment and yoga accessories; over one-third of that figure, or

 



 

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approximately $5.8 billion, was spent on instruction in 2016. At $16 billion in 2016, spend on yoga has increased by $6 billion since 2012.

 

LOGO

Source: 2016 Yoga in America Study.

Student Profile

Yoga is practiced by a number of desirable consumer demographics and YogaWorks is well positioned to reach a broad population due to our inclusive, multi-discipline and broad program offerings. According to the International Health, Racquet & Sportsclub Association (IHRSA) over 40% of yoga practitioners are part of “Generation Y,” also known as “Millennials”, who are increasingly focused on wellness and are generally willing to spend more on personal enrichment and authentic and meaningful experiences. Yoga appeals to people of all incomes and education levels. Approximately 60% of practitioners have college degrees and earn over $75,000 in annual income.

What Sets YogaWorks Apart

We believe we have a number of core competencies that distinguish YogaWorks from other yoga studio operators.

Market Defining Lifestyle Brand Focused on Healthy Living

We believe we are viewed as a trusted authority on the growing yoga movement and have a reputation for being the place where top teachers go to learn and teach. Today we are one of the largest branded operators of yoga studios in the U.S. by number of studios and number of students, with more than 225,000 practicing students and almost 3 million student visits in 2016. We believe our positioning as a lifestyle brand has resulted in attractive student economics for us. Driven in part by the large number of students that are referred to us by our teachers or existing students, we have been able to achieve a “lifetime value” per student of more than ten times our marketing cost to acquire a new student.

Appeal to Broad Demographic

We offer a high-quality fitness experience throughout our entire yoga studio network that appeals to a broad student demographic at attractive price points. The variety of classes and styles we teach distinguishes us from our competition and allows us to accommodate students from a wide variety of backgrounds. Our student base is approximately 80% female and 20% male with over 60% of the students earning over $75,000. In addition, our student base is widely and relatively evenly distributed in age ranging from 25 to 64 years old, with the majority of our students having attended or graduated college.

 



 

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High Quality Yoga Experience

Our classes are about peace of mind as well as physical challenge. We provide our students with a welcoming feeling beginning with our clean, bright and aesthetically pleasing studios. As an example, our studios tend not to have mirrors so our students can focus inwards on themselves and their experience and not compare themselves to others. Our classes feature our unique YogaWorks approach: safe, compassionate and skillful teaching. Many classes at YogaWorks offer themes from physical focal points such as releasing the hips or strengthening the upper body to more subtle themes like quieting the mind or opening the heart center.

The Gold Standard of Yoga Teacher Training

We differentiate our brand through our world-renowned and well established teacher training programs in which teachers are taught how to teach safe, inspiring yoga classes and engage students on an individual level. Our innovative and proven teaching program, originally created in 1990, is well-rounded and focuses on providing yoga teachers with the tools to sequence classes and teach skillfully rather than emphasizing memorization of set sequences. This enables our teacher graduates to be comfortable and well-trained to effectively teach anywhere and to any class composition. We have graduated over 11,000 teachers in the program’s 27 year history, across more than 25 countries. We believe we have trained and qualified more advanced yoga teachers than any other yoga operator in the country.

Strong Studio-Level Economics

We seek to generate attractive studio-level margins by increasing the average number of students per class which in turn provides better return on our fixed costs, such as teacher salaries and rent. We target studios with average annual revenues between $500,000 to $700,000 and a return on our invested capital to be within two to four years of opening a new studio. We approach our acquisition targets seeking similar returns. We believe that our strong studio-level economics are important for us to grow our studio base and successfully execute our acquisition strategy.

Acquirer of Choice with History of Successful Acquisitions

We believe that acquisitions can be an effective and profitable way for us to enter new regional markets and gain a thriving student base rather than build new studios that ramp up slowly over time. We have a history of successful yoga studio acquisitions and expect to continue to execute regional growth through acquisitions in the future. In 2015, we acquired 17 studios through four acquisitions (Be Yoga, Yoga Tree, Back Bay Yoga Studio and Charm City Yoga) for aggregate consideration of $12.2 million. These studios contributed $11.7 million of net revenue in 2016. With the integration of our operations, programming and instruction best practices, total visits in the studios acquired from these acquisitions increased more than 7% in 2016, our first full fiscal year of operating these studios, over 2015.

We believe we are uniquely positioned to grow via acquisition due to our (i) well-respected brand among studio operators, (ii) our multi-discipline approach to yoga that allows us to cohesively integrate studios teaching nearly any style of yoga, (iii) our leverageable infrastructure, (iv) our experienced management team, (v) our studio acquisition experience and (vi) our tested integration procedures. With each acquisition, we further refine our selection criteria and integration methodology, enabling us to preserve the acquired studio’s unique appeal to its local community while successfully increasing visits and net revenues under our ownership.

 



 

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Inspired Culture and Passionate Team

Since our founding in 1987, we have cultivated a positive culture that permeates all aspects of our organization. The core tenets of our culture include a belief in the benefits of yoga practice, transparency, a focus on performance, providing a compelling studio experience and a team-based customer service approach. We strive to recruit candidates into our organization who demonstrate a passion for healthy living and an understanding of the benefits of yoga. We continuously emphasize the need to communicate openly with our students and fellow employees; this transparency is also reflected in our pricing strategy. We believe our culture helps build and support a consistent and motivated group of team members that are passionate about providing a high-quality experience to our students.

Proven and Experienced Senior Management Team

We have assembled a proven and experienced senior management team that is aligned by the same vision and strategic direction for YogaWorks and continues to drive our growth and protect our culture. Our senior management team brings a wealth of experience across a broad range of business disciplines, including consumer products, retail and service operations, education, e-commerce and digital media, direct consumer marketing, brand development, finance, real estate and information technology. Additionally, our management team has extensive experience building consumer lifestyle brands. We believe our senior management team is a key driver of our success and is well-positioned to execute our growth strategy.

Our Growth Strategy

We believe we have significant opportunities to enhance our leadership in the yoga studio industry and improve profitability through strategic acquisitions and organic growth. This growth will fuel our ability to continue to make high-quality yoga accessible to everyone—dedicated yogis and beginners alike. Key elements of our growth strategy are as follows:

Grow our Studio Base

We believe we are ideally positioned to consolidate the highly fragmented yoga studio market. We plan to strengthen our presence in existing markets and selectively enter new markets predominantly by acquiring independently owned yoga studios. Based upon internal and third-party analysis of the number of currently existing yoga studios throughout the U.S., and assuming sufficient access to capital and successful execution of our business plan, we believe we have the opportunity to increase our studio count to over 250 studios in the next several years. We believe that acquisitions of existing studios and their thriving student bases can be an effective, profitable and risk-mitigating way to enter a new regional market versus building a new studio and waiting for attendance to ramp up over time. We will, however, selectively open new YogaWorks studios to complement existing and acquired regional studio clusters where there is sufficient density of population to support more of our studios.

Over the past 14 years, we have successfully integrated numerous acquisitions. In 2003, we acquired 3 studios located in Orange County, California. In 2004, we acquired 2 studios in the Los Angeles area and 4 studios in the New York City area (6 studios total). In 2007, we acquired one studio in the Los Angeles area. In 2008, we acquired 3 studios in the Northern California area. In 2013, we acquired 2 more studios in the Los Angeles area. In 2015, we acquired Be Yoga in the Palo Alto area (one studio), Yoga Tree in the San Francisco area (7 studios), Back Bay Yoga Studio in the Boston area (2 studios), and Charm City Yoga in the Baltimore/Washington D.C. area (7 studios). Generally, we have seen revenues and visits increase across acquired studios since their acquisitions. To date, 60% of our existing studios have become part of our studio base through acquisitions. We believe our significant experience in identifying attractive acquisition targets, our industry reputation, our proven

 



 

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integration process and solid operational infrastructure create a compelling platform for growth through acquisitions. Through future acquisitions, we can leverage our corporate infrastructure to grow our brand in both new and existing markets by quickly tapping into the thriving yoga communities that already exist in nearly every city in the U.S.

Through a combination of acquisitions and new studio openings, we plan to add more than 35 yoga studios over the next eighteen months. Our studio growth will likely include expansion into new geographic markets as well as an enhanced presence in existing markets.

Drive Increased Visits, Net Revenues and Regional Market Share

We remain focused on developing and offering high-quality yoga programming supported by our industry-leading teacher training to drive increased visits, net revenues and regional market share. Specifically, we intend to generate growth in visits, net revenues and market share by executing on the following strategies:

 

    Increase our Brand Awareness. We will continue to increase YogaWorks’ brand awareness and consumer loyalty through new and innovative marketing outreach, studio acquisitions, new studio openings and expansion of our digital presence. Our marketing efforts reflect our authentic and localized brand characteristics, and are comprised of grassroots and word-of-mouth marketing that include local events to enhance our unique profile in the communities where we operate. Our ability to engage with consumers across six regional markets demonstrates the effectiveness of our nationally-managed, but locally-focused marketing spend.

 

    Expand Teacher Training and Workshops. As the most recognized and accredited teacher training program in yoga, we plan to continue investing in the continuing education of our students and teachers, thereby driving the profitable revenues that the teacher training program brings to our company. Workshops, primarily used to deepen our students’ practice, have also been an incremental revenue opportunity by utilizing excess studio room capacity.

 

    Grow MyYogaWorks.com. We plan to continue investing in adding quality content for MyYogaWorks.com, improving the user experience and increasing the site’s functionality, including potentially adding live streaming. We are launching several initiatives to cross-sell consumers who use MyYogaWorks.com to join us in our studios for live instruction and hands-on one-on-one attention from our teachers. We are also exploring relationships with companies and complementary brands to drive growth and increase awareness of the MyYogaWorks.com platform.

Leverage our Infrastructure

In preparation for our continued growth, we have built out our corporate infrastructure over the past several years. We now have the corporate, regional and studio-level management personnel in place, as well as the information technology platform, to support our future growth and acquisition strategy, without significant new investments in corporate infrastructure. As our studio base grows, expenses for our corporate and regional overhead should become a smaller percentage of our net revenues and profitability. We will also continue to benefit from our strategy of “clustering” studios in distinct geographic regions. By building scale in existing markets, we will increase our local brand awareness and consumer engagement without spending incrementally more on marketing costs as a percentage of net revenues.

 



 

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Pursue Brand Extension Opportunities

We intend to extend and monetize the YogaWorks brand in the following areas:

 

    Corporate Relationships. We believe we can capitalize on our position as an industry authority on high-quality, multi-discipline yoga to establish relationships with large corporations, health insurers and other institutions to incorporate YogaWorks classes into their employee wellness programs and encourage them to promote the usage of YogaWorks studios.

 

    Retail. We believe that our retail and merchandise offerings contribute to a high quality in-studio environment for our students and better enable them to live the YogaWorks lifestyle. In addition, there is considerable opportunity to expand our retail and merchandising offerings going forward, including the launch of YogaWorks-branded apparel and accessories as well as offering select merchandise to be sold via e-commerce.

 

    Licensing. We believe we have an opportunity to license the YogaWorks brand into new complementary healthy lifestyle categories that would benefit from our brand reputation and market recognition. Examples include licensing MyYogaWorks.com content to media companies and content providers and through alternative online distribution channels.

 

    Publishing of Digital Content. We also see an opportunity to publish our yoga class content and stream live classes through MyYogaWorks.com which will help us maintain our industry leadership position and increase the additional revenue that could be generated through our planned e-commerce platform.

Summary Risk Factors

Our business is subject to numerous risks and uncertainties, including those in the section entitled “Risk Factors” and elsewhere in this prospectus. These risks include, but are not limited to, the following:

 

    our incurrence of losses in the past and expectation of incurring losses in the future;

 

    our ability to maintain the value and reputation of our brand;

 

    negative publicity, particularly through social media, which could hurt our brand;

 

    our ability to implement our growth strategy or successfully integrate the studios we acquire to achieve our growth strategy;

 

    our inability to achieve sales and operating levels for our recently acquired and opened studios that is consistent with our existing studios;

 

    our expansion into new markets;

 

    our inability to manage our growth effectively;

 

    our inability to renew or replace our current studio leases on favorable terms;

 

    an economic downturn or the occurrence of economic uncertainty in our markets;

 

    unexpected increases in our operating expenses, including labor costs and overhead; and

 

    changes in government regulations or our inability to comply with them.

 



 

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Recapitalization Transactions

On March 24, 2017, we undertook the following transactions:

 

    the conversion of all of our outstanding preferred stock, all beneficially owned by Great Hill Partners, into 7,426,169 shares of our common stock;

 

    the conversion of all of our then existing convertible notes held by Great Hill Partners, the 2015 GHP Convertible Notes, into 1,407,632 shares of our common stock;

 

    after effecting the conversion of all of our outstanding preferred stock and conversion of all then-existing convertible notes, effecting a 1-for-10 reverse stock split of our common stock and a proportional adjustment to the exercise price of then-existing stock option awards;

 

    the approval of the issuance of new convertible notes to Great Hill Partners, or the 2017 GHP Convertible Notes, in the aggregate principal amount of $3.2 million, which are convertible, at the option of the holder, into shares of our common stock at a conversion price of $8.40 per share of common stock;

 

    an increase in the number of shares that may be issued under our 2014 Stock Option and Grant Plan, or our 2014 Plan, to 1,695,484 shares of our common stock; and

 

    the award of stock option grants to our employees and consultants to purchase up to 1,425,641 shares in the aggregate of our common stock.

Prior to the closing of this offering, we intend to undertake the following transactions:

 

    a 1-for-1.333520 reverse stock split of our common stock and a proportional adjustment to the exercise price of then outstanding stock option awards; and

 

    the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws in connection with our initial public offering.

We refer to the foregoing as the Recapitalization Transactions.

Recent Developments

Preliminary Second Quarter Results

Our financial statements for the quarter ended June 30, 2017 are not yet available and our independent registered public accounting firm, BDO USA, LLP, has not completed its review of any financial statements for such period. Our expectations with respect to our unaudited results for the period discussed below are based upon management estimates.

The results below are preliminary and subject to revision based upon the completion of our quarter-end financial closing process and are not meant to be comprehensive for this period. Following the completion of our quarter-end financial closing process and review by our independent registered public accounting firm, we may report financial results that could differ from these estimates, and the differences could be material.

While we believe that the following information and estimates are based on reasonable assumptions, our actual results may vary, and such variations may be material. Factors that could cause the preliminary financial data and estimates to differ include, but are not limited to: (i) additional adjustments in the calculation of, or application of accounting principles for, the financial results for the

 



 

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quarter ended June 30, 2017; (ii) discovery of new information that affects accounting estimates and management’s judgment underlying these estimated results; and (iii) the completion of the review by our independent registered public accounting firm of our financial results for the quarter ended June 30, 2017.

We are providing the following estimated results for the quarter ended June 30, 2017:

 

    Net revenues of between $12.3 million and $12.6 million; and

 

    Visits of between 700,000 and 720,000.

The decrease in net revenues from $13.3 million for the quarter ended June 30, 2016 was primarily due to a larger portion of our sales for the quarter ended June 30, 2017 being recognized as deferred revenue. The increase in deferred revenue was driven by our initiation of a more flexible pricing strategy in July 2016 that, as expected, has resulted in a shift in sales toward class packages which require recognition of revenue over a longer time period than other sales options. This sales mix shift resulted in less revenue being recognized during the second quarter of 2017 than the same quarter in 2016, in which we had a higher percentage of monthly membership revenue.

Our decision to offer class packages at all of our studios also impacted our number of visits, as students on class packages tend to visit studios less than students with memberships, which primarily led to the decrease from 754,567 visits for the quarter ended June 30, 2016. We expect this trend to continue at a decreasing rate over time as students in our existing studios purchase class packages more frequently than memberships and as we acquire and open additional studios that are more class package-focused. While our strategy to sell more class packages has had an impact on both our net revenues and visits during the transition period, we believe the implementation of this strategy allows us to better serve our students and will draw a broader student base as consumers favor more flexible pricing options.

Studio Acquisition Activity

As of the date of this prospectus, we have entered into letters of intent to acquire 10 studios and are in late-stage negotiations to acquire 4 additional studios. In total, we have entered into confidentiality agreements with respect to more than 125 studios, pursuant to which we are evaluating and discussing potential acquisitions of those studios, and have contacted owners of over 250 additional studios regarding a potential acquisition. We believe each of the potential acquisitions subject to the letters of intent is consistent with our growth strategy and intend to fund any purchase price with cash, but may also decide to issue stock as consideration or compensation to new employees. There can be no assurance that we will enter definitive agreements based on the letters of intent, consummate any such acquisitions or acquire any additional studios. Furthermore, our acquisitions are subject to a number of risks and uncertainties, including as to when, whether and to what extent the anticipated benefits and cost savings of a particular acquisition will be realized. See “Risk Factors—Risks Related to Our Business and Industry—Our growth strategy is highly dependent on our ability to successfully identify and acquire studio targets and integrate their operations with ours.”

Our Sponsor and Controlled Company Status

Great Hill Partners, L.P., one of the affiliates of Great Hill Partners, is a private equity firm that has raised over $5 billion in commitments since inception through six funds to finance the expansion, recapitalization or acquisition of companies in a wide range of sectors in business-to-business and business-to-consumer industries including software, financial and healthcare technology, consumer

 



 

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retail, digital media, e-commerce and internet infrastructure. Based in Boston, funds advised by Great Hill Partners, L.P. have invested in over 50 companies, targeting investments in established companies that are leaders in their markets with strong management teams. Great Hill Partners, L.P. supports these companies by providing board-level oversight of company management, capital structure, and growth strategy, including strategic acquisitions. In addition to YogaWorks, representative current and former consumer/retail portfolio companies include Wayfair, The Shade Store, and Vitacost.

We were acquired by Great Hill Partners in July 2014 for $45.6 million in cash. The terms of the acquisition, including the purchase price, were determined based on arms’ length negotiations between Great Hill Partners, YogaWorks and the prior majority shareholder of YogaWorks, Highland Capital Partners. Net of the $9.6 million liabilities assumed, $12.0 million of the purchase price was allocated to net tangible assets, $25.2 million of the purchase price was allocated to specific identifiable intangible assets and $18.0 million of the purchase price was allocated to goodwill.

Following this offering, assuming the purchase of the Great Hill Shares, Great Hill Partners will control approximately 70% of our common stock (or 66% if the underwriters exercise their option to purchase additional shares). As a result, Great Hill Partners will control any action requiring the general approval of our stockholders, including the election of our board of directors (which will control our management and affairs), the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets. Because Great Hill Partners will control more than 50% of the voting power of our common stock, we will be considered a controlled company under the NASDAQ rules. As such, we are permitted, and have elected, to opt out of compliance with certain corporate governance requirements. Accordingly, stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements. See “Risk Factors—We are a “controlled company” within the meaning of the NASDAQ rules. As a result, we qualify for, and intend to continue to rely on, exemptions from corporate governance requirements that provide protection to stockholders of other companies.”

Corporate Information

We launched our principal operations in 1987. We are a Delaware corporation and our principal executive offices are located at 5780 Uplander Way, Culver City, California 90230, and our telephone number is (310) 664-6470. Our website address is www.yogaworks.com. The information on or that can be accessed through our website is not incorporated by reference into this prospectus, and you should not consider any such information as part of this prospectus or in deciding whether to purchase our common stock.

Implications of Being an Emerging Growth Company

The Jumpstart Our Business Startups Act, or the JOBS Act, was enacted in April 2012 with the intention of encouraging capital formation in the United States and reducing the regulatory burden on newly public companies that qualify as “emerging growth companies”. We are an emerging growth company within the meaning of the JOBS Act. As an emerging growth company, we may take advantage of exemptions from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, requirements related to compliance with new or revised accounting standards, requirements related to the disclosure of executive compensation in this prospectus and in our periodic reports and proxy statements, and the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute

 



 

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payments. We may take advantage of these exemptions until we are no longer an emerging growth company.

We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have $1.0 billion or more in annual revenue; (ii) the date we qualify as a “large accelerated filer” with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or (iv) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

For risks related to our status as an emerging growth company, see the disclosure elsewhere in this prospectus under the caption “Risk Factors” below.

 



 

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THE OFFERING

 

Common stock offered by YogaWorks

   5,000,000 shares

Common stock outstanding after this offering

   13,909,081 shares

Underwriters’ option to purchase additional shares of common stock from YogaWorks

   750,000 shares

Use of proceeds

   We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be approximately $58.5 million based upon the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
   The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and thereby enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds to us from this offering to repay the 2017 GHP Convertible Notes of approximately $3.3 million, to repay the outstanding indebtedness under our existing loan agreement with Deerpath Funding, LP, referred to herein as our Loan Agreement, of approximately $7.0 million (including prepayment premiums), fund future acquisitions of individual yoga studios or businesses with multiple studios (although we have no present binding obligations to enter into any such acquisitions), investments or capital expenditures and for working capital and other general corporate purposes. See “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering.

Dividend Policy

   We currently do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, contractual restrictions and other factors that our board of directors considers relevant. See “Dividend Policy” for further information.

 



 

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Voting Rights

   Shares of common stock are entitled to one vote per share. See the section captioned “Description of Capital Stock”. Assuming no exercise of the underwriters’ option to purchase additional shares, following this offering, outstanding shares of common stock held by our executive officers, directors and holders of more than 5% of our capital stock will represent approximately 64% of the voting power of our outstanding capital stock (or approximately 70% of the voting power of our outstanding capital stock, assuming the purchase of the Great Hill Shares).

Controlled Company

   Immediately following completion of this offering, Great Hill Partners will control approximately 70% of the total voting power of our outstanding common stock, assuming the purchase of the Great Hill Shares. As a result, Great Hill Partners will be able to control the outcome of all matters submitted to a vote of our stockholders, including, for example, the election of directors, amendments to our certificate of incorporation and mergers or other business combinations. See “Description of Capital Stock”. In addition, we currently intend to avail ourselves of the controlled company exemption under the NASDAQ corporate governance rules, and so you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Proposed trading symbol on The NASDAQ Global Market

   “YOGA”.

Great Hill Partners has indicated an interest in purchasing up to $10.0 million in shares of our common stock in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to Great Hill Partners, and Great Hill Partners may determine to purchase more, less or no shares in this offering.

The total number of shares of our common stock that will be outstanding after this offering includes 13,909,081 shares, and excludes, in each case as of March 31, 2017:

 

    an aggregate of 1,289,013 shares of common stock issuable upon the exercise of outstanding options under the 2014 Stock Option and Grant Plan, or our 2014 Plan, with a weighted-average exercise price of approximately $8.40 per share;

 

    1,901,598 shares of common stock, subject to annual increases, reserved for future grant or issuance under our 2017 Incentive Award Plan, or our 2017 Plan, which will become effective upon the completion of this offering (plus an additional number of shares of common stock subject to outstanding awards under the 2014 Plan as of the effective date of the 2017 Plan and which are forfeited or lapse unexercised thereafter), including an aggregate of 398,643 shares of common stock issuable upon the exercise of options expected to be granted under the 2017 Plan in connection with the closing of this offering;

 

 



 

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    conversion of the 2017 GHP Convertible Notes into shares of our common stock (we intend to repay the 2017 GHP Convertible Notes in connection with the closing of this offering); and

 

    shares issuable upon vesting of restricted stock units to be granted to our non-employee directors under the 2017 Plan in connection with this offering and our Director Compensation Program (see “Management—Director Compensation”).

Except as otherwise indicated, all information in this prospectus assumes as of March 31, 2017:

 

    the Recapitalization Transactions; and

 

    no exercise by the underwriters of their right to purchase up to an additional 750,000 shares of common stock from us to cover overallotments, if any.

 



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The consolidated statements of operations and cash flows data for the years ended December 31, 2016 and 2015 is derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations and cash flows data for the three months ended March 31, 2017 and 2016 and the consolidated balance sheet data as of March 31, 2017 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements were prepared on a basis consistent with that used to prepare our audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal recurring items, necessary for a fair presentation of the consolidated financial statements.

The terms “Predecessor” and “Successor” used below and throughout this prospectus refer to the periods prior and subsequent to the acquisition of us by Great Hill Partners in July 2014. See “Prospectus Summary—Our Sponsor and Controlled Company Status.” The unaudited combined results of operations for the year ended December 31, 2014 represents the mathematical addition of our Predecessor’s results of operations from January 1, 2014 to July 10, 2014 and the Successor’s results of operations from July 11, 2014 to December 31, 2014. The consolidated statements of operations data for the period from January 1, 2014 to July 10, 2014 and from July 11, 2014 to December 31, 2014 and the consolidated balance sheet data as of December 31, 2014 are each derived from financial statements not included in this prospectus.

You should read this data together with our audited consolidated financial statements and related notes, as well as the information under the captions “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results, and results for any interim period below are not necessarily indicative of results for the full year.

