Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
 
FORM 10-Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number: 001-37453
 
MINDBODY, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
20-1898451
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4051 Broad Street, Suite 220
San Luis Obispo, CA 93401
(Address of principal executive offices)(Zip Code)
(877) 755-4279
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No  ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x

Accelerated filer
 
o

 
 
 
 
Non-accelerated filer
 
o  (Do not check if a small reporting company)
Small reporting company
 
o
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No x
As of May 8, 2018, the registrant had 43,778,041 shares of Class A common stock, and 3,691,775 shares of Class B common stock outstanding.
 

1


Table of Contents
 
 
 
Page
PART I.
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
 
Item 1.
Item 1A.
Item 6.
 

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Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. 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,” “possible,” “continue” or the negative of these words or other similar terms or expressions that concern, among other things, our expectations, strategy, plans or intentions. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
 
our ability to grow revenue and/or maintain our revenue growth rate by adding new customers, retaining and deepening relationships with existing customers, growing our consumer user base and increasing transaction volume across our two-sided marketplace of wellness;
our ability to timely and effectively scale and adapt our existing technology;
the effects of the evolving regulatory framework for privacy, security and data protection on our platform;
the effects of price increases;
benefits associated with use of our products and services;
our ability to introduce, develop or acquire new products and services, improve our existing products and services and increase the value of our products and services;
the network effects associated with our business;
our future financial performance, including expectations regarding trends in revenue, cost of revenue, operating expenses, other income and expenses, and income taxes;
our future key metric performance;
our ability to further develop strategic relationships, including our ability to increase or maintain our revenue from our API and technology partners;
our ability to strengthen or maintain partnerships with payment processors;
the security of our platform and the protection of data on our platform;
our plans for and ability to achieve positive returns on investments, including investment in research and development, sales and marketing, the development of our customer and consumer support teams and our data center infrastructure, and our ability to effectively manage our growth and associated investments;
our ability to successfully identify, acquire and integrate companies (including FitMetrix, Inc., or FitMetrix, and Booker Software, Inc., or Booker) and assets in a manner that generates positive returns;
our expectations relating to our acquisitions of FitMetrix and Booker;
the sufficiency of our cash and cash equivalents on hand, cash generated from operations or equity and/or debt financing activities to meet requirements for working capital and capital expenditures;
the effects of seasonal trends on our operating results;
our ability to attract and retain senior management, qualified employees and key personnel;
our ability to successfully enter new markets and manage our international expansion; and
our ability to maintain, protect and enhance our intellectual property and not infringe upon others’ intellectual property.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. The outcomes of the events described in these forward-looking statements are subject to substantial risks, uncertainties and other factors described in Part II, Item 1A - “Risk Factors,” and elsewhere, in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. 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 Quarterly Report on Form 10-Q. 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.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

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GLOSSARY

To assist you in reading this Quarterly Report on Form 10-Q, we have provided definitions of some of the terms and acronyms that we use:

Active consumer” - As of a given date, the estimated number of unique clients of our customers’ services who have used our platform to transact with our customers during the two years ending on such date. While we do not directly monetize consumers of our subscribers’ services, we believe that growth in the number of active consumers on our platform also contributes to our subscriber growth.  For a discussion of risks related to our calculation of active consumers, see the section titled “Risk Factors - Real or perceived inaccuracies in our key, user and other metrics may harm our reputation and negatively affect our business.”

API - Application programming interface.

app - Application.

ARPS” - Average monthly revenue per subscriber.

Client - A consumer who has chosen to purchase services from a customer's business.

Consumer” - Any person who may purchase wellness services.

High Value Subscriber” - Any customer on our platform, including FitMetrix customers and, beginning in the second quarter of 2018, Booker customers, exclusive of those customers on the Solo software level.

Subscriber” or “Customer - Unique physical locations or individual practitioners who have active subscriptions to services on our platform, as of the end of the period, including subscriptions to FitMetrix services and, beginning in the second quarter of 2018, Booker services.

The app” or “The MINDBODY app” - The MINDBODY app, our consumer-facing mobile application.

Wellness Practitioner or Practitioner” - Generally, staff members, instructors, trainers and stylists, and specifically where discussed as a number, those staff members, instructors, trainers and stylists with one or more bookings on our platform in the last month of the applicable period.


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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MINDBODY, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
 
 
March 31,
 
December 31,
2018
 
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
217,708

 
$
232,019

Accounts receivable
12,196

 
10,917

Deferred commissions, current portion
938

 

Prepaid expenses and other current assets
6,393

 
5,612

Total current assets
237,235

 
248,548

Property and equipment, net
33,185

 
32,871

Deferred commissions, non-current portion
2,668

 

Intangible assets, net
17,484

 
7,377

Goodwill
20,248

 
11,583

Other non-current assets
1,246

 
934

TOTAL ASSETS
$
312,066

 
$
301,313

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,376

 
$
7,448

Accrued expenses and other liabilities
12,827

 
13,099

Deferred revenue, current portion
5,949

 
6,318

Other current liabilities
1,135

 
1,828

Total current liabilities
29,287

 
28,693

Deferred revenue, non-current portion
1,499

 
3,201

Deferred rent, non-current portion
2,096

 
1,966

Financing obligation on leases, non-current portion
14,789

 
14,932

Other non-current liabilities
607

 
585

Total liabilities
48,278

 
49,377

Commitments and contingencies (Note 8)


 


Stockholders’ equity:
 
 
 
Class A common stock, par value of $0.000004 per share; 1,000,000,000 shares authorized, 43,672,907 shares issued and outstanding as of March 31, 2018; 1,000,000,000 shares authorized, 43,041,405 shares issued and outstanding as of December 31, 2017
1

 
1

Class B common stock, par value of $0.000004 per share; 100,000,000 shares authorized, 3,747,030 shares issued and outstanding as of March 31, 2018; 100,000,000 shares authorized, 3,901,966 shares issued and outstanding as of December 31, 2017

 

Additional paid-in capital
463,905

 
454,196

Accumulated other comprehensive loss
(116
)
 
(108
)
Accumulated deficit
(200,002
)
 
(202,153
)
Total stockholders’ equity
263,788

 
251,936

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
312,066

 
$
301,313

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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MINDBODY, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended March 31,
2018
 
2017
Revenue
$
53,823

 
$
42,214

Cost of revenue
15,421

 
12,019

Gross profit
38,402

 
30,195

Operating expenses:
 
 
 
Sales and marketing
18,105

 
16,334

Research and development
11,788

 
8,648

General and administrative
12,663

 
8,686

Total operating expenses
42,556

 
33,668

Loss from operations
(4,154
)
 
(3,473
)
Interest income (expense), net
366

 
(214
)
Other income (expense), net
39

 
(80
)
Loss before provision for income taxes
(3,749
)
 
(3,767
)
Income tax provision (benefit)
(2,058
)
 
142

Net loss
(1,691
)
 
(3,909
)
Net loss per share, basic and diluted
$
(0.04
)
 
$
(0.10
)
Weighted-average shares used to compute net loss per share, basic and diluted
47,106

 
40,757

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

MINDBODY, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
2018
 
2017
Net loss
$
(1,691
)
 
$
(3,909
)
Other comprehensive gain, net of taxes:
 
 
 
Change in cumulative translation adjustment
19

 
90

Comprehensive loss
$
(1,672
)
 
$
(3,819
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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MINDBODY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Three Months Ended March 31,
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(1,691
)
 
$
(3,909
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,648

 
2,090

Stock-based compensation expense
4,816

 
2,497

Partial release of valuation allowance
(2,133
)
 

Other
30

 
(9
)
Changes in operating assets and liabilities net of effects of acquisitions:
 
 
 
Accounts receivable
(1,012
)
 
(721
)
Deferred commissions
(2,674
)
 

Prepaid expenses and other assets
(1,036
)
 
(364
)
Accounts payable
1,089

 
294

Accrued expenses and other liabilities
(463
)
 
327

Deferred revenue
321

 
652

Deferred rent
160

 
176

Net cash provided by operating activities
55

 
1,033

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of property and equipment
(1,969
)
 
(1,406
)
Additions to internally developed software
(1,043
)
 

Acquisition of business, net of cash acquired
(15,196
)
 
(1,450
)
Net cash used in investing activities
(18,208
)
 
(2,856
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from employee stock purchase plan
2,006

 
1,510

Proceeds from exercise of equity awards
3,499

 
2,408

Payment related to shares withheld for taxes
(790
)
 

Payment of financing obligation related to HealCode acquisition
(750
)
 

Repayment on financing and capital lease obligations
(121
)
 
(100
)
Other

 
(33
)
Net cash provided by financing activities
3,844

 
3,785

Effect of exchange rate changes on cash and cash equivalents
(2
)
 
115

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(14,311
)
 
2,077

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
232,019

 
85,864

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
217,708

 
$
87,941

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
45

 
$
51

Cash paid for interest
297

 
310

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Earnout in business combination deemed part of total purchase consideration

 
5,142

Unpaid equipment purchases
1,798

 
559

Acquisition consideration held back to satisfy potential indemnification claims


 
750

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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MINDBODY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
MINDBODY, Inc. (“MINDBODY” or the “Company”) was incorporated in California in 2004 and reincorporated in Delaware in March 2015. MINDBODY is headquartered in San Luis Obispo, California and has operations in the United States, the United Kingdom, and Australia.
MINDBODY and its wholly-owned subsidiaries (collectively, the “Company”, “we”, “us” or “our”) is a provider of cloud-based business management software for the wellness services industry and a rapidly growing consumer brand. Its integrated software and payments platform helps business owners in the wellness services industry run, market and build their businesses. MINDBODY enables the consumers to evaluate, engage, and transact with local businesses in its marketplace.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements are presented in accordance with United States generally accepted accounting principles (“GAAP”), which include the accounts of MINDBODY and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP, and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments consisting only of normal recurring adjustments that are necessary for a fair statement of the Company’s financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2018. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted under the rules and regulations of the SEC.
These condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2017 included in the Annual Report on Form 10-K (“Annual Report”), which was filed with the SEC on March 1, 2018.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include the capitalization and estimated useful life of the Company’s internally developed software, useful lives of property and equipment, the period of benefit that deferred commissions are amortized over, the determination of fair value of stock awards issued and forfeiture rates, a valuation allowance for deferred tax assets, contingencies, and the purchase price allocation of acquired businesses. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Changes in facts or circumstances may cause the Company to change its assumptions and estimates in future periods, and it is possible that actual results could differ from current or future estimates.
Concentration of Credit Risk
As of March 31, 2018 and December 31, 2017, one trade receivable represented 22% and 17% of the accounts receivable balance, respectively. No single customer, API partner, or technology partner represented over 10% of revenue for any of the periods presented in the condensed consolidated statements of operations.

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Summary of Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies, other than the adoption of the new guidance on revenue from contracts with customers described below under the heading Recently Adopted Accounting Pronouncements and Note 2 - “Revenue Recognition,” as compared to the significant accounting policies described in the Company’s Annual Report.
Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09) (“Topic 606”). Topic 606 requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. It also states that an entity should recognize as an asset the incremental costs of obtaining a contract that the entity expects to recover and amortize that cost over a period consistent with the period over which the transfer to the customer of the underlying good or services occurs. Topic 606 requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted Topic 606 effective January 1, 2018 using the modified retrospective method to apply this guidance to all open contracts at the date of initial application, which resulted in an adjustment to accumulated deficit for the cumulative effect of applying this guidance.

Under Topic 606, incremental costs of obtaining a contract are recorded as an asset and recognized as an operating expense over the period that the Company expects to recover the costs, which is approximately four years.

The most significant impact of Topic 606 on revenue to the Company relates to the timing of revenue recognition for one of its payment contracts. Under Topic 606, the Company estimates the transaction price, including variable consideration, at the commencement of the contract and recognizes revenue over the contract term, rather than when fees become fixed or determinable.

The cumulative effect of changes related to the adoption of Topic 606 are reflected in the opening balance of accumulated deficit is shown below:

 
 
As Reported

 
Revenue Standard Adjustments

 
As Adjusted
 
 
December 31, 2017
 
 Payments Contract
 
Product and Other
 
 Cost to obtain a Contract
 
January 1, 2018

ASSETS
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
5,612

 
$

 
$
38

 
$

 
$
5,650

Other non-current assets
 
934

 

 
33

 

 
967

Deferred commissions, current portion
 

 

 

 
224

 
224

Deferred commissions, non-current portion
 

 

 

 
677

 
677

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
Deferred revenue, current portion
 
$
6,318

 
$
(958
)
 
$

 
$

 
$
5,360

Deferred revenue, non-current portion
 
3,201

 
(1,912
)
 

 
 
 
1,289

 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Accumulated deficit
 
$
(202,153
)
 
$
2,869

 
$
72

 
$
900

 
$
(198,312
)

See Note 2 – “Revenue Recognition,” for additional accounting policy and transition disclosures.


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In May 2017, the FASB issued authoritative guidance related to employee Share-Based Payments Transactions. The new guidance clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity should not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The amendments in this guidance are effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted the guidance on the effective date. The new guidance did not have and is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued authoritative guidance related to Clarifying the Definition of a Business. The new guidance clarifies whether transactions should be accounted for as acquisitions of assets or businesses. To be considered a business, the assets in the transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of this new guidance, an acquisition or disposition would be considered a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the guidance on the effective date noting there was no impact on its consolidated financial statements or the acquisitions of FitMetrix and Booker.