 

    Unaudited
Three Months
Ended March 31,
    Year Ended
December 31,
    Unaudited
Non-GAAP

Combined
Year Ended
December 31,
2014(1)
    Period from
July 11, 2014
to December 31,
2014
(Successor)
                Period from
January 1, 2014
to July 10, 2014
(Predecessor)
 
(U.S. dollars in thousands
except per share data)
  2017     2016     2016     2015            

Consolidated Statement of Operations Data:

                 

Net revenues

  $ 13,990     $ 15,092     $ 55,090     $ 48,506     $ 44,102     $ 21,094         $ 23,008  

Cost of revenues and operating expenses

                 

Cost of revenues

    5,129       5,318       20,535       17,105       14,955       7,152           7,803  

Center operations

    5,687       5,563       22,469       19,859       27,549       11,559           15,990  

General and administrative expenses

    3,010       3,178       11,067       12,556       6,598       3,210           3,388  

Depreciation and amortization

    2,201       2,181       8,893       6,515       3,146       2,180           966  

Goodwill impairment

   

 

 

 

 

   

 
          927                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                 

Total cost of revenues and operating expenses

   

 

 

16,027

 

 

 

 

 

 

 

 

 

 

 

16,240

 

 

 

    62,964       56,962       52,248       24,101           28,147  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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    Unaudited
Three Months
Ended March 31,
    Year Ended
December 31,
    Unaudited
Non-GAAP

Combined
Year Ended
December 31,
2014(1)
    Period from
July 11, 2014
to December 31,
2014
(Successor)
                Period from
January 1, 2014
to July 10, 2014
(Predecessor)
 
(U.S. dollars in thousands
except per share data)
  2017     2016     2016     2015            

Loss from operations

  $ (2,037   $ (1,148   $ (7,874   $ (8,456   $ (8,146   $ (3,007       $ (5,139

Interest expense, net

    562       391       1,587       746       90       47           43  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net loss before provision for income taxes

    (2,599     (1,539     (9,461     (9,202     (8,236     (3,054         (5,182

Provision for income taxes

    18       7       43       13       28       13           15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net loss

  $ (2,617   $ (1,546     (9,504     (9,215     (8,264     (3,067         (5,197

Net income attributable to non-controlling interest

 

 

 

                      (411               (411
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net loss attributable to YogaWorks

  $ (2,617   $ (1,546   $ (9,504   $ (9,215   $ (8,675   $ (3,067       $ (5,608
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net loss per share attributable to common stockholders:(2)

                 

Basic

  $ (14.81   $ (36.80   $ (191.60   $ (189.96          

Diluted

   
(14.81

    (36.80     (191.60     (189.96          

Weighted-average number of shares used in computing net loss per share attributable to common stockholders:(2)

                 

Basic

    243,848       72,735       73,796       71,244            

Diluted

    243,848       72,735       73,796       71,244            

Pro forma net loss per share attributable to common stockholders:(2)

                 

Basic

  $ (0.41     $ (1.59            

Diluted

   
(0.41

      (1.59            

Weighted-average number of shares used in computing pro forma net loss per share attributable to common stockholders:(2)

                 

Basic

    8,908,233         8,907,597              

Diluted

    8,908,233         8,907,597              

 



 

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     Unaudited
As of
March 31, 2017
     As of December 31,  
(U.S. dollars in thousands)       2016     2015     2014  

Consolidated Balance Sheet Data:

         

Cash and cash equivalents

   $ 5,456      $ 1,912     $ 3,773     $ 4,511  

Total assets

     57,537        57,148       65,000       56,052  

Total long term debt, net of debt issuance costs

     6,553        6,769       7,201       1,428  

2015 GHP Convertible Notes

     3,203        11,635       10,728        

Redeemable preferred stock

            61,393       56,758       52,436  

Total stockholders’ equity (deficit)

     38,656        (32,632     (18,534     (5,014

 

     Three Months Ended March 31,      Year Ended December 31,  
     2017      2016      2016      2015      2014  

Other Information:

              

Studios (period end)

     50        49        49        47        29  

Student visits

     760,707        789,677        2,946,807        2,439,469        2,165,073  

Studio classes

     45,154        44,772        181,796        146,846        120,895  

 

    Three Months Ended March 31,     Year Ended December 31,  
(U.S. dollars in thousands)   2017     2016     2016      2015  

Other Financial Information:

        

Adjusted EBITDA(3)

  $ 841     $ 1,245     $ 1,699      $ 361  

Adjusted EBITDA Margin(4)

    6.0     8.2     3.1      0.7

Studio-Level EBITDA(3)

  $ 3,205     $ 4,392     $ 12,373      $ 12,398  

Studio-Level EBITDA Margin(4)

    22.9     29.1     22.5      25.6

Average Unit Volume(5)

      $ 1,126      $ 1,338  
    Unaudited
Three Months Ended March 31,
    Year Ended December 31,  
(U.S. dollars in thousands)   2017     2016     2016      2015  

Consolidated Statement of Cash Flow Data:

        

Net cash provided by (used in) operating activities

  $ 783     $ (779   $ 762      $ (888

Net cash used in investing activities

    (196     (923     (2,097      (15,124

Net cash provided by (used in) financing activities

    2,956             (526      15,273  

Increase (decrease) in deferred revenue

    (115     (980     (650      427  

 

(1) The unaudited non-GAAP combined results of operations for the year ended December 31, 2014 represents the mathematical addition of our Predecessor’s results of operations from January 1, 2014 to July 10, 2014 and the Successor’s results of operations from July 11, 2014 to December 31, 2014. The presentation of combined financial information for the year ended December 31, 2014 is not consistent with United States Generally Accepted Accounting Principles, or GAAP, or with the pro forma requirements of Article 11 of Regulation S-X, and may yield results that are not comparable on a period-to-period basis. The financial information for the two periods was prepared on different accounting bases for the Successor and Predecessor and the combined financial information does not include any pro forma adjustments to make them comparable.
(2)

See Note 12 to our audited consolidated financial statements and Note 9 to our unaudited condensed consolidated financial statements included in this prospectus for additional information regarding the calculation of basic and diluted net loss per share attributable to common

 



 

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  stockholders. Net loss per share attributable to common stockholders and pro forma net loss per share attributable to common stockholders gives effect to the 1-for-10 reverse stock split of our common stock that occurred in March 2017 and a subsequent 1-for-1.333520 reverse stock split of our common stock to be effected prior to the effectiveness of this registration statement of which this prospectus is a part. Pro forma net loss per share attributable to common stockholders is calculated by dividing net loss for the applicable period by the weighted average number of shares for the applicable period. The weighted average number of shares used in computing pro forma net loss per share attributable to common stockholders for the year ended December 31, 2016 gives effect to, (i) the conversion of our outstanding redeemable preferred stock into 7,426,169 shares of our common stock; (ii) the conversion of the 2015 GHP Convertible Notes into 1,407,632 shares of our common stock; (iii) the 1-for-10 reverse stock split of our common stock that occurred in March 2017 and a subsequent 1-for-1.333520 reverse stock split of our common stock to be effected prior to the effectiveness of this registration statement of which this prospectus is a part; and (iv) stock option grants to our employees and consultants to purchase up to 1,425,641 shares in the aggregate of our common stock that occurred after December 31, 2016 in connection with the Recapitalization Transactions.
(3) In addition to our results determined in accordance with GAAP, we have presented Adjusted EBITDA and Studio-Level EBITDA, which are non-GAAP measures. The following table presents a reconciliation of Adjusted EBITDA and Studio-Level EBITDA to net loss for each of the periods indicated:

 

    Three Months
Ended March 31,
    Year Ended
December 31,
 
(U.S. dollars in thousands)   2017     2016     2016     2015  

Net loss

  $ (2,617   $ (1,546   $ (9,504   $ (9,215

Interest expense, net

    562       391       1,587       746  

Provision for income taxes

    18       7       43       13  

Depreciation and amortization

    2,201       2,181       8,893       6,515  

Goodwill impairment

                      927  

Deferred rent(a)

    31       181       276       803  

Stock based compensation(b)

    539       7       23       17  

Acquisition professional expenses(c)

                      263  

Severance(d)

    82             225       99  

Executive recruiting(e)

                56       93  

Great Hill Partners expense reimbursement fees(f)

    25       25       100       100  
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 841     $ 1,246     $ 1,699     $ 361  

Other general and administrative expenses(g)

    2,364       3,147       10,674       12,037  
 

 

 

   

 

 

   

 

 

   

 

 

 

Studio-Level EBITDA

  $ 3,205     $ 4,393     $ 12,373     $ 12,398  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Reflects the extent to which our rent expense for the period has been above or below our cash rent payments.
(b) Non-cash charges related to equity-based compensation programs, which vary from period to period depending on timing of awards and forfeitures.
(c) Professional expenses incurred in connection with studio acquisitions, including legal and advisory fees.
(d) Severance expenses incurred in the period related to the termination of studio and non-studio employees.
(e) Executive recruiting expenses incurred in connection with the recruitment and hiring of members of our executive management team, Mmes. McCollough (2015) and Dawson (2016) and Mr. Chang (2016).

 



 

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(f) Represents expense reimbursement fees incurred in connection with our Expense Reimbursement Agreement with Great Hill Partners, which we expect to terminate upon completion of this offering.
(g) Represents general and administrative expenses that are corporate and regional expenses and not incurred by our studios, and which are primarily comprised of expenses related to (i) wages and benefits of corporate and regional employees, (ii) non-studio rent, utilities and maintenance, (iii) corporate and regional marketing and advertising and (iv) corporate professional fees. Other general and administrative expenses excludes any general and administrative expenses related to deferred rent, stock based compensation, acquisition professional expenses, executive recruiting, severance, the Great Hill Partners expense reimbursement fees or any other general and administrative expenses that are included in the reconciliation of net loss to Adjusted EBITDA.

We use Adjusted EBITDA and Studio-Level EBITDA to understand and evaluate our business. Adjusted EBITDA is a supplemental measure of the operating performance of our core business operations. Studio-Level EBITDA is a supplemental measure of the operating performance of our studios. Accordingly, we believe Adjusted EBITDA and Studio-Level EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Our use of Adjusted EBITDA and Studio-Level EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:

 

    although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA and Studio-Level EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

    Adjusted EBITDA and Studio-Level EBITDA are not intended to be a measure of free cash flow for management’s discretionary use, as they do not reflect: (i) changes in, or cash requirements for, our working capital needs; (ii) debt service requirements; (iii) tax payments that may represent a reduction in cash available to us; and (iv) other cash costs that may recur in the future;

 

    Studio-Level EBITDA is not a measure of our overall profitability but a supplemental measure of the operating performance of our studios. While Studio-Level EBITDA excludes regional and corporate general and administrative expenses that are not necessary to operate our studios, these excluded expenses are essential to support the operation and development of our studios; and

 

    other companies, including companies in our industry, may calculate Adjusted EBITDA, Studio-Level EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider Adjusted EBITDA and Studio-Level EBITDA along with other GAAP-based financial performance measures, including cash flows from operating activities, investing activities and financing activities, net loss and our other GAAP financial results.

 

(4) Adjusted EBITDA Margin and Studio-Level EBITDA Margin are each calculated as Adjusted EBITDA or Studio-Level EBITDA, as applicable, divided by net revenues.
(5) Average Unit Volume, or AUV, for any 12-month period is calculated by dividing total net revenues by the number of studios open during that period. For studios that are not open for the entire period, we make fractional adjustments to the number of studios open such that it corresponds to the period of associated net revenues.

 



 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. In deciding whether to invest, you should carefully consider the following risk factors, as well as the financial and other information contained in this prospectus, including our consolidated financial statements and related notes. Any of the following risks could have a material adverse effect on our business, financial condition, results of operations or prospects and cause the value of our stock to decline, which could cause you to lose all or part of your investment. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial also may become important factors that affect us.

Risks Related to Our Business and Industry

We have incurred losses in the past, expect to incur losses in the future and may never achieve or maintain profitability.

We incurred a net loss of $2.6 million for the three months ended March 31, 2017. We had an accumulated deficit of $36.3 million as of March 31, 2017 and negative working capital of $3.4 million at March 31, 2017. We incurred a net loss of $9.5 million in 2016 and $9.2 million in 2015 and had negative operating cash flow of $0.9 million in 2015. In addition, we had accumulated deficits of $32.7 million as of December 31, 2016 and $18.6 million as of December 31, 2015 and negative working capital of $3.7 million at December 31, 2016 and $14.4 million at December 31, 2015. We expect our operating expenses to increase in the future as we expand our operations. As a public company, we will incur additional legal, accounting and other expenses that we did not incur as a private company. If our net revenues do not grow at a greater rate than our expenses, we will not be able to achieve and maintain profitability. We may incur significant losses in the future for many reasons, including the other risks and uncertainties described in this prospectus. We may also encounter unforeseen expenses, operating delays or other unknown factors that may result in losses in future periods. If our net revenues do not grow faster than our expenses, we may never achieve or maintain profitability.

If we are unable to maintain the value and reputation of our brand, our business will be harmed.

The YogaWorks name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting and positioning our brand will depend largely on the success of our ability to provide a consistent, high-quality student experience, our marketing, merchandising and community-building efforts and successfully integrating studios acquired pursuant to our growth strategy. We believe that we have built our reputation on the high quality of our in-studio classes, our commitment to our students, our strong employee culture and the atmosphere and design of our studios, and we must protect and grow the value of our brand in order for us to continue to be successful. We rely on social media and digital marketing, as some of our marketing strategies, to have a positive impact on both our brand value and reputation. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation were to be tarnished by negative publicity. Any incident that erodes student loyalty for our brand could significantly reduce its value and damage our business. Additionally, while we devote considerable efforts and resources to protecting our intellectual property, if these efforts are not successful, the value of our brand may be harmed. Our failure to maintain the value and reputation of our brand could have a material adverse effect on our financial condition and growth.

Our growth strategy is highly dependent on our ability to successfully identify and acquire studio targets and integrate their operations with ours.

Our growth strategy primarily contemplates expansion through targeted acquisitions of other yoga studio businesses. Implementing this strategy depends on our ability to successfully identify

 

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opportunities that complement our businesses, share our business and company philosophy and operate in markets that are complementary to our operations and the communities in which we operate. We will also need to assess and mitigate the risk of any target opportunity, to acquire targets on favorable terms and to successfully integrate their operations with ours. We may not be able to successfully identify opportunities that meet these criteria, or, if we do, we may not be able to successfully negotiate, finance, acquire and integrate them. Even if we enter into confidentiality agreements or letters of intent with potential studios, we may not be able to complete the acquisition. If we are unable to identify and acquire suitable studios, our revenue growth rate and financial performance may fall short of our expectations. If we are successful in acquiring studio targets, we may not be able to successfully integrate the operations of these studios with ours, to execute the growth objectives of our combined operations or to realize the revenue opportunities or cost savings that may be assumed. In addition, any such opportunity may require us to raise additional capital, which may be dilutive to our existing shareholders, or require us to incur additional indebtedness. If our analysis of the suitability of a studio or group of studios for acquisition is incorrect, we may not be able to recover our capital investment in acquiring such studios.

Our recently acquired or newly opened studios may negatively impact our financial results in the short-term, and may not achieve sales and operating levels consistent with our existing studios on a timely basis, or at all.

We have actively pursued new studio growth, primarily through acquisitions, and plan to continue doing so in the future. Many of our studios are still relatively new as YogaWorks-branded studios, as we have opened or acquired 23 studios since January 1, 2015. We cannot assure you that our recently acquired or newly opened studios will be successful or reach the sales and profitability levels of our existing studios. New studio acquisitions may negatively impact our financial results in the short term due to the effect of studio conversion costs, loss of students or teachers at the acquired studios, lower class package and drop-in class sales and lower contribution to overall profitability during the initial period following an acquisition. Acquired and newly opened studios require a transition period to build their sales volume and their student base and, as a result, generally have lower margins and higher operating expenses, as a percentage of net revenues, when initially acquired or opened. Newly acquired and opened studios may not achieve membership levels, class package and drop-in class sales and operating levels consistent with our existing studio base on a timely basis, or at all. We cannot assure you that our recently acquired or newly opened studios will generate revenue, cash flow or profitability levels comparable with those generated by our existing studios. These risks may have an adverse effect on our financial condition, operating results and growth rate.

Our expansion into new markets may present increased risks, which could affect our ability to achieve or maintain profitability.

As part of our growth strategy, we plan to enter markets where we have little or no operating experience. Studios that we operate in new markets may take longer to reach expected studio sales and profit levels on a consistent basis and may be less profitable than studios we open in existing markets. New markets may have competitive conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than our existing markets. We may need to make greater investments than we originally planned in advertising and promotional activity in new markets to build brand awareness. We may find it more difficult in new markets to hire, motivate and keep qualified employees who share our values. We may also incur higher costs from entering new markets if, for example, we assign regional managers to manage comparatively fewer studios than we assign in more developed markets. Also, until we attain a critical mass in a market, the studios we do operate will have reduced operating leverage. As a result, these new studios may be less successful or may achieve target studio-level operating profit margins at a slower rate, if ever. If we do not successfully

 

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execute our plans to enter new markets, our business, financial condition or results of operations could be adversely affected.

Acquiring or opening new studios in close proximity to existing studios may negatively impact our existing studios’ revenues and profitability.

We currently operate studios in six markets across the U.S. and, in line with our growth strategy, we plan to acquire and open many new studios in the future, some of which will be in existing markets. Acquiring or opening new studios in close proximity to existing studios may attract some students away from existing studios, which may lead to diminished revenues and profitability for us rather than increased market share.

We expect to make capital expenditures to pursue our growth strategy, which may be significant and will adversely impact our cash flow.

Our growth strategy will require capital expenditures to acquire additional studios and open new studios. These expenditures may at times be significant and may adversely impact cash flows during the periods when incurred. As we increase our number of studios, we may also open studios in higher-cost geographies, which could entail greater lease payments and construction costs, among other things. We may also need to incur significant expenditures to remodel existing or acquired studios and replace equipment, furniture or fixtures. Our cash flows used in investing activities totaled $15.1 million in 2015 and $2.1 million in 2016 and are expected to increase as we pursue our acquisition and growth strategy. In particular, as we acquire and open additional studios, we intend to use net proceeds of this offering to fund those acquisitions and studio openings.

To finance our growth strategy, we may have to incur additional indebtedness or issue new equity securities and, if we are not able to obtain additional capital, our ability to operate or expand our business may be impaired and our results of operations could be adversely affected.

We will require significant levels of capital to finance our acquisitions and to open new studios. If cash from available sources, such as our credit facility, is insufficient or unavailable, or if cash is used for unanticipated needs, we may require additional capital sooner than anticipated. In the event that we are required or choose to raise additional funds, we may be unable to do so on favorable terms or at all. Furthermore, the cost of debt financing could significantly increase, making it cost-prohibitive to borrow, which could force us to issue new equity securities. If we issue new equity securities, existing shareholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, we may not be able to execute our current growth plans, take advantage of future opportunities or respond to competitive pressures. Any inability to raise additional capital when required could have an adverse effect on our business plans and operating results.

Any debt financing we may incur after this offering could restrict our operational and financial flexibility, which could adversely affect our ability to respond to changes in our business and to manage our operations.

We intend to repay the outstanding debt under the Loan Agreement with a portion of the proceeds of this offering and cancel that facility. Any debt financing we may incur after the consummation of this offering would likely contain covenants that restrict our operations, including limitations on our ability to grant liens, incur additional debt, pay dividends, cause our subsidiaries to pay dividends to us, make investments and engage in merger, consolidation or asset sale transactions. A failure by us to comply with the covenants or financial ratios contained in such debt financing could result in an event of default, which could adversely affect our ability to respond to changes in our business and manage our

 

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operations. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding under such debt financing to be due and payable and exercise the remedies as set forth thereunder. If the indebtedness under such debt financing were to be accelerated, our future financial condition could be materially adversely affected. In 2015 and in 2016 we were not in compliance with certain Loan Agreement covenants. Our lenders waived any default or event of default related to any such non-compliance. During the quarter ended December 31, 2016, we were not able to comply with our senior debt to EBITDA ratio financial covenant due to slower than expected growth of newly opened studios. Our lenders under the Loan Agreement agreed to waive any default for such failure to comply and agreed to not require testing of any of our financial covenant ratios under the Loan Agreement for the fiscal quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017.

We have grown rapidly in recent years and have limited operating experience at our current scale of operations. Our growth could place strains on our management, employees, information systems and internal controls, which may adversely impact our business.

We have expanded our operations rapidly and have limited operating experience at our current size. If our operations continue to grow, we will be required to continue to expand our sales and marketing team, to upgrade our management information systems and other processes and to obtain more space for our expanding administrative support and other headquarters personnel. Our expansion will also place significant demands on our management resources. We will be required to identify attractive studio locations and acquisition targets, negotiate favorable acquisition terms and open or convert new studios on a timely and cost-effective basis while maintaining a high level of quality, efficiency and performance at both existing and newly opened or converted studios. We may expand into markets where we have little or no direct prior experience, and we could encounter unanticipated problems, cost overruns or delays in opening studios in new markets or in the market acceptance of our studios. We will need to continue to improve our operating, administrative, financial and accounting systems and controls. We will also need to recruit, train and retain new yoga instructors, teacher trainers, studio and regional managers and other team members and maintain close coordination among our executive, accounting, finance, human resources, legal, marketing, sales and operations functions. These processes are time-consuming and expensive and may divert management’s attention. We may not be able to effectively manage this expansion, and any failure to do so could have a material adverse effect on our rate of growth, business, financial condition and results of operations.

An economic downturn or economic uncertainty in our markets may adversely affect discretionary spending and demand for our services.

Our yoga offerings may be considered discretionary items for our students. Factors affecting the level of spending for such discretionary items include general economic conditions and other factors such as consumer confidence in future economic conditions, fears of recession, the availability of consumer credit, levels of unemployment, tax rates and the cost of consumer credit. As global economic conditions continue to be volatile or economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the future. Unfavorable economic conditions may lead consumers to reduce or forgo use of our services. Our sensitivity to economic cycles and any related fluctuation in discretionary purchases may have a material adverse effect on our business, financial condition and results of operations.

Increases in labor costs, including wages, could adversely affect our business, financial condition and results of operations.

The labor costs associated with our studios are subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other insurance costs and changes in employment and

 

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labor legislation or other workplace regulation. From time to time, legislative proposals are made to increase the federal minimum wage in the U.S., as well as the minimum wage in a number of individual states and municipalities, and to reform entitlement programs, such as health insurance and paid leave programs. As minimum wage rates increase or related laws and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly or salaried employees. Our employees may seek to be represented by labor unions in the future or negotiate additional compensation. Any increase in the cost of our labor could have an adverse effect on our business, financial condition and results of operations or if we fail to pay such higher wages we could suffer increased employee turnover. Increases in labor costs could force us to increase prices, which could adversely impact our visits. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline and could have a material adverse effect on our business, financial condition and results of operations.

Our profitability is vulnerable to cost increases and inflation.

Future increases in costs, such as the property taxes, utility rates and studio maintenance and repairs, may increase our operating expenses and reduce our profitability. These cost increases may also be the result of inflationary pressures that could further increase expenses or our losses. Competitive pressures in our industry as well as our pricing strategy may have the effect of inhibiting our ability to reflect these increased costs in the prices of our classes, training sessions and other services and therefore reduce our profitability and have a material adverse effect on our business, financial condition and results of operations.

Our growth and profitability could be negatively impacted if we are unable to renew or replace our current studio leases on favorable terms, or at all, and we cannot find suitable alternate locations.

We lease all of our studio locations pursuant to long-term non-cancelable leases. We have 21 leases that are due to expire between the years 2017 and 2019, of which 9 have no renewal rights and 12 have renewal options (2 of which are subject to the sublessor renewing its lease with the landlord). Our ability to negotiate favorable terms on an expiring lease or to negotiate favorable terms on leases with renewal options, or conversely for a suitable alternate location, could depend on conditions in the real estate market, competition for desirable properties and our relationships with current and prospective landlords or may depend on other factors that are not within our control. Any or all of these factors and conditions could negatively impact our business, financial condition and results of operations.

If we fail to attract new students and teachers and retain existing students and teachers, it could have an adverse impact on our growth strategy as we may not be able to increase the number of visits to our studios or students that go through our teacher training.

The performance of our studios and success of our growth strategy is largely dependent on our ability to continuously attract new students and teachers and retain existing students and teachers. We cannot be sure that we will be successful in these efforts, or that visits to our studio classes and teacher trainings or participation in MyYogaWorks.com will not materially decline. There are numerous factors that could lead to a decline in visits at established studios or that could prevent us from increasing our student visits at newer or acquired studios, including harm to our reputation, a decline in our ability to deliver quality yoga classes and teacher trainings at a competitive cost, the opening or acquisition of new studios or hosting of additional teacher trainings that may have the potential to cannibalize store sales in existing areas, the heightened presence of direct and indirect competition in the areas in which the studios are located, the decline in the public’s interest in fitness through yoga, a deterioration of general economic conditions and a change in consumer spending preferences or

 

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buying trends. As a result of these factors, we cannot be sure that our student visits will be adequate to maintain or permit the expansion of our operations. A decline in student visits levels may have a material adverse effect on our business, financial condition, results of operations and growth rate.

In addition, we must acquire new students in a cost-effective manner. In order to expand our active student base, we must appeal to and acquire students who identify with our brand. Our paid marketing derives a significant amount of traffic via search engines such as Google, Yelp and Bing. Search engines frequently update and change the logic that determines the placement and display of results of a user’s search, such that the purchased or algorithmic placement of links to our site can be negatively affected. Additionally, digital advertising costs may continue to rise. As our usage of e-commerce and social media channels expands, such costs may impact our ability to acquire new students in a cost-effective manner. If the level of usage of these channels by our active student base does not grow as expected, we may suffer a decline in student growth or net revenues or we may need to increase our marketing costs more than expected.

As our brand becomes more widely known in the market, future marketing campaigns may not result in the acquisition of new students at the same rate as past campaigns. There can be no assurances that the revenue from new students we acquire will ultimately exceed the cost of acquiring those students. If we are unable to acquire new students in a cost-effective manner, it could have a material adverse effect on our business, financial condition and results of operations.

We may be adversely affected by any negative publicity, regardless of its accuracy, that could harm our business.

Publicity about our business can harm our operations. This publicity could be related to a wide variety of matters, including:

 

    student injuries;

 

    claims of teacher or employee impropriety, including inappropriate physical contact with students;

 

    security breaches of confidential student or employee information;

 

    employment-related claims relating to alleged employment discrimination, wage and hour violations;

 

    labor standards or healthcare and benefit issues; or

 

    government or industry findings concerning our studios or others across the yoga or fitness industry.

In addition to traditional media, there has been a marked increase in the use of social media platforms and similar devices, including weblogs (blogs), social media websites and other forms of Internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate as is its impact. Many social media platforms immediately publish the content their subscribers and participants can post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our company may be posted on such platforms at any time. Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business. The harm may be immediate without affording us an opportunity for redress or correction.

 

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The risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our reputation, business, financial condition and results of operations.

Our business is geographically concentrated, and a failure to gain acceptance in new markets may have an adverse effect on our business and rate of growth.

As of March 31, 2017 we operate 50 studios in six markets consisting of Los Angeles, Orange County (California), New York City, Northern California, Boston and Baltimore/Washington D.C. We may not find as much demand in other markets and our brand may not gain the same acceptance. The benefits of our brand may also be diluted by the presence of multiple locations in the same market. A failure to gain acceptance in new markets may have a material adverse effect on our business, financial condition, results of operations or growth rate.

Our financial and operating performance may be adversely affected by epidemics, adverse weather conditions, natural disasters and other catastrophes.

Our studios are located in geographic regions across the U.S. Adverse weather conditions (such as regional winter storms), natural disasters (such as earthquakes in California) and other catastrophes and epidemics or outbreaks of disease in any of the regions where our studios are located could materially and adversely affect our business in the future, our financial condition and operating results. Any occurrence of these or other events or conditions in any of these locations may interrupt our business operations, resulting in a material adverse effect on our operations and financial results. For instance, health or other government regulations adopted in response to a natural disaster, epidemic or outbreak, may require closure of our studios, leading to reduced studio visits or cancelled classes.

Furthermore, our headquarters and a significant number of our studios are located in the Southern California area, an area susceptible to earthquakes. A major earthquake or other natural disaster, fire, act of terrorism or other catastrophic event in Southern California or elsewhere that results in the destruction or disruption of our headquarters or studios could severely affect our ability to conduct normal business operations and our operating results could be harmed.

The level of competition we face could negatively impact our revenue growth and profitability.

The level of competition we face is high and continues to increase. In each of the markets in which we operate, we compete with other branded operators in the yoga industry, health clubs and fitness centers (some of which offer or may want to offer yoga), private studios and other boutique fitness offerings, recreational facilities established by non-profit organizations and businesses for their employees, racquet/tennis and other athletic clubs, amenity and condominium clubs and country clubs, online personal training and fitness coaching and the home-use fitness industry that offer or make available yoga alternatives, such as home videos and mobile applications. We also compete with other yoga oriented competitors, other entertainment and retail businesses for the discretionary income of our target demographics. We might not be able to compete effectively in the future in the markets in which we operate. We may face new competitors that enter our market with greater resources than us and such competition may be detrimental to our business. Competitive conditions may limit our ability to increase fees without a material decrease in student visits, both in-studio and on MyYogaWorks.com, attract new students and attract and retain qualified personnel.

The number of competitor studios and other venues, such as fitness clubs, that offer lower pricing for yoga classes continues to grow in our markets. These studios and other venues have attracted, and may continue to attract, students away from our studios. In addition, competitors could open additional studios in the markets in which we already operate or in the markets that we plan to expand to through acquisitions and opening new studios.

 

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If we do not retain key management personnel or fail to attract and retain highly qualified studio personnel, including teachers, our business will suffer.

The success of our business depends on our ability to attract and retain key management personnel. If any of these persons were to leave, it might be difficult to replace them, and our business could be harmed. In addition, the quality of our teachers and other studio operations personnel, including our regional and studio managers, is central to the success of our business. We cannot assure you that we can continue to attract, train and retain high quality teachers at our studios, our teacher trainings and MyYogaWorks.com, who are critically important to our success and ability to attract students. If we are unable to attract, train and retain management, teachers and staff, our business would be harmed.

We have experienced significant recent turnover in our executive leadership team. If we fail to effectively integrate and retain these new executives, we may not be able to accomplish our growth strategy and our financial performance may suffer.

In the past few years, we have experienced significant turnover in our senior management ranks, including turnover in the individuals who previously served as our Chief Executive Officer, Chief Financial Officer, Chief Customer Officer and General Counsel. Our current Chief Executive Officer assumed her role in June 2016, our current Chief Financial Officer assumed his role in April 2016, our current Chief Customer Officer assumed her role in August 2016 and our current General Counsel assumed his role in January 2017. This lack of management continuity could adversely affect our ability to successfully execute our acquisition focused growth strategy, as well as result in operational and administrative inefficiencies and added costs, and may make recruiting for future management positions more difficult. In addition, we must successfully integrate any new management personnel into our organization in order to achieve our operating objectives, and changes in other key management positions may affect our financial performance and results of operations while new management becomes familiar with our business. Accordingly, our future financial performance will depend to a significant extent on our ability to motivate and retain key management personnel, particularly those with retail, direct consumer marketing, e-commerce, brand development, finance, human resources, legal, operations and information technology expertise.

If we are unable to anticipate student preferences and provide high quality yoga offerings, we may not be able to maintain or increase our membership base, sales from class packages, drop-ins and teacher trainings, participation in MyYogaWorks.com and profitability.

Our success in maintaining and increasing our student base depends on our ability to identify and originate trends as well as to anticipate and react to changing customer preferences and trends in a timely manner. All of our yoga offerings and retail products are subject to changing consumer preferences that cannot be predicted with certainty. If we are unable to introduce new yoga offerings or retail products in a timely manner, or our new yoga offerings or retail products are not accepted by our students, our competitors may introduce similar yoga offerings or retail products in a more timely fashion, which could negatively affect our rate of growth. Our new yoga offerings or retail products may not receive acceptance as preferences could shift rapidly to different types of healthy lifestyle offerings or athletic apparel or away from these types of yoga offerings or retail products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing customer preferences could lead to, among other things, lower class visits and lower retail sales and excess inventory levels. Even if we are successful in anticipating customer preferences, our ability to adequately react to and address those preferences will in part depend upon our continued ability to provide high-quality yoga offerings and retail products. Our failure to address student preferences could result in a decrease in net revenues, which could have a material adverse effect on our financial condition.

 

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We may be subject to obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales, which could adversely harm our business.

State and local jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our yoga offerings in various jurisdictions is unclear. While we do not believe we are currently required to collect and remit sales or similar taxes on our yoga offerings in any jurisdiction in which we are not collecting such tax, we could face the possibility of tax assessments and audits. A successful assertion that we should be collecting sales, use, value added or other taxes on our yoga offerings in those jurisdictions where we do not do so or have not historically done so could result in substantial tax liabilities and related penalties for past sales, discourage students from visiting our classes or otherwise harm our business and operating results.

Changes in government regulations or a failure to comply with them could have a negative effect on our financial condition.

Our operations and business practices are subject to federal, state and local government regulations in the various jurisdictions in which our studios and teacher trainings are located, including, but not limited to:

 

    General rules and regulations of the Federal Trade Commission, state and local consumer protection agencies and state statutes that regulate the terms of transactions with our students and govern the advertising, sale, financing and collection of fees;

 

    State and local health regulations, zoning and use restrictions, parking regulations and building codes;

 

    State wage and hour payment and reporting laws; and

 

    State licensing requirements, including licensing requirements to conduct teacher training programs.

If we were to fail to comply with these statutes, rules and regulations, we could suffer fines or other penalties. These may include regulatory or judicial orders enjoining or curtailing aspects of our operations. It is difficult to predict the future development of such laws or regulations, and any changes in such laws could have a material adverse effect on our financial condition.

We are, or may become, subject to risks associated with our teacher training sessions or workshops held in international countries.

In 2016, we operated teacher training sessions in 17 countries outside of the U.S. In conducting teacher training sessions and workshops outside the country, we regularly work with local yoga studios or businesses to host the session or workshop and to coordinate any foreign legal requirements that may be required with respect to conducting such session or workshop. In the event our foreign partners fail to properly advise us on foreign legal requirements and customs that may apply, this could result in hindering our operations in the applicable foreign jurisdiction, result in negative publicity against us, or result in significant fees or fines for noncompliance, any of which could have a material adverse effect on our business.

We are subject to a number of risks related to credit card and debit card payments we accept.

We accept payments through credit card and debit card transactions. For credit card and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for our memberships, class packages, drop-ins, teacher trainings and participation in MyYogaWorks.com which could cause us to

 

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lose students or suffer an increase in our operating expenses, either of which could harm our operating results. If we or any of our processing vendors have problems with our billing software, or the billing software malfunctions, it could have an adverse effect on our customer satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our students’ credit cards, debit cards or bank accounts on a timely basis or at all, we could lose revenues, which would harm our operating results. If we fail to adequately control fraudulent credit card and debit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher credit card and debit card related costs, each of which could adversely affect our business, financial condition and results of operations. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.

Security breaches of confidential customer information, in connection with our electronic processing of credit and debit card transactions, or confidential employee information may adversely affect our business.

Our business requires the collection, transmission and retention of large volumes of customer and employee data, including credit and debit card numbers and other personally identifiable information, in various information technology systems that are maintained internally and by third parties with whom we contract to provide services. The integrity and protection of that customer and employee data is critical to us. Our customers and employees have a high expectation that we and our service providers will adequately protect their personal information.

The information, security and privacy requirements imposed by governmental regulation are increasingly demanding. Our systems may not be able to satisfy these changing requirements and customer and employee expectations, or may require significant additional investments or time in order to do so. Efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error or inadvertent releases of data all threaten our information systems and records. A breach in the security of our service providers’ information technology systems could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss of profits. A significant theft, loss or misappropriation of, or access to, customers’ or other proprietary data or other breach of our information technology systems could result in fines, legal claims or proceedings, including regulatory investigations and actions, or liability for failure to comply with privacy and information security laws, which could disrupt our operations, damage our reputation and expose us to claims from customers and employees, any of which could have a material adverse effect on our financial condition and results of operations.

We rely on third parties to provide services in connection with our business, and any failure by these third parties to perform their obligations could have an adverse effect on our business, financial condition and results of operations.

We have entered into agreements with third parties that include, but are not limited to, information technology systems (including hosting our website, mobile application and our point of sale system), software development and support, select marketing services, employee benefits servicing and video production and distribution. Services provided by third-party suppliers could be interrupted as a result of many factors, such as acts of nature or contract disputes. Accordingly, we are subject to the risks associated with the third parties’ abilities to provide these services to meet our needs. Any failure by a third party to provide services for which we have contracted on a timely basis or within expected service level and performance standards could result in a disruption of our business and have an adverse effect on our business, financial condition and results of operations.

 

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Disruptions and failures involving our information systems could cause dissatisfaction and adversely affect our billing and other administrative functions.

The continuing and uninterrupted performance of our information systems is critical to our success. We use a fully-integrated information system to process new students, bill students, check in students and track and analyze sales and student statistics, the frequency and timing of student visits and demographic profiles of students. This system also assists us in evaluating staffing needs and program offerings. We also use third party services for our payroll and financial reporting.

Any failure of our current systems, such as crashes in the class booking function, could also cause us to lose students and adversely affect our business and results of operations. Our students may become dissatisfied by any systems disruption or failure that interrupts our ability to provide our services to them. Disruptions or failures that affect our billing and other administrative functions could have an adverse effect on our operating results.

Computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect our sites. Any system disruption or failure, security breach or other damage that interrupts or delays our operations could cause us to lose students, damage our reputation and adversely affect our business and results of operations. In addition, fire, floods, earthquakes, power loss, telecommunications failures, break-ins, acts of terrorism and similar events could damage our systems.

We rely extensively on our information technology systems to record and process transactions, manage communications, summarize results, compute payroll, pay bills and manage our business. The failure of our systems to operate properly or effectively, problems with transitioning to upgraded or replacement systems or difficulty in integrating new systems, could adversely affect our business.

We rely on a limited number of vendors for our retail product offerings and fitness equipment. A loss of any of our vendors could negatively affect our business.

A limited number of vendors provide products for the retail sales in our studios. Our retail sales could be substantially disrupted or curtailed if one or more of these vendors were to cease, decrease or delay supply of our products, whether for voluntary or involuntary reasons, or if the retail products they supply have quality issues. Our retail sales would also be harmed if there are delays in the delivery of merchandise to our studios. Our costs of goods may also increase if our vendors charge us more, which could adversely impact our profitability if we are unable to pass such increases directly on to our students and have a material adverse effect on our business, financial condition and results of operations.

Our operating results are subject to seasonal and quarterly variations in our net revenues and income from operations, which could adversely affect the price of our publicly traded common stock.

We have experienced, and expect to continue to experience, seasonal and quarterly variations in our net revenues and income from operations. These variations are primarily related to increased class visits during the first quarter, as students tend to exercise more regularly at the beginning of each calendar year as a part of setting goals for the upcoming year.

Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new studio acquisitions and openings, changes in pricing and revenues mix, and changes in marketing and other operating expenses. As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our operating results between different quarters within a single year are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance. Any seasonal or quarterly fluctuations that we report in the

 

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future may not match the expectations of market analysts and investors. These fluctuations could cause the price of our publicly traded stock to fluctuate significantly.

We could be subject to personal injury claims or claims of teacher or employee impropriety related to the use of our studios.

Students, as well as teachers, could assert claims related to personal injury or teacher or employee impropriety in connection with their use of our services and facilities. We believe that yoga-related injuries have increased in recent years due to an increased interest in yoga in the U.S. and as a result, more inexperienced practitioners doing yoga. We also believe this increase in injuries is due to the growing population of older yoga practitioners, who may have a higher likelihood of injury. In addition, in recent years, there have been accusations and reports of sexual impropriety involving persons in the yoga industry, including claims of inappropriate physical contact with students. If we cannot successfully defend any large claim or maintain our general liability insurance on acceptable terms or maintain adequate coverage against potential claims, our financial results could be adversely affected. Depending upon the outcome, these matters may have a material effect on our financial position, results of operations and cash flows.

Our trademarks and trade names may be infringed, misappropriated or challenged by others.

We believe our YogaWorks brand name and related intellectual property are important to our continued success. We attempt to protect our trademarks, trade names and other intellectual property by exercising our rights under applicable trademark and copyright laws. If we were to fail to successfully protect our intellectual property rights for any reason, it could have an adverse effect on our business, results of operations and financial condition. Any damage to our reputation could cause membership, class visits, teacher training and participation in MyYogaWorks.com to decline or make it more difficult to attract new students.

We may be subject to liability if we infringe upon the intellectual property rights of third parties.

Third parties may sue us for alleged infringement of their proprietary rights. The party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial costs and devote significant management resources to defend against such litigation. If the party claiming infringement were to prevail, we could be forced to discontinue the use of the related trademark or design or pay significant damages or enter into expensive royalty or licensing arrangements with the prevailing party, assuming these royalty or licensing arrangements are available at all on an economically feasible basis, which they may not be. We could also be required to pay substantial damages. Such infringement claims could harm our brand. In addition, any payments we are required to make and any injunction we are required to comply with as a result of such infringement could have a material adverse effect on our business, financial condition and results of operations.

Any further impairment of goodwill could adversely affect our financial condition and results of operations.

In 2015, we recorded an impairment of goodwill of $0.9 million. We did not record any impairment losses related to goodwill in 2016. As of December 31, 2016, our goodwill balance was $17.7 million. Accounting rules require the evaluation of our goodwill at least annually, or more frequently when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Such indicators are based on market conditions and the operational performance of our business. In testing goodwill for impairment, if the implied fair value of the goodwill is less than the reporting unit’s carrying amount, then goodwill is impaired and is written down to the implied fair value amount. If a significant amount of our goodwill were deemed to be impaired, our business, financial condition and results of operations could be materially adversely affected.

We incurred a net loss of $2.6 million for the three months ended March 31, 2017, $1.5 million for the three months ended March 31, 2016, $9.5 million in 2016 and $9.2 million in 2015 and had net

 

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cash provided by operating activities of $0.8 million in 2016. If we continue to experience net losses or our cash flows from operating activities decline or become negative, it could require us to lower our assessment of the fair value of our business. If this were to occur, we could be required to record additional material impairment charges to goodwill or other intangible assets which could have a material adverse effect on our business, financial condition and results of operations.

Changes in lease accounting standards may materially and adversely affect us.

The Financial Accounting Standards Board, or FASB, recently adopted new accounting rules, to be effective for our fiscal year beginning after December 2019 that will require companies to capitalize all leases on their balance sheets by recognizing a lessee’s rights and obligations. When the rules are effective, we will be required to account for the leases for studios as assets and liabilities on our balance sheet, where previously we accounted for such leases on an “off balance sheet” basis. As a result, a significant amount of lease-related assets and liabilities will be recorded on our balance sheet and we may be required to make other changes to the recording and classification of our lease-related expenses. Though these changes will not have any direct impact on our overall financial condition, these changes could cause investors or others to believe that we are highly leveraged and could change the calculations of financial metrics and covenants under our debt facilities, as well as third-party financial models regarding our financial condition.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business are highly complex. These matters include, but are not limited to, revenue recognition, income taxes, impairment of goodwill and long-lived assets and equity-based compensation. Changes in these rules, guidelines or interpretations could significantly change our reported or expected financial performance or financial condition.

In addition, the preparation of financial statements in conformity with GAAP requires management to make assumptions, estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of net revenues and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, income taxes, impairment of goodwill and long-lived assets and equity-based compensation.

Our insurance may not provide adequate levels of coverage against claims.

We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business and results of operations.

 

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Inventory shrinkage could have a negative impact on our business, financial condition and results of operations.

We are subject to the risk of inventory loss and theft. Although our inventory shrinkage rates have not been material, or fluctuated significantly in recent years, there can be no assurances that actual rates of inventory loss and theft in the future will be within our estimates or that the measures we are taking will effectively reduce inventory shrinkage. Although some level of inventory shrinkage is an unavoidable cost of doing business, if we were to experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft, it could have a negative impact on our business, financial condition and results of operations.

Our ability to use our net operating losses to offset future taxable income may be subject to limitations.

As of December 31, 2016, we had federal net operating loss, or NOL, carryforwards of approximately $25.4 million and state NOL carryforwards of approximately $17.2 million. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Our existing NOLs are subject to limitations arising from a previous ownership change, and if we undergo an ownership change in connection with or after the equity transactions we entered into during the three months ended March 31, 2017 or this offering, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, whether or not we attain profitability.

Changes in U.S. tax law may have an adverse effect on our business, financial condition and results of operations and affect the U.S. federal tax considerations of the purchase, ownership and disposition of the common stock.

Potential tax reforms in the U.S. may result in significant changes in the rules governing United States federal income taxation. Such changes may have an adverse effect on our business, financial condition and results of operations. Such changes may also affect the U.S. federal tax considerations of the purchase, ownership and disposition of our common stock, as discussed below in “Material U.S. Federal Income Tax Consequences to Non-U.S. Holders.”

Risks Related to this Offering and Ownership of Our Common Stock

Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.

We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and have imposed various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to comply with these rules and regulations. Moreover, these rules and regulations relating to public companies will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain and maintain director and officer

 

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liability insurance. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain and periodically evaluate our internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and, to the extent that we are no longer an “emerging growth company” as defined in the JOBS Act, our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to satisfy the ongoing requirements of Section 404 and provide internal audit services. If our finance and accounting organization is unable for any reason to respond adequately to the increased demands that will result from being a public company, the quality and timeliness of our financial reporting may suffer and we could experience internal control weaknesses. Any consequences resulting from inaccuracies or delays in our reported financial statements could have an adverse effect on the trading price of our common stock as well as an adverse effect on our business, operating results and financial condition.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form 10-K, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm is not required to express an opinion as to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company.” At such time, however, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating.

The process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation is time-consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an “emerging growth company,” investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be negatively affected, and we could become subject to investigations by our stock exchange, the SEC or other regulatory authorities, which could require additional financial and management resources.

We qualify as an emerging growth company, and any decision on our part to comply with reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we currently intend to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited

 

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to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our registration statements, periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of the IPO; (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year.

We cannot predict whether investors will find our common stock less attractive if we choose to rely on these exemptions while we are an emerging growth company. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We plan to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

There is no existing market for our common stock, and you cannot be certain that an active trading market or a specific share price will be established.

Prior to this offering, there has been no public market for shares of our common stock. We have applied to list our common stock on The NASDAQ Global Market. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on such exchange or otherwise or how liquid that market might become. The initial public offering price for the shares of our common stock will be determined by negotiations between us and the underwriters, and may not be indicative of the price that will prevail in the trading market following this offering. The market price for our common stock may decline below the initial public offering price, and our stock price is likely to be volatile. In addition, because Great Hill Partners has indicated an interest in purchasing up to $10.0 million in shares of our common stock in this offering, the overall trading market for our shares may not be as active as it otherwise would have been had these shares been purchased by other investors.

If our stock price fluctuates after this offering, you could lose a significant part of your investment.

The market price of our stock may be influenced by many factors, some of which are beyond our control, including the following:

 

    the opinions and estimates of any securities analysts who publish research about us after this offering;

 

    announcements by us or our competitors of significant contracts, acquisitions or capital commitments;

 

    variations in quarterly operating results;

 

    changes in general economic or market conditions or trends in our industry or the economy as a whole;

 

    future sales of our common stock; and

 

    investor perception of us and the retail industry.

 

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As a result of these factors, investors in our common stock may not be able to resell their shares at or above the initial offering price. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.

In addition, the stock markets, including NASDAQ, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

Our operating results and share price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results are likely to fluctuate in the future as a publicly traded company. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price or at all. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

 

    market conditions in the broader stock market;

 

    actual or anticipated fluctuations in our quarterly financial and operating results;

 

    introduction of new products or services by us or our competitors;

 

    changes in the sales mix between paid-in-full memberships, monthly memberships and class packages in a given period;

 

    issuance of new or changed securities analysts’ reports or recommendations;

 

    results of operations that vary from expectations of securities analysis and investors;

 

    guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

    strategic actions by us or our competitors;

 

    announcement by us, our competitors or our acquisition targets;

 

    sales, or anticipated sales, of large blocks of our stock;

 

    additions or departures of key personnel;

 

    regulatory, legal or political developments;

 

    public response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

    litigation and governmental investigations;

 

    changing economic conditions;

 

    changes in accounting principles;

 

    default under agreements governing our indebtedness;

 

    exchange rate fluctuations; and

 

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    other events or factors, including those from natural disasters, war, actors of terrorism or responses to these events.

These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. While we believe that operating results for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.

Immediately after this offering, we will have outstanding 13,909,081 shares of our common stock. Of these shares, the 5,000,000 shares sold in this offering will be freely tradable except for any shares purchased by our “affiliates” as that term is used in Rule 144 under the Securities Act of 1933, as amended, which we refer to as the Securities Act. At various times after the date of this prospectus, the remaining 8,909,081 shares will become available for resale in the public market, in compliance with the requirements of the federal securities laws and in accordance with lock-up agreements that the holders of these shares have with the underwriters. However, the underwriters can waive these restrictions and allow these stockholders to sell their shares at any time without prior notice.

In addition, up to 1,289,013 shares of our common stock reserved for issuance pursuant to options previously granted by us will become eligible for sale in the public market once permitted by provisions of the lock-up agreements, or Rule 144 or Rule 701 under the Securities Act, as applicable.

If the 8,909,081 remaining shares not sold in this offering or the 1,289,013 shares underlying options described above are sold, or if it is perceived that they will be sold in the public market, the trading price of our common stock could drop significantly.

Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $9.03 in net tangible book value per share from the price you paid. Furthermore, investors purchasing shares of our common stock in this offering will only own approximately 36% of our outstanding shares of common stock.

The issuance of additional stock, not reserved for issuance under our equity incentive plans or otherwise, will dilute all other stockholdings.

After this offering, we will have an aggregate of 32,900,308 shares of common stock authorized but unissued and not reserved for issuance under our equity incentive plans, options granted to our directors, employees and consultants, or otherwise. We may issue all of these shares without any action or approval by our stockholders. The issuance of additional shares could be dilutive to existing holders.

 

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Your ability to influence corporate matters may be limited because Great Hill Partners beneficially owns a substantial amount of our common stock and will continue to have substantial control over us after the offering.

Our common stock, which is the stock we are selling in this offering, has one vote per share. Upon completion of this offering, Great Hill Partners will, in the aggregate, beneficially own approximately 70% of our outstanding common stock, assuming the purchase of the Great Hill Shares. As a result, Great Hill Partners will be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have significant influence over our management and policies for the foreseeable future. Great Hill Partners may have interests that are different from yours. For example, Great Hill Partners may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership in our company could delay or prevent a change in control of our company or otherwise discourage a potential acquirer from attempting to obtain control of our company, which in turn could reduce the price of our common stock.

Two of our directors have relationships with Great Hill Partners, which may cause conflicts of interest with respect to our business.

Following this offering, two of our directors will be affiliated with Great Hill Partners. Our Great Hill Partners-affiliated directors have fiduciary duties to us and, in addition, have duties to Great Hill Partners. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and Great Hill Partners, whose interests may be adverse to ours in some circumstances.

Our certificate of incorporation will contain a provision renouncing our interest and expectancy in corporate opportunities.

Our certificate of incorporation will provide for the allocation of corporate opportunities between us and Great Hill Partners. Under these provisions, neither Great Hill Partners, its portfolio companies, funds or other affiliates, nor any of their officers, directors, agents, stockholders, members or partners will have any duty to refrain from engaging, directly or indirectly, in the same business activities, similar business activities or lines of business in which we operate. For instance, a director of our company who also serves as a director, officer, partner or employee of Great Hill Partners or any of its portfolio companies, funds or other affiliates may pursue acquisitions or other opportunities that may be complementary to our business and, as a result, such acquisition or other opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if attractive corporate opportunities are allocated by Great Hill Partners to itself or its portfolio companies, funds or other affiliates instead of to us.

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management may not apply our net proceeds from this offering in ways that increase the value of your investment. We intend to use the net proceeds from this offering to repay the 2017 GHP Convertible Notes of approximately $3.3 million, to repay the outstanding indebtedness under our Loan Agreement of approximately $7.0 million (including prepayment premiums), fund future acquisitions of individual yoga studios or businesses with multiple studios (although we have no binding obligations to enter into any such acquisitions), investments or capital expenditures and for working capital and other general corporate purposes. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

 

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Anti-takeover provisions in our organizational documents could delay a change in management and limit our share price.

Upon the consummation of this offering, provisions of our amended and restated certificate of incorporation and amended and restated bylaws that will become effective prior to the completion of this offering could make it more difficult for a third party to acquire control of us even if such a change in control would increase the value of our common stock and prevent attempts by our stockholders to replace or remove our current board of directors or management.

We have a number of anti-takeover devices that will be in place prior to the completion of this offering that will hinder takeover attempts and could reduce the market value of our common stock or prevent sale at a premium. Our anti-takeover provisions:

 

    permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships;

 

    provide that our board of directors will be classified into three classes with staggered, three year terms and that directors may only be removed for cause;

 

    include blank-check preferred stock, the preference, rights and other terms of which may be set by the board of directors and could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise benefit our stockholders;

 

    eliminate the ability of our stockholders to call special meetings of stockholders;

 

    specify that special meetings of our stockholders can be called only by our board of directors, the chairman of our board of directors, or our chief executive officer;

 

    prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

    provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

    prohibit cumulative voting in the election of directors; and

 

    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law, or the DGCL. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a period of time.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation which will become effective prior to the closing of this offering will provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following civil actions:

 

    any derivative action or proceeding brought on our behalf;

 

    any action asserting a claim of breach of a fiduciary duty by any of our directors, officers, employees or agents or our stockholders;

 

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    any action asserting a claim arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; or

 

    any action asserting a claim governed by the internal affairs doctrine.

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition or results of operations.

After the completion of this offering, we do not expect to declare any dividends in the foreseeable future.

The continued operation and growth of our business will require substantial cash. Accordingly, after the completion of this offering, we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, any contractual restrictions, our indebtedness, restrictions imposed by applicable law and other factors our board of directors deems relevant. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who cover us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.

We are a “controlled company” within the meaning of the NASDAQ rules. As a result, we qualify for, and intend to continue to rely on, exemptions from corporate governance requirements that provide protection to stockholders of other companies.

After completion of this offering, Great Hill Partners will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of NASDAQ. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with some corporate governance requirements, including:

 

    the requirement that a majority of our Board of Directors consist of “independent directors”;

 

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    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

    the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirement for an annual performance evaluation of the compensation and nominating and corporate governance committees.

Following this offering, we intend to continue to utilize these exemptions. As a result, we will not have a nominating and corporate governance committee and our compensation committee may not consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the            .

In addition, NASDAQ has developed listing standards regarding compensation committee independence requirements and the role and disclosure of compensation consultants and other advisers to the compensation committee that, among other things, requires:

 

    compensation committees be composed of independent directors, as determined pursuant to new independence requirements;

 

    compensation committees be explicitly charged with hiring and overseeing compensation consultants, legal counsel and other committee advisors; and

 

    compensation committees be required to consider, when engaging compensation consultants, legal counsel or other advisors, independence factors, including factors that examine the relationship between the consultant or advisor’s employer and us.

As a controlled company, we will not be subject to these compensation committee independence requirements.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. 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. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We believe that these factors include, but are not limited to, the following:

 

    our ability to achieve or maintain profitability;

 

    our ability to maintain the value and reputation of our brand;

 

    our ability to successfully execute our growth and acquisition strategy;

 

    our ability to effectively integrate acquired studios;

 

    our financial outlook and financial performance;

 

    changes in the sales mix between paid-in-full memberships, monthly memberships and class packages in a given period;

 

    capital expenditures needed to pursue our growth strategy;

 

    our ability to identify and respond to new and changing trends, customer preferences and other related factors;

 

    our ability to execute successfully our growth strategy and to manage effectively our growth;

 

    changes in the economy, consumer spending, the financial markets and the industries in which we operate;

 

    changes in the competitive environment in our industry and the markets we serve;

 

    increases in labor costs;

 

    our ability to attract and retain students and to attract, retain and train qualified teachers;

 

    our cash needs and the adequacy of our cash flows and earnings;

 

    the availability and cost of additional indebtedness;

 

    our dependence upon key executive management and our ability to integrate new executives;

 

    our reliance on third parties to provide key services;

 

    our indebtedness and lease obligations;

 

    the impact of governmental laws and regulations and the outcomes of legal proceedings and impact of legal compliance;

 

    the effects of restrictions imposed by our indebtedness on our current and future operations;

 

    our inability to protect our trademarks or other intellectual property rights; and

 

    increased costs as a result of being a public company.