In January 2017, the FASB issued authoritative guidance related to Simplifying the Test for Goodwill Impairment. The new guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. The standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted the guidance effective on January 1, 2018 noting the adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued authoritative guidance related to the Classification of Certain Cash Receipts and Cash Payments. The new guidance standardizes cash flow statement classification of certain transactions, including cash payments for debt prepayment or extinguishment, proceeds from insurance claim settlements, and distributions received from equity method investments. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this update should be applied using a retrospective transition method to each period presented. If impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company adopted the guidance on the effective date noting the adoption of the new guidance did not have and is not expected to have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements

In March 2018, the FASB issued authoritative guidance intended to state the income tax accounting implications of the Tax Cuts and Jobs Act (“New Tax Act”), which clarifies the measurement period time frame, changes in subsequent reporting periods and reporting requirements as a result of the New Tax Act of 2017. The guidance allows disclosure that some or all of the income tax effects from the New Tax Act are incomplete by the due date of the financial statements and requests entities provide a reasonable estimate if possible. The Company has accounted for the tax effects of the New Tax Act under the guidance on a provisional basis. The Company’s accounting for certain income tax effects is incomplete, but it has determined reasonable estimates for those effects and has recorded provisional amounts in its consolidated financial statements as of March 31, 2018 and December 31, 2017.

In February 2016, the FASB issued authoritative guidance intended to improve financial reporting about leasing transactions. The new guidance requires entities to recognize assets and liabilities for leases with lease terms of more than 12 months. The new guidance also requires qualitative and quantitative disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. The new guidance is effective for the Company beginning January 1, 2019. The Company is evaluating the impact of the new standard on its consolidated financial statements and anticipates recording certain operating leases on the balance sheet upon adoption on the effective date.

In January 2018, the FASB issued authoritative guidance related to income statement-reporting for comprehensive income. The standard will permit entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of U.S. tax reform to retained earnings. The new guidance is effective for the Company beginning after December 15, 2018, and interim periods within those fiscal years. The effects of this standard on the Company’s financial position, results of operations and cash flows are not expected to be material.



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2. REVENUE RECOGNITION

The Company adopted Topic 606 effective January 1, 2018 using the modified retrospective method applying this guidance to all open contracts at the date of initial application, which resulted in an adjustment to accumulated deficit for the cumulative effect of applying this guidance.

We generate revenue primarily from providing an integrated cloud-based business management software and payments platform for the wellness services industry and, to a lesser extent, products.

The Company determines revenue recognition through the following steps:
i.
Identification of the contract, or contracts, with a customer
ii.
Identification of the performance obligations in the contract
iii.
Determination of the transaction price
iv.
Allocation of the transaction price to the performance obligations in the contract
v.
Recognition of revenue when, or as, the Company satisfies a performance obligation

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Components of revenue

The following is a description of principal activities from which the Company generates revenue. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. Stand-alone selling prices are determined based on the prices at which the Company separately sells its services or goods.

Subscription and Services. Subscription and services revenue is generated primarily from sales of subscriptions to the Company’s cloud-based business management software for the wellness services industry. The majority of the subscription fees are prepaid by customers on a monthly basis. The Company has concluded that each promised service is delivered concurrently with all other promised services over the contract term and, as such, has concluded that these promises are a single performance obligation that includes a series of distinct services that have the same pattern of transfer to the customer. The use of the cloud-based bundle and premium services is a stand-ready obligation to provide access to the Company’s cloud-based offering and related services over the contract term. Customers simultaneously receive and consume the benefit from the Company’s stand-ready obligation to perform these services. For subscription and service contracts, the period of time over which the Company is performing is commensurate with the contract term because that is the period during which the Company has an obligation to provide the service. The performance obligation is recognized on a time elapsed basis, by month for which the services are provided, as the Company transfers control evenly over the contractual period.

Additionally, the Company’s customers can choose to enter into a separate contract with its technology partners to purchase additional services for which the technology partner is the principal. The Company satisfies its stand-ready performance obligation by providing technology partners access to its platform for usage-based contracts. The transaction price includes variable consideration which is allocated to the series of distinct services the Company is providing each day. The variability is resolved as the performance of distinct services are satisfied and any remaining variability is allocated to unsatisfied performance obligations.

The Company also earns revenue from providing API partners access to customers sites, consumer bookings, and data query, through its platform. The Company satisfies its stand-ready performance obligation by providing access to its API and by processing transactions for usage-based contracts. The transaction price is calculated based on the number of transactions processed through its platform. Usage-based fees are deemed to be variable consideration that meet the “as invoiced” practical expedient as they are specific to the month that the usage occurs.

Payments. The Company earns payments revenue from revenue share arrangements with third-party payment processors on transactions between its customers who utilize the Company’s payments platform and their consumers. These payment transactions are generally related to purchases of classes, memberships, goods or services through a customer’s website, at its business location, and through the MINDBODY app. These transaction fees are recorded as revenue on a net basis when the payment transactions occur. The Company satisfies its performance obligation by providing access to its platform

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and processing transactions for payment-related services. Payment fees are variable consideration that meet the “as invoiced” practical expedient as they are specific to the month that the usage occurs.

Products and Other. The Company offers various point-of-sale system products and physical gift cards to its customers. The Company recognizes revenue when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery.

Disaggregation of Revenue

The following table provides information about disaggregated revenue by primary geographical market and major product line and timing of revenue recognition, and includes a reconciliation of the disaggregated revenue (in thousands):

 
Three Months Ended March 31,
 
2018
 
Subscription & Services
 
 Payments
 
 Products & Other
 
 Total
 
 
 
 
 
 
 
 
Primary geographical markets
 
 
 
 
 
 
 
United States
$
25,153

 
$
17,320

 
$
791

 
$
43,264

Other
7,590

 
2,909

 
60

 
10,559

Total
$
32,743

 
$
20,229

 
$
851

 
$
53,823


Subscription and service revenue and payments revenue is transferred over time and products and other revenue is transferred at a point in time.


Contract balances

The following table provides information about contract assets and deferred revenue from contracts with customers (in thousands):
 
Contract Assets
 
Deferred Revenue
 
Prepaid expenses and other current assets
 
Other non-current assets
 
Current
 
Non-Current
January 1, 2018
$
38

 
$
33

 
$
5,360

 
$
1,289

March 31, 2018
$
77

 
$
101

 
$
5,949

 
$
1,499


The Company receives payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets includes amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenues include payments received in advance of performance under the contract and are realized with the associated revenue recognized under the contract. The Company had no asset impairment charges related to contract assets in the period.

The Company did not recognize any revenue during the three months ended March 31, 2018 from performance obligations satisfied or partially satisfied in previous periods. Movements between contract assets and receivables was not significant during the three months ended March 31, 2018.

Deferred commissions costs (contract acquisition costs)

Contract acquisition cost, which primarily consists of sales commissions paid, is considered as incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined to be four years. The Company determined the period of benefit by taking into consideration its customer life and its technology useful life. Amortization expense is included in sales and marketing expenses on the condensed consolidated statements of operations.


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Contract acquisition cost was $2,848,000 for the three months ended March 31, 2018. Amortization expenses for contract acquisition cost were $143,000 for the three months ended March 31, 2018, and there was no impairment loss in relation to costs capitalized.

Practical Expedients and Exemptions

The Company has elected the following additional practical expedients in applying Topic 606:

Portfolio Approach: The Company is utilizing portfolio approach practical expedient for its contract portfolios e.g. subscription and services. The Company accounts for its contracts within each portfolio as a collective group, rather than individual contracts. Based on the Company’s history with these portfolios and the similar nature and characteristics of the customers within each portfolio, it has concluded that the financial statement effects are not materially different than if accounting for revenue on a contract by contract basis.

Sales Tax Exclusion from the Transaction Price: The Company excludes from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from its customers.


Transaction price allocated to the remaining performance obligations

The following table includes revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The transaction price for all unsatisfied performance obligations related to subscription and service revenue is not shown below since it is included in deferred revenue - current portion (in thousands):

 
2018 (Remaining nine months)
 
2019
 
2020
 
Thereafter
Payments revenue
$
1,547

 
2,062

 
2,062

 
$
1,547



Comparative GAAP Financials

The adoption of the new standard has the following impact to the Company’s condensed consolidated statements of operations (in thousands):

 
Three Months Ended March 31,
 
2018
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
Revenues
 
 
 
 
 
Subscription and services
$
32,743

 
32,743

 

Payments
20,229

 
20,240

 
(11
)
Product and Other
851

 
763

 
88

 
 
 
 
 
 
Cost and Expenses
 
 
 
 
 
Sales and marketing
18,105

 
20,810

 
(2,705
)
Net loss
(1,691
)
 
(4,473
)
 
2,782


The adoption of Topic 606 has the following impact to the Company’s condensed balance sheet (in thousands):


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Three Months Ended March 31,
 
2018
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
ASSETS
 
 
 
 
 
Prepaid expenses and other current assets
$
6,393

 
$
6,316

 
$
77

Other non-current assets
1,246

 
1,145

 
101

Deferred commissions, current portion
938

 

 
938

Deferred commissions, non-current portion
2,668

 

 
2,668

 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Deferred revenue, current portion
$
5,949

 
$
6,874

 
$
(925
)
Deferred revenue, non-current portion
1,499

 
$
3,413

 
(1,914
)
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
Accumulated deficit
200,002

 
206,626

 
(6,624
)

3. FAIR VALUE MEASUREMENTS
The Company measures and reports its cash equivalents at fair value on a recurring basis. The Company’s cash equivalents are invested in money market funds.
The following table presents the fair value of the Company’s financial assets by level within the fair value hierarchy (in thousands):
 
 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 
 
 
 
 
 
Money market funds(1)
$
210,334

 
$

 
$

 
$
210,334

 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Acquisition-related contingent consideration(2)
$

 
$

 
$
5,143

 
$
5,143


 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 
 
 
 
 
 
Money market funds(1)
$
224,165

 
$

 
$

 
$
224,165

 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Acquisition-related contingent consideration(2)

$

 
$

 
$
5,143

 
$
5,143

 
(1)
The Company’s cash and cash equivalents include money market funds that are required to be measured at fair value on a recurring basis. All such assets as of March 31, 2018 and December 31, 2017 were recorded based on Level 1 inputs.
(2)
The contingent consideration related to the acquisition of Lymber (see Note 5 - “Business Combinations”) is recorded as equity and is not subject to remeasurement. Fair value was based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company determined the fair value of the contingent consideration by discounting payments that are calculated based on Lymber’s projected future gross profit scenarios using the Monte Carlo simulation. The significant inputs used in the fair value measurement of contingent consideration are the timing and amount of gross profit in the respective periods (see Note 5 - “Business Combinations”) and the discount rate.

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There were no transfers of financial instruments between the three levels of the fair value hierarchy during the three months ended March 31, 2018. As of March 31, 2018 and December 31, 2017, the Company did not have any assets or liabilities that were required to be measured at fair value on a nonrecurring basis.
4. BALANCE SHEET COMPONENTS
Property and Equipment, net
Property and equipment consisted of the following (in thousands):
 
March 31,
 
December 31,
2018
 
2017
Computer equipment
$
21,451

 
$
20,671

Leasehold improvements
12,072

 
11,386

Office equipment
2,976

 
2,702

Software licenses
5,816

 
5,378

Building, leased
16,438

 
16,438

Property and equipment, gross
58,753

 
56,575

Less: accumulated depreciation and amortization
(25,568
)
 
(23,704
)
Property and equipment, net
$
33,185

 
$
32,871

Depreciation of property and equipment was $2,067,000 and $1,909,000 for the three months ended March 31, 2018 and 2017, respectively.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
March 31,
 
December 31,
2018
 
2017
Accrued payroll
$
7,584

 
$
7,591

Accrued vacation
3,075

 
2,400

Employee stock purchase plan contributions
608

 
1,548

Other liabilities
1,560

 
1,560

Total accrued expenses and other liabilities
$
12,827

 
$
13,099


5. BUSINESS COMBINATION
FitMetrix
On February 19, 2018, the Company completed the acquisition of FitMetrix, Inc. (FitMetrix), a privately-held company. FitMetrix, a MINDBODY technology partner at the time of acquisition, specializes in innovative performance tracking integrations with fitness studio equipment and wearables. The FitMetrix technology helps enable business owners to increase retention in group and personal training environments, and provides wellness seekers with an engaging, more interactive fitness experience. 
The acquisition of FitMetrix was accounted for in accordance with the acquisition method of accounting for business combinations with MINDBODY as the accounting acquirer. Under the acquisition method of accounting, the total purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price of $15,341,000, paid in cash, was allocated as follows: $9,540,000 to identifiable intangible assets acquired, $731,000 in net liabilities acquired and $2,133,000 to net deferred tax liabilities, with the excess $8,665,000 of the purchase price over the fair value of net assets acquired recorded as goodwill. Goodwill is primarily attributable to expanded market opportunities from selling and integrating FitMetrix’s technology solution with the Company’s other offerings and the associated assembled workforce acquired.

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The acquisition provided the Company with acquired intangible assets representing customer relationships, developed software/technology, and market related intangible assets. The fair value of the acquired intangibles is amortized on straight-line basis over its remaining useful life and is not expected to be deductible for tax purposes. As such, the Company recorded a net deferred tax liability which is comprised of deferred tax liabilities recognized in connection with the acquired intangible assets partially offset by deferred tax assets associated with acquired net operating loss carryforwards and credits.