 

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We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, business strategy and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions and other factors described in the section captioned “Risk Factors” and elsewhere in this prospectus. These risks are not exhaustive. Other sections of this prospectus include additional factors that could adversely impact our business and financial performance. Furthermore, new risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this prospectus or to conform such statements to actual results or revised expectations, except as required by law.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be approximately $58.5 million, based upon the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds to be received by us will be approximately $67.5 million, after deducting underwriting discounts, commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share would increase (decrease) the net proceeds that we receive from this offering by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million in the number of shares offered by us would increase (decrease) the net proceeds that we receive from this offering by approximately $12.1 million, assuming that the assumed initial public offering price remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and thereby enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds to us from this offering to repay the 2017 GHP Convertible Notes, to repay the outstanding indebtedness under our Loan Agreement of approximately $7.0 million (including prepayment premiums), fund future acquisitions of individual yoga studios or businesses with multiple studios (although we have no binding obligations to enter into any such acquisitions), investments or capital expenditures and for working capital and other general corporate purposes.

In March 2017, we issued the 2017 GHP Convertible Notes to Great Hill Partners in the aggregate principal amount of $3.2 million, with an annual interest rate of 8% and with a maturity date of March 27, 2018. We issued the 2017 GHP Convertible Notes to ensure we had adequate working capital available to finance the incremental costs to be incurred in connection with this offering and becoming a public company. We intend to use $3.3 million of our net proceeds from this offering to repay outstanding amounts under the 2017 GHP Convertible Notes upon the consummation of this offering.

The maturity date of the Loan Agreement is in July 2020. Borrowings under the Loan Agreement currently carry an annual interest rate of LIBOR rate plus 8.00%, with a decrease to LIBOR plus 7.50% upon the consummation of our initial public offering if our initial public offering is consummated on or prior to December 31, 2017 and results in aggregate cash proceeds of at least $25.0 million. Upon the first fiscal quarter we are in compliance with our Loan Agreement’s financial ratio covenants, starting with the fiscal quarter ending March 31, 2018, and so long as there is no default or potential event of default under the Loan Agreement, the applicable interest rate on our loans under the Loan Agreement would be LIBOR plus 7.00%. We intend to use $7.0 million of our net proceeds from this offering to repay the outstanding balance under the Loan Agreement (including any prepayment premiums) and cancel the Loan Agreement upon the consummation of this offering.

We will have broad discretion over the uses of the net proceeds from this offering and investors will be relying on the judgement of our management regarding the application of the net proceeds from this offering. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering in short-term and long-term interest-bearing obligations, including debt securities and money market funds.

 

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DIVIDEND POLICY

Since our acquisition by Great Hill Partners in July 2014, we have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors considers relevant.

 

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CAPITALIZATION

The following table sets forth cash and cash equivalents, as well as our capitalization, as of March 31, 2017:

 

    on an actual basis, after giving effect to the 1-for-10 reverse stock split of our common stock that occurred in March 2017 and a subsequent 1-for-1.333520 reverse stock split of our common stock to be effected prior to the effectiveness of the registration statement of which this prospectus forms a part; and

 

    on a pro forma as adjusted basis to give effect to (i) the 1-for-1.333520 reverse stock split of our common stock to be effected prior to the effectiveness of the registration statement of which this prospectus forms a part, (ii) the filing and effectiveness of our amended and restated certificate of incorporation in connection with our offering, (iii) the issuance and sale by us of 5,000,000 shares of common stock in our initial public offering, and the receipt of the net proceeds from our sale of these shares at an assumed initial public offering price of common stock of $13.00 per share, the midpoint of the price range on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (iv) repayment of the 2017 GHP Convertible Notes and outstanding indebtedness under our Loan Agreement from the net proceeds of this offering.

 

     As of March 31, 2017  
     Actual        Pro Forma
As Adjusted(1)
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 5,456        $ 54,150  
  

 

 

      

 

 

 

2017 GHP Convertible Notes

   $ 3,203        $ —    

Total long-term debt, net of debt issuance costs

     6,553          —    

Stockholders’ equity:

       

Common stock; $0.0001 par value, 14,131,014 shares authorized, 8,907,579 shares issued and outstanding, actual; $0.001 par value 50,000,000 shares authorized, 13,909,081 shares issued and outstanding, pro forma as adjusted

     1          1  

Additional paid-in capital

     74,967          133,417  

Accumulated deficit

     (36,312        (36,312
  

 

 

      

 

 

 

Total stockholders’ equity

     38,656          97,106  
  

 

 

      

 

 

 

Total capitalization

   $ 48,412        $ 97,106  
  

 

 

      

 

 

 

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of our common stock of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of cash, and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by approximately $4.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1.0 million in the number of shares offered by us would increase (decrease) the pro forma as adjusted amount of cash, and cash equivalents, additional paid-in capital, total stockholders’ deficit and total capitalization by

 

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  approximately $12.1 million, assuming that the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted column in the table above excludes the following, in each case as of March 31, 2017:

 

    an aggregate of 1,289,013 shares of common stock issuable upon the exercise of outstanding options under our 2014 Plan, with a weighted-average exercise price of approximately $8.40 per share;

 

    shares issuable upon vesting of restricted stock units to be granted to our non-employee directors under the 2017 Plan in connection with this offering and our Director Compensation Program (see “Management—Director Compensation”);

 

    shares of common stock, subject to annual increases, reserved for future grant or issuance under our 2017 Plan, which will become effective upon the completion of this offering, consisting of 1,901,598 shares of common stock reserved under our 2017 Plan (plus an additional number of shares of common stock subject to outstanding awards under the 2014 Plan as of the effective date of the 2017 Plan and which are forfeited or lapse unexercised thereafter), including an aggregate of 398,643 shares of common stock issuable upon the exercise of options expected to be granted under the 2017 Plan in connection with the closing of this offering; and

 

    any exercise of the underwriters’ option to purchase additional shares solely to cover overallotments, if any.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the net tangible book value per share of our common stock after this offering. As of March 31, 2017, we had a historical net tangible deficit of $(3.2) million, or $(0.36) per share of common stock. Our net tangible book value (deficit) represents total tangible assets less total liabilities, all divided by the number of shares of common stock outstanding on such date.

After giving effect to the sale of 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and assuming the repayment of the 2017 GHP Convertible Notes and outstanding indebtedness under our Loan Agreement, our pro forma as adjusted net tangible book value at March 31, 2017 would have been approximately $55.2 million, or $3.97 per share. This represents an immediate increase in net tangible book value (deficit) of $4.33 per share to existing stockholders and an immediate dilution of $9.03 per share to new investors. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $ 13.00  

Historical net tangible book value (deficit) per share as of March 31, 2017

   $ (0.36  

Increase in net tangible book value (deficit) per share attributable to new investors

   $ 4.33    
  

 

 

   

Pro forma as adjusted net tangible book value (deficit) per share after this offering

     $ 3.97  
    

 

 

 

Dilution per share to investors in this offering

     $ 9.03  
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of common stock of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease), our pro forma as adjusted net tangible book value per share after this offering by $0.33, and would increase (decrease) dilution per share to new investors in this offering by $0.67, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by approximately $0.63 per share and decrease (increase) the dilution to new investors by approximately $0.63 per share, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters fully exercise their option to purchase additional shares to cover overallotments, if any, pro forma as adjusted net tangible book value after this offering would increase to approximately $4.39 per share, and there would be an immediate dilution of approximately $8.61 per share to investors in this offering.

To the extent that outstanding options with an exercise price per share that is less than the pro forma as adjusted net tangible book value per share, before giving effect to the issuance and sale of shares in this offering, are exercised, new investors will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Furthermore, we may choose

 

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to issue common stock as part or all of the consideration in acquisitions of other yoga companies and studios as part of our planned growth and acquisition strategy. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

The following table shows, as of March 31, 2017, on a pro forma as adjusted basis, after giving effect to the pro forma adjustments described above, the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering at an assumed initial public offering price of $13.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us (in thousands, except per share amounts and percentages):

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     8,908        64   $ 74,968        54   $ 8.42  

New investors

     5,000        36       65,000        46     $ 13.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     13,908        100   $ 139,968        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by approximately $5.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by approximately $13.0 million, assuming that the assumed initial public offering price remains the same, and before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The above table and discussion includes 8,907,579 shares of common stock outstanding as of March 31, 2017 and excludes:

 

    an aggregate of 1,289,013 shares of common stock issuable upon the exercise of outstanding options under our 2014 Plan, with a weighted-average exercise price of approximately $8.40 per share;

 

    an aggregate of 398,643 shares of common stock issuable upon the exercise of options expected to be granted under our 2017 Plan in conjunction with the closing of this offering;

 

    shares issuable upon vesting of restricted stock units to be granted to our non-employee directors under the 2017 Plan in connection with this offering and our Director Compensation Program (see “Management—Director Compensation”);

 

    shares of common stock, subject to annual increases, reserved for future grant or issuance under our 2017 Plan, which will become effective upon the completion of this offering, consisting of 1,901,598 shares of common stock reserved under our 2017 Plan (plus an additional number of shares of common stock subject to outstanding awards under the 2014 Plan as of the effective date of the 2017 Plan and which are forfeited or lapse unexercised thereafter);

 

    common stock issuable upon conversion of the 2017 GHP Convertible Notes (we intend to repay the 2017 GHP Convertible Notes in connection with the closing of this offering); and

 

 

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    any exercise of the underwriters’ option to purchase additional shares to cover overallotments, if any.

Great Hill Partners has indicated an interest in purchasing up to $10.0 million in shares of our common stock in this offering at the initial public offering price. Based on an assumed public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, Great Hill Partners would purchase up to an aggregate of 769,230 shares of our common stock in this offering based on these indications of interest. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, less or no shares in this offering to Great Hill Partners, and Great Hill Partners may determine to purchase more, less or no shares in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The consolidated statements of operations and cash flows data for the years ended December 31, 2016 and 2015 is derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations and cash flows data for the three months ended March 31, 2017 and 2016 and the consolidated balance sheet data as of March 31, 2017 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements were prepared on a basis consistent with that used to prepare our audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal recurring items, necessary for a fair presentation of the consolidated financial statements.

The terms “Predecessor” and “Successor” used below and throughout this prospectus refer to the periods prior and subsequent to the acquisition of us by Great Hill Partners in July 2014. See “Prospectus Summary—Our Sponsor and Controlled Company Status.” The unaudited non-GAAP combined results of operations for the year ended December 31, 2014 represents the mathematical addition of our Predecessor’s results of operations from January 1, 2014 to July 10, 2014 and the Successor’s results of operations from July 11, 2014 to December 31, 2014. The consolidated statements of operations data for the period from January 1, 2014 to July 10, 2014 and from July 11, 2014 to December 31, 2014 and the consolidated balance sheet data as of December 31, 2014 are each derived from financial statements not included in this prospectus.

You should read this data together with our audited consolidated financial statements and related notes, as well as the information under the captions “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results, and results for any interim period below are not necessarily indicative of results for the full year.

 

(U.S. dollars in thousands
except per share data)

  Unaudited
Three Months
Ended March 31,
   

 

Year Ended
December 31,

    Unaudited
Non-GAAP
Combined
Year Ended
December 31,
2014(1)
    Period from
July 11, 2014
to December 31,
2014
(Successor)
                Period from
January 1, 2014
to July 10, 2014
(Predecessor)
 
  2017     2016     2016     2015            

 

Consolidated Statement of Operations Data:

             

Net revenues

  $ 13,990     $ 15,092     $ 55,090     $ 48,506     $ 44,102     $ 21,094         $ 23,008  

Cost of revenues and operating expenses

                 

Cost of revenues

    5,129       5,318       20,535       17,105       14,955       7,152           7,803  

Center operations

    5,687       5,563       22,469       19,859       27,549       11,559           15,990  

General and administrative expenses

    3,010       3,178       11,067       12,556       6,598       3,210           3,388  

Depreciation and amortization

    2,201       2,181       8,893       6,515       3,146       2,180           966  

Goodwill impairment

   

 
   

 
          927                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues and operating expenses

 

 

 

 

16,027

 

 

 

 

 

 

16,240

 

 

    62,964       56,962       52,248       24,101           28,147  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Loss from operations

    (2,037     (1,148     (7,874     (8,456     (8,146     (3,007         (5,139

Interest expense, net

 

 

 

 

 

 

562

 

 

 

 

 

 

 

 

 

391

 

 

 

    1,587       746       90       47           43  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net loss before provision for income taxes

    (2,599     (1,539     (9,461     (9,202     (8,236     (3,054         (5,182

 

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(U.S. dollars in thousands
except per share data)

  Unaudited
Three Months Ended
March 31,
   

 

Year Ended
December 31,

    Unaudited
Non-GAAP
Combined
Year Ended
December 31,
2014(1)
    Period from
July 11, 2014
to December 31,
2014
(Successor)
                Period from
January 1, 2014
to July 10, 2014
(Predecessor)
 
  2017     2016     2016     2015            

Provision for income taxes

  $ 18     $ 7     $ 43     $ 13     $ 28     $ 13         $ 15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net loss

  $ (2,617   $ (1,546     (9,504     (9,215     (8,264     (3,067         (5,197

Net income attributable to non-controlling interest

                            (411               (411
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net loss attributable to YogaWorks

  $ (2,617   $ (1,546   $ (9,504   $ (9,215   $ (8,675   $ (3,067       $ (5,608
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Net loss per share attributable to common stockholders:(2)

                 

Basic

  $ (14.81   $ (36.80   $ (191.60   $ (189.96          

Diluted

    (14.81     (36.80     (191.60     (189.96          

Weighted-average number of shares used in computing net loss per share attributable to common stockholders:(2)

                 

Basic

    243,848       72,735       73,796       71,244            

Diluted

    243,848       72,735       73,796       71,244            

Pro forma net loss per share attributable to common stockholders:(2)

                 

Basic

  $ (0.41     $ (1.59            

Diluted

    (0.41       (1.59            

Weighted-average number of shares used in computing pro forma net loss per share attributable to common stockholders:(2)

                 

Basic

    8,908,233         8,907,597              

Diluted

    8,908,233         8,907,597              

 

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     Unaudited As of
March 31, 2017
     As of December 31,  
(U.S. dollars in thousands)       2016     2015     2014  

Consolidated Balance Sheet Data:

         

Cash and cash equivalents

   $ 5,456      $ 1,912     $ 3,773     $ 4,511  

Total assets

     57,537        57,148       65,000       56,052  

Total long term debt, net of debt issuance costs

     6,553        6,769       7,201       1,428  

2015 GHP Convertible Notes

     3,203        11,635       10,728        

Redeemable preferred stock

            61,393       56,758       52,436  

Total stockholders’ equity (deficit)

     38,656        (32,632     (18,534     (5,014

 

    Three Months Ended March 31,      Year Ended December 31,  
    2017      2016      2016      2015      2014  

Other Information:

             

Studios (period end)

    50        49        49        47        29  

Student visits

    760,707        789,677        2,946,807        2,439,469        2,165,073  

Studio classes

    45,154        44,772        181,796        146,846        120,895  

 

    Three Months Ended March 31,     Year Ended December 31,  
(U.S. dollars in thousands)   2017     2016     2016     2015  

Other Financial Information:

       

Adjusted EBITDA(3)

  $ 841     $ 1,245     $ 1,699     $ 361  

Adjusted EBITDA Margin(4)

    6.0     8.2     3.1     0.7

Studio-Level EBITDA(3)

  $ 3,205     $ 4,392     $ 12,373     $ 12,398  

Studio-Level EBITDA Margin(4)

    22.9     29.1     22.5     25.6

Average Unit Volume(5)

      $ 1,126     $ 1,338  
    Unaudited
Three Months Ended March 31,
    Year Ended December 31,  
(U.S. dollars in thousands)   2017     2016     2016     2015  

Consolidated Statement of Cash Flow Data:

       

Net cash provided by (used in) operating activities

  $ 783     $ (779   $ 762     $ (888

Net cash used in investing activities

    (196     (923     (2,097     (15,124

Net cash provided by (used in) financing activities

    2,956             (526     15,273  

Increase (decrease) in deferred revenue

    (115     (980     (650     427  

 

(1) The unaudited non-GAAP combined results of operations for the year ended December 31, 2014 represents the mathematical addition of our Predecessor’s results of operations from January 1, 2014 to July 10, 2014 and the Successor’s results of operations from July 11, 2014 to December 31, 2014. The presentation of combined financial information for the year ended December 31, 2014 is not consistent with United States Generally Accepted Accounting Principles, or GAAP, or with the pro forma requirements of Article 11 of Regulation S-X, and may yield results that are not comparable on a period-to-period basis. The financial information for the two periods was prepared on different accounting bases for the Successor and Predecessor and the combined financial information does not include any pro forma adjustments to make them comparable.
(2)

See Note 12 to our audited consolidated financial statements and Note 9 to our unaudited condensed consolidated financial statements included in this prospectus for additional information regarding the calculation of basic and diluted net loss per share attributable to common stockholders. Net loss per share attributable to common stockholders and pro forma net loss per share attributable to common stockholders gives effect to the 1-for-10 reverse stock split of our common stock that occurred in March 2017 and a subsequent 1-for-1.333520 reverse stock split of our common stock to

 

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  be effected prior to the effectiveness of the registration statement of which this prospectus is a part. Pro forma net loss per share attributable to common stockholders is calculated by dividing net loss for the applicable period by the weighted average number of shares for the applicable period. The weighted average number of shares used in computing pro forma net loss per share attributable to common stockholders for the year ended December 31, 2016 gives effect to (i) the conversion of our outstanding redeemable preferred stock into 7,426,169 shares of our common stock; (ii) the conversion of the 2015 GHP Convertible Notes into 1,407,632 shares of our common stock; (iii) the 1-for-10 reverse stock split of our common stock that occurred in March 2017 and a subsequent 1-for-1.333520 reverse stock split of our common stock to be effected prior to the effectiveness of the registration statement of which this prospectus is a part; and (iv) stock option grants to our employees and consultants to purchase up to 1,425,641 shares in the aggregate of our common stock that occurred after December 31, 2016 in connection with the Recapitalization Transactions.
(3) In addition to our results determined in accordance with GAAP, we have presented Adjusted EBITDA and Studio-Level EBITDA, which are non-GAAP measures. The following table presents a reconciliation of Adjusted EBITDA and Studio-Level EBITDA to net loss for each of the periods indicated:

 

    Three Months
Ended March 31,
    Year Ended
December 31,
 
(U.S. dollars in thousands)   2017     2016     2016      2015  

Net loss

  $ (2,617   $ (1,546   $ (9,504    $ (9,215

Interest expense, net

    562       391       1,587        746  

Provision for income taxes

    18       7       43        13  

Depreciation and amortization

    2,201       2,181       8,893        6,515  

Goodwill impairment

                       927  

Deferred rent(a)

    31       181       276        803  

Stock based compensation(b)

    539       7       23        17  

Acquisition professional expenses(c)

                       263  

Severance(d)

    82             225        99  

Executive recruiting(e)

                56        93  

Great Hill Partners expense reimbursement fees(f)

    25       25       100        100  
 

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

  $ 841     $ 1,246     $ 1,699      $ 361  

Other general and administrative expenses(g)

    2,364       3,147       10,674        12,037  
 

 

 

   

 

 

   

 

 

    

 

 

 

Studio-Level EBITDA

  $ 3,205     $ 4,393     $ 12,373      $ 12,398  
 

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) Reflects the extent to which our rent expense for the period has been above or below our cash rent payments.
(b) Non-cash charges related to equity-based compensation programs, which vary from period to period depending on timing of awards and forfeitures.
(c) Professional expenses incurred in connection with studio acquisitions, including legal and advisory fees.
(d) Severance expenses incurred in the period related to the termination of studio and non-studio employees.
(e) Executive recruiting expenses incurred in connection with the recruitment and hiring of members of our executive management team, including Mmes. McCollough (2015) and Dawson (2016) and Mr. Chang (2016).
(f) Represents expense reimbursement fees incurred in connection with our Expense Reimbursement Agreement with Great Hill Partners, which we expect to terminate upon completion of this offering.
(g)

Represents general and administrative expenses that are corporate and regional expenses and not incurred by our studios, and which are primarily comprised of expenses related to (i) wages and benefits of corporate and regional employees, (ii) non-studio rent, utilities and maintenance, (iii) corporate and regional marketing and advertising and (iv) corporate professional fees. Other general and administrative expenses excludes any general and administrative expenses related to

 

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  deferred rent, stock based compensation, acquisition professional expenses, executive recruiting, severance, the Great Hill Partners expense reimbursement fees or any other general and administrative expenses that are included in the reconciliation of net loss to Adjusted EBITDA.

We use Adjusted EBITDA and Studio-Level EBITDA to understand and evaluate our business. Adjusted EBITDA is a supplemental measure of the operating performance of our core business operations. Studio-Level EBITDA is a supplemental measure of the operating performance of our studios. Accordingly, we believe Adjusted EBITDA and Studio-Level EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Our use of Adjusted EBITDA and Studio-Level EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:

 

    although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA and Studio-Level EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

    Adjusted EBITDA and Studio-Level EBITDA are not intended to be a measure of free cash flow for management’s discretionary use, as they do not reflect: (i) changes in, or cash requirements for, our working capital needs; (ii) debt service requirements; (iii) tax payments that may represent a reduction in cash available to us; and (iv) other cash costs that may recur in the future;

 

    Studio-Level EBITDA is not a measure of our overall profitability but a supplemental measure of the operating performance of our studios. While Studio-Level EBITDA excludes regional and corporate general and administrative expenses that are not necessary to operate our studios, these excluded expenses are essential to support the operation and development of our studios; and

 

    other companies, including companies in our industry, may calculate Adjusted EBITDA, Studio-Level EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider Adjusted EBITDA and Studio-Level EBITDA along with other GAAP-based financial performance measures, including cash flows from operating activities, investing activities and financing activities, net loss and our other GAAP financial results.

 

(4) Adjusted EBITDA Margin and Studio-Level EBITDA Margin are each calculated as Adjusted EBITDA or Studio-Level EBITDA, as applicable, divided by net revenues.
(5) Average Unit Volume, or AUV, for any 12-month period is calculated by dividing total net revenues by the number of studios open during that period. For studios that are not open for the entire period, we make fractional adjustments to the number of studios open such that it corresponds to the period of associated net revenues.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion of our historical results of operations and our liquidity and capital resources should be read together with the consolidated financial statements and related notes that appear elsewhere in this prospectus. In addition to historical financial information, this prospectus contains “forward-looking statements.” You should review the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this prospectus for factors and uncertainties that may cause our actual future results to be materially different from those in our forward-looking statements. Forward-looking statements in this prospectus are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements.

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.

Markets

We operate in regional markets across the U.S. As a result of the clustering of our studios in key geographic markets, and the flexibility we offer our students to use different studios in their regional markets, we do not report net revenues on an individual studio basis or report same studio sales. We prefer to analyze our financial results on a regional market basis. Given our focus on acquisitions, we may acquire stores 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, 2017, we owned and operated 50 yoga studios in 6 regional markets. The following table illustrates our studio locations by regional market:

 

     As of March 31,
2017
    As of December 31,  
       2016     2015  

Regional Market

   Number of
Studios
     Percentage of
Net Revenues(1)
    Number of
Studios
     Percentage of
Net Revenues(2)
    Number of
Studios
     Percentage of
Net Revenues(2)
 

Los Angeles

     17        42     17        41     15        46

Orange County (California)(3)

     4        7     4        8     5        11

New York City(3)

     5        14     5        14     6        18

Northern California

     13        25     13        26     12        23

Boston

     3        4     2        3     2        1

Baltimore/Washington D.C.

     8        8     8        7     7        1

 

(1) For the three months ended March 31, 2017. Assumes that any net revenues for teacher training, workshops and MyYogaWorks.com for such period are allocated to our regional markets on a proportional basis based on the market’s share of total studio net revenues for such period.
(2) For the year ended December 31. Assumes that any net revenues for teacher training, workshops and MyYogaWorks.com for such period are allocated to our regional markets on a proportional basis based on the market’s share of total studio net revenues for such period.
(3) Reflects closures in 2016 of one studio in Orange County (California) and one studio in New York City.

 

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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.

 

     Three Months Ended
March 31,
     Year Ended December 31,  

Metric

   2017      2016      2016      2015  

Studios (period end)

     50        49        49        47  

Student visits(1)

     760,707        789,677        2,946,807        2,439,469  

Studio classes(2)

     45,154        44,772        181,796        146,846  

 

(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.

Factors Affecting Our Operating Results

Various factors are expected to continue to affect our future results of operations, including the following:

Overall economic trends. Consumer purchases of yoga studio classes and related merchandise can be affected by changes in disposable income, and consequently our results of operations are affected by general economic conditions. In addition, the growth rate of the overall United States yoga market could be affected by macroeconomic conditions in the United States.

Competition. The boutique fitness and overall exercise industry is highly competitive and operators compete based on a variety of factors, including studio design, location, class quality, instruction, price and customer service. The levels of competition and the ability of our competitors to more accurately predict class trends and otherwise attract customers through competitive pricing, compelling marketing or other factors, may impact our results of operations.

Revenue recognition for our various products. 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 revenues are recognized ratably 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. As a result, the product mix of our sales in a period, and how revenue is recognized at the time of such sales and in subsequent periods, may affect our results of operations period to period. With the adoption of our more flexible pricing strategy in July 2016, our sales mix has shifted toward a higher number of class-package sales and a corresponding decline in monthly membership sales. We anticipate this trend to continue at a decreasing rate over time as students in our existing studios purchase class packages more frequently than memberships and as we acquire and open additional studios that are more class package-focused. We expect that the impact of this shift in sales mix will be a reduction in the amount of revenue recognized in a given period by an increase in deferred revenue liability associated with class package sales, as well as a decrease in student visits, as students on class packages tend to visit studios less than students with membership.

New studios. We intend to increase the number of yoga studios we operate both through acquisitions and selectively opening new studios. As a result, the timing of acquisitions and expenditures related to new studios, as well as the pace at which we transition acquired studios to the YogaWorks operating model, may affect our results of operations in future periods.

 

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Changes in pricing. We offer a variety of pricing packages, including paid-in-full memberships (for six or twelve months), monthly memberships, multi-class packages and individual classes. The levels at which we are able to price our packages are influenced by a variety of factors, including the quality of our teachers, cost of labor, rent, prices at which our competitors are selling similar classes and the overall willingness of our students to pay for our classes. We sometimes also offer sales promotions, which may increase our student visits but decrease our operating margins.

In early 2016, we began evolving our pricing, product and promotional strategies to better serve our students. By July 2016, we had successfully implemented class package options at all of our studios in addition to adding the ability of our students to purchase memberships and packages online. We believe the offering of additional products that provide more flexibility will draw a broader student base over time. During the same period we reduced our reliance on deeply discounted promotional programs, including annual membership drives that historically drove a significant amount of prepaid annual memberships, as a key revenue generation tactic. Our intent is to focus the students’ attention on content and product, instead of price, and thereby extend our long term brand equity as a result.

Changes in operating expenses. Our operating expenses and our rent expenses are primarily based on the number of studios we have open. For individual studios, short term fluctuations primarily relate to teacher payroll and other studio labor costs and, to a lesser extent, other overhead expenses. Our marketing expenses may also increase in the future as we increase our marketing programs for existing and new studios.