The estimated useful lives and fair values of the identifiable intangible assets are as follows (in thousands):
 
Amount
Estimated Useful Life (in years)
Market related intangible asset
$
1,800

10
Customer relationships
5,800

5
Developed technology
1,940

5
Total intangible assets acquired
$
9,540

 
The results of operations of FitMetrix, which are not material, are included in the Company's consolidated statements of operations since the acquisition date. The Company does not consider the results to have a material effect on any of the periods presented in its consolidated statements of operations.
Lymber
On March 27, 2017, the Company completed the acquisition of substantially all of the assets of Lymber Wellness, Inc. (“Lymber”), a privately-held API partner that specializes in yield management solutions for class and appointment-based businesses. Lymber’s technology enables business owners to set dynamic pricing parameters for class and appointment sessions.  The technology identifies open class and appointment inventory, and automatically adjusts session prices in real-time to match supply and demand. 
The total purchase consideration for these assets was $7,342,000, which included cash consideration of $2,200,000, and contingent consideration with a fair value of approximately $5,142,000, of which $1,304,000 and $3,838,000 are expected to be earned in 2018 and 2019, respectively, payable in Class A common stock. This consideration is contingent upon Lymber’s product achieving certain levels of gross profit, measured annually, in 2018 and 2019, respectively, and the fair value of the equity classified contingent consideration was measured using a Monte Carlo simulation with various unobservable market data inputs, which are Level 3 measurements. The Company held back $500,000 of the cash consideration to satisfy potential indemnification claims, which amount is included in other current liabilities.  This hold back amount was paid to Lymber in April 2018.
The acquisition of Lymber was accounted for in accordance with the acquisition method of accounting for business combinations with MINDBODY as the accounting acquirer. Acquisition-related costs incurred and expensed by the Company were immaterial and were included within general and administrative expenses on the consolidated statements of operations. Under the acquisition method of accounting, the total purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. Goodwill of $2,544,000 was allocated to the Company’s one operating segment and represents 35% of the total purchase consideration. Goodwill is primarily attributable to expanded market opportunities from selling and integrating Lymber’s yield management solution with the Company’s other offerings and the associated assembled workforce acquired. Goodwill is amortized over 15 years for tax purposes.
The acquisition provided the Company with acquired intangible assets representing internally developed software/technology. The fair value of the acquired intangible asset was determined based on the income approach and discounted cash flow/excess earnings method and is subject to amortization on a straight-line basis over its remaining useful life of five years.
The allocation of the purchase price consideration is as follows (in thousands):
 
 
Amount
Intangible asset – developed software/technology
 
$
4,798

Goodwill
 
2,544

Fair value of total purchase consideration
 
$
7,342

The results of Lymber are included in the Company’s consolidated statements of operations since the acquisition date, including revenues and net loss, and were not material. Pro forma results of operations have not been presented because the acquisition was not material to the Company’s results of operations.

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Contemporaneous to signing the purchase agreement, the stockholders of Lymber amended the existing company charter to effectively increase the distribution of ownership interest to existing stockholders who continued as employees with MINDBODY.  The change in the ownership interest is viewed to have benefited MINDBODY, and as such, a portion of the contingent consideration discussed above is attributed to post-acquisition expense. The approximate fair value of this consideration is $2,547,000, of which $646,000 and $1,901,000 relate to the 2018 and 2019 earnouts, respectively. This post-acquisition expense is being recorded as non-cash operating expense over the requisite service periods.

6. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company’s goodwill balance is solely attributable to acquisitions. There have been no impairment charges recorded against goodwill.
The Company’s intangible assets consisted of the following (in thousands except years):
 
March 31, 2018
 
Useful Life
(Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Acquired technology
3 to 5
 
$
9,469

 
$
(2,501
)
 
$
6,968

Acquired market-related intangibles
10
 
1,800

 
(20
)
 
1,780

Acquired customer relationships
2 to 5
 
6,220

 
(550
)
 
5,670

Internally developed software
2 to 3
 
4,851

 
(1,785
)
 
3,066

Total intangible assets
 
 
$
22,340

 
$
(4,856
)
 
$
17,484

 
December 31, 2017
 
Useful Life
(Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Acquired technology
3 to 5
 
$
7,529

 
$
(2,104
)
 
$
5,425

Acquired customer relationships
2
 
420

 
(420
)
 

Internally developed software
2 to 3
 
3,703

 
(1,751
)
 
1,952

Total intangible assets
 
 
$
11,652

 
$
(4,275
)
 
$
7,377

 
The Company’s capitalized software development costs were $1,148,000 and zero for the three months ended March 31, 2018 and 2017, respectively. The Company has internally developed software in process of $606,000 and $1,559,000 as of March 31, 2018 and December 31, 2017, respectively.


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Amortization of intangible assets (in thousands):

 
Three Months Ended March 31,
 
2018
 
2017
Amortization of acquired intangible assets
$
547

 
$
174

Amortization of internally developed software
34

 
7

Total amortization of intangible assets
$
581

 
$
181

The expected future annual amortization expense of intangible assets as of March 31, 2018 is presented below (in thousands):
Year Ending December 31,
 
2018 (Remaining nine months)
$
2,924

2019
3,883

2020
3,881

2021
3,105

2022
1,953

Thereafter
1,132

Total amortization expense, excluding internally developed software in process
$
16,878


7. DEBT
Credit Facility
On January 12, 2015, the Company entered into a loan agreement with Silicon Valley Bank for a secured revolving credit facility that allows the Company to borrow up to $20,000,000 for working capital and general business requirements. The Company has not drawn down any amounts under the loan.
On January 12, 2018, the Company amended the loan agreement with Silicon Valley Bank. Silicon Valley Bank extended the maturity date of the revolving line from January 12, 2018 to January 11, 2019 and included an accordion feature for the revolving line, such that the revolving line may, upon the Company’s request and subject to certain conditions, be increased by an additional aggregate amount of up to $20,000,000. Silicon Valley Bank also reduced the interest rate to the greater of the prime rate (4.75% as of March 31, 2018) or 4.5%. The credit facility is secured by substantially all of the Company’s corporate assets.

8. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company has operating lease agreements with lease periods expiring between 2019 and 2030. Rent expense was $1,791,000 and $1,343,000 for the three months ended March 31, 2018 and 2017, respectively.
Financing Obligation
The Company occupies office space in San Luis Obispo, California, constructed under a 15 year build-to-suit lease arrangement for which the Company is considered the “deemed owner” for accounting purposes. The lease has an initial term of 15 years, and the Company has an option to extend the term of the lease for three consecutive terms of five years each. The portion of the lease obligation allocated to the building for accounting purposes is being treated as a financing obligation. The portion of the lease obligation allocated to the land for accounting purposes is being treated as an operating lease. The financing obligation is being settled through the monthly lease payments. In the table below, the remaining future minimum lease payments on the building, leased, include interest of $8,811,000 to be recognized over the remainder of the initial term of the lease agreement. The total financing obligation as of March 31, 2018 is $15,329,381, of which $540,000 is recorded as a current obligation.

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Future Minimum Lease Payments
Future minimum lease payments under non-cancellable lease agreements as of March 31, 2018 were as follows (in thousands):
Year Ending December 31,
 
Operating
Leases
 
Financing
Obligation,
Building-
Leased
 
Total
2018 (Remaining nine months)
 
$
3,732

 
$
1,269

 
$
5,001

2019
 
4,861

 
1,729

 
6,590

2020
 
4,741

 
1,781

 
6,522

2021
 
4,005

 
1,835

 
5,840

2022
 
3,324

 
1,890

 
5,214

Thereafter
 
10,151

 
15,637

 
25,788

Total minimum lease payments
 
$
30,814

 
$
24,141

 
$
54,955

 
Purchase Commitments
 
Future unconditional purchase commitments for software subscriptions and data center and communication services as of March 31, 2018 were as follows (in thousands):
Year Ending December 31,
 
2018 (remaining nine months)
$
2,645

2019
3,711

2020
1,124

Total purchase commitments
7,480

Litigation
 
From time to time, the Company may become involved in legal proceedings, claims, and litigation arising in the ordinary course of business.  Management is not currently aware of any matters that it expects would have a material adverse effect on the consolidated financial position, results of operations, or cash flows of the Company.

9. COMMON STOCK AND STOCKHOLDER’S EQUITY
Common Stock
Immediately prior to the completion of MINDBODY’s initial public offering (“IPO”), all outstanding shares of common stock were reclassified into 11,305,355 shares of Class B common stock, and the Company’s certificate of incorporation was amended and restated to authorize the Company to issue 1,000,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each with a par value of $0.000004 per share. The amended and restated certificate of incorporation also:
established that, on any matter that is submitted to a vote of the stockholders, the holder of each share of Class A common stock is entitled to 1 vote per share, while the holder of each share of Class B common stock is entitled to 10 votes per share;
established that shares of Class B common stock are convertible into shares of Class A common stock at the option of the holder and automatically convert into shares of Class A common stock upon transfer, subject to limited exceptions; and
established that, except with respect to voting and conversion rights, as discussed above, the rights of the holders of Class A and Class B common stock are identical.

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Following the IPO, the number of outstanding shares of Class A common stock has increased, with an associated decrease in the number of shares of outstanding Class B common stock, primarily as a result of the conversion of shares of Class B common stock held by pre-IPO investors and stockholders into shares of Class A common stock. In addition, several options have been exercised and RSUs (as defined herein) have vested, as well as purchases under the Company’s 2015 ESPP (as defined herein), all resulting in an increase in the number of shares of Class A common stock. Finally, in May 2017, the number of shares of Class A common stock increased as a result of the issuance of 5,060,000 shares of Class A common stock in the Company’s follow-on public offering.
2015 Equity Incentive Plan
The Company’s 2015 Equity Incentive Plan (“2015 Plan”) became effective on June 17, 2015 and serves as the successor to the Company’s 2009 Stock Option Plan (“2009 Plan”).  As of March 31, 2018, there were 7,726,327 shares of Class A common stock available for issuance under the 2015 Plan. The number of shares available for issuance under the 2015 Plan includes an annual increase on the first day of each fiscal year beginning in 2016, equal to the least of 3,915,682 shares, 5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year, or such other amount as the Company’s board of directors or compensation committee may determine. Accordingly, effective as of January 1, 2018, the number of shares available for issuance under the 2015 Plan was increased by 2,347,168 shares of Class A common stock. All stock options under the 2015 Plan have a term of no greater than ten years from the date of grant. As of March 31, 2018, options to purchase 1,416,734 shares of Class A common stock and 1,757,487 restricted stock units (“RSUs”), which will be settled in shares of Class A common stock, remained outstanding under the 2015 Plan.
The 2015 Plan provides for the grant of non-statutory stock options, restricted stock awards (“RSAs”), RSUs, stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants and its parent and subsidiary corporations’ employees and consultants. Neither RSAs nor RSUs require payment from the employee or service provider. Each RSA and RSU represents the right to receive one share of Class A common stock upon vesting or settlement, as applicable. The RSUs generally vest over a period of approximately one or four years depending on the nature of the award. These awards are contingent upon the related employees’ continuous employment with the Company. As such, compensation expense is being recorded over the requisite service period of one or four years.
2015 Employee Stock Purchase Plan
The Company’s 2015 Employee Stock Purchase Plan (“ESPP”) became effective on June 2, 2015. As of March 31, 2018, there were 1,349,813 shares of Class A common stock available for issuance under the ESPP. The number of shares available for sale under the ESPP includes an annual increase on the first day of each fiscal year beginning in 2016, equal to the least of 783,136 shares, 1% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year, or such other amount as the Company’s board of directors or compensation committee may determine. Accordingly, effective as of January 1, 2018, the number of shares available for issuance under the ESPP was increased by 469,433 shares of Class A common stock.
Under the ESPP, eligible employees are granted options to purchase shares of Class A common stock through payroll deductions. The ESPP provides for 24-month offering periods. Each offering period includes four purchase periods, which are approximately six-month periods commencing with one exercise date and ending with the next exercise date. At the end of each purchase period, employees are able to purchase shares at 85% of the lower of the fair market value of the Class A common stock on the first trading day of each offering period or the end of each six-month purchase period. New offering periods commence every six months on or about February 22 and August 22 of each year. Employees purchased 152,345 shares of Class A common stock for an aggregate cost of $2,006,000 under the ESPP during the three months ended March 31, 2018.
2009 Stock Option Plan
The 2009 Plan, which provides for the grant of incentive stock options, non-statutory stock options, and restricted stock to employees, directors, and consultants terminated on June 18, 2015. Accordingly, no shares were available for issuance under the 2009 Plan after that time. The 2009 Plan continues to govern outstanding awards granted thereunder. As of March 31, 2018, options to purchase 2,053,808 shares of Class B common stock remained outstanding under the 2009 Plan.
RSU and RSA Activity
A summary of the activity for the Company’s RSUs and RSAs is presented below (in thousands, except share numbers and per share amounts):

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Number of
Shares
 
Weighted-
Average
Grant Date
Fair Value
(per share)
 
Aggregate
Intrinsic
Value
Unvested balance – December 31, 2017
1,322,650

 
$
23.14

 
$
40,275

Granted
532,554

 
35.78

 
 
Vested
(68,832
)
 
26.65

 
 
Forfeited
(28,885
)
 
24.35

 
 
Unvested balance – March 31, 2018
1,757,487

 
$
26.81

 
$
68,366


As of March 31, 2018, there was a total of $41,115,000 in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of approximately 3.1 years.
Stock Option Activity
A summary of the activity for the Company’s stock option plans during the reporting periods and a summary of information related to options vested and expected to vest and options exercisable are presented below (in thousands, except shares, per share amounts, and contractual life years):
 
Options Outstanding
Number of
Shares
Underlying
Outstanding
Options
 
Weighted-
Average
Exercise Price
 
Weighted-Average
Grant Date Fair Value
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic Value
Outstanding – December 31, 2017
3,436,048

 
$
13.44

 
 
 
6.8
 
$
58,605

Granted
317,797

 
34.33

 
$
12.76

 
 
 
 
Exercised
(278,451
)
 
12.57

 
 
 

 
7,332

Forfeited or canceled
(4,852
)
 
14.05

 
 
 

 
 
Outstanding – March 31, 2018
3,470,542

 
$
15.42

 
 
 
6.9
 
$
81,598

Exercisable – March 31, 2018
1,925,520

 
$
9.53

 
 
 
5.6
 
$
56,561

Vested and expected to vest – March 31, 2018
3,443,070

 
$
15.35

 
 
 
6.9
 
$
81,194


The total fair value of options vested during the three months ended March 31, 2018 and 2017 was $2,078,000 and $1,585,000, respectively.

As of March 31, 2018, the total unrecognized stock-based compensation expense for unvested stock options, net of expected forfeitures, was $13,682,000, which is expected to be recognized over a weighted-average period of 2.6 years.
Other Stock-Based Compensation
During the three months ended March 31, 2018 and 2017, the Company recorded stock-based compensation expense of $259,000 and $15,000, respectively, attributed to post-acquisition services that are payable in shares of the Company’s Class A common stock.
There were no non-employee grants during the three months ended March 31, 2018 and 2017.
Determination of Fair Value
The Company records stock-based compensation based on the fair value of stock options on grant date using the Black-Scholes option-pricing model. The Company determines the fair value of shares of common stock to be issued under the ESPP using the Black-Scholes option-pricing model.

The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine the fair value of stock options granted:


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Three Months Ended March 31,
2018
 
2017
Expected term (in years)
5.2
 
5.8
Expected volatility
37% - 38%
 
44%
Risk-free interest rate
2.7%
 
2%
Dividend yield
0%
 
0%
 
The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine fair value of common shares to be issued under the ESPP:

 
Three Months Ended March 31,
2018
 
2017
Expected term (in years)
0.5 - 2.0
 
0.5 - 2.0
Expected volatility
33% - 37%
 
35% - 39%
Risk-free interest rate
1.7% - 2.3%
 
0.59% - 1.22%
Dividend yield
0%
 
0%
Total Stock-Based Compensation Expense
Total stock-based compensation expense related to stock options, ESPP and restricted stock units and awards is included in the consolidated statements of operations as follows (in thousands):

 
Three Months Ended March 31,
2018
 
2017
Cost of revenue
$
424

 
$
261

Sales and marketing
1,144

 
506

Research and development
1,312

 
527

General and administrative
1,936

 
1,203

Total stock-based compensation expense
$
4,816

 
$
2,497


10. INCOME TAXES
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act, among other things, reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, changes rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and creates new taxes on certain foreign sourced earnings. On December 31, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation. However, the Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax.
The income tax benefit of $2,058,000 for the three months ended March 31, 2018 is primarily attributable to the partial release of $2,133,000 of the U.S. valuation allowance in conjunction with the acquisition of FitMetrix since the acquired net deferred tax liabilities will provide a source of income for the Company to realize a portion of its deferred tax assets, for which a valuation allowance is no longer needed (see Note 5 - “Business Combinations”). The Company’s effective tax rate for the three months ended March 31, 2018 and 2017 was 54.9% and negative 3.8%, respectively.


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11. NET LOSS PER SHARE
The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders for the periods presented (in thousands, except per share data):
 
Three Months Ended March 31,
2018
 
2017
Net loss attributable to common stockholders
$
(1,691
)
 
$
(3,909
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.04
)
 
$
(0.10
)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted
47,106

 
40,757

 
Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss. The following shares have been excluded from the calculation of diluted net loss per share attributable to common stockholders for each period presented because they are anti-dilutive (in thousands):
 
As of March 31,
2018
 
2017
Shares subject to outstanding stock options and employee stock purchase plan
3,505
 
4,022

Shares subject to outstanding restricted stock units
1,757
 
988

Total
5,262
 
5,010


12. SEGMENTS AND INFORMATION BY GEOGRAPHIC LOCATION
Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer.
The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Further, there is one business activity, and there are no segment managers who are held accountable for operations, operating results, and plans for levels, components, or types of products or services below the consolidated unit level. Accordingly, the Company has a single operating and reporting segment.

Substantially all of the Company’s assets were attributable to operations in the United States as of March 31, 2018 and December 31, 2017.

13. SUBSEQUENT EVENTS

Acquisition of Booker Software, Inc.

On April 2, 2018, the Company completed the acquisition of Booker Software, Inc. (Booker), a privately-held company for $150.0 million in cash (as adjusted based on Booker’s closing indebtedness, cash, unpaid transaction expenses and net working capital), assumed liabilities, and the assumption of unvested stock option awards. Booker is a leading cloud-based business management platform for salons and spas, and is the provider of Frederick, a fast-growing, automated marketing software for wellness businesses. The assumed unvested stock option awards were converted into options to purchase shares of the Company’s Class A common stock, based upon an exchange ratio as described in the definitive agreement. Of the as-adjusted cash purchase price, we deposited $7.5 million into a third-party escrow account for one year as partial security for the indemnification obligations of the Booker equityholders, and another $1.0 million in a third-party escrow account as partial security for certain specified indemnified matters. The Company also secured representation and warranty insurance as additional recourse for certain losses

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arising out of any inaccuracy in, or breaches of, representations and warranties of Booker. The Company is in the process of completing a purchase price allocation and expects to include it the Company’s consolidated financial statements for the quarterly period ending June 30, 2018.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q.
Overview
We are the leading provider of cloud-based business management software for the wellness services industry and a rapidly growing marketplace for wellness services. As of March 31, 2018, our customers employed approximately 395,000 wellness practitioners serving approximately 43 million active consumers in more than 100 countries. We are also a leading payments platform dedicated to the wellness services industry transacting approximately $2,245 million and $1,866 million on our payments platform for the three months ended March 31, 2018 and 2017, respectively, representing a 20% increase year over year.
We provide our software as a subscription-based service to our 57,909 subscribers, as of March 31, 2018. We primarily market and sell subscriptions for our platform to small and medium-sized businesses within the wellness services industry, targeting specifically boutique fitness, salon, spa and integrative health businesses.
Our integrated software and payments platform creates powerful network effects. As more local wellness businesses adopt our platform, more customer listings appear on the MINDBODY app and third-party partner sites available through MINDBODY Promote (formerly the MINDBODY Network).  As awareness of these businesses increases through these marketing channels, they attract more consumers to our platform. Those consumers then attract even more businesses to our platform. As those businesses and consumers engage in more transactions on our platform, payments and API revenue increases resulting in additional revenue streams from demand generation. Finally, as we add more customers and consumers to our wellness ecosystem, we attract more technology developers and partners who can use our open API to develop additional apps that extend the capabilities of our open platform.
We currently focus our growth strategy on the United States, Canada, the United Kingdom, Ireland, Australia, New Zealand, Hong Kong, and Singapore. In the first quarter of 2018, we began implementing price increases and we simplified our software packaging, offering the following three software levels to our customers: Essential, Accelerate and Ultimate.
On February 19, 2018, we completed the acquisition of FitMetrix, Inc. (FitMetrix), a privately-held company specializing in innovative performance tracking integrations with fitness studio equipment and wearables. We expect to expand adoption of FitMetrix across our customer base while continuing to develop new cutting-edge workout innovations. We believe the acquisition of FitMetrix expands our value proposition for fitness studios and clubs worldwide, while also helping us attract new high value subscribers.
We intend to continue scaling our organization in order to meet the needs of our customers. We also intend to continue growing the inventory of wellness services on our transaction-enabled marketplace. We have invested and expect to continue to invest in our sales and marketing teams to sell our platform globally, including, in particular, to high value subscribers in the countries noted above. A key element of our growth strategy is the continuous enhancement and expansion of our software and payments platform, as well as our transaction-enabled marketplace, by continuously developing and implementing new features and functionality. Through consistent innovation and strategic acquisitions, we have increased both the number of high value subscribers and the revenue we generate from our customers over time.
We plan to continue to enhance our software architecture and enhance and expand our platform through ongoing investments in research and development and sales and marketing, and by pursuing strategic acquisitions of complementary businesses and technologies that will enable us to continue to drive growth in the future.

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We also expect to continue to make investments in both our data center infrastructure and our customer service and customer onboarding teams to meet the needs of our growing user base.
While these areas represent significant opportunities for us, we also face significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. Due to our continuing investments to grow our business, we are continuing to incur expenses in the near term from which we may not realize any long-term benefit. In addition, any investments that we make in sales and marketing or other areas will occur in advance of our experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas.
Set forth below are summary financial highlights for the three months ended March 31, 2018 and 2017:

 
Three Months Ended March 31,
 
Change
2018
 
2017
 
%
(dollars in millions)
Revenue
$
53.8

 
$
42.2

 
27
%
Net loss
(1.7
)
 
(3.9
)
 

Adjusted EBITDA(1)
$
4.6

 
$
1.1

 

(1) For a reconciliation of Adjusted EBITDA to net loss, see the section below titled “Non-GAAP Financial Measure.”
During the three months ended March 31, 2018 and 2017, approximately 80% and 82% of our revenue came from the United States, respectively.
Our employee headcount increased to 1,461 employees as of March 31, 2018, from 1,444 as of March 31, 2017.
Recent Developments
Acquisition of Booker Software, Inc.    

On April 2, 2018, we completed our acquisition of Booker Software, Inc. (Booker). For additional information, see Note 13 - “Subsequent Events” contained in the “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Key Metrics
We regularly review the following key metrics to measure our performance, identify trends affecting our business, formulate financial projections, make strategic business decisions and assess working capital needs.
 
As of and for the Three Months Ended March 31,
 
2018
 
2017
Subscribers (end of period)
57,909

 
59,919

Average monthly revenue per subscriber
$
302

 
$
230

Payments volume (in millions)
$
2,245

 
$
1,866

Dollar-based net expansion rate (average for the quarter)
106
%
 
108
%
 

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Subscribers. Subscribers are defined as unique physical locations or individual practitioners who have active subscriptions to services on our platform, as of the end of the period, including subscriptions to FitMetrix services and, beginning in the second quarter of 2018, Booker services. The overall number of subscribers has decreased year over year from 59,919 to 57,909. We believe the number of subscribers is one indicator of the growth of our platform, but the revenue contribution of individual subscribers can vary widely. For example, the vast majority of our revenue is generated from our high value subscribers. High value subscribers are defined as any customer on our platform, including FitMetrix customers and, beginning in the second quarter of 2018, Booker customers, exclusive of those customers on the Solo software level. The number of subscribers on our Solo software level has decreased from 5,841 as of March 31, 2017 to 2,129 as of March 31, 2018, and the number of our high value subscribers increased from 54,078 as of March 31, 2017 to 55,780 as of March 31, 2018. Growth in the number of our high value subscribers depends, in part, on our ability to successfully develop and market our platform to wellness businesses and consumers who have not yet become part of our network. We expect the number of high value subscribers and overall subscribers to fluctuate over time.
Average Monthly Revenue per Subscriber. We believe that our ability to increase the average monthly revenue per subscriber, which we also refer to as ARPS, is an indicator of our ability to increase the long-term value of our existing subscriber relationships. ARPS is calculated by dividing the subscription and services and payments revenue generated in a given month by the number of subscribers at the end of the previous month. For periods greater than one month, ARPS is the sum of the average monthly revenue per subscriber for each month in the applicable period, divided by the number of months in the period. For example, the ARPS measurement period in the table above was measured over each of the three months ended March 31, 2018 and 2017. ARPS increased for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. ARPS may decrease on a sequential basis in the near term as result of the addition of Booker customers in the second quarter of 2018.

Payments Volume. We believe that payments volume is an indicator of the underlying current health of our customers’ businesses and of consumer spending trends as well as being a major driver of our payments revenue. Payments volume is the total dollar volume of transactions between our customers and consumers utilizing our payments platform. Payments volume increased for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, and we expect it to continue to increase in the future.  The growth rate in payments volume decreased for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, and we expect it to fluctuate over time.

Dollar-Based Net Expansion Rate. Our business model focuses on maximizing the lifetime value of a customer relationship. We can achieve this by focusing on delivering value and functionality that retains our existing customers and by expanding the revenue derived from our customers over the lifetime of the relationship by selling higher value subscriptions to customers on lower software levels, through the utilization of our premium customer support offering, by increasing the value of transactions processed through our payments platform, and through services provided by our API and technology partners. We assess our performance in this area by measuring our dollar-based net expansion rate. Our dollar-based net expansion rate provides a measurement of our ability to increase revenue across our existing customer base, offset by churn, downgrades in subscriptions, reduction in services utilization and reductions in the value of transactions that our customers process through our payments platform. Our dollar-based net expansion rate is based upon our monthly subscription and services and payments revenue for a set of customer accounts. We calculate our dollar-based net expansion rate by dividing our retained revenue net of contraction and churn by our base revenue. We define our base revenue as the aggregate monthly subscription and services and payments revenue of our customer base as of the date one year prior to the date of calculation. We define our retained revenue net of contraction and churn as the aggregate monthly subscription and services and payments revenue of the same customer base included in our measure of base revenue at the end of the period being measured. In the first quarter of 2018, we started to calculate our dollar-based net expansion rate using a quarterly average. We believe that this change in methodology for calculating our dollar-based net expansion rate will mitigate some of the volatility that can occur when this key metric is calculated using only the last month in the period. Prior period amounts have been adjusted to reflect this change in methodology. We expect our dollar based net expansion rate to fluctuate over time.

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Non-GAAP Financial Measure
Adjusted EBITDA
To provide investors with additional information regarding our financial results prepared in accordance with U.S. generally accepted accounting principles, or GAAP, we have presented Adjusted EBITDA, which is a non-GAAP financial measure defined by us as our net loss before (1) stock-based compensation expense, (2) depreciation and amortization, (3) acquisition-related expenses, including, transaction expenses, (4) income tax provision (benefit), and (5) other expense, net, which consisted of interest income (expense), net, and other income (expense), net. Prior period acquisition-related expenses were insignificant. Accordingly, prior periods have not been adjusted to reflect these expenses.
We have provided below a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. We have presented Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short and long-term operational plans. In particular, we believe that the exclusion of the amounts eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
The use of Adjusted 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:
Adjusted EBITDA excludes stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business;
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 does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
Adjusted EBITDA does not reflect cash requirements for acquisition-related expenses, or tax payments; and
Other companies, including companies in our industry, may calculate Adjusted 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 along with other GAAP-based financial performance measures, including various cash flow metrics, net loss, and our GAAP financial results. The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods indicated:
 
 
Three Months Ended March 31,
2018
 
2017
(in thousands)
Net loss
$
(1,691
)
 
$
(3,909
)
Stock-based compensation expense
4,816

 
2,497

Depreciation and amortization
2,648

 
2,090

Acquisition-related expenses
1,311

 

Income tax provision (benefit)
(2,058
)
 
142

Other (income) expense, net
(405
)
 
294

Adjusted EBITDA
$
4,621

 
$
1,114

Components of Statements of Operations
Revenue

See Note 2 - “Revenue Recognition,” contained in the “Notes to Condensed Consolidated Financial Statements” in Item I of Part I of this Quarterly Report on Form 10-Q.