Seasonality. We have historically experienced seasonal and quarterly variations in our net revenues and income from operations. These variations are primarily related to increased class visits during the first quarter, as students tend to exercise more regularly at the beginning of each calendar year as a part of setting goals for the upcoming year.

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. Workshop and teacher training revenue is deferred until the date of the event or is recognized over the period the event takes place.

Cost of revenues. Cost of revenues consists of direct costs associated with delivering our classes and services, which mainly includes teacher payroll and related expenses, and cost of physical goods sold, such as yoga clothing and accessories. We review our inventory levels of physical goods on an ongoing basis to identify slow-moving yoga merchandise and use retail product markdowns to

 

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efficiently sell those retail products. We expect that our newer studios to have higher cost of revenues as a percent of net revenues as they ramp to maturity.

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

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

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

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We expect that compliance with the rules and regulations of the Securities and Exchange Commission will increase our legal and financial compliance costs and will make some of our corporate and administrative activities more time consuming and costly. In addition, we expect that our management and other personnel will need to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring our compliance with the requirements of applicable laws and regulations. In addition, we expect to hire 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 generally incurred and expensed within 30 days of opening a new yoga studio.

Depreciation and amortization. Depreciation and amortization includes the depreciation of property and equipment, and the amortization expense of 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 year. 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 summarizes key components of our consolidated statement of operations for the periods indicated:

 

     Three Months Ended
March 31,
    Year Ended
December 31,
 

(dollars in thousands)

       2017             2016             2016             2015      
     (unaudited)        

Net revenues

   $ 13,990     $ 15,092     $ 55,090     $ 48,506  

Cost of revenues and operating expenses:

        

Cost of revenues

     5,129       5,318       20,535       17,105  

Center operations

     5,687       5,563       22,469       19,859  

General and administrative expenses

     3,010       3,178       11,067       12,556  

Depreciation and amortization

     2,201       2,181       8,893       6,515  

Goodwill impairment

                       927  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues and operating expenses

     16,027       16,240       62,964       56,962  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (2,037     (1,148     (7,874     (8,456

Interest expense, net

     562       391       1,587       746  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before provision for income taxes

     (2,599     (1,539     (9,461     (9,202

Provision for income taxes

     18       7       43       13  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (2,617   $ (1,546   $ (9,504   $ (9,215
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth our consolidated statement of operations data as a percentage of net revenues:

 

     For Three Months
Ended March 31,
    Year Ended
December 31,
 
     2017     2016     2016     2015  
     (unaudited)        

Net revenues

     100     100     100     100

Cost of revenues and operating expenses:

        

Cost of revenues

     37       35       37       35  

Center operations

     41       37       41       41  

General and administrative expenses

     22       21       20       26  

Depreciation and amortization

     16       14       16       13  

Goodwill impairment

                       2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues and operating expenses

     116       107       114       117  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (15     (8     (14     (17

Interest expense, net

     4       2       3       2  

Net loss before provision for income taxes

     (19     (10     (17     (19

Provision for income taxes

                        
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (19 %)      (10 %)      (17 %)      (19 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (unaudited)

 

     Three Months Ended     Variance  
(in thousands)    Mar 31, 2017     Mar 31, 2016     Dollar     Percent  

Net revenues

   $ 13,990     $ 15,092     $ (1,102     (7 %) 

Cost of revenues and operating expenses:

        

Cost of revenues

     5,129       5,318       (189     (4

Center operations

     5,687       5,563       124       2  

General and administrative expenses

     3,010       3,178       (168     (5

Depreciation and amortization

     2,201       2,181       20       1  
  

 

 

   

 

 

   

 

 

   

Total cost of revenues and operating expenses

     16,027       16,240       (213     (1
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (2,037     (1,148     889       (77

Interest expense, net

     562       391       171       44  
  

 

 

   

 

 

   

 

 

   

Net loss before income taxes

     (2,599     (1,539     1,060       (69

Provision for income taxes

     18       7       11       157  
  

 

 

   

 

 

   

 

 

   

Net loss

   $ (2,617   $ (1,546   $ 1,071       (69 %) 

Net revenues. The decrease in net revenue between the three months ended March 31, 2017 and the three months ended March 31, 2016 was primarily due to $0.9 million less deferred revenue being recognized as revenue between the comparable periods. The higher amount of deferred revenue recognized as revenue in the first quarter of 2016 was partially due to increased year-end discounting of paid-in-full memberships at the end of 2015, which drove sales of such memberships and thereby increased the deferred revenue balance going into 2016. We did not repeat the same year-end discounting of paid-in-full memberships in the fourth quarter of 2016. As a result, the deferred revenue balance for paid-in-full memberships going into 2017 was $0.6 million lower, leading to less revenue recognized in the first quarter of 2017 from previously sold paid-in-full memberships. During the first quarter of 2017, we sold more class packages and paid-in-full memberships (which require a longer period of time to be recognized as revenue in comparison to our other sales options) than we did in the first quarter in 2016 (in which we had a higher percentage of monthly membership fee revenue in comparison to the first quarter of 2017), which resulted in less revenue being recognized during the first quarter of 2017. We believe the implementation of our strategy to sell more class packages allows us to better serve our students and will draw a broader student base over time. We anticipate our deferred revenue, subject to refunds, to be recognized as net revenue over time as it is deemed earned based on pattern of usage or the applicable product’s expiration period. Other changes in net revenues between the comparable periods include an increase in net revenues from teacher trainings by $11,308, a decrease in net revenues from workshops by $0.2 million and a decrease in net revenues from retail sales by $0.2 million. The decrease in net revenues from workshops was primarily due to a reduction in the number of workshop events held in the first quarter of 2017 compared to the first quarter of 2016. The decrease in net revenues from retail sales was due to a new customer loyalty program implemented in February 2016 in which we offered price discounts on our retail merchandise.

Cost of revenues. The decrease in cost of revenues between the three months ended March 31, 2017 and the corresponding period in 2016 was primarily due to a decrease of $0.2 million in workshop and retreat costs caused by conducting less workshops and retreats in the first quarter of 2017 in comparison to the first quarter of 2016.

 

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Center operations. Center operations expense increased between the three months ended March 31, 2017 and the three months ended March 31, 2016 primarily due to the opening of two studios in the first quarter of 2016 in Los Angeles that did not have an entire quarter of expenses as compared to the first quarter of 2017 which included a full quarter of expenses for these studios plus the impact of two new studios that were opened after the first quarter of 2016. The above changes resulted in increased studio lease costs of $0.2 million from the first quarter of 2016 as compared to the first quarter of 2017.

General and administrative. General and administrative expenses decreased between the three months ended March 31, 2017 and the three months ended March 31, 2016 primarily due to a reduction in our non-studio employee headcount that resulted in a decrease of $0.4 million in payroll expense and a decrease in promotional and marketing expenses of $0.2 million, partially offset by an increase of $0.5 million in stock-based compensation expense due to the grant of options to purchase up to 1,425,641 shares of our common stock in the first quarter of 2017.

Depreciation and amortization. There was no material change in depreciation and amortization expense between the three months ended March 31, 2017 and March 31, 2016.

Interest expense, net. There was no material change in interest expense, net between the three months ended March 31, 2017 and March 31, 2016.

Provision for income taxes. There was no material change in the provision for income taxes between the three months ended March 31, 2017 and March 31, 2016. Our effective income tax rate was (0.96)% for the three months ended March 31, 2017 and (0.46)% for the three months ended March 31, 2016.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

    Year Ended December 31,      Variance  
(dollars in thousands)   2016     2015      Dollar     Percent  

Net revenues

  $ 55,090     $ 48,506      $ 6,584       14

Cost of revenues

    20,535       17,105        3,430       20  

Center operations

    22,469       19,859        2,610       13  

General and administrative expenses

    11,067       12,556        (1,489     (12

Depreciation and amortization

    8,893       6,515        2,378       37  

Goodwill impairment

          927        (927     (100
 

 

 

   

 

 

    

 

 

   

 

 

 

Total cost of revenues and operating expenses

    62,964       56,962        (6,002     11  

Interest expense, net

    1,587       746        841       113  

Provision for income taxes

    43       13        30       231
 

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

  $ (9,504   $ (9,215    $ 289       (3 )% 

Net revenues. Net revenues increased in 2016 due primarily to a 21% increase in the number of visits to our studios from 2015, the opening of four additional studios in 2016 (two in Los Angeles, one in Northern California and one in Boston), the full-year impact from the consolidation of the 17 studios we acquired during 2015 (eight in Northern California, seven in Baltimore and two in Boston) and the three studios we opened during 2015 (two in Los Angeles and one in Northern California), net of the impact from the closure of two studios in 2016 (one in Orange County and one in Northern California). In 2016, our net revenues were also favorably impacted by our moving towards a more flexible pricing strategy to include class packages (in addition to memberships and drop-in classes) as well as moving away from our past reliance on a discounted promotional pricing strategy focused on memberships. In 2016, net revenues from class packages increased $2.9 million and net revenues from teacher training

 

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increased $1.2 million. These increases were partially offset by a decrease in net revenues from paid-in-full memberships of $0.8 million. In comparing net revenues derived from teacher training programs, workshops and the sale of yoga-related retail merchandise in 2015 and 2016, net revenues from our teacher training program increased by $1.2 million, net revenue from workshops increased by $0.2 million and net revenues from our retail sales decreased by $0.2 million primarily driven by increases in visits and a net increase in studios.

Cost of revenues. Cost of revenues increased in 2016 due primarily to a 24% increase in the number of classes we held from 2015, the opening of four additional studios in 2016, the full-year impact from the consolidation of the 17 studios we acquired during 2015 and the three studios we opened during 2015, net of the impact from the closure of two studios in 2016. The above changes resulted in increased teacher payroll costs of $2.9 million from 2015 to 2016.

Center operations. Center operations expense increased in 2016 due the opening of four additional studios in 2016, the full-year impact from the consolidation of the 17 studios we acquired during 2015 and the three studios we opened during 2015, net of the impact from the closure of two studios in 2016. The above changes resulted in increased lease expenses of $2.4 million in 2016 due to annual rent escalations in some of our studios’ lease agreements and additional property tax obligations.

General and administrative. General and administrative expenses decreased in 2016 mainly due to operational efficiency initiatives we implemented during the year, which primarily included a reduction in our non-studio employee headcount, that resulted in a decrease of $0.5 million. General and administrative expenses decreased in 2016 also because of a reduction of our acquisition-related professional expenses of $0.3 million from 2015 to 2016 and a reduction in marketing expense from 2015 to 2016 of $0.1 million, offset by an increase in severance costs of $0.2 million from 2015 to 2016 as a result of a reduction in headcount of non-studio employees.

Depreciation and amortization. Depreciation and amortization expense increased in 2016 primarily due to the intangible assets and property, plant and equipment resulting from our 16 studio acquisitions in 2015 being subject to a full year of depreciation or amortization for the 2016 fiscal year.

Goodwill impairment. We recognized an impairment of goodwill of $0.9 million in 2015. We did not record any impairment losses related to goodwill in 2016. See “Risk Factors—Risks Related to Our Business and Industry—Any further impairment of goodwill could adversely affect our financial condition and results of operations.”

Interest expense, net. Interest expense, net, primarily consisted of interest expense on the term loans under the Loan Agreement and the 2015 GHP Convertible Notes. Interest expense increased in 2016 due to the term loan under our Loan Agreement and the 2015 GHP Convertible Notes being outstanding for the full year.

Provision for income taxes. Provision for income taxes increased in 2016 primarily due to a $36,508 increase in our net deferred tax liability from December 31, 2015 to December 31, 2016.

 

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Quarterly Results of Operations (unaudited)

The following tables set forth our quarterly unaudited consolidated statements of operations data in dollars and as a percentage of net revenues for each of the nine quarters through the period ended March 31, 2017. We have prepared the quarterly unaudited consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial information in these tables reflects all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of this data. This information should be read together with the audited consolidated financial statements and unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results for any future period.

 

     Three Months Ended  
(in thousands)    Mar 31,
2017
    Dec 31,
2016
    Sept 30,
2016
    Jun 30,
2016
    Mar 31,
2016
    Dec 31,
2015
    Sept 30,
2015
    Jun 30,
2015
    Mar 31,
2015
 

Net revenues

   $ 13,990     $ 13,173     $ 13,495     $ 13,330     $ 15,092     $ 13,375     $ 12,467     $ 11,582     $ 11,082  

Cost of revenues and operating expenses

                  

Cost of revenues

     5,129       4,990       4,943       5,284       5,318       4,855       4,234       3,946       4,070  

Center operations

     5,687       5,639       5,735       5,532       5,563       5,099       5,102       4,845       4,813  

General and administrative expenses

     3,010       2,592       2,572       2,725       3,178       3,479       2,832       2,876       3,369  

Depreciation and amortization

     2,201       2,235       2,250       2,227       2,181       2,080       1,934       1,378       1,123  

Goodwill impairment

                                   927                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues and operating expenses

     16,027       15,456       15,500       15,768       16,240       16,440       14,102       13,045       13,375  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (2,037     (2,283     (2,005     (2,438     (1,148     (3,065     (1,635     (1,463     (2,293

Interest expense, net

     562       407       399       390       391       380       270       77       19  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (2,599     (2,690     (2,404     (2,828     (1,539     (3,445     (1,905     (1,540     (2,312

Provision (benefit) for income taxes

     18       14       18       4       7       (11     7       6       11  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (2,617   $ (2,704   $ (2,422   $ (2,832   $ (1,546   $ (3,434   $ (1,912   $ (1,546   $ (2,323
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth our unaudited consolidated results of operations for the specified periods as a percentage of our net revenues for those periods.

 

     Three Months Ended  
     Mar 31,
2017
    Dec 31,
2016
    Sept 30,
2016
    Jun 30,
2016
    Mar 31,
2016
    Dec 31,
2015
    Sept 30,
2015
    Jun 30,
2015
    Mar 31,
2015
 

Net revenues

     100     100     100     100     100     100     100     100     100

Cost of revenues and operating expenses

                  

Cost of revenues

     37       37       37       40       35       36       34       34       37  

Center operations

     41       43       42       41       37       38       40       42       44  

General and administrative expenses

     22       20       19       20       21       26       23       25       30  

Depreciation and amortization

     16       17       17       17       14       16       16       12       10  

Goodwill impairment

                                   7                    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues and operating expenses

     116       117       115       118       107       123       113       113       121  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (15     (17     (15     (18     (8     (23     (13     (13     (21

Interest expense, net

     4       3       3       3       2       3       2       1        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (19     20       (18     (21     (10     (26     (15     (14     (21

Provision (benefit) for income taxes

                                                      
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (19 %)      (20 %)      (18 %)      (21 %)      (10 %)      (26 %)      (15 %)      (14 %)      (21 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents a reconciliation of Adjusted EBITDA and Studio-Level EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP. For more information on our use of Adjusted EBITDA and Studio-Level EBITDA, and to the limitations of using such non-GAAP measurements, see footnote 3 in the section captioned “Selected Consolidated Financial Data”.

 

     Three Months Ended  
(in thousands)    Mar 31,
2017
    Dec 31,
2016
    Sept 30,
2016
    Jun 30,
2016
    Mar 31,
2016
    Dec 31,
2015
    Sept 30,
2015
    Jun 30,
2015
    Mar 31,
2015
 

Net loss

   $ (2,617   $ (2,704   $ (2,422   $ (2,832   $ (1,546   $ (3,434   $ (1,912   $ (1,546   $ (2,323

Interest expense, net

     562       407       399       390       391       380       270       77       19  

Provision for income taxes

     18       14       18       4       7       (11     7       6       11  

Depreciation and amortization

     2,201       2,235       2,250       2,227       2,181       2,080       1,934       1,378       1,123  

Goodwill impairment

                                   927                    

Deferred rent(a)

     31       (32     61       66       181       65       223       149       366  

Stock based compensation(b)

     539       2       2       12       7       10       7              

Acquisition professional expenses(c)

                                   118       69       38       39  

Severance(d)

     82       124       86       15             10       42       46        

Executive recruiting(e)

                 9       47             93                    

Great Hill Partners expense reimbursement fees(f)

     25       25       25       25       25       25       25       25       25  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 841     $ 71     $ 428     $ (46   $ 1,246     $ 263     $ 665     $ 173     $ (740

Other general and administrative expenses(g)

     2,364       2,446       2,454       2,627       3,147       3,231       2,708       2,788       3,310  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Studio-Level EBITDA

   $ 3,205     $ 2,517     $ 2,882     $ 2,581     $ 4,393     $ 3,494     $ 3,373     $ 2,961     $ 2,570  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Over the periods presented, we have experienced a growth trend in net revenue, cost of revenues and center operations due to studios that we have acquired and opened. Net revenue for the three months ended March 31, 2016 also included the favorable impact of $0.9 million of revenue recognized in the period from sales of paid-in-full memberships and teacher trainings in prior periods (for which payment was made in advance) originally recorded as deferred revenue in such periods. The increase in cost of revenue as a percentage of net revenue for the three months ended June 30, 2016 was the result of a higher number of workshop events scheduled during the quarter. Workshop events have a higher cost of revenues as a percentage of net revenue compared to our service offerings. The general decrease in general and administrative expense as a percentage of net revenue since the three months ended March 31, 2015 was primarily related to the leveraging of our infrastructure as we grew our studio base.

Liquidity and Capital Resources

We have a history of operating losses and an accumulated deficit of $36.3 million as of March 31, 2017. In addition, we had negative working capital of $3.4 million at March 31, 2017, $3.7 million at December 31, 2016 and $14.4 million at December 31, 2015. Historically, we have satisfied our liquidity needs primarily through cash generated from financing activities, including cash generated from our Loan Agreement and convertible notes issued from time to time to Great Hill Partners. 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.

Based upon our current level of operations, we believe that our cash balance on hand, together with the net proceeds of this offering, our cash flow from operations and our ability to draw under our Loan Agreement prior to the closing of this offering will be adequate to meet our short- and long-term liquidity requirements for at least the next twelve months from the date of this prospectus. There can be no assurance that we will sustain positive cash flows from operations or achieve profitability, and incremental funding from Great Hill Partners may be required as needed if this offering is not consummated. If available funds are not adequate, we may need to obtain additional funding or scale back operations.

We utilize operating lease arrangements for all of our studios. We believe that our operating lease arrangements continue to provide the appropriate leverage for our capital structure in a financially efficient manner. Because we lease all of the properties related to our studios, as well as our corporate office, we do not have any debt that is secured by real property.

Selected Cash Flow Data

The following table and discussion presents, for the periods indicated, a summary of cash flow data from operating, investing and financing activities.

 

   

Three Months Ended March 31,

    Year Ended December 31,  
    2017     2016     2016     2015  
(dollars in thousands)   (unaudited)              

Provided by (used in) operating activities

  $ 783     $ (779   $ 762     $ (888

Used in investing activities

    (196     (923     (2,097     (15,124

Provided by (used in) financing activities

    2,956             (526     15,273  

Increase (decrease) in cash and cash equivalents

    3,543       (1,702     (1,861     (738

Cash and cash equivalents at beginning of period

    1,912       3,773       3,773       4,511  

Cash and cash equivalents at end of period

    5,455       2,071       1,912       3,773  

 

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Net cash provided by (used in) operating activities

For the three months ended March 31, 2017, our cash provided by operating activities primarily resulted from our net loss of $2.6 million, which included depreciation and amortization expense of $2.2 million and stock-based compensation expense of $0.5 million. Prepaid expenses and other current assets decreased $1.1 million due to a decrease in prepaid rent.

For the three months ended March 31, 2016, our cash used in operating activities primarily resulted from our net loss of $1.5 million, which included depreciation and amortization expense of $2.2 million. Deferred revenue decreased $1.0 million due to timing of when membership and class package sales occurred and when the corresponding revenue recognized for such sales occurred.

For the year ended December 31, 2016, our cash provided by operating activities primarily resulted from our net loss of $9.5 million, which included depreciation and amortization expense of $8.9 million, and tenant improvement allowances received of $1.6 million. Prepaid expenses and other assets increased $0.9 million due to increases in prepaid rent, and deferred revenue decreased $0.6 million due to timing of when memberships and class packages had been sold and when the corresponding revenue recognized for such sales occurred.

For the year ended December 31, 2015, our cash used in operating activities primarily resulted from our net loss of $9.2 million, which included depreciation and amortization expense of $6.5 million, and impairment losses of $0.9 million. Deferred rent increased $0.8 million primarily due to accounting adjustments for leases entered into prior to Great Hill Partner’s acquisition of us.

Net cash used in investing activities

For the three months ended March 31, 2017, our cash used in investing activities primarily resulted from $0.2 million of purchases of property and equipment.

For the three months ended March 31, 2016, our cash used in investing activities primarily resulted from $0.9 million in construction costs of new studios.

For the year ended December 31, 2016, our cash used in investing activities primarily resulted from $2.1 million of purchases of property and equipment.

For the year ended December 31, 2015, our cash used in investing activities primarily resulted from $11.5 million of cash used for acquisitions (net of cash acquired) and $3.4 million of purchases of property and equipment.

Net cash provided by (used in) financing activities

For the three months ended March 31, 2017, our cash provided by financing activities primarily resulted from the issuance of 2017 GHP Convertible Notes, in the aggregate principal amount of $3.2 million, less $0.2 million in payments to settle promissory notes related to acquisitions made in fiscal year 2015.

For the three months ended March 31, 2016, there were no cash flows from financing activities.

For the year ended December 31, 2016, our cash used in financing activities primarily resulted from principal payments under our subordinated note agreement of $0.5 million, partially offset by $17,877 of net proceeds from the issuance of shares of our common stock.

For the year ended December 31, 2015, our cash used in financing activities primarily resulted from our receipt of $7.0 million from the funding of our term loans under the Loan Agreement and

 

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$10.2 million from the issuance of the 2015 GHP Convertible Notes, partially offset by a $1.4 million repayment on our equipment line, $0.5 million debt issuance cost and $16,581 principal payment on our notes payable.

Credit and Other Obligations

Loan Agreement with Deerpath Funding LP

On July 24, 2015, we entered into a Loan Agreement by and among us and our subsidiaries, Deerpath Funding, LP, as administrative agent and collateral agent and the lenders party thereto. The Loan Agreement provided YogaWorks, Inc. and certain of our subsidiaries (the “Borrowers”) with an initial senior secured term loan of $5.0 million, and upon our meeting certain conditions, gave the Borrowers the ability to borrow up to an additional $15.0 million in senior secured term loans. On July 24, 2015, the Borrowers borrowed $5.0 million under the Loan Agreement. In December 2015, the Borrowers borrowed an additional $2.0 million pursuant to a First Amendment to Loan Agreement. As of March 31, 2017, the outstanding principal balance under the Loan Agreement was $6.9 million, and bore interest at the LIBOR rate plus 8.00%. At that date, the Borrowers had $13.1 million of incremental borrowing availability under the Loan Agreement. On March 27, 2017, we entered into the Second Amendment to Loan Agreement. Pursuant to the Second Amendment, effective as of January 1, 2017 to March 31, 2018, the loans under the Loan Agreement will bear interest at a rate of LIBOR plus 8.00%, with a decrease to LIBOR plus 7.50% upon the consummation of our initial public offering if our initial public offering is consummated on or prior to December 31, 2017 and results in aggregate cash proceeds of at least $25.0 million. Upon the first fiscal quarter we are in compliance with our Loan Agreement’s financial ratio covenants, starting with the fiscal quarter ending March 31, 2018, and so long as there is no default or potential event of default under the Loan Agreement, the applicable interest rate on our loans will be LIBOR plus 7.00%.

Borrowings under our Loan Agreement are secured, subject to permitted liens, by a first-priority lien on, and perfected security interest in, substantially all of our and our subsidiaries’ assets. In addition, we and our subsidiary, Whole Body, Inc., each agreed to guarantee the obligations of the Borrowers under the Loan Agreement. Our Loan Agreement contains customary representations and warranties and customary events of default, as well as affirmative and negative covenants, including restrictions concerning the incurrence of indebtedness and liens, mergers, consolidations and acquisitions, sales of assets, the conduct of our business, investments, dividends, redemptions and distributions and affiliated transactions. Our Loan Agreement also requires us to maintain compliance with a senior debt to EBITDA ratio, not to exceed 3.00 to 1.00, and a fixed charge coverage ratio of at least 1.25 to 1.00. Pursuant to the Second Amendment to Loan Agreement, dated March 27, 2017, our lenders agreed to not require testing of any of our financial covenant ratios under the Loan Agreement for the fiscal quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017. Under the Second Amendment, we could be required to make a mandatory prepayment of the debt under the Loan Agreement equal to $1.3 million upon the earliest of any of the following events: (i) if we do not consummate our initial public offering by December 31, 2017; (ii) if we fail to comply with the financial ratio covenants under the Loan Agreement for the fiscal quarter ending March 31, 2018; or (iii) if we fail to deliver monthly financial statements as of, and for the period ending on, March 31, 2018.

We intend to cancel the Loan Agreement in connection with the closing of this offering.

Great Hill Convertible Notes

On June 3, 2015, we issued to Great Hill Partners the 2015 GHP Convertible Notes in an aggregate principal amount of $10.2 million, each with an annual interest rate of 8%. As part of a series of recapitalization transactions completed on March 24, 2017, the aggregate principal amount of the 2015 GHP Convertible Notes (as amended on that date), together with accrued and unpaid interest, was converted into 1,407,632 shares of our common stock.

 

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On March 27, 2017, we issued to Great Hill Partners the 2017 GHP Convertible Notes in the aggregate principal amount of $3.2 million, with an annual interest rate of 8% and with a maturity date of March 27, 2018. These convertible notes are convertible into shares of our common stock, at the option of the holder, at a conversion rate of $8.40 per share of common stock. We intend to repay the 2017 GHP Convertible Notes in connection with the closing of this offering.

Subordinated Notes

In connection with our acquisition of studios in 2015, we issued two subordinated promissory notes to seller parties in the acquisitions with a principal amount of $200,000 on September 8, 2015 that matured on February 8, 2017 and $500,000 on October 27, 2015 that matured on October 27, 2016 (the “Subordinated Notes”). These subordinated promissory notes carried imputed interest at the applicable federal rate and were subordinated to indebtedness under the Loan Agreement. The subordinated note in the principal amount of $500,000 was fully repaid in 2016 and the subordinated note in the principal amount of $200,000 was fully repaid in February 2017.

Redeemable Preferred Stock

In connection with the formation of YogaWorks, Inc. in 2014, we issued 10,000 shares of redeemable preferred stock at a price per share of $5,050 per share. The redeemable preferred stock had a cumulative dividend rate of 8.0% percent per annum. On March 24, 2017, all of our shares of redeemable preferred stock were converted into 7,426,169 shares of our common stock.

Off-Balance Sheet Arrangements

As of December 31, 2016, we did not have any off-balance sheet arrangements, except for operating leases entered into in the normal course of business.

Contractual Obligations

The following table and discussion presents contractual obligations and commercial commitments as of December 31, 2016.