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Cost of Revenue
Cost of revenue primarily consists of costs associated with personnel and related infrastructure for operation of our cloud-based business management platform, data center operations, global customer support and onboarding services, payment processing for customers that pay via credit card, and allocated overhead. Personnel costs consist of salaries, benefits, bonuses and stock-based compensation. Overhead consists of certain facilities costs, depreciation expense, amortization expense associated with acquired intangible assets, information technology costs, and impairment charges for acquired intangible assets and internally developed software.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses.
Sales and marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, benefits, bonuses, stock-based compensation and commission costs for our sales and marketing personnel. Sales and marketing expense also includes costs for market development programs, advertising, lead generation, promotional and other marketing activities, and allocated overhead. Sales and marketing expense is our largest operating expense, driving growth in customers, ARPS and consumer adoption, and we expect to continue to increase this expense in absolute dollars as we increase our sales and marketing efforts, including consumer marketing efforts, although such expense may fluctuate as a percentage of total revenue. Historically, we expensed all these costs as incurred, but in connection with the adoption of Topic 606, we are capitalizing incremental costs of obtaining a contract with a customer, and we amortize this cost over a four-year period providing a temporary reduction in sales and marketing personnel costs. See Note 2 - “Revenue Recognition,” contained in the “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q for a description of the impact of the capitalization of incremental costs of obtaining a contract with a customer.
Research and development. Research and development expense consists primarily of personnel costs, including salaries, benefits, bonuses, and stock-based compensation for our development personnel. Research and development expense also includes outsourced software development costs and allocated overhead. We expect research and development expense to continue to increase in absolute dollars as we continue to invest in our research and product development efforts to enhance our product capabilities and access new markets, although such expense may fluctuate as a percentage of total revenue.
General and administrative. General and administrative expense consists primarily of personnel costs, including salaries, benefits, bonuses, and stock-based compensation for our executive, finance, legal, human resources, information technology, and other administrative personnel. General and administrative expense also includes acquisition-related expenses, including transaction expenses, consulting, legal and accounting services, allocated overhead, and other expenses associated with compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and other regulations governing public companies. We will continue to incur additional costs associated with being a public company including higher legal, corporate insurance and accounting expenses. We also expect to incur transaction and integration expenses associated with the acquisition of Booker, which closed on April 2, 2018. We expect general and administrative expense to continue to increase in absolute dollars as we grow our operations and operate as a public company, although such expense may fluctuate as a percentage of total revenue.
Other Income and Expenses
Our other income and expenses line items consist of interest income (expense), net, and other expense, net.
Interest income (expense), net. Interest income (expense), net, consists primarily of the interest incurred on the financing obligation associated with our build-to-suit lease arrangement and interest earned on our cash and cash equivalent balances. We entered into a loan agreement with Silicon Valley Bank in 2015 for a secured revolving credit facility, and any future draws on this loan agreement will incur interest expense and result in increased interest expense in future periods. This loan agreement is set to expire in January 2019.
Other income (expense), net. Other income (expense), net, consists primarily of gains and losses on disposals of property and equipment, gains and losses from foreign currency transactions, and other income and expenses.
Income Tax Provision (Benefit)
Income tax provision (benefit) consists primarily of federal and state income taxes in the United States, income taxes in certain foreign jurisdictions in which we conduct business, and the partial release of our valuation allowance as a result of net

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deferred tax liabilities assumed in business acquisitions. We have a full valuation allowance for net U.S. deferred tax assets, including net operating loss carryforwards. We expect to maintain this full valuation allowance for the foreseeable future.
Results of Operations
The following tables set forth our results of operations data in dollars and as a percentage of revenue for the periods presented. The period-to-period comparison of results of operations is not necessarily indicative of results to be expected for future periods.
 
Three Months Ended March 31,
2018
 
2017
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
Revenue
$
53,823

 
$
42,214

Cost of revenue(1)
15,421

 
12,019

Gross profit
38,402

 
30,195

Operating expenses:
 
 
 
Sales and marketing(1)
18,105

 
16,334

Research and development(1)
11,788

 
8,648

General and administrative(1)
12,663

 
8,686

Total operating expenses
42,556

 
33,668

Loss from operations
(4,154
)
 
(3,473
)
Interest income (expense), net
366

 
(214
)
Other income (expense), net
39

 
(80
)
Loss before provision for income taxes
(3,749
)
 
(3,767
)
Income tax provision (benefit)
(2,058
)
 
142

Net loss
$
(1,691
)
 
$
(3,909
)
 
Three Months Ended March 31,
2018
 
2017
(as a percentage of revenue)
Consolidated Statements of Operations Data:
 
 
 
Revenue
100
 %
 
100
 %
Cost of revenue
29
 %
 
28
 %
Gross profit
71
 %
 
72
 %
Operating expenses:
 
 
 
Sales and marketing
34
 %
 
39
 %
Research and development
22
 %
 
20
 %
General and administrative
23
 %
 
21
 %
Total operating expenses
79
 %
 
80
 %
Loss from operations
(8
)%
 
(8
)%
Interest income (expense), net
1
 %
 
(1
)%
Other income (expense), net
 %
 
 %
Loss before provision for income taxes
(7
)%
 
(9
)%
Income tax provision (benefit)
4
 %
 
 %
Net loss
(3
)%
 
(9
)%

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(1)
Cost of revenue and operating expenses include stock-based compensation expense as follows (in thousands):
  
 
Three Months Ended March 31,
2018
 
2017
Cost of revenue
$
424

 
$
261

Sales and marketing
1,144

 
506

Research and development
1,312

 
527

General and administrative
1,936

 
1,203

Total stock-based compensation expense
$
4,816

 
$
2,497

 
Comparison of the three months ended March 31, 2018 and 2017
Revenue
 
Three Months Ended
March 31,
 
Change
2018
 
2017
 
$
 
%
(dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription and services
$
32,743

 
$
24,953

 
$
7,790

 
31
%
Payments
20,229

 
16,750

 
3,479

 
21
%
Product and other
851

 
511

 
340

 
67
%
Total revenue
$
53,823

 
$
42,214

 
$
11,609

 
28
%

Revenue increased $11.6 million, or 28%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Subscription and services revenue increased $7.8 million, or 31%, of which $6.0 million was due to pricing increases, the increased adoption of our branded mobile app offering, and an improvement in the mix to high value subscribers, and $1.8 million was due to an increase in revenue from our API and technology partners. Payments revenue increased $3.5 million, or 21%, due to an increase in the volume of transactions processed by our customers combined with an increase in the number of customers that utilize our payments platform. Product and other revenue increased due to hardware sales. We expect our revenue to increase over time through both organic growth and acquisitions.
Cost of Revenue and Gross Margin
 
Three Months Ended
March 31,
 
Change
2018
 
2017
 
$
 
%
(dollars in thousands)
Cost of revenue
$
15,421

 
$
12,019

 
$
3,402

 
28
%
Gross profit
$
38,402

 
$
30,195

 
$
8,207

 
27
%
Gross margin
71
%
 
72
%
 
 
 
 
 
Cost of revenue increased $3.4 million, or 28%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was primarily attributable to a $1.5 million increase in personnel-related expenses due to an increase in headcount. The increase was also due to a $1.4 million increase in infrastructure costs. As of March 31, 2018, we had 576 employees dedicated to data center operations, global customer support and onboarding services as compared to 510 employees as of March 31, 2017. Gross margins remained relatively flat.

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Operating Expenses
Sales and Marketing
 
Three Months Ended
March 31,
 
Change
2018
 
2017
 
$
 
%
(dollars in thousands)
Sales and marketing
$
18,105

 
$
16,334

 
$
1,771

 
11
%
 
Sales and marketing expense increased $1.8 million, or 11%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was primarily attributable to a $2.1 million increase in promotional spending and other marketing programs and a $1.6 million increase in personnel-related expenses, which includes a $0.6 million increase in stock-based compensation expense. These increases were partially offset by a $2.7 million net deferral of contract acquisition costs in connection with the adoption of Topic 606. For a discussion of Topic 606, refer to Note 1 - “Summary of Business and Significant Accounting Policies,” and Note 2 - “Revenue Recognition,” contained in the “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q. The increase in personnel-related expenses before taking into account the deferral of contract acquisition costs was due to our focus on building a dedicated and skilled full-time sales team workforce. As of March 31, 2018, we had 464 employees, which includes 17 part-time employees, dedicated to sales and marketing, compared to 564 employees, which included 65 part-time employees, as of March 31, 2017.
Research and Development
 
Three Months Ended
March 31,
 
Change
2018
 
2017
 
$
 
%
(dollars in thousands)
Research and development
$
11,788

 
$
8,648

 
$
3,140

 
36
%
 
Research and development expense increased $3.1 million, or 36%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was primarily attributable to an increase in headcount and resulting personnel-related expenses of $3.2 million, including a $0.8 million increase in stock-based compensation, and an increase of $0.6 million in outsourced development costs and consulting, offset by an increase of $1.1 million in development costs that qualified for capitalization. As of March 31, 2018, we had 263 employees dedicated to research and development as compared to 225 employees as of March 31, 2017.
General and Administrative
 
Three Months Ended
March 31,
 
Change
2018
 
2017
 
$
 
%
(dollars in thousands)
General and administrative
$
12,663

 
$
8,686

 
$
3,977

 
46
%
 
General and administrative expense increased $4.0 million, or 46%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was primarily attributable to a $1.9 million increase in personnel-related expenses, including a $0.7 million increase in stock-based compensation, a $1.3 million increase in third-party transaction costs associated with the acquisitions of FitMetrix and Booker, and $0.5 million in additional costs for compliance with Section 404 of the Sarbanes-Oxley Act. As of March 31, 2018, we had 158 employees dedicated to general and administrative as compared to 145 employees as of March 31, 2017.

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Interest Income (Expense), net, Other Income (Expense), net, and Income Tax Provision (Benefit)
 
Three Months Ended
March 31,
 
Change
2018
 
2017
 
$
 
%
(dollars in thousands)
Interest income (expense), net
$
366

 
$
(214
)
 
$
580

 
(271
)%
Other income (expense), net
39

 
(80
)
 
119

 
(149
)%
Income tax provision (benefit)
$
(2,058
)
 
$
142

 
$
(2,200
)
 
(1,549
)%
 
As a result of the acquisition of FitMetrix, we recorded a tax benefit of $2.1 million as a discrete item in the first quarter. This tax benefit is a result of the partial release of our existing U.S. valuation allowance in conjunction with the acquisition since the acquired net deferred tax liabilities from FitMetrix will provide a source of income for us to realize a portion of our deferred tax assets, for which a valuation allowance is no longer needed. Interest income (expense), net increased during the three months ended March 31, 2018 compared to the three months ended March 31, 2017 as a result of interest income earned on higher cash balances, which are invested in money market funds.
Liquidity and Capital Resources
As of March 31, 2018, and December 31, 2017, we had cash and cash equivalents of $217.7 million and $232.0 million, respectively. Cash and cash equivalents consist of cash on deposit and money market funds.
On January 12, 2018, we amended the loan agreement that we originally entered into with Silicon Valley Bank in January 2015. The loan agreement provides a secured revolving credit facility that allows us to borrow up to $40.0 million for working capital and general business requirements. Amounts outstanding under the credit facility will bear interest at the greater of the prime rate (4.75% as of March 31, 2018), or 4.5%, with accrued interest payable on a monthly basis and outstanding and unpaid principal due upon maturity of the credit facility in January 2019. The credit facility is secured by substantially all of our corporate assets. We also granted and pledged a security interest to the lender in all rights, title, and interest in our intellectual property. We did not draw down any amounts under the loan agreement during the three months ended March 31, 2018.
We believe that our existing cash and cash equivalents balance will be sufficient to meet our working capital requirements for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, and those factors set forth in Part II, Section 1A - “Risk Factors,” of this Quarterly Report on Form 10-Q. For example, on April 2, 2018 we acquired Booker for approximately $150.0 million paid in cash. We cannot assure you that we will be able to raise additional capital on acceptable terms or at all. In addition, if we fail to meet our operating plan during the next 12 months, our liquidity and ability to operate our business could be adversely affected.
The following table summarizes our cash and cash equivalents and our cash flows as of and for the periods presented (in thousands):
 
As of March 31,
2018
 
2017
Cash and cash equivalents
$
217,708

 
$
87,941

 
Three Months Ended March 31,
2018
 
2017
Cash provided by operating activities
$
55

 
$
1,033

Cash used in investing activities
18,208

 
2,856

Cash provided by financing activities
3,844

 
3,785

 
Operating Activities
During the three months ended March 31, 2018, operating activities provided $0.1 million in cash, primarily as a result of $5.4 million of adjustments for non-cash-items included in our net loss of $1.7 million, offset by a $3.6 million net decrease in

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operating assets and liabilities. The non-cash adjustments primarily consisted of $4.8 million of stock-based compensation expense and $2.6 million of depreciation and amortization expense, partially netted by a $2.1 million partial release of the valuation allowance. The net decrease in operating assets and liabilities was primarily a result of deferred commissions of $2.7 million, a $1.0 million increase in accounts receivable, and a $1.0 million increase in prepaid expenses and other current assets, partially offset by a $0.6 million increase in accounts payable, accrued expenses, and other liabilities and a $0.3 million increase in deferred revenue. The increase in accounts payable, accrued expenses, and other liabilities was due to the increase in employment related expenses and the timing of payments to our vendors and employees. The increase in deferred commissions was in relation to the implementation of Topic 606.
During the three months ended March 31, 2017, operating activities provided $1.0 million, primarily as a result of $4.6 million of non-cash expenses included in our net loss of $3.9 million, and $0.4 million provided by the net change in operating assets and liabilities. The non-cash expenses primarily consisted of $2.5 million of stock-based compensation expense and $2.1 million of depreciation and amortization expense. The net change in operating assets and liabilities was primarily a result of a $0.6 million increase in accounts payable, accrued expenses, and other liabilities and a $0.7 million increase in deferred revenue, which were partially offset by a $0.7 million increase in accounts receivable, and a $0.4 million increase in prepaid expenses and other current assets. The increase in accounts payable, accrued expenses, and other liabilities was due to the increase in headcount and the timing of payments to our vendors and employees.
Investing Activities
During the three months ended March 31, 2018, investing activities used $18.2 million as a result of $15.2 million cash paid for a business acquisition, $2.0 million in purchases of property and equipment, and additions of intangible assets through the capitalization of qualifying development costs of $1.0 million.
During the three months ended March 31, 2017, investing activities used $2.9 million as a result of $1.4 million purchases of property and equipment and $1.5 million cash paid in a business acquisition.
Financing Activities
During the three months ended March 31, 2018, net cash provided by financing activities was $3.8 million, consisting primarily of $3.5 million in proceeds from the exercise of equity awards by employees, and proceeds from our employee stock purchase plan of $2.0 million, partially offset by $0.8 million in tax payments related to employee shares withheld from RSUs vesting during the period and a final holdback payment of $0.8 million for a prior business acquisition.
During the three months ended March 31, 2017, net cash provided by financing activities was $3.8 million, consisting primarily of the exercise of equity awards of $2.4 million and proceeds from our employee stock purchase plan of $1.5 million.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under non-cancelable leases for our office space in San Luis Obispo, California and unconditional purchase commitments for software subscriptions and communication services. For additional information, see Note 8 – “Commitments and Contingencies” contained in the “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Off Balance Sheet Arrangements
As of March 31, 2018, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.
Segment Information
We have one primary business activity and operate in one reportable segment.

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Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
There have been no material changes in our critical accounting policies and estimates as described in our Annual Report on Form 10-K for the year ended December 31, 2017, other than the adoption of the new guidance on revenue from contracts with customers described in Note 2 - “Revenue Recognition” contained in the “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Recently Issued and Adopted Accounting Pronouncements
For a discussion of new accounting pronouncements, refer to Note 1 – “Summary of Business and Significant Accounting Policies” contained in the “Notes to Condensed Consolidated Financial Statements” in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and expenses denominated in currencies other than the U.S. Dollar, principally the British Pound Sterling, the Euro and the Australian Dollar, which are subject to fluctuations due to changes in foreign currency exchange rates. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statements of operations. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in foreign currency hedging transactions. A hypothetical 10% change in foreign currency exchange rates during any of the periods presented would not have had a material impact on our consolidated financial statements. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates.
Interest Rate Risk
Our cash and cash equivalents consist of cash on deposit and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Because our cash equivalents have a short maturity, our portfolio’s fair value is relatively insensitive to interest rate changes. To date, we have not been exposed, nor do we anticipate being exposed, to material risks due to changes in interest rates. A hypothetical 100 basis points change in interest rates during any of the periods presented would not have had a material impact on our consolidated financial statements. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives.
Item 4. Controls and Procedures
Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s, or SEC’s, rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
Except for the implementation of certain internal controls related to our January 1, 2018 adoption of guidance issued by the Financial Accounting Standards Board on revenue from contracts with customers, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that in the opinion of our management, if determined unfavorably to us, would have a material adverse effect on our business, financial condition, operating results or cash flows. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and divert management resources.
Item 1A. Risk Factors
Investing in our Class A common stock involves a high degree of risk.  You should carefully consider the following risks, together with all of the other information contained in this Quarterly Report on Form 10-Q, including our financial statements and related notes, before making a decision to invest in our Class A common stock.  Any of the following risks could have a material adverse effect on our business, operating results, and financial condition and could cause the trading price of our Class A common stock to decline, which would cause you to lose all or part of your investment.
Risks Related to Our Business
We have a history of losses, and we may not achieve or maintain profitability in the future.  In addition, our revenue growth rate may not sustain the levels experienced in recent years.  
We have incurred a net loss in each year since our inception, including a net loss of $14.8 million, $23.0 million and $36.1 million in the years ended December 31, 2017, 2016 and 2015, respectively, and $1.7 million and $3.9 million in the three months ended March 31, 2018 and 2017, respectively. We have expended and expect to continue to expend financial and other resources on, among other things:  
continuing the development of, and ongoing improvements to, our platform, including research and development investments in our technology infrastructure, the development or acquisition of new products, features and functionality and improvements to the scalability, availability and security of our platform;
strategic acquisitions;
sales and marketing expenses, including personnel, lead generation and consumer advertising expenses;
expenses related to international expansion in an effort to increase our customer and consumer base; and
general and administrative expenses, including legal, regulatory, accounting and other expenses related to being a public company.
If we expend more resources on growing our business than currently anticipated or if we encounter unforeseen operating expenses, difficulties, complications and other unknown factors, we may not be able to achieve or sustain profitability and our operating results and business would be harmed.
For the years ended December 31, 2017, 2016 and 2015, our revenue was $182.6 million, $139.0 million and $101.4 million, respectively, representing a 31% and 37% growth rate, respectively. For the three months ended March 31, 2018 and 2017, our revenue was $53.8 million and $42.2 million, respectively, representing a 28% growth rate. Our historical revenue growth rates are not necessarily indicative of future growth, and we may not achieve similar revenue growth rates in future periods.  
If we fail to increase market acceptance of our platform, enhance and adapt our platform to changing market dynamics and customer preferences, or keep pace with technological developments, our business, results of operations, financial condition and growth prospects would be adversely affected.
We derive, and expect to continue to derive, a majority of our revenue and cash inflows from our integrated cloud-based business management software and payments platform for the wellness services and beauty industry.  As such, market acceptance of this platform is critical to our success.  Our ability to attract new customers, increase revenue from existing customers, or cross-sell products from acquired companies, depends in part on our ability to enhance and improve our existing platform and to introduce new and innovative features, products and services, including features, products and services designed for a mobile user environment.  Demand for our platform is affected by a number of factors, many of which are beyond our control, such as the timing of development and release of new products, features and functionality by our competitors, technological change, consumer preferences and growth or contraction in our addressable market.  

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To grow our business, we must develop features, products and services that reflect the changing nature of business management software and expand beyond our core scheduling and point-of-sale functionality to other areas of managing relationships with our customers and consumers.  For example, in 2013, we expanded our platform to include MINDBODY Connect (now the MINDBODY app), in 2015 we introduced the MINDBODY Marketing Platform (now MINDBODY Promote), in 2017 we introduced dynamic pricing, and in 2018 we introduced the FitMetrix, Frederick and Booker products.  The success of these and any other enhancements to our platform depends on several factors, including timely completion, adequate quality testing and sufficient customer or consumer demand.  Any new feature, product or service that we acquire or develop may not be introduced in a timely or cost-effective manner, may contain defects and/or may not achieve the market acceptance necessary to generate sufficient revenue.  For example, we recently acquired Booker Software, Inc., or Booker, to expand the capabilities of our platform to engage with more consumers in our marketplace and expand our leadership in wellness and beauty. If we are unable to successfully introduce new and innovative features, products or services, meet the demands and expectations of our customers and consumers for features, products and services that meet their needs and are easy to use and deploy, or enhance our existing platform to meet customer requirements, our ability to achieve widespread market acceptance of our platform will be undermined, and our business, results of operations, financial condition and growth prospects will be adversely affected.
In addition, because our platform is available over the Internet, we need to continuously modify and enhance our platform to keep pace with changes in Internet-related hardware, software, communications and database technologies and standards.  If we are unable to respond in a timely and cost-effective manner to these rapid technological developments and changes in standards, our platform may become less marketable, less competitive, or obsolete, and our operating results will be harmed.  If new technologies emerge that are able to deliver competitive products and applications at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete.  Our platform must also integrate with a variety of network, hardware, mobile and software platforms and technologies, and we need to continuously modify and enhance our products and services to adapt to changes and innovation in these technologies.  Any failure of our platform to operate effectively with future infrastructure platforms and technologies could reduce the demand for our platform.  If we are unable to respond to these changes in a cost-effective manner, our platform may become less marketable, less competitive or obsolete, and our operating results may be adversely affected.
Our business depends substantially on our customers renewing, upgrading, or expanding their subscriptions to our platform and our ability to sell subscriptions to a large number of new small and medium-sized businesses on a consistent basis and in a cost-effective manner.  Any decline in the rate at which customers renew, upgrade, or expand their subscriptions could harm our future operating results.
The vast majority of our subscription revenue is derived from subscriptions to our platform that have monthly terms, with some larger customers on longer term contracts.  For us to maintain or improve our operating results, it is important that our customers renew, upgrade and/or expand their subscriptions.  Our retention rate may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with our platform, accessibility of our platform, our customer support, our prices, the prices of competing software systems, system uptime, network performance, data breaches, mergers and acquisitions affecting our customer base, the effects of global economic conditions and the strength of our customers’ businesses.  If our customers do not renew and / or expand their subscriptions or renew but shift to lower priced software subscriptions, our revenue may decline and we may not realize improved operating results from our customer base.
In addition, even if our market grows as expected, our business depends on our sales team’s ability to sell subscriptions to a large number of new small and medium-sized businesses on a consistent basis, with each sale constituting only a small portion of our overall revenue.  To achieve this type of customer growth and expansion in a cost-effective manner, it is crucial that our platform is easy to use and implement and remains accessible to our customers through our distribution channels without the need for excessive post-sale customer support.  If we are unable to sell a large volume of subscriptions on a consistent basis, if we are forced to incur excessive costs to provide post-sale customer support, or if we are unable to retain, upgrade, or expand offerings to our existing customers, our business, results of operations, financial condition and growth prospects will be adversely affected.
If pricing for our software subscriptions is not acceptable to our customers, our operating results will be harmed.
We have, from time to time, increased the price of our software subscriptions and may do so again in the future. For example, we have implemented several price increases over the past few years, including most recently starting in February 2018 for some of our software levels. We believe these increases have caused and may continue to cause customers to leave our platform, and such increases may also have reduced, and in the future may reduce, the number of new customers adopting our software. We cannot guarantee that new or existing customers will adopt or renew subscriptions at our current prices. Additionally, in the future we may further refine our tiered pricing model and our software levels, and/or increase pricing. Such further changes may cause customers to migrate to lower level offerings or leave our platform entirely, which would adversely affect our customer numbers, and could adversely affect our revenue, gross margin, profitability, financial position and cash flow.

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If our network or computer systems are breached, unauthorized access to customer or consumer data is otherwise obtained, or denial-of-service attacks occur, our platform may be perceived as insecure, we may lose existing customers or fail to attract new customers, and we may incur significant liabilities.
Use of our platform, including some of our third-party applications, involves the storage, transmission and processing of our customers’ proprietary data, including personal or identifying information regarding their clients or employees.  As a result, unauthorized access to, security breaches of, or denial-of-service attacks against our platform could result in the unauthorized access to or use of, and/or loss of, such data, as well as loss of intellectual property or trade secrets.
If any unauthorized access to our systems or data, security breach, or significant denial-of-service attack occurs or is believed to have occurred, our reputation and brand could be damaged, we could be required to expend significant capital and other resources to alleviate problems caused by such actual or perceived breaches or attacks and remediate our systems, and we could be exposed to a risk of loss, litigation or regulatory action and possible liability, some or all of which may not be covered by insurance, and our ability to operate our business may be impaired.  We have in the past and may in the future experience denial-of-service attacks against our platform. If potential new customers or existing customers believe that our platform does not provide adequate security for the storage of personally identifiable or sensitive information or its transmission over the Internet, they may not adopt our platform or may choose not to renew their subscriptions to our platform, which could harm our business.  Additionally, actual, potential or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants.  Our errors and omissions insurance policies covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all potential liability.  Although we maintain cyber liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.
Because the techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.  We may also experience security breaches that may remain undetected for extended periods of time.
Because data security is a critical competitive factor in our industry, we make statements in our privacy policies and terms of service, through our certifications to privacy standards, and in our marketing materials, describing the security of our platform, including descriptions of certain security measures we employ.  Should any of these statements be untrue, become untrue, or be perceived to be untrue, even if through circumstances beyond our reasonable control, we may face claims, including claims of unfair or deceptive trade practices, brought by the U.S. Federal Trade Commission, state, local or foreign regulators (e.g., a European Union-based data protection agency) or private litigants.
Because our platform can be used to collect and store personal information, domestic and international privacy and data security concerns could result in additional costs and liabilities to us or inhibit sales of our platform.
Our customers can use our platform to use, collect and store personal or identifying information regarding their employees and clients. Federal, state and foreign governments and agencies have adopted laws and regulations concerning the collection and use of personally identifiable information obtained from their residents or by businesses operating within their jurisdiction.  The costs of compliance with and other burdens imposed by privacy-related laws, regulations and standards may limit the use or adoption of our platform, reduce overall demand for our platform, lead to significant fines, penalties or liabilities for noncompliance, or slow the pace at which we close sales transactions, any of which could harm our business.  Moreover, if our employees fail to adhere to adequate data protection practices around the usage of our customers' data, it may damage our reputation and brand.
We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we may not be able to predict the impact such future laws, regulations and standards may have on our business.  For example, in April 2016, the EU Parliament formally adopted the General Data Protection Regulation, or GDPR, which supersedes existing EU data protection legislation, imposes more stringent EU data protection requirements, and provides for greater penalties for noncompliance. The GDPR will be effective in May 2018. Complying with the GDPR has caused us to incur operational costs and divert attention from other operational priorities. Our efforts to bring practices into compliance before the effective date of the GDPR may not be successful. Additionally, in July 2016, the European Union and the United States adopted a new framework for legitimizing trans-Atlantic data flows, the EU-U.S. Privacy Shield. Uncertainty remains as to whether the EU-U.S. Privacy Shield and other legal mechanisms for the lawful transfer of data from the European Union to the United States will withstand legal challenges, whether from regulators or private parties. If one or more of the legal bases for transferring data from Europe to the United States is invalidated, it could affect the manner in which we provide our services or adversely affect our financial results. Moreover, if our privacy and data policies and practices, are, or are perceived to be, insufficient, customer demand for our platform could decline, and our business could be negatively impacted.