 

(dollars in thousands)    Total      2017      2018-2019      2020-2021      Thereafter  

Operating lease obligations

   $ 41,652      $ 8,785      $ 12,869      $ 8,996      $ 11,002  

Loan Agreement(1)

     7,156        419        700        6,038         

2015 GHP Convertible Notes(2)

     11,635        11,635                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Minimum Payments

   $ 60,443      $ 20,839      $ 13,569      $ 15,034      $ 11,002  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Consists of our obligations under our Loan Agreement and the Subordinated Notes. In February 2017, we repaid the full outstanding balance under our Subordinated Notes, which had an outstanding balance of $0.2 million as of December 31, 2016. We intend to repay the outstanding balance under the Loan Agreement in connection with the closing of this offering and cancel that facility.
(2) On March 24, 2017, the 2015 GHP Convertible Notes, which had an outstanding balance of $11.6 million as of December 31, 2016, were converted into shares of our common stock. On March 27, 2017, we issued to Great Hill Partners the 2017 GHP Convertible Notes in the aggregate principal amount of $3.2 million, which we intend to repay in connection with the closing of this offering.

We also enter into purchase commitments related to retail, equipment, construction and other service-related arrangements that occur in the normal course of business. Such commitments are excluded from the above table, as they are typically short-term in nature and are not material as of December 31, 2016.

 

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Other long-term liabilities excluded from the above table include our 2017 GHP Convertible Notes, deferred rent and deferred tax liabilities. In addition, other unrecorded obligations that have been excluded from the contractual obligations table include contingent rent payments, property taxes, insurance payments and common-area maintenance costs.

Critical Accounting Policies and Use of Estimates

Our discussion and analysis of operating results and financial condition are based upon our consolidated financial statements included elsewhere in this prospectus. The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. We base our estimates on assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates.

Our critical accounting policies are those that materially affect our consolidated financial statements and involve difficult, subjective or complex judgments by management. A thorough understanding of these critical accounting policies is essential when reviewing our consolidated financial statements. We believe that the critical accounting policies listed below are the most difficult management decisions as they involve the use of significant estimates and assumptions as described above.

We are an emerging growth company 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 elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Revenue Recognition

We generate 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. Customers typically pay upfront for their services. 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 advance. There are primarily two types of memberships, monthly memberships and paid-in-full memberships (for six or twelve months), and revenues are recognized ratably 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. Our deferred revenue balance was $4,478,318 as of March 31, 2017, $4,593,076 as of December 31, 2016 and $5,242,957 as of December 31, 2015. Our deferred revenue balance is reduced by refunds in the reporting period which results in less revenue recognized over the service term than originally anticipated. The accounts receivable balance was $99,992 as of March 31, 2017, $63,736 as of December 31, 2016 and $67,452 as of December 31, 2015 and is included in prepaid expenses and other current assets on our consolidated balance sheets.

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. We sell 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. We do not estimate gift

 

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card breakage. Our gift card liability balance was $395,144 as of March 31, 2017, $442,947 as of December 31, 2016 and $343,401 as of December 31, 2015 and is included in deferred revenue on our consolidated balance sheets.

Income Taxes

Income taxes are accounted for under the asset and liability method prescribed by ASC 740 “Income Taxes”. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. We measure tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in income in the period that includes the enactment date. We provide a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

We follow ASC Topic 740-10 which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. Therefore, there will only be recognition where a tax position is more likely than not to be sustained upon examination by taxing authorities. We recognize interest and penalties on taxes, if any, related to unrecognized tax benefits as income tax expense. As of March 31, 2017, December 31, 2016 and 2015, we had no material uncertain tax positions to be accounted for in the financial statements; accordingly, no interest or penalties on taxes were recognized in the three months ended March 31, 2017, the year ended December 31, 2016 or the year ended December 31, 2015.

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

Asset Impairment Assessments

Valuation of Long-Lived Assets and Finite-Lived Intangible Assets. We review long-lived assets other than goodwill and indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation of recoverability is required, the estimated undiscounted future cash flows directly associated with the asset are compared to the asset’s carrying amount. If the estimated future cash flows from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the asset to its estimated fair value. No impairment was recognized to long-lived assets or finite-lived intangible assets in 2016 or in 2015.

Recoverability of Goodwill. Goodwill is not amortized but rather is tested for impairment on annual basis, or if there is a triggering event or circumstances require, on an interim basis, in accordance with ASC Topic 350 “Intangibles—Goodwill and Other”. We perform our goodwill impairment test annually in the fourth quarter of the year, or more frequently if impairment indicators arise. We review goodwill for impairment utilizing either a qualitative assessment or a two-step process. If we decide that it is appropriate to perform a qualitative assessment and conclude that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If we perform the two-step process, the first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The fair values of goodwill are determined using

 

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valuation techniques based on estimates, judgments and assumptions management believes are appropriate in the circumstances. No impairment was recognized to goodwill in the three months ended March 31, 2017 or for the year ended December 31, 2016. We recorded a write-down of goodwill of $0.9 million in 2015.

We incurred a net loss of $2.6 million for the three months ended March 31, 2017, $1.5 million for the three months ended March 31, 2016, $9.5 million for the year ended December 31, 2016 and $9.2 million for the year ended December 31, 2015 and had net cash provided by operating activities of $0.8 million for the year ended December 31, 2016. If we continue to experience net losses or our cash flows from operating activities decline or become negative, it could require us to lower our assessment of the fair value of our business. If this were to occur, we could be required to record additional material impairment charges to goodwill which could have a material adverse effect on our business, financial condition and results of operations.

Stock-Based Compensation

We record stock-based compensation expense in accordance with the provisions of ASC 718 Compensation—Stock Compensation for all equity awards made to employees based on the estimated fair value of such awards as of the grant date. The expense is recognized over the employee’s requisite service period (the vesting period, generally four years). The fair value of shares of our common stock is estimated using a generally accepted valuation methodology, see Note 13 to our audited consolidated financial statements included in this prospectus, and the fair value of the options is calculated using the Black-Scholes option-pricing model. Using this option-pricing model, the fair value of each employee award is estimated on the grant date. The fair value is expensed on a straight-line basis over the vesting period. The expected volatility assumption is based on the volatility of the share price of comparable public companies. The expected life is determined using the “simplified method” permitted by Staff Accounting Bulletin Numbers 107 and 110 (the midpoint between the term of the agreement and the weighted average vesting term). The risk-free interest rate is based on the implied yield on a U.S. Treasury security at a constant maturity with a remaining term equal to the expected term of the option granted. The dividend yield is zero, as we have never declared a cash dividend. We recognize equity-based compensation expense for only those options expected to vest on a straight-line basis over the requisite service period of the award.

On February 11, 2016, the board of directors of the Company granted options to purchase 832 shares of our common stock with an exercise price of $9.20 per share, which was also the fair value per share price of common stock as determined by our board of directors on the grant date. In conjunction with our year-end procedures, our board of directors obtained a third-party valuation of our common stock as of December 2015, which suggested a fair value of $9.20 per share. Our board of directors considered this valuation together with other objective and subjective factors in reaching its determination of the fair value of our common stock as of February 11, 2016, the option grant date. In particular, our board of directors considered the general financial condition of the business, the continued illiquidity of our common stock given our status as a private company, our capital resources at that time, and the risks and uncertainties associated with further development and expansion of our business. In addition, as part of the year-end procedures for fiscal 2016, the Company obtained a third-party valuation of our common stock as of December 2016, which determined a fair value of $8.40 per share. The decrease in the fair value of our common stock when compared to the prior year is due primarily to changes in market conditions, expectations, and assumptions appropriate for our company at the time of valuation.

On March 24, 2017, the Board of Directors of the Company amended the 2014 Stock Option and Grant Plan to increase the shares of Common Stock reserved for issuance thereunder to 1,695,484. In addition, the board of directors approved the grant of options to purchase 1,425,641 shares of our

 

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common stock to certain employees and consultants. The options granted had an exercise price of $8.40 per share, which was greater than the fair value of our common stock as determined by our board of directors on the grant date. In conjunction with our quarter-end procedures and our granting of stock options in the quarter, our board of directors obtained a third-party valuation of our common stock as of March 24, 2017, which suggested a fair value of $5.88 per share. The enterprise valuation that we obtained as of March 24, 2017 increased when compared to the December 2016 enterprise valuation. The increase in fair value was driven largely by the increased likelihood of an initial public offering which resulted in higher financial multiples that comparable public companies are trading at, higher multiples that recent transactions have been priced at, and the increase in our revenue and other financial performance growth rates used in the December 2016 valuation. We believe it is reasonable to expect that the completion of an initial public offering will add value to the shares of our common stock because they will have increased liquidity and marketability. The decrease in fair value per share as compared to the prior year per share value is due primarily to the dilutive effect of increased outstanding common stock due to the conversion of the 2015 GHP Notes and our redeemable preferred stock to common stock.

Stock-based compensation expense was $538,872 for the three months end March 31, 2017, $23,443 for the year ended December 31, 2016 and $16,942 for the year ended December 31, 2015 and was recorded in cost of revenue and general and administrative expenses.

Valuation of Common Stock

Given the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including our financial and operating history; recent equity financings and the related valuations; the estimated present value of our future cash flows; industry information such as market size and growth; market capitalization of comparable companies and the estimated value of transactions such companies have engaged in; the rights, preferences and privileges of our preferred stock relative to those of our common stock; equity market conditions affecting comparable public companies; the lack of marketability of our common stock; and macroeconomic conditions. In addition, our board of directors also considered valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Estimates of fair value are sensitive to such factors.

For valuations after the completion of this offering, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

Recent Accounting Pronouncements

See Note 3 to our consolidated financial statements included elsewhere in this prospectus for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this prospectus.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are exposed to interest rate risk through fluctuations in interest rates on our debt obligations. Borrowings under our Loan Agreement carry interest at a floating rate. We seek to manage exposure

 

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to adverse interest rate changes through our normal operating and financing activities. As of March 31, 2017, we had $6.9 million in outstanding borrowings under our Loan Agreement at an interest rate of LIBOR + 8%, which was 9%. A 1% increase in the interest rate on the Loan Agreement would result in an increase of our interest expense by approximately $69,000. Effective as of January 1, 2017, the loans under the Loan Agreement bear interest at a rate of LIBOR plus 8.00%, with a decrease to LIBOR plus 7.50% upon the consummation of this offering, if this offering is consummated on or prior to December 31, 2017 and results in aggregate cash proceeds of at least $25.0 million. We intend to cancel the Loan Agreement in connection with the closing of this offering.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you our business will not be affected in the future by inflation.

 

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BUSINESS

Our Mission

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.

YogaWorks for Everybody

We are one of the largest and fastest growing providers of high quality yoga instruction in the U.S., with almost 3 million student visits in 2016 and 50 company-owned studios, as well as our Internet-based digital media service, MyYogaWorks.com. YogaWorks is the only national, multi-discipline yoga instruction company, and our highly recognizable brand is present in six geographically dispersed U.S. markets—Los Angeles, Orange County (California), New York City, Northern California, Boston and Baltimore/Washington D.C. Our teachers taught more than 180,000 classes in our conveniently located studios and attracted more than 225,000 students in 2016. Since 1990, we have offered the YogaWorks teacher training program, which we believe is the gold standard within the yoga community and respected across the globe for instructing teachers on how to teach yoga to a broad population of students. We believe our YogaWorks teacher training program extends our brand beyond our current six markets and that many of our 11,000 graduates serve as ambassadors of the YogaWorks brand and help us identify new markets.

We believe our approach to yoga has broad appeal and positions us for continued success. We strive to make yoga accessible to everyone and offer a lifestyle approach that can be applied on and off the mat. We help people improve their physical and mental well-being through the 5,000 year old tradition of yoga, which we practice as a community-oriented experience. Our bright, clean and inspiring studios offer a broad range of yoga disciplines and ability levels to meet the needs of a wide variety of students—from fast-paced flow to soothing restorative or integrated fitness classes. Our classes are designed to safely challenge practitioners of all levels, making yoga accessible to a diverse population ranging from beginners and casual practitioners to seasoned yogis and professional athletes. Students with limited mobility or those intimidated by traditional gym environments can stretch their bodies and their minds at YogaWorks to achieve a sense of accomplishment and relaxation and advanced yogis can be challenged by our seasoned teachers who provide a challenging and rigorous curriculum to deepen their practice.

We are told some students find yoga to be the only form of exercise they need or wish to do. Others enjoy how yoga complements their other exercise routines, as yoga can enhance performance and reduce injuries by helping people stretch to increase flexibility, strength, balance and focus. Whatever the motivation or frequency of use, we aim to support our students’ mental and physical well-being in addition to building confidence and a sense of possibility that lasts long after rolling up one’s mat. Our teachers practice safe techniques and our studios seek to be a nexus of health and wellness for our students.

Our student experience centers on three key benefits:

Connection: Our first goal is to help our students connect their bodies with their minds. In fact, the word “yoga” means to unite or join. We offer our students a variety of class options ranging from rigorous physical exertion to classes that provide a deep stretch that is low-impact. Each class requires a student to connect breathing with movement, necessitating tremendous focus. This concentration, in turn, helps our students to block out their worries, cares and distractions. Yoga offers a rare opportunity to slow down, tune out the world and work on improving one’s physical and mental well-being. We believe that healthy physical

 

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strengthening and stretching combined with meditation can lead to a feeling of centered positivity and relief from stress that so many seek.

Community: We feel the YogaWorks studio experience creates an emotional connection between our teachers and students that can last long after they leave the studio. Our inviting atmosphere fosters a supportive environment where students can work toward their fitness and mindfulness goals and meet others with similar interests. Our inclusive, non-judgmental approach enables students of all ages and ability feel accepted and respected. Friendly and trained greeters welcome our students, inform them about the YogaWorks offering, and assist them in finding the right class. During class, teachers combine group instruction with hands-on, one-on-one attention, as desired, to individualize each experience and improve a student’s technique. This student-teacher connection is an important step in building community. While each studio has a unique look and feel, all of our studios are unified by a shared brand, community-oriented mission, value system and focus on quality teaching and welcoming customer service. Studios are encouraged to get involved with their community by participating in local events, sponsoring special donation classes for local causes or reaching out to those who have not previously practiced yoga but may be interested in doing so.

Calm: From the moment a student enters our studio, we strive to create a tranquil space. Our practice rooms prepare students for a completely different experience geared towards mind-body balance. We do not generally allow cell phones or have mirrors or televisions as we believe they can be distracting and outwardly focused. The highlight of the YogaWorks experience is the class work, which is designed to help students strengthen their mind and body as well as find a sense of connection with their own center. As an additional benefit, most of our classes end with five to ten minutes of deep relaxation, or savasana, to engender a sense of calm that our students can take back with them to their everyday lives, after leaving our studios. In fact, these last few minutes of each class are often cited as our students’ favorite moment of each class and students leave visibly relaxed and calm—a feeling which is unique to the yoga experience.

Since 1990, we have offered our own teacher training program that derives its inspiration from combining three different respected yoga styles to create a unique YogaWorks approach. We believe our teacher training program is respected within the yoga community for training teachers how to tailor and curate classes, have a presence in the room and truly teach rather than focusing on memorizing and repeating rote sequences of postures. More than 11,000 teachers have graduated from our program since its inception, with alumni in nearly every state in the U.S. and numerous countries around the world.

We believe our teacher training offerings enhance our brand, provide us with a steady stream of well-trained, talented teachers to fill our schedules, and help us maintain a leadership position in the industry. Our training program is also an effective outreach tool, as our graduates often become ardent champions of our brand and programming. Additionally, by offering teacher classes in geographies where we do not operate a studio, we are able to extend our brand to new U.S. regions.

To make yoga accessible, we offer flexible pricing options that provide greater value with increased class usage. Students can choose from membership programs (monthly, six months or annual), packages of classes or single drop-in classes. Whether students seek a long-term commitment or single session, they can find a studio and class that works for them.

In addition to our in-studio instruction and teacher training programs, YogaWorks has developed, and markets and sells online subscriptions to, MyYogaWorks.com, an on-demand video library of over

 

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1,000 proprietary instructional classes that allows students to practice yoga anytime, anywhere. We believe our MyYogaWorks.com classes are complementary to our in-studio classes as students can focus on a particular pose, hone a skill or continue their practice between visits. Our video classes are expertly taught by YogaWorks-trained teachers. While there is no hands-on instruction or community participation, MyYogaWorks.com offers students another way to connect with us and to access yoga in a convenient manner to further their healthy lifestyle. MyYogaWorks.com streamed almost 700,000 classes to over 18,000 users in more than 145 countries in 2016. Through MyYogaWorks.com, we are also able to extend our brand presence beyond our physical studio footprint and allow our teachers to reach students beyond the classroom.

Strong Financial Performance

As a result of our quality class offerings, talented teachers and solid brand reputation, we have achieved a strong historical financial performance. We derive our revenues from multiple sources, including in-studio instruction and retail sales, teacher training, workshops and subscriptions to MyYogaWorks.com. We believe our compelling value proposition to our students, consisting of competitive pricing for high-quality instruction, has also driven our growth throughout a variety of economic cycles and conditions since we were founded in 1987.

Our significant growth is reflected in:

 

    49 studios at December 31, 2016 reflecting a CAGR of 19.5%, from 24 studios at December 31, 2012 (primarily related to our acquisition of 17 studios in 2015);

 

    2.9 million visits in 2016, reflecting a CAGR of 13.6%, from 1.8 million visits in 2012; and

 

    Net revenues of $55.1 million in 2016, reflecting a CAGR of 10.9%, from $36.4 million in 2012.

 

LOGO

Our recent growth has been driven by our strategy of adding studios primarily through acquisitions and selectively building new studios. Through acquisitions we can quickly gain students, grow our market share and build on the operating momentum of these acquired businesses. Our acquisition strategy also allows us to immediately gain a strong presence in targeted markets and local communities.

We have developed a multi-factor evaluation system that allows us to quickly assess potential acquisition candidates and continually add qualified new targets to our active outreach process. We have also built an efficient due diligence review workflow, and a proven post-acquisition integration methodology that is designed to facilitate a seamless student, teacher and staff transition to the YogaWorks operating model. In addition, we have a proven history of retaining and improving the student and teacher focus of each studio or chain of studios acquired. Our acquired studios have experienced positive results under our ownership, benefiting from being part of our brand and implementing our best practices.

 

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Our Market Opportunity

History of Yoga

Yoga is an ancient practice of movements and poses designed to bring harmony between mind and body. The practice of yoga has roots dating back to 3300-1500 B.C., when some of India’s earliest known writings referenced yoga poses, though these early poses were primarily suggestions for sitting comfortably in meditation. Centuries later, yoga masters began to embrace the physical body itself as a means to achieve the same expanded awareness and freedom from suffering. This was the goal of meditation and yoga teachers began to develop more varied techniques aimed at connecting mind and body. Since its origin, yoga has endured and continue to evolve with hundreds of distinct styles and approaches, all of which involve concentration and focus on being present in order to achieve a mindful state of being, including:

 

•    Anusara

  

•    Iyengar

  

•    Restorative

•    Ashtanga

  

•    Kundalini

  

•    Vinyasa

•    Hatha

  

•    Prenatal

  

•    Yin

Benefits of Yoga

We believe that helping students connect their breathing and movement can yield a powerful result. From increasing strength and flexibility to reduction of stress to clarity of mind, the noted benefits of yoga are many and meaningful. Our students tell us about how calm they feel after class and how they turn to yoga to help them reach their health and wellness goals, manage difficult situations and relieve stress. These benefits are part of the reason that yoga adoption is increasing across all segments of the population, and they are why word-of-mouth is such a major marketing source for us, as students share the benefits of yoga.

In addition to the consistent student feedback on how yoga helps people feel, scientific research has begun to quantify some of the health benefits of practicing yoga, including, but not limited to:

 

    Decreasing disabilities, pain and depression;

 

    Improvements in visuospatial memory (which is important for balance, depth perception and ability to recognize objects); and

 

    Improvements in fatigue, inflammation, blood pressure and cholesterol levels.

 

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Market Awareness, Yoga Participation and Spend

The practice of yoga in the U.S. is gaining popularity. According to the IBISWorld Report, approximately 37 million Americans practiced yoga in 2016, up from approximately 20 million in 2012, representing 80% growth. According to the Sports Club Advisors, Inc. Industry Snap Shot from April 2016, the number of yoga practitioners is expected to grow to 55.1 million Americans in 2020, representing 50% more participants than 2016. Yoga awareness among Americans has increased from 75% to 2012 to 90% in 2016, according to the 2016 Yoga in America Study. According to the same study, in 2016, yoga practitioners spent over $16 billion on instruction, apparel, equipment and yoga accessories; over one-third of that figure, or approximately $5.8 billion, was spent on instruction in 2016. At $16 billion in 2016, spend on yoga has increased by $6 billion since 2012.

 

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Source: 2016 Yoga in America Study.

Student Profile

Yoga is practiced by a number of desirable consumer demographics and YogaWorks is well positioned to reach a broad population due to our inclusive, multi-discipline and broad program offerings. According to the International Health, Racquet & Sportsclub Association, IHRSA, over 40% of yoga practitioners are part of “Generation Y,” also known as Millennials, who are increasingly focused on wellness and are generally willing to spend more on personal enrichment and authentic and meaningful experiences. Yoga appeals to people of all incomes and education levels. Approximately 60% of practitioners have college degrees and earn over $75,000 in annual income.

 

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Source: The International Health, Racquet & Sportsclub Association, 2016 Health Club Consumer Report (2016).

In addition to the increasing number of young yoga practitioners, there are more male and older yoga practitioners today than ever before and they are growing at meaningful rates. Approximately 10 million men and 14 million practitioners over the age of 50 participated in yoga in 2016. Comparatively, only 4 million men and 4 million practitioners over the age of 55 participated in yoga in 2012. As the U.S. population ages and continues to live longer, many of the benefits of yoga, which

 

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include strength, flexibility and mental clarity, will continue to be relevant to more people across all age groups and drive more people to try yoga. The average age of a yoga practitioner is 32, which is nearly a decade younger than the average age of a person in the traditional fitness market. This is not surprising as yoga is increasingly being offered in schools (from preschool to high school) due to its physical benefits as well as a way of calming students’ minds and reducing stress. This trend towards students learning yoga at a young age continues as more schools and communities adopt this view of yoga.

 

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Source: 2016 Yoga in America Study.

 

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Broad Regional Participation and Highly Fragmented Market

Yoga adoption is fairly evenly distributed across all regions of the U.S., with many opportunities for growth. According to the IBISWorld Report, in 2016 there were estimated to be over 33,000 yoga and pilates studios throughout the U.S. Of these, we believe the vast majority are independently owned with only a few operators who operate 10 or more studios. Yoga studios tend to be more concentrated in the coastal regions of the United States that are more densely populated. YogaWorks studios are located in major metropolitan areas in the Northeast, Mid-Atlantic and Pacific regions of the U.S. But, with yoga penetration still rising, there is ample opportunity for the establishment of additional YogaWorks studios across the entire country.

 

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Source: 2016 Yoga in America Study.

What Sets YogaWorks Apart

We believe we have a number of core competencies that distinguish YogaWorks from other yoga studio operators.

Market Defining Lifestyle Brand Focused on Healthy Living

We believe we are viewed as a trusted authority on the growing yoga movement and have a reputation for being the place where top teachers go to learn and teach. We are a destination for both new students looking to learn more about yoga and also advanced yogis who want to deepen their practice. Today we are one of the largest branded operators of yoga studios in the U.S. by number of studios and number of students, with more than 225,000 practicing students and almost 3 million student visits in 2016. Our brand appeals to a growing segment of society that is increasingly interested in health and wellness.

We believe our positioning as a lifestyle brand has resulted in attractive student economics for us. Driven in part by the large number of students that are referred to us by our teachers or existing students, we have been able to be very efficient in our advertising and marketing expenditures which,

 

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in recent years, has historically been less than 2% of our net revenues. In addition, our students tend to take our classes many times in their lifetime due to the quality of our teachers and facilities. As a result, we have been able to achieve “lifetime value” per student of more than ten times our marketing cost to acquire a new student. The combination of our authentic, high-quality class offerings, our attractive price points and our on-trend, diverse class styles differentiates us and allows us to meet the needs of a wide range of students who care about living a healthy lifestyle.

Appeal to Broad Demographic

We offer a high-quality fitness experience throughout our entire yoga studio network that appeals to a broad student demographic at attractive price points. The variety of classes and styles we teach distinguishes us from our competition and allows us to accommodate students from a wide range of backgrounds. We make yoga accessible to a diverse population ranging from beginners and practitioners with physical limitations and limited mobility, to advanced yogis and super fit athletes. We strive to create a welcoming and non-judgmental environment, where we are able to attract a broad demographic based on age, household income, gender and ethnicity. Our student base is approximately 80% female and 20% male with over 60% of the students earning over $75,000. In addition, our student base is widely distributed in age ranging from 25 to 64 years old with the majority of our students having attended or graduated college. We believe our broad appeal, our flexible pricing and our ability to attract occasional and first-time yoga users as well as advanced practitioners position us to continue to reach large segments of the population in a variety of markets and geographies across the U.S.

High Quality Yoga Experience

Our classes are about peace of mind as well as physical challenge. We provide our students with a welcoming feeling beginning with our clean, bright and aesthetically pleasing studios. As an example, our studios tend not to have mirrors so our students can focus inwards on themselves and their experience and not compare themselves to others. Our classes feature our unique YogaWorks approach: safe, compassionate and skillful teaching. Many classes at YogaWorks offer themes from physical focal points such as releasing the hips or strengthening the upper body to more subtle themes like quieting the mind or opening the heart center. We strive to optimize our class schedules by continuously making small changes to the formats and tracking the impact on student visits. YogaWorks signature classes deliver precise instruction to align breathing with movement and place an emphasis on thoughtful sequencing of poses. All of our classes offer personal modifications (where welcome) so students can refine their practice along the way. We also take pride in our specialty programs which are available for beginning yoga students, children, athletes, seniors and people in need of rehabilitation. Our team of over 1,700 highly-trained, passionate YogaWorks teachers allows us to make yoga accessible to everyone and offer a lifestyle approach that can be applied on and off the mat.

The Gold Standard of Yoga Teacher Training

We differentiate our brand through our world-renowned and well established teacher training programs in which teachers are taught how to teach safe, inspiring yoga classes and engage students on an individual level. Becoming a teacher is not the only motivation for taking a 200-hour teacher training. Many students take the training simply to deepen one’s practice or have a transformational experience. Our innovative and proven teaching program, originally created in 1990, is well-rounded and focuses on providing yoga teachers with the tools to sequence classes and teach skillfully rather than emphasizing memorization of set sequences. This enables our teacher graduates to be comfortable and well-trained to effectively teach anywhere and to any class composition. We have graduated over 11,000 teachers in the program’s 27 year history, across more than 25 countries. We believe we have trained and qualified more advanced yoga teachers than any other yoga operator in the country. Recognized as the gold standard in teacher training, YogaWorks has a 4.73-star (out of 5) rating from Yoga Alliance, a non-profit association of yoga schools and teachers dedicated to the promotion of yoga education and training, of which we are a paid member. We believe our teacher training offerings enhance our brand, provide us with a steady stream of well-trained, talented teachers

 

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to fill our schedules, and help us maintain a leadership position in the industry. Our training program is also an effective outreach tool, as our graduates often become ardent champions of our brand and programming. Additionally, by offering teacher classes in geographies where we do not operate a studio, we are able to extend our brand to new regions.