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The U.S. Federal Trade Commission and numerous state attorneys general are also applying federal and state consumer protection laws to enforce regulations related to the online collection, use and dissemination of personally identifiable information and other data.  Some of these requirements include obligations on companies to notify individuals of security breaches involving particular personal information, which could result from breaches experienced by us or our service providers.  For example, our solutions must conform, in certain circumstances, to requirements set forth in the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which governs the privacy and security of protected health information.  Through the provision of online scheduling services to certain of our customers, we may collect, access, use, maintain and transmit protected health information in ways that may be subject to certain of these laws and regulations.  
Additionally, because we process a significant portion of our payments through debit or credit cards and enable our customers to engage in payments through our service, we are contractually required to maintain Payment Card Industry Data Security Standard, or PCI DSS, compliance as part of our information security program.   We also may be bound by additional, more stringent contractual obligations relating to our collection, use and disclosure of personal, financial and other data.  If we cannot comply with or if we incur a violation of any of these regulations or requirements, we could incur significant liability through fines and penalties imposed by credit card associations or other organizations or breach of contracts with our payment processors, either of which could have an adverse effect on our reputation, business, financial condition and operating results.
Finally, in March 2017, the U.K. government invoked Article 50 of the Lisbon Treaty to initiate the process to leave the European Union, which follows the results of the referendum in June 2016 in which the United Kingdom voted to leave the European Union.  The impact of the foregoing on data and privacy regulations in the United Kingdom remains uncertain.
We may find it necessary to change our business practices or expend significant resources to modify our software or platform to adapt to new laws, regulations and industry standards concerning these matters.  We may be unable to make such changes and modifications in a commercially reasonable manner or at all. Any failure to comply with federal, state or foreign laws or regulations, industry standards or other legal obligations, or any actual or suspected security incident, may result in governmental enforcement actions and prosecutions, private litigation, fines, penalties or adverse publicity and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.  
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.
Our continued growth depends in part on the ability of our existing and potential customers and consumers to access our platform at any time and within an acceptable amount of time.  Our platform is proprietary, and we rely on the expertise of members of our engineering, operations and software development teams for our platform’s continued performance.  In addition, we depend on external data centers to host our applications. While we control and have access to our servers located in our external data centers, we do not control the operation of these facilities. We have experienced, and may in the future experience, disruptions, outages and other performance problems related to our platform due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, delays in scaling our technical infrastructure if we do not maintain enough excess capacity and accurately predict our infrastructure requirements, capacity constraints due to an overwhelming number of users accessing our platform simultaneously, denial-of-service attacks or other security-related incidents. For example, we are in the process of upgrading and improving our systems to enable new products and services and accommodate future growth.  Recently, following the installation of a new release, we experienced a series of events that resulted in an interruption in our service for several hours.  From time to time we have also been the subject of denial-of-service attacks that have rendered our core software inaccessible for several hours. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time.  It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our platform becomes more complex and our user traffic increases due to, among other things, a growing number of customers and consumers originating from and demanding service in a greater number of countries.  If our platform is unavailable or if our users are unable to access our platform within a reasonable amount of time, or at all, our business would be adversely affected and our brand could be harmed.  In the event of any of the factors described above, or certain other failures of our infrastructure, customer or consumer data may be permanently lost.  Moreover, our agreements with customers typically provide for limited service level commitments. Our customers may be eligible for credits if we are unable to meet these service level commitments.  If we experience significant periods of service downtime in the future, we may be subject to claims by our customers against these service level commitments.  To the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected.
Real or perceived errors, failures, or bugs in our platform could adversely affect our operating results and growth prospects.

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Because our platform is complex, undetected errors, failures, vulnerabilities or bugs may occur, especially when updates are deployed or if there are issues with our secure access management procedures.  Our platform is often used in connection with computing environments with different operating systems, system management software, equipment and networking configurations, which may cause errors in or failures of our platform or other aspects of the computing environments.  In addition, deployment of our platform into complicated, large-scale computing environments may expose undetected errors, failures, vulnerabilities or bugs in our platform.  Despite testing by us, errors, failures, vulnerabilities or bugs may not be found in our platform until after it is deployed to our customers or consumers.  We have discovered, and expect to discover in the future, software errors, failures, vulnerabilities and bugs in our platform, and we anticipate that certain of these errors, failures, vulnerabilities and certain bugs can only be discovered and remediated after deployment to customers.  Real or perceived errors, failures or bugs in our platform could result in negative publicity, loss of or delay in market acceptance of our platform, loss of competitive position or claims by customers for losses sustained by them.  In such an event, we may be required, or may choose for customer relations or other reasons, to expend additional resources in order to help correct the problem and or repair goodwill with our customers.
Our payments platform is a core element of our business, and any failure to grow and develop our payment processing activities, or to anticipate changes in consumer behavior, could materially and adversely affect our business and financial results.
Our payments platform is a core element of our business.  For the years ended December 31, 2017, 2016 and 2015, our payments platform generated 38%, 39% and 37% of our total revenue, respectively.  For the three months ended March 31, 2018 and 2017, our payments platform generated 38% and 40% of our total revenue, respectively.
Our future success depends in large part on the continued growth and development of our payments platform.  If such activities are limited, restricted, curtailed or degraded in any way, or if we fail to continue to grow and develop such activities, our business may be materially and adversely affected.
The continued growth and development of our payments platform will depend on our ability to anticipate and adapt to changes in consumer behavior.  For example, consumer behavior may change regarding the use of payment types, including the relative increased use of cash, ACH, crypto-currencies, card-based transactions, and other emerging or alternative payment methods and payment systems that we or our processing partners do not adequately support or that do not provide adequate commissions to Independent Sales Organizations such as us.  Any failure to timely integrate emerging payment methods (e.g., Alipay, Bitcoin or other crypto-currencies) into our software, anticipate consumer behavior changes, or contract with processing partners that support such emerging payment technologies could cause us to lose traction among our customers, resulting in a corresponding loss of revenue, in the event such methods become popular among their consumers.
Our payments platform is subject to U.S. and international rules and regulations, some of which are still developing.  If we fail to comply with such rules and regulations or if new laws, rules or practices applicable to payment systems restrict our ability to collect fees from our payments platform, our financial results could be materially and adversely effected.
Payment processing is subject to extensive regulation in the United States and other countries where we operate, and presents a wide range of risks.  We may encounter increased regulatory scrutiny and new regulatory compliance requirements brought about by evolving laws, rules and regulations.  Some of the payment processing activities on our platform are subject to price controls within the United States and other countries, and may be subject to an increase of price controls, including controls limiting the amount we are allowed to charge customers for processing transactions.  In addition, certain countries limit payments-related activities by foreign companies, including by restricting the transfer of funds out of such countries.  Changes in the laws, rules or practices applicable to payment systems such as VISA, MasterCard or American Express, among others, including changes resulting in increased costs that we or our customers must pay, may force changes to our payments platform that could adversely affect our business.
If we incur an actual or perceived breach to our payments platform, we may incur significant liabilities and our brand and reputation may be damaged.
We may suffer an attack on our payments platform that results in a breach of consumer cardholder data.  We maintain payment records of our customers and consumers on our payments platform, and we are a potential target for hackers and other parties attempting to steal card data via cyber-attacks or other means.  As we increase our consumer base and our brand becomes more widely known and recognized, we may become more of a target for these malicious third parties.  If we experience any actual or perceived data breach as a result of third-party actions, employee negligence or error, or malfeasance, whether or not resulting in the unauthorized acquisition of or access to cardholder data, we could incur significant liability, our business may suffer and our brand and reputation may be damaged.  We could be required to pay extensive fines and costs related to any such data breach, including costs incurred to replace cards and cardholder information and provide security monitoring services, and we could lose future sales and customers, any of which could harm our business and operating results.  Such fines and costs could become due

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soon after such breach and exceed the amount of cash available to us, thereby impacting our ability to operate our business.  In addition, a data breach or failure to comply with rules or regulations of payment systems could also result in the termination of our status as a registered Independent Sales Organization / Merchant Service Provider, thereby dramatically impairing our ability to continue doing business in the payments industry.
We are subject to risks related to our reliance on third-party processing partners to perform our payment processing services.
We depend on our third-party processing partners to perform payment processing services.  Our processing partners may go out of business or otherwise be unable or unwilling to continue providing such services, which could significantly and materially reduce our payments revenue and disrupt our business.  A number of our processing contracts require us to assume liability for any losses our processing partners may suffer as a result of losses caused by our customers, including losses caused by chargebacks and consumer or customer fraud.  We have in the past and may in the future incur losses caused by chargebacks and fraud.  In the event of a significant loss by our processing partners, we may be required to remit a large amount of cash following such event and, if we do not have sufficient cash on hand, may be deemed in breach of such contracts.  In addition, our customers may be subject to quality issues related to products or services provided by our third-party processing partners or we may become involved in contractual disputes with our processing partners, both of which could impact our reputation and adversely impact our revenue.  Certain contracts may expire or be terminated, and we may not be able to replicate the associated revenue through a new processing partner relationship for a considerable period of time.
We have initiated and expect to continue to initiate new third-party payment relationships or migrate to other third-party payment partners in the future.  The initiation of these relationships and the transition from one relationship to another could require significant time and resources.  Due to non-solicitation obligations under our existing contracts, establishing these new relationships may be challenging. Further, any new third-party payment processing relationships may not be as effective, efficient or well received by our customers and consumers, nor is there any assurance that we will be able to reach an agreement with such processing partners.  Our contracts with such processing partners may be less lucrative.  For instance, we may be required to pay more for payment processing or receive a less favorable revenue arrangement from our payment processing partners.  We may also experience the termination of revenue streams due to such migrations or be subject to claims relating to any disputes that could arise as a result of migrations.
We may undertake to directly perform certain payment processing services and expand the scope of payment processing services we provide, which may require a significant investment of time and resources, and expand our exposure to potential liabilities.
In the future, we may undertake to directly perform certain payment processing services that we currently depend upon our processing partners to perform, expand the scope of payment processing services we provide, offer additional payment processing services or otherwise undertake additional responsibilities and liabilities related to such payment processing services.  For example, in the future, we may undertake to act as a registered payment facilitator or payment service provider of the payment systems, providing merchants with a suite of services, including payment processing and funding and accepting payments as the merchant of record on behalf of other merchants.  As part of our dynamic pricing functionality, we have undertaken to act as a payment service provider and the merchant of record for those dynamically priced classes booked on our mobile applications, and we may undertake to expand our role as a payment service provider to other areas of our platform. Any of these endeavors could require a significant investment of time and effective management of resources before presenting any potential upside for us, and may dramatically expand the scope of our potential contractual liability or exposure in the event of a lawsuit.  Further, we may fail to effectively execute in performing such an expansion of services.
The market for business management software is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The market for business management software for the wellness services industry is fragmented and rapidly evolving, with relatively low barriers to entry.  We face competition from in-house developed software systems, other software companies, and traditional paper-based methods.  Our competitors vary in size and in the breadth and scope of the products and services they offer.  In addition, there are a number of companies that are not currently direct competitors but that could in the future shift their focus to the wellness services industry and offer competing products and services.  Some of these companies, such as Intuit and Square, have or may in the future acquire greater financial and other resources than we do and could bundle competing products and services with their other offerings or offer such products and services at lower prices as part of a larger sale.  There is also a risk that certain of our current business partners could terminate their relationships with us and use the insights they have gained from partnering with us to introduce their own competing products.  Many of our current and potential competitors have greater name recognition, established marketing relationships, access to larger customer bases and pre-existing relationships with customers, consultants, system integrators and resellers.  Additionally, some potential customers in the wellness services industry,

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particularly large organizations, have elected, and may in the future elect, to develop their own business management software.  Certain of our competitors have partnered with, or have acquired or been acquired by, and may in the future partner with or acquire, or be acquired by, other competitors to offer services, leveraging their collective competitive positions, which makes, or would make, it more difficult to compete with them. Moreover, we may also face competition from wellness booking services for consumers, or other consumer app or website companies, particularly as we grow our consumer brand and awareness.
Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements.  With the introduction of new technologies, the evolution of our platform and new market entrants, we expect competition to intensify in the future.  Pricing pressures and increased competition generally could result in reduced sales, reduced margins, increased churn, reduced customer retention, further losses or the failure of our platform to achieve or maintain more widespread market acceptance, any of which could harm our business.  For all of these reasons, we may fail to compete successfully against our current and future competitors, and if such failure occurs, our business will be harmed.
Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our platform.
Increasing our customer base and number of active consumers, upgrading and expanding services to our existing customers, and achieving broader market acceptance of our platform will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities, including internationally.  We are substantially dependent on our marketing organization to generate a sufficient pipeline of qualified sales leads and on our direct sales force to close new customers.  From December 31, 2017 to March 31, 2018, our sales and marketing organizations decreased from 471 to 464 employees.  We plan to expand our direct sales and account development specialist workforce, both domestically and internationally.  We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require.  Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training, and retaining a sufficient number of experienced sales professionals.  New hires require significant training and time before they achieve full productivity, particularly in new sales segments and territories.  Our recent and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business.  We cannot predict whether, or to what extent, our sales will increase, our existing customers will upgrade or expand their usage of our platform as we invest in our sales force, or how long it will take for sales personnel to become productive.  If our marketing organization does not generate a sufficient pipeline of qualified sales leads and our direct sales force is unable to close customers, our business and future growth prospects could be harmed.
Any failure to offer high-quality customer support may adversely affect our relationships with our customers and our financial results.
In deploying and using our platform, our customers depend on our 24/7 customer support team to resolve complex technical and operational issues, including ensuring that our platform is implemented in a manner that integrates with a variety of third-party platforms.  We may be unable to respond quickly enough to accommodate short-term increases in customer demand for customer support or to modify the nature, scope and delivery of our customer support to compete with changes in customer support services provided by our competitors.  Increased customer demand for customer support, without corresponding revenue, could increase costs and adversely affect our operating results.  Our sales are highly dependent on our business reputation and on positive recommendations from our existing customers.  Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation and brand, our ability to sell our platform to existing and prospective customers, our business, operating results and financial position.
Our quarterly results may fluctuate for various reasons, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control.  If our quarterly financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our Class A common stock could decline substantially.  Some of the important factors that may cause our revenue, operating results and cash flows to fluctuate from quarter to quarter include but are not limited to:
our ability to attract new customers, retain and increase sales to existing customers and satisfy our customers’ requirements;
the mix of our customer base, including the concentration of high value subscribers;
the volume of transactions processed on our payments platform;

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the adoption of our fee-based dynamic pricing marketing services by our customers and consumers;
significant security breaches, technical difficulties or interruptions to our platform and any related impact on our reputation;
the variability of revenues derived from our partners;
the ability to realize benefits from strategic partnerships or acquisitions;
the number of employees added;
the rate of expansion and productivity of our sales force;
the entrance of new competitors in our market, whether by established companies or new companies;
changes in our or our competitors’ pricing;
the amount and timing of operating costs and capital expenditures related to the expansion of our business, including our sales force, and expenses related to the development or acquisition of technologies or businesses;
new pricing models, products, features or functionalities introduced by us or our competitors;
the timing of payments by customers and other payment processing partners and payment defaults by customers or other payment processing partners;
litigation, including class action litigation, involving our company, our services or our industry;
general economic conditions or declines in consumer interest in the wellness industries that we serve, either of which may adversely affect either our customers’ ability or willingness to purchase additional subscriptions, delay a prospective customer’s purchasing decision, reduce the value of new subscription contracts or affect customer retention;
changes in the relative and absolute levels of customer support we provide;
changes in foreign currency exchange rates;
extraordinary expenses such as litigation or other dispute-related settlement payments;
the impact of new accounting pronouncements; and
the timing of the grant or vesting of equity awards to employees.
Many of these factors are outside of our control, and the occurrence of one or more of them might cause our revenue, operating results and cash flows to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.

If we fail to effectively manage our growth in a manner that preserves the key aspects of our corporate culture, our business and operating results could be harmed.

We believe that our corporate culture fosters innovation, creativity and teamwork.  However, as our organization grows, we may find it increasingly difficult to maintain the beneficial aspects of such culture, and the failure to do so could adversely impact our ability to retain and attract the kind of employees necessary for our future success.  If we are unable to manage our anticipated growth and change in a manner that preserves the key aspects of our culture, the quality of our products and services may suffer, which could adversely affect our brand and reputation and harm our ability to retain and attract customers.
We depend on our executive officers and other key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely affect our business.
Our success depends largely upon the continued services of our executive officers and other key employees, including our Chairman and Chief Executive Officer, Richard Stollmeyer.  We rely on our leadership team in the areas of research and development, operations, security, marketing, sales, support, general and administrative functions, and on individual contributors in our research and development and operations, including key employees hired through our recent acquisition of Booker.  We have experienced, and may in the future experience, changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business.  We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period, and, therefore, they could terminate their employment with us at any time.  The loss of one or more of our executive officers, especially our Chief Executive Officer, or other key employees, could have an adverse effect on our business.

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In addition, to execute our growth plan, we must attract and retain highly qualified personnel.  Competition for these personnel in the locations where we maintain offices is intense, especially in the San Luis Obispo area, where our headquarters is located, due in part to the relatively close proximity to the San Francisco Bay Area.  We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications.  In some cases, we have recruited employees from the San Francisco Bay Area and other regions with a greater supply of managerial, sales and engineering talent, and in such cases, we have sometimes found it necessary to offer compensation packages that were larger than would have been necessary if no relocation had been required.   We also outsource some of our research and development to India, which requires compliance with security protocols. Many of the companies with which we compete for experienced personnel have greater resources than we have and are located in areas in which sales and engineering talent is more readily available.  Moreover, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment.  If the perceived value of our equity awards declines, our ability to recruit and retain highly skilled employees may be adversely impacted.  If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees have breached their legal obligations, resulting in a diversion of our time and resources. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.  
If we are not able to maintain and enhance our brand, then our business, operating results and financial condition may be adversely affected.
We believe that maintaining and enhancing our reputation as a differentiated and category-defining business management software company serving the wellness services industry and consumers through a two-sided marketplace is critical to our relationship with our existing customers and to our ability to attract new customers.  The successful promotion of our brand attributes will depend on a number of factors, including our marketing efforts, our ability to continue to develop high-quality software, and our ability to successfully differentiate our platform from competitive products and services.
The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive and as we seek to expand our platform.  To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur.  If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors, and we could lose customers or fail to attract potential customers, all of which would adversely affect our business, results of operations and financial condition.
Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and adversely affect our operating results.
Our operating results may vary based on the impact of changes in our industry or the global economy on us or our customers.  The revenue growth and potential profitability of our business depend on demand for business management software generally and for business management software serving the wellness services industry in particular.  Historically, during economic downturns, there have been reductions in spending on information technology as well as pressure for extended billing terms and other financial concessions.  The adverse impact of economic downturns may be particularly acute among small and medium-sized businesses, which comprise the vast majority of our customer base.  If economic conditions deteriorate, our current and prospective customers may elect to decrease their information technology budgets, which would limit our ability to grow our business and adversely affect our operating results.
Our financial results may fluctuate due to increasing variability in our sales cycles resulting from, among other things, an expansion of the focus of our sales efforts to include larger organizations.
We plan our expenses based on certain assumptions about the length and variability of our sales cycle.  These assumptions are based upon historical trends for sales cycles and conversion rates associated with our existing customers, many of whom to date have been small to medium-sized organizations.  As we expand our sales efforts to include larger organizations, we have incurred and expect to continue to incur higher costs and longer and more unpredictable sales cycles.  With larger organizations, the decision to subscribe to our platform may require the approval of more technical personnel and management levels within a potential customer’s organization than we have historically encountered, and if so, these types of sales would require us to invest more time educating these potential customers.  In addition, larger organizations may demand more features and integration and customer support services.  We have limited experience in developing and managing sales strategies for larger organizations and in successfully onboarding larger organizations as new customers.  As a result of these factors, these sales opportunities may not prove to be successful or may require us to devote greater research and development, sales, customer support and professional services resources to individual customers, resulting in increased costs and reduced profitability, and will likely lengthen our typical sales cycle, which could strain our resources.  Moreover, these larger transactions may require us to delay recognizing the associated

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revenue we derive from these customers until any technical or implementation requirements have been met, and larger customers may demand discounts to the prices they pay for our platform.  
Other factors that may influence the length and variability of our sales cycle include but are not limited to:
our pricing terms;
the need to educate prospective customers about the uses and benefits of our platform;
lead generation, including both inbound and outbound;
the discretionary nature of purchasing and budget cycles and decisions;
the competitive nature of evaluation and purchasing processes;
evolving functionality demands;
announcements or planned introductions of new products, features or functionality by us or our competitors; and
lengthy purchasing approval processes, particularly among larger organizations.
If we are unsuccessful expanding sales to larger organizations, our business and results of operations could be adversely affected. In addition, if we are unable to close one or more expected significant transactions with customers in a particular period, or if one or more expected transactions are delayed until a subsequent period, our operating results for that period, and for any future periods in which revenue from such transactions would otherwise have been recognized, may be adversely affected.

Our future performance depends in part on our reliance on third-party platforms to distribute our mobile applications, and support from our partner ecosystem.
We rely on third-party distribution platforms, including the Apple App Store and Google Play, for distribution of our mobile applications. We are subject to these platform providers’ standard terms and conditions for application developers, which govern the promotion, distribution and operation of applications on their platforms. If we violate, or if a platform provider believes that we have violated, its terms and conditions, the platform provider may, at its discretion, discontinue or limit our access to their platform. We are currently in the process of operationalizing changes to our branded mobile apps offering to comply with Apple’s recent changes to its terms of service. These platform providers have broad discretion to change their terms and conditions at any time, with or without notice to application developers, and to interpret their respective terms and conditions in a manner that limits, eliminates or otherwise interferes with our ability to distribute our mobile applications through their platforms. If Apple or Google took any of these steps to limit or otherwise interfere with our business, our business, financial condition and results of operations could be adversely affected.
We also depend on our partner ecosystem to create applications that will integrate with our platform.  This presents certain risks to our business, including:
security standards for our APIs could limit integration possibilities for our apps with partners’ products;
these applications may not meet the same quality standards that we apply to our own development efforts (including, among other things, data and privacy protections), and to the extent they contain bugs or defects, they may create disruptions in our customers’ use of our platform or adversely affect our brand;
we do not currently provide substantive support for software applications developed by our partner ecosystem, and users may be left without adequate support and potentially cease using our platform if our partners do not provide adequate support for these applications;
our partners may not possess the appropriate intellectual property rights to develop and share their applications;
our relationship with our partners may change, particularly those partners who contribute or who have contributed more significantly to our revenue or demand for our platform, which could adversely affect our revenue and our results of operations;
some of our partners may use the insight or access to data that they gain from integrating with our software and from information publicly available to develop competing products or product features; and
our partners may establish relationships with, or functionality to offer to, our customers that diminish or eliminate the need or desire for our API platform.


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Since many of these risks are not within our control, any new standards or requirements by these third-party developers or platforms could adversely affect our business, thereby reducing our revenue or increase our operating costs and adversely affecting our growth prospects.
We have in the past completed acquisitions, and we may in the future acquire or invest in companies.  Such acquisitions and investments divert our management’s attention and may in some cases result in additional dilution to our stockholders.  In addition, we may be unable to integrate the acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.
We have in the past acquired companies, including our acquisition of HealCode LLC in 2016, Lymber Wellness, Inc. in 2017 and FitMetrix and Booker in 2018, and we may in the future evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future.  We also may enter into relationships with other businesses to expand our platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies.
Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures.  In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with our platform or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise.  The pursuit of potential acquisitions, whether or not they are consummated, may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our existing business.  Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized and/or we may be exposed to unknown risks or liabilities.
Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to complete these transactions may be subject to approvals that are beyond our control.  Consequently, these transactions, even if announced, may not be completed.  For one or more of these transactions, we may:
issue additional equity securities that would dilute our existing stockholders;
use cash that we may need in the future to operate our business;
incur large charges or substantial liabilities, whether known or unknown, associated with the acquisition;
encounter difficulties integrating and maintaining relationships with customers and partners of the acquired business;
encounter difficulties cross-selling the services of the acquired company to our existing customers;
encounter difficulties incorporating acquired technologies and rights into our platform, providing access and rights to our internal systems, integrating the acquired companies’ accounting, management information and human resources systems, and maintaining quality and security standards consistent with our reputation and brand;
incur debt on terms unfavorable to us or that we are unable to repay;
encounter difficulties retaining key employees of the acquired company, integrating diverse software codes or business cultures or coordinating organizations that are geographically diverse and that have different business cultures;
incur unanticipated expenses and delays in completing acquired development projects and technology integration and upgrades;
assume unknown material liabilities of acquired companies;
encounter difficulties accurately projecting the revenue and costs structure associated with acquired companies;
incur impairment charges related to potential write-downs of acquired assets or goodwill;
incur acquisition-related costs, which would be recognized as current period expenses; and
become subject to adverse tax consequences, substantial depreciation or deferred compensation charges.

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Mergers and acquisitions are inherently risky and subject to many factors outside of our control, and no assurance can be given that our previous or future acquisitions will be successful and will not result in a material adverse effect on our business operations and financial results.
Real or perceived inaccuracies in our key, user and other metrics may harm our reputation and negatively affect our business.

The numbers for certain of our key, user and other metrics, including, among others, active consumers, registered users of our applications and number of wellness practitioners employed by our customers, are calculated using internal company data based on the activity of customer and consumer accounts. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring usage of our platform, usage of specific features of our platform, and user information across large online and mobile populations around the world. For example, we estimate that approximately 43 million active consumers used our platform during the two years ended March 31, 2018. In calculating this number, we have attempted to avoid duplicative counting of consumers by identifying consumers who may have used our platform through different customers.  However, in certain cases, a single consumer may have transacted with multiple customers under slightly different names, in which case we may have counted the same consumer more than once.  Given the challenges inherent in identifying whether a single consumer has engaged in transactions on our platform under different names, we do not have a reliable way of identifying the precise number of consumers using our platform.   We are continuing to invest in our systems and controls to improve the precision and reliability of our metrics. If third parties, including investors and analysts, do not perceive our metrics to be accurate, or if we discover material inaccuracies in our metrics, we may be subject to liability and our reputation may be harmed, which could negatively affect our business and financial results.
Our international sales and operations subject us to additional risks that can adversely affect our business, operating results and financial condition.

In the three months ended March 31, 2018 and 2017, we derived 20% and 18%, respectively, of our revenue from customers located outside of the United States. We are continuing to expand our international operations as part of our growth s