Strong Studio-Level Economics

We seek to generate attractive studio-level margins by increasing the average number of students per class which in turn provides better return on our fixed costs, such as teacher salaries and rent. We target studios with average annual revenues between $500,000 to $700,000 and a return on our invested capital to be within two to four years of opening a new studio. We approach our acquisition targets seeking similar returns. We believe that our strong studio-level economics are important for us to grow our studio base and successfully execute our acquisition strategy.

We continuously undertake initiatives to improve studio-level economics. Specifically, we regularly monitor and adjust our studio staffing to align with student activity and we frequently optimize our programming and pricing. In addition, we constantly assess and refine our marketing efforts to reduce student acquisition costs and to increase studio visits. We also invest in our studios so that they are well maintained, clean and inspiring spaces that encourage repeat visits.

Acquirer of Choice with History of Successful Acquisitions

We believe that acquisitions can be an effective and profitable way for us to enter new regional markets and gain a thriving student base rather than build new studios that ramp up slowly over time. We have a history of successful yoga studio acquisitions and expect to continue to execute regional growth through acquisitions in the future. Since 1987, YogaWorks has grown from a single studio in Santa Monica, California to 50 studios in six markets, primarily through acquisitions and, to a lesser extent, through new studio openings. In 2015, we accelerated our acquisition strategy by purchasing 17 studios in three geographic markets. We believe we are uniquely positioned to grow via acquisition due to our well-respected brand among studio operators, our multi-discipline approach to yoga that allows us to cohesively integrate studios teaching nearly any style of yoga, our leverageable infrastructure, our experienced management team, our studio acquisition experience and our tested integration procedures. With each acquisition, we further refine our selection criteria and integration methodology, enabling us to preserve the acquired studio’s unique appeal to its local community while successfully increasing visits and net revenues under our ownership.

We believe our success in acquiring studios has been built upon a sense of trust in our highly-respected brand, world-renowned teacher training program and appreciation for the student and local community. As a byproduct of our acquisition philosophy, we have built a positive image with past and present yoga studio owners and seek to be viewed as the acquirer of choice in the highly fragmented yoga industry. We believe that many of the studios we acquire are interested in only selling to us because we have the brand recognition, reputation and operational excellence to increase productivity, adding value to both students and teachers. Many owners interested in selling their studios can benefit from turning over their business management responsibilities to YogaWorks so that they can re-focus on their passion for teaching and working with their yoga students. Teachers seem excited to join our learning-based company as it not only adds a level of cachet to work for one of the most respected yoga brands but we also support teachers with additional teaching opportunities at our studios across the nation. Finally, we believe students benefit when we acquire local studios as they have the ability to access other studios with the same values of quality teaching and focus on learning. Overall, we always strive to honor the legacy of the previous ownership, maintain the continuity of the teachers and preserve the student’s journey while enabling us to achieve our financial and operating goals.

 

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Inspired Culture and Passionate Team

Since our founding in 1987, we have cultivated a positive culture that permeates all aspects of our organization. The core tenets of our culture include a belief in the benefits of yoga practice, transparency, a focus on performance, providing a compelling studio experience and a team-based customer service approach. We strive to recruit candidates into our organization who demonstrate a passion for healthy living and an understanding of the benefits of yoga. We continuously emphasize the need to communicate openly with our students and fellow employees; this transparency is also reflected in our pricing strategy. We are a performance-based culture, incentivized to deliver strong studio visit growth and overall profitability. We believe our culture helps build and support a consistent and motivated group of team members that are passionate about providing a high-quality experience to our students. Teachers bring their collective wisdom and dedication, their years of practice and training, their openness, their care and their creativity into the classroom every day, and they have fun doing it. Studio managers and staff also play a critical role in delivering a positive experience that helps build relationships with our students from the minute they walk through our doors.

Proven and Experienced Senior Management Team

We have assembled a proven and experienced senior management team that is aligned by the same vision and strategic direction for YogaWorks and continues to drive our growth and protect our culture. Our senior management team brings a wealth of experience across a broad range of business disciplines, including consumer products, retail operations, merchandising, e-commerce, direct consumer marketing, brand development, finance, real estate and information technology. Additionally, our management team has extensive experience building consumer lifestyle brands. We believe our senior management team is a key driver of our success and is well-positioned to execute our growth strategy.

Our Growth Strategy

We believe we have significant opportunities to enhance our leadership in the yoga studio industry and improve profitability through strategic acquisitions and organic growth. This growth will fuel our ability to continue to make high-quality yoga accessible to everyone—dedicated yogis and beginners alike. Key elements of our growth strategy are as follows:

Grow our Studio Base

We believe we are ideally positioned to consolidate the highly fragmented yoga studio market. We plan to strengthen our presence in existing markets and selectively enter new markets predominantly by acquiring independently owned yoga studios. Based upon internal and third-party analysis of the number of currently existing yoga studios throughout the U.S., and assuming sufficient access to capital and successful execution of our business plan, we believe we have the opportunity to increase our studio count to over 250 studios in the next several years. We believe that acquisitions of existing studios and their thriving student bases can be an effective, profitable and risk-mitigating way to enter a new regional market versus building a new studio and waiting for attendance to ramp up over time. We will, however, selectively open new YogaWorks studios to complement existing and acquired regional studio clusters where there is sufficient density of population to support more of our studios.

Over the past 14 years, we have successfully integrated numerous acquisitions. In 2003, we acquired 3 studios located in Orange County, California. In 2004, we acquired 2 studios in the Los Angeles area and 4 studios in the New York City area (6 studios total). In 2007, we acquired one studio in the Los Angles area. In 2008, we acquired 3 studios in the Northern California area. In 2013, we acquired 2 more studios in the Los Angeles area. In 2015, we acquired Be Yoga in the area (one studio), Yoga Tree in the San Francisco area (7 studios), Back Bay Yoga Studio in the Boston area (2 studios), and Charm City Yoga in the Baltimore/Washington D.C. area Palo Alto (7 studios). Generally,

 

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we have seen revenues and visits increase across acquired studios since their acquisitions. In 2015, we acquired 17 studios through four acquisitions (Be Yoga, Yoga Tree, Back Bay Yoga Studio and Charm City Yoga) for aggregate consideration of $12.2 million. These studios contributed $11.7 million of net revenue in 2016. With the integration of our operations, programming and instruction best practices, total visits in the studios acquired from these acquisitions increased more than 7% in 2016, our first full fiscal year of operating these studios, over 2015.

To date, 60% of our existing studios have become part of our studio base through acquisitions. We believe our significant experience in identifying attractive acquisition targets, our industry reputation, our proven integration process and solid operational infrastructure create a compelling platform for growth through acquisitions. Through future acquisitions, we can leverage our corporate infrastructure to grow our brand in both new and existing markets by quickly tapping into the thriving yoga communities that already exist in nearly every city in the U.S. For the yoga student, this expansion plan offers greater choices for quality yoga and the ability to practice at a greater number of locations across the U.S.

We continue to actively assess the yoga studio market across the U.S. and are always seeking out the most attractive geographic markets to enter. According to the IBISWorld Report, in 2016 there were estimated to be over 33,000 yoga and pilates studios throughout the U.S. Through our disciplined identification and diligence process, we review studio programming, observe teachers, analyze visit trends and learn about the market to identify the best studios in this very large pool of existing studios in the U.S. that will fit our brand and overall growth strategy. We identify yoga studios in each targeted region and proactively reach out to their owners to gauge their level of interest in discussing an acquisition by us. To date, we have completed preliminary evaluations on more than 1,100 yoga studios based on location, physical layout, studio size, teachers and programming offered. In addition, we regularly field in-bound interest from yoga studio owners looking to find a permanent home for their instructors and students within the YogaWorks family. We have identified hundreds of yoga studios that we believe have programming that aligns with the Yogaworks’ approach and have demonstrated a level of local brand awareness within their communities that make them attractive acquisition candidates. As of the date of this prospectus, we have entered into letters of intent to acquire 10 studios and are in late-stage negotiations with 4 other studios that we believe are probable to be acquired in the next twelve months. In total, we have entered into confidentiality agreements with respect to more than 125 studios. We have also contacted owners of over 250 additional studios regarding a potential acquisition.

Through a combination of acquisitions and new studio openings, we plan to add more than 35 yoga studios over the next eighteen months. Our studio growth will likely include expansion into new geographic markets as well as an enhanced presence in existing markets and will depend on the amount of available opportunities and internal and external factors relating to our ability to execute. To achieve our planned acquisition-focused growth, we have already begun allocating internal resources, including the hiring of Kurt Donnell, as Executive Vice President, Partnerships and General Counsel, to lead acquisition outreach, diligence and negotiations with potential targets. We intend to use the majority of our net proceeds from this offering to fund our acquisitions and capital expenditures in connection with our acquisitions and new studio openings planned for the next 18 months. As more studios are acquired, we plan to leverage our existing infrastructure but also plan to add additional resources in specific functional areas as needed (including studio management, human resources, finance and accounting) to manage the additional studio oversight, employee and financial reporting needs of a larger studio base. We are currently in active discussions with over 135 studios across the United States and Canada. However, there can be no assurances that we may not be able to successfully identify opportunities that meet our acquisition criteria, or, if we do, we may not be able to successfully negotiate, finance, acquire and integrate them.

 

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Drive Increased Visits, Net Revenues and Regional Market Share

We remain focused on developing and offering high-quality yoga programming supported by our industry-leading teacher training to drive increased visits, net revenues and regional market share. Specifically, we intend to generate growth in visits, net revenues and market share by executing on the following strategies:

 

    Increase our Brand Awareness. We will continue to increase YogaWorks’ brand awareness and consumer loyalty through new and innovative marketing outreach, studio acquisitions, new studio openings and expansion of our digital presence. Our marketing efforts reflect our authentic and localized brand characteristics, and are comprised of grassroots and word-of-mouth marketing that include local events to enhance our unique profile in the communities where we operate. Our ability to engage with consumers across six regional markets demonstrates the effectiveness of our nationally-managed, but locally-focused marketing spend. In addition to our programming, we also engage with students through our mobile application that allows them to plan and schedule classes and to learn more about their teachers. Additionally, we are launching new initiatives through technology investments to better communicate digitally with our consumer base. We believe that increased brand awareness for YogaWorks will result in increased studio visits and net revenues and ultimately enhance profitability.

 

    Expand Teacher Training and Workshops. As the most recognized and accredited teacher training program in yoga, we plan to continue investing in the continuing education of our students and teachers, thereby driving the profitable revenues that the teacher training program brings to our company. Workshops, primarily used to deepen our students’ practice, have also been an incremental revenue opportunity by utilizing excess studio room capacity. Workshops are also a chance for popular teachers to earn additional income. In addition, workshops allow our students and teachers to access visiting master yoga teachers from around the world as well as renowned health and wellness experts, in order to deepen their practice and earn continuing education credits. We believe our highly trained teachers, teacher training programs and our workshops inspire deep brand loyalty across our consumer base, driving visits and net revenues growth, while preserving our industry leadership.

 

    Grow MyYogaWorks.com. We plan to continue to invest in adding quality content for MyYogaWorks.com, improving the user experience and increasing the site’s functionality, including potentially adding live streaming. We are launching several initiatives to cross-sell consumers who use MyYogaWorks.com to join us in our studios for live instruction and hands-on one-on-one attention from our teachers. We are also exploring relationships with companies and complementary brands to drive growth and increase awareness of the MyYogaWorks.com platform.

Leverage our Infrastructure

In preparation for our continued growth, we have built out our corporate infrastructure over the past several years. We now have the corporate, regional and studio-level management personnel in place, as well as the information technology platform, to support our future growth and acquisition strategy, without significant new investments in corporate infrastructure. Our existing infrastructure in administration, accounting, information technology, our new website, human resources, training, marketing and operating systems and processes can be leveraged across all additional studios to eliminate duplicative costs in acquired studios and realize synergies. With a larger number of studios we believe we will be able to negotiate and secure more favorable rates for insurance, bank fees, merchandise and certain capital expenditures. As our studio base grows, expenses for our corporate and regional overhead should become a smaller percentage of our net revenues and profitability. We will also continue to benefit from our strategy of “clustering” studios in distinct geographic regions. By

 

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building scale in existing markets, we will increase our local brand awareness and consumer engagement without spending incrementally more on marketing costs as a percentage of net revenues.

Pursue Brand Extension Opportunities

We intend to extend and monetize the YogaWorks brand in the following areas:

 

    Corporate Relationships. We believe we can capitalize on our position as an industry authority on high-quality, multi-discipline yoga to establish relationships with large corporations, health insurers and other institutions to incorporate YogaWorks classes into their employee wellness programs and encourage them to promote the usage of YogaWorks studios.

 

    Retail. We believe that our retail and merchandise offerings contribute to a high quality in-studio environment for our students and better enable them to live the YogaWorks lifestyle. In addition, there is considerable opportunity to expand our retail and merchandising offerings going forward, including the launch of YogaWorks-branded apparel and accessories as well as offering select merchandise to be sold via e-commerce.

 

    Licensing. We believe we have an opportunity to license the YogaWorks brand into new complementary healthy lifestyle categories that would benefit from our brand reputation and market recognition. Examples include licensing MyYogaWorks.com content to media companies and content providers and through alternative online distribution channels.

 

    Publishing of Digital Content. We also see an opportunity to publish our yoga class content and stream live classes via MyYogaWorks.com which will help us maintain our industry leadership position and increase the additional revenue that could be generated through our planned e-commerce platform.

Programming

Our programming supports a multi-channel distribution platform designed to serve our students wherever they want to practice yoga. We strive to create a seamless experience that integrates the offerings available through our studios, a variety of special events and MyYogaWorks.com. As a result, YogaWorks students can continue their practice wherever they may be, whether in our studio, at home or while travelling. Our continued national expansion will only further this benefit for our students.

In-Studio Programming

Our diverse in-studio programming and focus on instruction provides a differentiated and ideal environment for both seasoned yogis as well as beginners and casual enthusiasts. We believe we have highly relevant and compelling yoga offerings that meet our students’ needs. Further, given our teachers’ deep knowledge of yoga traditions and teaching styles, we have proven insights into changing yoga trends and consumer preferences. We are able to quickly interpret these trends for our students through our evolving and thoughtful schedule of classes. Our local approach to programming allows us to tailor our schedule in each market to best serve our students’ needs based on the nuances of each community.

We have created an extensive number of classes for each skill level, which allows us to offer our students multiple paths on their journey from beginner to experienced yogi. Class types include fast-paced flow classes (such as Vinyasa flow, some set to music), slower and more stretch oriented sessions (such as our signature YogaWorks, Hatha or Yin classes), relaxing restorative classes (to soothe and calm the body and mind), beginners and gentle offerings (that move slowly and focus on basics), and even integrated fitness options (such as SculptWorks and BarWorks). As we strive to be inclusive and flexible with our offerings, classes are determined and scheduled based on consumer

 

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acceptance and attendance. Furthermore, we carefully review classes and teachers monthly, making adjustments as appropriate, to optimize the style, duration, teacher and time of day for every class.

We have a disciplined operating structure that shares best practices across our different regions in order to maintain a consistently high level of service. We also have a dedicated Customer Experience team that seeks to uphold the YogaWorks standards and deliver a consistent YogaWorks experience. We believe this sets us apart from our competition, as we are able to operate successful studios in many different markets that share the YogaWorks brand, while at the same time providing flexibility to accommodate regional differences.

MyYogaWorks.com Programming

MyYogaWorks.com is an online, on-demand video library of over 1,000 instructional classes that allows students to personalize their yoga practice anytime, anywhere. Through MyYogaWorks.com, we are able to extend our brand presence beyond our physical studio footprint. In 2016, MyYogaWorks.com streamed almost 700,000 classes to over 18,000 users in more than 145 countries. We produce our own professional-quality content in-house and own the content for multiple distribution opportunities. We feel it is important to update our video library and film new videos each month to rotate our featured classes and provide more teachers, styles and options to our growing customer base.

MyYogaWorks.com offers more than just online classes. We have created an online yoga community where we nurture a health and wellness lifestyle. Members can save their favorite classes, create their own playlists and provide feedback. Students can also elect to participate in a Journey Series which is pre-curated content on a particular pose, benefit, or style to motivate a student to accomplish a particular goal in a 5-, 10- or 14-day sequence.

Above all, our online videos are of exceptional quality. Each teacher featured must be Yoga Alliance certified, and is trained to give clear alignment cues and create safe sequences for our practitioners to follow despite there being no ability for hands-on adjustments. While anyone can post yoga videos to the Internet, it is the high quality teacher instruction that separates us from everyone else.

Teacher Training

With over 1,700 teachers employed in our studios, the consistent quality of our instructors is critical to our success. Innovative and comprehensive teacher training has been a core philosophical business practice since our Teacher Training program was founded over 25 years ago, soon after the opening of our second studio. In order to grow our business, we need exceptional teachers, and our teacher training program has been critical to maintaining and increasing the depth of our teacher roster. Since its inception, over 11,000 teachers have graduated from our teacher training program across more than 25 countries. Our program is now considered the gold standard across the industry, with a 4.73-star (out of 5) rating from Yoga Alliance. We offer both a 200-hour and 300-hour program to prospective teachers and students. Becoming a teacher is not the only motivation for taking a 200-hour teacher training. Many students take the training simply to deepen one’s practice or have a transformational experience. We strive to continually enhance our teacher training programs with new techniques, teaching strategies and updated yoga education principles.

We believe our teacher training programming is a primary driver of our appealing studio experience and has resulted in our strong lifestyle brand as well as our market recognition as a leading authority on the growing yoga movement, particularly for safe and effective yoga practices. We utilize this program to identify new teacher talent for our studios and it is also an effective outreach tool for YogaWorks, as our graduates often become ardent champions of our brand and programming and share their enthusiasm

 

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for our programming with other students and would-be teachers. Additionally, by offering teacher training classes in geographies where we might not operate a yoga studio, we are able to extend our brand to new locations and learn more about the local Yoga communities in those markets.

Our approach to training teachers is not YogaWorks-specific and therefore, our teacher graduates can teach at other studios, which expands the pool of prospective teachers who may select one of our programs. Our training programs are proprietary and we believe they offer teachers a compelling and differentiated teaching platform. We believe our program is respected for teaching teachers how to tailor and curate classes, have a presence in the room and truly teach students, rather than having an emphasis on teachers memorizing and repeating a rote sequence of postures.

We have more than 80 YogaWorks teacher trainers employed worldwide who have become experts in both yoga and the art of teaching. These trainers teach classes in our studios in addition to leading our teacher training programs. In 2016, we held approximately 100 teacher training programs in 18 countries. We offer teacher training programs that are taught in a YogaWorks studio as well as in non-YogaWorks studios.

Our Culture

We have developed a distinctive culture that inspires our team members. Our culture is centered on a passion for YogaWorks yoga, a performance-based team approach, exceptional customer service, transparency and an environment of continuous growth and learning. We believe our culture allows us to attract passionate and motivated team members who are driven to succeed and share our vision of creating the highest-quality yoga experience for our students.

Passion for YogaWorks Yoga

We never compromise the quality and integrity of our yoga. It is the cornerstone on which we built our company, teacher training and programs. We seek to recruit, hire, train and retain qualified and enthusiastic teachers, greeters and other staff members who share our passion for the highest quality yoga.

Performance-based Team Approach

Our passionate teachers, greeters and other team members are a major element contributing to the superior quality of our students’ in-studio yoga experience. We believe that the power of many is greater than the power of one and treat one another with respect, welcome new ideas and encourage everyone to step up to go the extra mile.

We are guided by a philosophy that recognizes performance, and we offer an incentive bonus program for studio staff to reward strong performance. We actively track and reward team-based performance, which we believe encourages excellence and helps us maintain a sufficient talent pool to support our growth. Many of our studio and regional managers are promoted from within our organization.

Exceptional Customer Service

Our number one job is to ensure our customers are happy and we treat every interaction with our customers as an opportunity to deliver exceptional service. We emphasize delivering customer service in a timely, accurate and friendly manner with a “can-do” attitude, never forgetting that our students come to us by choice.

Transparency

We lead by example with honesty, integrity and respect. We applaud initiative, hold employees accountable and own our mistakes. We continuously emphasize the need to communicate openly with

 

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our students and fellow employees to foster an environment of transparency and trust. This commitment to transparency is reflected in our pricing strategy and our use of data to uncover consumer insights which help us drive and measure our business.

Continuous Growth and Learning

We are committed to evolving our programs and developing our employees. We strive to create an environment where everyone has the opportunity to grow. We look toward the future and learn from the past. We believe this aspect of our culture allows us to attract and retain committed team members and that the knowledge and passion for growth of our team members is critical in enabling us to acquire new students at our studios and strengthen loyalty. We believe motivated and educated team members lead to satisfied students who, in turn, lead to increased visits.

Pricing

Classes

Our studios have membership and class package options that are diverse, transparent and flexible, just like our classes. Our pricing plans are designed to provide our students with optimal flexibility and compelling value. Whether they seek a long-term commitment or a single drop-in session, our students can find a studio and a rate that works for them. The hallmark of our pricing strategy is our 100% transparency as students can find all pricing information on our website. We believe our class packages and unlimited membership programs are priced at or below the industry average while at the same time providing our students with a higher quality yoga experience.

Pricing for our classes varies by region. On average, our students pay approximately $90-135 per month for a membership which includes unlimited yoga and fitness classes at any studio, with access to unlimited classes at our full national network priced at $135 per month. We also offer six months and annual prepaid memberships at competitive prices. For students who prefer to visit a single studio, we provide a variety of options from unlimited memberships to class packages in increments of 10 or 20 classes. YogaWorks unlimited memberships receive the following services: unlimited yoga and fitness classes; 1 guest pass per month; $5 members-only monthly subscription rate for MyYogaWorks.com; rewards for referring new members; 5% discount on retail merchandise; 15% off of private yoga packages; and 15% off a student’s first package of pilates reformer classes. We also offer private classes for those who wish to receive one-on-one instruction. Our pricing strategy is simple: the more our students treat themselves to our classes, the more value they receive in return.

Strategy

In early 2016, we began evolving our pricing, product and promotional strategies. By July 2016, we had successfully implemented class package options at all of our studios in addition to adding the ability of our students to purchase memberships and packages online. We believe the offering of additional products that provide more flexibility will draw a broader student base over time. During the same period we reduced our reliance on deeply discounted promotional programs, including annual membership drives that historically drove a significant amount of prepaid annual memberships, as a key revenue generation tactic. Our intent is to focus the students’ attention on content and product, instead of price, and thereby extend our long term brand equity as a result.

Teacher Training

We offer both 200-hour and 300-hour programs to prospective teachers in our teacher training program.

 

    Our 200-hour program is more popular because it appeals not just to students who want to become teachers but to those looking to deepen their practice. Many yoga studios will employ teachers with just 200 hours of training so this program also meets a demonstrated market need. The tuition for our 200-hour program is approximately $3,500.

 

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    Our 300-hour program is designed for graduates of our 200-hour program who want to continue their studies, become better teachers or pursue teaching a YogaWorks signature class. This program includes a mentorship with a master teacher to personally hone technique with hands-on instruction in actual classes with live students. The tuition for our 300-hour program is approximately $4,200.

MyYogaWorks.com

MyYogaWorks.com offers unlimited access to over 1,000 online yoga classes through a monthly subscription model, offering options based on monthly price and the length of the subscription. Our most popular plan is $15 per month, with no long term commitment. We also offer a $5 monthly subscription rate for students that also have a YogaWorks studio membership.

Acquisition Integration Strategy

Studio acquisitions have been and are a significant part of our history and continued growth strategy as we have acquired 60% of our 50 studios. We target yoga businesses we believe we can effectively integrate with our YogaWorks brand.

We have developed a comprehensive acquisition integration process designed to facilitate a seamless transition to the YogaWorks operating model from the vantage point of employees, students and teachers. Our goal is to remember that the student comes first and that we must maintain the momentum of a student’s practice to keep them working toward their goals. Retaining staff and teachers is important for the continuity with the students but also for the local community we value. Specifically, several owners who have sold their studios to YogaWorks were immediately hired by us as teachers (including owners from Back Bay Yoga Studio and Charm City Yoga), and remained with us after the closing of the applicable acquisition. In other cases, selling owners have chosen to do something different with their career following the closing of the acquisition, but have remained advocates of the YogaWorks brand helping us continue to grow the communities they had built.

We implement a tested, multi-stage integration process with numerous checklist items to integrate with our human resources, finance, IT, marketing and operations personnel, systems and workflow. We then slowly make customer-facing changes like updating signage, the studio website and our mobile application to begin the transition to the YogaWorks brand. Our integration process also includes the investment of necessary capital in newly acquired studios to upgrade facilities and equipment where appropriate, so that these studios are set up for success and have the visual elements that identify our YogaWorks brand. This thoughtful and methodical approach has proven successful in retaining students, employees and teachers and driving growth post-integration.

Administrative Systems

We seek to quickly integrate the acquired studio into our point of sale, accounting, human resources, information technology and other operating systems after the acquisition, thereby allowing us to more efficiently operate the studio and monitor performance. In many cases, the acquired studio already utilizes the same point of sale system as YogaWorks, which simplifies both the diligence and integration processes while reducing training costs.

Programming and Branding

One of the most delicate areas of the integration is the programming. Our first goal is to take an even deeper dive into understanding the teachers, the mix of classes and class attendance statistics to ensure we fully understand the nuances that make programming successful at each studio. In doing so, we learn more about what appeals to the existing students and to the broader community before applying any changes. We make small changes at first, including monitoring attendance and training

 

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local staff with our best practices so that each business can scale. We slowly integrate our class formats, our branding and marketing and our ideology over time in order to minimize disruption to the acquired studio’s class offerings while bringing the studio under the YogaWorks umbrella. We do not immediately change the brand to YogaWorks, but build up to the name change gradually over several weeks or months in order for both the teachers and students to trust our brand and gain confidence that the re-flagged studio will maintain the sense of community that initially drew them to that studio. This approach has earned us the reputation of being respectful to the owners and community and showing we genuinely care about our mission.

Marketing

We primarily use grassroots and viral marketing activities in each of our studio markets to build brand awareness and increase studio attendance with existing and new students. We believe our students and teachers are the most impactful and efficient marketing tools we have. Our reputation as the premier yoga studio operator drives our viral marketing, which inspires new students to try our yoga classes. Information about our studios, schedules and numerous offerings are easily accessed via our consumer-friendly website and mobile application. In addition, we deploy digital campaigns focused on expanding our brand that have historically been successful for us. We have a growing social media presence with a total following as of December 31, 2016 of over 288,000 touchpoints, including approximately 88,000 Facebook fans, 43,000 Instagram followers and 157,000 Twitter followers.

Our marketing programs target a broad range of students, including the smaller but faster growing populations in yoga like over 65 year olds, under 18 year olds and pregnant women, for whom we believe yoga and meditation is appealing given these population groups’ lifestyles, consumer preferences and stress levels.

Currently we offer various introductory promotions, such as first class free and weekly packages, to new students. We believe that our introductory specials are an effective way for people to try YogaWorks as it typically takes a few classes to develop a new behavior and begin the relationship building process with our studios. Once students sample our classes, our staff personally follow up to see how they enjoyed the class and offer to assist finding additional classes to try. We also send personalized direct marketing to communicate news and encourage more visits. Attracting new students is an important part of our marketing strategy as we always want to introduce new students to yoga and YogaWorks. Specifically, we have a new student referral program and a loyalty program under which rewards earned can be used towards discounts on private yoga and pilates sessions, classes, apparel and accessories in our studios. These are important tools to not only attract new students but also to retain loyal students.

In 2017, we strengthened our marketing department with new leadership, bringing proven experience in acquiring new students. In addition, we intend to dedicate increased resources to advertising and marketing in the future. Our national marketing efforts will be complemented by our important grassroots marketing efforts led by the local teachers and studio staff. From cross-promotions with other businesses to donation classes or community events, we will continue to spread the word about YogaWorks through local efforts.

Studios

Our bright, clean and inspiring studios typically have two yoga rooms, square footage dedicated and designed for our retail offerings, lockers and restrooms. We target a size between 3,500 and 5,000 square feet, but may have larger or smaller studios depending on the market and volume. Many of our higher volume locations have two or three yoga rooms. Each yoga room is equipped with equipment for our students, including mats, blankets, blocks and straps. While the instructor leads the class at the front of the room, he or she also walks around during the class giving hands-on, one-on-one attention

 

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to individualize each student’s experience and instruct on proper technique. Our studios all have visual elements that are distinctive to the YogaWorks brand, including visible signage as well as a relatively consistent and soothing color palate. Most importantly, we strive to provide students with a warm and appealing ambiance and customer experience from the moment they walk into our studios. Students are welcomed by our friendly greeters who are trained to make our students feel welcome and informed about the YogaWorks experience.

Real Estate

We opened our first studio in 1987 in Santa Monica and opened a second studio in the same area several years later. Since then, we have expanded through acquisitions and new studio openings in the greater Los Angeles area as well as in five new markets: Northern California, New York City, Boston, Baltimore/Washington D.C. and Orange County (California). Between 1996 and 2014, we grew from 2 studios to 29, and since our acquisition by Great Hill Partners in July 2014, we have added 23 studios.

As of March 31, 2017, we operate studios in six markets in the U.S. We lease all of our studio locations and our corporate headquarters, which is located in Culver City, California. The following list shows the number of studios we operate in each major market.

 

Market

   YogaWorks Studios  

Los Angeles

     17  

Orange County (California)

     4  

New York City

     5  

Northern California

     13  

Boston

     3  

Baltimore/Washington D.C.

     8  
  

 

 

 

Total

     50  

In 2017, we opened a new YogaWorks studio in Chestnut Hill, Boston and have one studio that is under a lease agreement anticipated to be opened in 2017 in Manhasset, Long Island.

We are flexible in the type of real estate venues we will pursue making our studio model extremely portable. We focus on securing convenient locations that include easy customer access and parking. We do not believe we need to be in malls or expensive ground floor retail locations with high foot traffic in order to drive visits to our studios. Many of our studios are located in less expensive second floor locations. Given that we are a destination location, we do not need to rely on foot traffic in front of our studios to the same extent as many retail stores.

Seasonality

We have historically experienced some seasonal and quarterly variations in our net revenues and income from operations. These variations are primarily related to increased class visits during our first quarter, as students tend to exercise more regularly at the beginning of each calendar year as a part of setting goals for the upcoming year.

Competition

Because many of our students are first-time or occasional yoga practitioners, we believe we compete with both fitness and non-fitness consumer discretionary spending alternatives for our members’ and prospective students’ time and discretionary resources.

 

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To a great extent, we compete with other industry participants, including:

 

    individual, single-unit independent operators and small, multi-unit operators, with limited regional brands;

 

    other branded operators in the yoga industry, like CorePower Yoga;

 

    subscription based digital fitness programs and offerings, such as YogaGlo, and other mobile applications and websites that provide free instructional yoga videos, including YouTube;

 

    health clubs and fitness centers, some of which offer or may want to offer yoga, such as Equinox, Life Time Fitness, LA Fitness, 24 Hour Fitness, Planet Fitness and Town Sports International;

 

    private studios and other boutique fitness offerings (such as those offering barre, pilates, bootcamps and spinning);

 

    recreational facilities established by non-profit organizations and by businesses for their employees;

 

    racquet, tennis and other athletic clubs;

 

    amenity and condominium/apartment clubs;

 

    country clubs;

 

    online personal training and fitness coaching; and

 

    businesses offering similar services.

The fitness and healthy living industry is highly competitive and fragmented, and the number, size and strength of competitors vary by region. Some of our competitors have national name recognition or an established presence in local markets, and some are established in markets in which we have existing stores or intend to locate new stores.

We believe that we successfully compete based on our high-quality class offerings, diversity of programming, competitive price points, passionate and dedicated teachers and the local community culture of each of our studios. Our offerings are also often complementary to other fitness concepts.

Our competition will continue to increase as we add studios in existing markets and expand into new markets.

Information Technology and Systems

We utilize MINDBODY Online, an online health-focused business management software, which handles processing class sign-ups, billing students, updating student information, processing point-of-sale transactions and online payments, tracking and analyzing sales data, studio utilization, billing performance and demographic profiles. Our websites are hosted by third parties, and we also utilize other leading third party vendors for our key systems, including ADP, for payroll, and Oracle Cloud, for accounting and financial reporting. For MyYogaWorks.com, we use Recurly, a billing management software solution for payment processing, and use Ooyala, for online streaming of our MyYogaWorks.com videos.

Intellectual Property

We own a number of registered trademarks and service marks in the U.S. and in other countries. We also own several teacher training manuals and curriculum that we use in our teacher training. In

 

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addition, we own domain names, including YogaWorks.com and MyYogaWorks.com. We believe the YogaWorks name and logo and the many distinctive marks associated with it are of significant value and are very important to our business. Accordingly, as a general policy, we pursue registration of our marks in the U.S. and in select international jurisdictions, monitor the use of our marks and oppose any unauthorized use of the marks.

We register some of our copyrighted material and otherwise rely on common law protection of our copyrighted works, such as our library of videos streamed through MyYogaWorks.com. Such copyrighted materials are beneficial, but not material to our business.

We protect our intellectual property rights through a variety of methods, including enforcing trademark laws, as well as utilizing confidentiality agreements with vendors, employees, consultants and others who have access to our proprietary information.

Government Regulation

We are subject to various U.S. federal, state and local laws affecting our business, including labor and employment laws, laws governing advertising, privacy laws, safety regulations and other laws, including consumer protection regulations that govern the operation of our studios and the promotion and sale of retail merchandise.

We are also subject to the U.S. Fair Labor Standards Act of 1938, as amended, and various other laws in the U.S. governing such matters as minimum-wage requirements, overtime and other working conditions. A significant number of our employees are paid at rates related to the U.S. federal minimum wage, and past increases in the U.S. federal minimum wage have increased our labor costs, as would future increases.

We are responsible at our studios for compliance with state laws that regulate the relationship between health clubs and their members. Nearly all states have consumer protection regulations that limit the collection of monthly membership dues prior to opening, require disclosures of pricing information, mandate the maximum length of contracts and “cooling off” periods for members (after the purchase of a membership), set escrow and bond requirements for health clubs, govern member rights in the event of a member relocation or disability, provide for specific member rights when a health club closes or relocates, or preclude automatic membership renewals.

Employees

As of March 31, 2017, we employed over 2,000 employees at our studios and approximately 45 employees at our corporate headquarters, currently located in Culver City, California. None of our employees are represented by labor unions, and we believe we have an excellent relationship with our employees.

Legal Proceedings

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. As part of these alleged violations, penalties under the Private Attorneys General Act of 2004 and relevant sections of the California Labor Code are being sought on behalf of the State of California and allegedly aggrieved employees. Neither the outcome of the alleged claims, nor the amount and range of potential damages or exposure associated with the allegations can be assessed with certainty, and any damage award or settlement amount could be substantial.

 

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In addition to the Wage Statement Claim, from time to time, we may become involved in legal proceedings arising in the ordinary course of our 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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MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding our executive officers and directors, as of July 10, 2017:

 

Name

  

    Age    

    

Position(s)

Executive Officers

     

Rosanna McCollough

     51    President & Chief Executive Officer, Director

Suzanne Dawson

     52    Chief Customer Officer

Vance Chang

     41    Chief Financial Officer

Kurt Donnell

     36    Secretary, Executive Vice President, Partnerships and General Counsel

Non-Employee Directors

     

Peter L. Garran

     41    Director and Chairman of the Board

Michael A. Kumin

     45    Director

Michael J. Gerend(1)(2)

     53      Director

Brian Cooper(1)(2)

     52      Director

 

(1) Member of the compensation committee.
(2) Member of the audit committee.

Executive Officers

Rosanna McCollough joined YogaWorks in February 2015 as President and Chief Operating Officer, initially managing studio operations, marketing, teacher training, MyYogaWorks.com, human resources and IT, before being promoted to President and Chief Executive Officer in June 2016. Before joining YogaWorks, Ms. McCollough was Chief Operating Officer of Merle Norman Cosmetics from February 2010 to February 2015 where she was primarily responsible for managing the company’s operations, advertising, product innovation, training and merchandising. Prior to Merle Norman Cosmetics, Ms. McCollough worked as General Manager of Evite.com from November 2007 to June 2009, where she managed all areas of the business. Prior to Evite.com, Ms. McCollough was the Senior Vice President of WeddingChannel.com from December 1999 to November 2006, in charge of various aspects of the business from product development and editorial to profit and loss responsibilities of their registry, local advertising and e-commerce business units. Ms. McCollough also has worked in marketing and product development roles with Neutrogena Corporation, Max Factor, and Twentieth Century Fox Licensing & Merchandising. Ms. McCollough is a graduate of the University of California, Los Angeles with a B.A. in English. Ms. McCollough also serves as a member of our board of directors. Ms. McCollough was selected to serve on our board of directors because of the perspective and experience she brings as our Chief Executive Officer as well as her extensive marketing experience in consumer-focused industries.

Suzanne Dawson joined YogaWorks as Chief Customer Officer in August 2016. Her role consists of managing all of our studios, workshops and retail operations, as well as our marketing functions. Prior to joining YogaWorks, Ms. Dawson served as Chief Executive Officer and President of OleHenriksen (LVMH) from 2014 to 2015, where she was responsible for all aspects of brand and business development. In 2015, Ms. Dawson partnered with her husband to launch YUNI, a beauty products brand focused on active people. Ms. Dawson also served as Chief Marketing Officer at Murad from 2012 to 2014, in charge of marketing, product development, portfolio management, as well as the creative, education, e-commerce and digital components of the company. Prior to her time at Murad,

 

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Ms. Dawson served as Vice President of Global Marketing & Innovation at Aveda from 2005 to 2012, where she was responsible for global brand strategy, marketing, product development, portfolio management, e-commerce, digital and social aspects of the company, as well as consumer engagement and loyalty programs for salons, spas and company-owned stores. Ms. Dawson was educated in Australia, receiving her B.Bus (Marketing) from Monash University and is also a credentialed Ashtanga Yoga teacher.

Vance Chang joined YogaWorks as Chief Financial Officer in April 2016. Prior to joining YogaWorks, Mr. Chang served as the Head of Finance of Pressed Juicery from 2013 to 2016, a consumer goods specialty retailer, where he was chiefly responsible for the company’s finance and accounting operations. Prior to Pressed Juicery, Mr. Chang was an investment banker with Moelis & Company from 2008 to 2013 where he was responsible for executing M&A and capital structure advisory assignments for public and private companies in the consumer and retail sector. Mr. Chang has also worked as a financial auditor with Deloitte & Touche from 1998 to 2000 and was an investment banker with JMP Securities from 2000 to 2003. Mr. Chang earned his B.A. in accounting from the University of Washington and his M.B.A. in corporate finance from The Wharton School of the University of Pennsylvania.

Kurt Donnell joined YogaWorks in January of 2017 as Executive Vice President, Partnerships and General Counsel. His role consists of leading corporate development initiatives, including mergers, acquisitions and strategic partnerships, and overseeing all company legal and corporate governance matters. Prior to joining YogaWorks, Mr. Donnell led the corporate development, audience development and legal teams for SheKnows Media, a women-focused digital media company and Great Hill Partners portfolio company, from November 2012 to January 2017. While at SheKnows Media, Mr. Donnell oversaw the identification, assessment, negotiation and execution of several of the company’s acquisitions. Before SheKnows Media, Mr. Donnell was a corporate attorney with Jones Day from June 2008 to May 2010, and Ballard Spahr LLP from May 2010 to November 2012, where he specialized in mergers and acquisitions and also practiced in the areas of corporate finance and real estate. Mr. Donnell earned his B.A. and master’s degree in accounting from Miami University in Oxford, Ohio and his J.D. from the University of Virginia School of Law.

Non-Employee Directors

Peter L. Garran has served as a member of our board of directors of YogaWorks since July 2014 and as chairman of our board of directors since April 2017. Mr. Garran has worked as an investment professional at Great Hill Partners, L.P. since 2008 where he currently serves as a Partner. In addition to YogaWorks, Mr. Garran currently serves on the board of directors of a number of private companies. He also served on the board of directors of Spark Networks, Inc. from April 2011 to December 2013. Prior to joining Great Hill Partners, Mr. Garran was an investment banker at J.P. Morgan from 1999 to 2008. Mr. Garran earned an A.B. in history and literature from Harvard College. We believe Mr. Garran is qualified to serve on our board of directors due to his experience in the consumer retail industry as a private equity investor, his broad financial experience and his service on the board of directors of other consumer and technology companies.

Michael Kumin has served as a member of our board of directors since July 2014. Mr. Kumin has worked as an investment professional at Great Hill Partners, L.P. since 2002 where he currently serves as a Managing Partner. Mr. Kumin also currently serves on the board of directors of Wayfair Inc., a role he has served in since June 2011, and on the board of a number of private companies. He also served on the board of directors of Spark Networks, Inc. from June 2006 to December 2013 and Vitacost.com, Inc. from July 2010 to August 2014. Mr. Kumin received a B.A. from Princeton University’s Woodrow Wilson School of Public & International Affairs. We believe Mr. Kumin is qualified to serve on our board

 

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of directors due to his experience in the consumer retail and e-commerce industries as a private equity investor and his service on the board of directors of other consumer and technology companies.

Michael J. Gerend has served as a member of our board of directors since May 2017. Mr. Gerend served as Chief Executive Officer of Edge Fitness Clubs, a group of thirteen health clubs, from January 2015 to March 2017 where he was responsible for the company’s strategy and operational infrastructure. Prior to Edge Fitness Clubs, Mr. Gerend served as President of Schwan’s Home Service, an online grocery delivery service, from July 2011 to January 2014 where he helped lead the company’s national expansion. Mr. Gerend also served as President and Chief Operating Officer of Life Time Fitness, Inc. from April 2003 to May 2009 during the period when Life Time Fitness, Inc. became a public company. Prior to joining Life Time Fitness, Inc., Mr. Gerend served as President and Chief Executive Officer of Grand Holdings, Inc. from 1998 to 2003. He also held senior management positions at Northwest Airlines, Inc. from 1991 to 1997. In addition to YogaWorks, Mr. Gerend currently serves on the board of directors of a number of private companies, including Edge Fitness Clubs and Movati Athletic, a chain of fitness clubs primarily located in Canada. Mr. Gerend earned his B.A. from the University of Notre Dame and his M.B.A. from the University of Wisconsin. We believe Mr. Gerend is qualified to serve on our board of directors due to his senior management experience in the consumer and fitness industries.

Brian Cooper has served as a member of our board of directors since May 2017. Mr. Cooper served as the Executive Vice President and Chief Financial Officer of Everyday Health, Inc., a public digital media company focused on health and wellness, from September 2003 to January 2017. Mr. Cooper joined Everyday Health, Inc. when it was a start-up and over a fourteen year period, led the company’s growth strategy, mergers and acquisitions, initial public offering and its ultimate sale to Ziff Davis, a subsidiary of j2 Global, Inc. Mr. Cooper was also responsible for the company’s accounting and finance departments, legal and business affairs, investor relations, human resources, business intelligence and data operations at Everyday Health, Inc. Prior to joining Everyday Health, Inc., Mr. Cooper served as Chief Financial Officer for AdOne LLC from 2000 to 2003 where he was responsible for its finance, accounting, corporate development and all administrative functions. He also served as Audit Partner in KPMG’s Information, Communications, and Entertainment practice from 1998 to 2000. Mr. Cooper also served as Vice President of Finance for Interfilm, Inc. from 1988 to 1995. Mr. Cooper began his career in Ernst and Young’s Entrepreneurial Services Group and is a graduate of the University of Pennsylvania’s Wharton School’s Executive Development Program and American University, where he earned his B.S. in Business Administration. We believe Mr. Cooper is qualified to serve on our board of directors due to his operating and finance knowledge and experience, and his public company management experience.

Board Composition

Our amended and restated bylaws that will become effective upon the closing of this offering provides that our Board of Directors shall consist of that number of directors to be determined from time to time by vote of our Board and is currently set at five members. Currently our Board consists of five members: Ms. McCollough and Messrs. Garran, Kumin, Gerend and Cooper.

 

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In accordance with our amended and restated certificate of incorporation, which will be in effect upon the closing of this offering, our board of directors will be divided into three classes with staggered three year terms. At each annual meeting of stockholders after the initial classification, the successors to the directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following their election. Our directors will be divided among the three classes as follows:

 

    the Class I directors will be Michael A. Kumin and Michael J. Gerend, and their terms will expire at the annual meeting of stockholders to be held in 2018;

 

    the Class II directors will be Rosanna McCollough and Brian Cooper, and their terms will expire at the annual meeting of stockholders to be held in 2019; and

 

    the Class III director will be Peter L. Garran, and his term will expire at the annual meeting of stockholders to be held in 2020.

Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our company.

Our Board has determined that upon completion of this offering, Messrs. Gerend and Cooper will be independent directors. In making this determination, our Board applied the standards set forth in the NASDAQ listing standards and in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In evaluating the independence of Messrs. Gerend and Cooper, our Board considered their current and historical employment, any compensation we have given to them, any transactions we have with them, their beneficial ownership of our capital stock, their ability to exert control over us, all other material relationships they have had with us and the same facts with respect to their immediate family. The Board also considered all other relevant facts and circumstances known to it in making this independence determination. In addition, Messrs. Garran and Kumin are non-employee directors, as defined in Rule 16b-3 of the Exchange Act.

Although there is no specific policy regarding diversity in identifying director nominees, the Board seeks the talents and backgrounds that would be most helpful to the Company in selecting director nominees. In particular, the Board may consider whether a director candidate, if elected, assists in achieving a mix of Board members that represents a diversity of background and experience.

Board Leadership Structure

Our board of directors recognizes that one of its key responsibilities is to evaluate and determine its optimal leadership structure so as to provide effective oversight of management. Our amended and restated bylaws and corporate governance guidelines, which will become effective immediately prior to the consummation of this offering, will provide our board of directors with flexibility to combine or separate the positions of chairperson of the board of directors and chief executive officer. Our board of directors currently believes that our existing leadership structure, under which Mr. Garran serves as chairperson of our board of directors and is a non-employee director, is effective, provides the appropriate balance of authority between independent and non-independent directors, and achieves the optimal governance model for us and for our stockholders.

Board Oversight of Risk

Although management is responsible for the day to day management of the risks our company faces, our Board of Directors and its committees take an active role in overseeing management of our risks and have the ultimate responsibility for the oversight of risk management. The Board regularly

 

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reviews information regarding our operational, financial, legal and strategic risks. Specifically, senior management attends quarterly meetings of the Board of Directors, provides presentations on operations including significant risks, and is available to address any questions or concerns raised by our Board.

In addition, we expect that our two Board committees will assist the Board of Directors in fulfilling its oversight responsibilities regarding risk. The Audit Committee will coordinate the Board of Directors’ oversight of the Company’s internal control over financial reporting, disclosure controls and procedures, related party transactions and code of conduct and corporate governance guidelines and management will regularly report to the Audit Committee on these areas. The Compensation Committee will assist the Board of Directors in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs. When any of the committees receives a report related to material risk oversight, the chairperson of the relevant committee will report on the discussion to the full Board of Directors.

Code of Business Conduct and Ethics

We anticipate adopting a code of ethics and conduct, effective upon the completion of this offering, which will apply to all of our employees, officers and directors, including those officers responsible for financial reporting. Following the completion of this offering, the code of ethics and conduct will be available on our website at www.yogaworks.com. We intend to disclose any amendments to the code, or any waivers of its requirements, on our website to the extent required by the applicable rules and exchange requirements. The inclusion of our website address in this prospectus does not incorporate by reference the information on or accessible through our website into this prospectus.

Controlled Company Exception

After giving effect to this offering, Great Hill Partners will continue to control a majority of the voting power of our outstanding common stock. As a result, under our amended and restated certificate of incorporation, Great Hill Partners will be able to nominate a majority of the total number of directors comprising our Board of Directors and we will remain a “controlled company” within the meaning of the NASDAQ corporate governance standards. Under the NASDAQ corporate governance standards, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance standards, including (1) the requirement that a majority of the Board of Directors consist of independent directors, (2) the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, (3) the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, and (4) the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees. We intend to utilize certain of these exemptions. As a result, we will not have a nominating and corporate governance committee and our compensation committee may not be composed entirely of independent directors. Accordingly, you do not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements. In the event that we cease to be a “controlled company,” we will be required to comply with these provisions within the transition periods specified in the NASDAQ corporate governance rules.

Board Committees

In connection with this offering, we anticipate that our Board will establish the following committees: an Audit Committee and a Compensation Committee. The anticipated composition and responsibilities of each committee are described below. Members will serve on these committees until their resignation or until otherwise determined by our Board of Directors.

 

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Audit Committee

Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee:

 

    appoints our independent registered public accounting firm;

 

    evaluates the independent registered public accounting firm’s qualifications, independence and performance;

 

    determines the engagement of the independent registered public accounting firm;

 

    reviews and approves the scope of the annual audit and the audit fee;

 

    discusses with management and the independent registered public accounting firm the results of the annual audit and the review of our quarterly financial statements;

 

    approves the retention of the independent registered public accounting firm to perform any proposed permissible non-audit services;

 

    monitors the rotation of partners of the independent registered public accounting firm on our engagement team in accordance with requirements established by the SEC;

 

    is responsible for reviewing our financial statements and our management’s discussion and analysis of financial condition and results of operations to be included in our annual and quarterly reports to be filed with the SEC;

 

    reviews our critical accounting policies and estimates; and

 

    reviews the audit committee charter and the committee’s performance at least annually.

After this offering, we expect that the members of our audit committee will be Brian Cooper (chairperson), Michael J. Gerend and Peter L. Garran. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and NASDAQ. Our board of directors has determined that Brian Cooper is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of NASDAQ. Under the rules of the SEC, members of the audit committee must also meet heightened independence standards. Our board of directors has determined that each of Messrs. Cooper and Gerend are independent under the heightened audit committee independence standards of the SEC and NASDAQ. As allowed under the applicable rules and regulations of the SEC and NASDAQ, we intend to phase in compliance with the heightened audit committee independence requirements prior to the end of the one-year transition period. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and NASDAQ.

Compensation Committee

Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. Among other matters, the compensation committee:

 

    reviews and recommends corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers;

 

    evaluates the performance of these officers in light of those goals and objectives recommends to our board of directors the compensation of these officers based on such evaluations;

 

    recommends to our board of directors the issuance of stock options and other awards under our stock plans; and

 

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    reviews and evaluates, at least annually, the performance of the compensation committee and its members, including compliance by the compensation committee with its charter.

After this offering, we expect that the members of our compensation committee will be Michael J. Gerend (chairperson) and Brian Cooper. Each of the members of our compensation committee is independent under the applicable rules and regulations of NASDAQ, is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act and is an “outside director” as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, or Section 162(m). The compensation committee operates under a written charter that satisfies the applicable standards of the SEC and NASDAQ.

Compensation Committee Interlocks and Insider Participation

For 2016, Messrs. Garran and Kumin, each non-employee directors, and Ms. McCollough, our Chief Executive Officer, established compensation for each of our executive officers, other than Ms. McCollough. These compensation decisions were guided based on input, feedback and recommendations from Ms. McCollough to Messrs. Garran and Kumin. Ms. McCollough’s compensation was approved by Messrs. Garran and Kumin. After completion of this offering, none of the expected members of our compensation committee has at any time been one of our officers or employees. None of our executive officers currently serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers on our board of directors or compensation committee.

Limitation on Liability and Indemnification Matters

Our amended and restated certificate of incorporation that will become effective immediately prior to the consummation of this offering, contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:

 

    any breach of the director’s duty of loyalty to us or our stockholders;

 

    any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

    unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or

 

    any transaction from which the director derived an improper personal benefit.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the consummation of this offering, provide that we are required to indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. Our amended and restated bylaws will also provide that we are obligated to advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under Delaware law. We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. With specified exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors’ and officers’ liability insurance.

 

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The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and our stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage.

Director Compensation

In 2016, our non-employee directors did not receive any cash compensation or equity awards for their services as directors. However, we have reimbursed our non-employee directors for reasonable out-of-pocket expenses incurred in attending board and committee meetings. Our employee directors did not receive any additional compensation for their service as members of our board of directors in 2016.

The following table sets forth information for the year ended December 31, 2016 regarding the compensation awarded to, earned by or paid to our non-employee directors:

 

Name

   Fees Earned
or Paid in
Cash ($)
     Option
Awards
($)
     All Other
Compensation
($)
     Total
($)
 

Peter L. Garran

                           

Michael A. Kumin

                           

In connection with this offering, we intend to adopt a Non-Employee Director Compensation Program (the “Director Compensation Program”) for the benefit of our non-employee directors, the expected material terms of which are described in more detail below under “–Director Compensation Program”. We expect that the Director Compensation Program will become effective on the date on which it is adopted by our board of directors. We have not yet implemented this program and, accordingly, its terms and conditions remain subject to modification. Directors who are also employees of the company will not receive fees for their service on our board of directors.

Director Compensation Program

The material terms of the Director Compensation Program, as it is currently contemplated, are summarized below. As noted above, our board of directors is still in the process of developing, approving and implementing the Director Compensation Program Plan and, accordingly, this summary is subject to change.

Under the Director Compensation Program, on the date of each annual meeting of our stockholders, each non-employee director as of the date of such meeting who will continue to serve on our board of directors following such meeting will receive an award of restricted stock units with a grant-date value equal to $100,000 (or, for any non-employee director who will serve as the chair of the audit committee immediately following such meeting, $120,000) (each, an “Annual Award”). Each non-employee director who commences service on the board of directors at any time other than on the date of an annual meeting of our stockholders will receive a pro-rated Annual Award for his or her initial year of service on the Board. In addition, the Director Compensation Program provides that, in connection with this offering, each non-employee director will receive a one-time award of restricted stock units with a grant-date value equal to $100,000 (or, with respect to the chair of the audit committee, $120,000).

Awards of restricted stock units granted under the Director Compensation Program will vest in full on the earlier to occur of the first anniversary of the grant date or the annual meeting of stockholders

 

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next-following the meeting at which such award was granted, subject to the non-employee director’s continued service on our board of directors through the vesting date.

Pursuant to the Director Compensation Program, non-employee directors also receive reimbursement of reasonable business expenses incurred in connection with their service on our board of directors.

 

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EXECUTIVE COMPENSATION

This section discusses the material components of the executive compensation program for our executive officers who are named in the “2016 Summary Compensation Table” below. In 2016, our “named executive officers” and their positions were as follows:

 

    Rosanna McCollough, Chief Executive Officer and President;