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 June 30, 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 August 3, 2018, the registrant had 44,414,653 shares of Class A common stock, and 3,318,190 shares of Class B common stock outstanding.
 

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

2



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 scale and adapt our existing technology in a timely and/or effective manner;
the effects of the evolving regulatory framework for privacy, security and data protection on our platform;
the effects of price changes for our products and services;
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 (“FitMetrix”), and Booker Software, Inc (“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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Investors and others should note that we announce material financial information to our investors using our investor relations website (http://investors.mindbodyonline.com/investor-overview), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our members and the public about our company, our services and other issues. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on these channels.

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 fitness, beauty or wellness services.

High Value Subscriber” – Any customer on our platform, including FitMetrix customers and 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 our services, including MINDBODY, Booker or FitMetrix, as of the end of the period. Subscribers or customers do not include locations or practitioners who only use Frederick (our marketing automation software.)

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)
 
 
June 30,
 
December 31,
2018
 
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
325,795

 
$
232,019

Accounts receivable
13,545

 
10,753

Deferred commissions, current portion
1,702

 

Prepaid expenses and other current assets
9,617

 
5,776

Total current assets
350,659

 
248,548

Property and equipment, net
33,514

 
32,871

Deferred commissions, non-current portion
4,640

 

Intangible assets, net
72,598

 
7,377

Goodwill
111,511

 
11,583

Other non-current assets
1,528

 
934

TOTAL ASSETS
$
574,450

 
$
301,313

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,993

 
$
7,448

Accrued expenses and other liabilities
17,443

 
13,099

Deferred revenue, current portion
7,241

 
6,318

Other current liabilities
832

 
1,828

Total current liabilities
36,509

 
28,693

Convertible senior notes, net
231,549

 

Deferred revenue, non-current portion
1,451

 
3,201

Deferred rent, non-current portion
2,256

 
1,966

Financing obligation on leases, non-current portion
14,634

 
14,932

Other non-current liabilities
667

 
585

Total liabilities
287,066

 
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, 44,033,244 shares issued and outstanding as of June 30, 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, 3,664,536 shares issued and outstanding as of June 30, 2018; 100,000,000 shares authorized, 3,901,966 shares issued and outstanding as of December 31, 2017

 

Additional paid-in capital
504,506

 
454,196

Accumulated other comprehensive loss
(230
)
 
(108
)
Accumulated deficit
(216,893
)
 
(202,153
)
Total stockholders’ equity
287,384

 
251,936

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
574,450

 
$
301,313

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

5



MINDBODY, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
Revenue
$
61,611

 
$
44,107

 
$
115,434

 
$
86,321

Cost of revenue
19,417

 
12,738

 
34,838

 
24,757

Gross profit
42,194

 
31,369

 
80,596

 
61,564

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
24,781

 
17,362

 
42,886

 
33,696

Research and development
17,547

 
8,802

 
29,335

 
17,450

General and administrative
16,075

 
9,358

 
28,738

 
18,044

Total operating expenses
58,403

 
35,522

 
100,959

 
69,190

Loss from operations
(16,209
)
 
(4,153
)
 
(20,363
)
 
(7,626
)
Interest income
436

 
227

 
1,099

 
324

Interest expense
(1,037
)
 
(310
)
 
(1,334
)
 
(621
)
Other income (expense), net
(3
)
 
(21
)
 
36

 
(101
)
Loss before provision for income taxes
(16,813
)
 
(4,257
)
 
(20,562
)
 
(8,024
)
Income tax provision (benefit)
78

 
118

 
(1,980
)
 
260

Net loss
(16,891
)
 
(4,375
)
 
(18,582
)
 
(8,284
)
Net loss per share, basic and diluted
$
(0.36
)
 
$
(0.10
)
 
$
(0.39
)
 
$
(0.20
)
Weighted-average shares used to compute net loss per share, basic and diluted
47,552

 
43,147

 
47,330

 
41,958

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

6



MINDBODY, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
Net loss
$
(16,891
)
 
$
(4,375
)
 
$
(18,582
)
 
$
(8,284
)
Other comprehensive gain, net of taxes:
 
 
 
 
 
 
 
Change in cumulative translation adjustment
(114
)
 
53

 
(122
)
 
143

Comprehensive loss
$
(17,005
)
 
$
(4,322
)
 
$
(18,704
)
 
$
(8,141
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

7



MINDBODY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Six Months Ended June 30,
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(18,582
)
 
$
(8,284
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,955

 
4,399

Stock-based compensation expense
12,218

 
6,010

Amortization of deferred sales commission costs
464

 

Amortization of debt discount and transaction costs
682

 

Partial release of valuation allowance
(2,133
)
 

Other
(6
)
 
(6
)
Changes in operating assets and liabilities net of effects of acquisitions:
 
 
 
Accounts receivable
(586
)
 
(100
)
Deferred commissions
(5,943
)
 

Prepaid expenses and other assets
(1,733
)
 
(1,073
)
Accounts payable
(2,447
)
 
695

Accrued expenses and other liabilities
3,903

 
1,270

Deferred revenue
754

 
1,009

Deferred rent
334

 
247

Net cash provided by (used in) operating activities
(5,120
)
 
4,167

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of property and equipment
(3,980
)
 
(3,707
)
Additions to internally developed software
(1,339
)
 
(237
)
Acquisition of business, net of cash acquired
(151,765
)
 
(1,450
)
Net cash used in investing activities
(157,084
)
 
(5,394
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of convertible senior notes, net of initial purchasers’ discounts and transaction costs
300,902

 

Purchase of capped calls related to issuance of convertible senior notes
(36,422
)
 

Net proceeds from follow-on public offering

 
134,528

Proceeds from exercise of equity awards
4,839

 
4,637

Proceeds from employee stock purchase plan
2,006

 
1,510

Payment related to shares withheld for taxes
(3,753
)
 
(1,461
)
Repayment of Booker long term debt
(10,008
)
 

Repayment on financing and capital lease obligations
(253
)
 
(211
)
Payment of financing obligation related to Lymber and HealCode acquisitions
(1,250
)
 

Other

 
(33
)
Net cash provided by financing activities
256,061

 
138,970

Effect of exchange rate changes on cash and cash equivalents
(81
)
 
185

NET INCREASE IN CASH AND CASH EQUIVALENTS
93,776

 
137,928

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
232,019

 
85,864

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
325,795

 
$
223,792

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
136

 
$
170

Cash paid for interest
594

 
621

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

 
$
5,142

Unpaid equipment purchases
1,807

 
783

Acquisition consideration held back to satisfy potential indemnification claims


 
750

Unpaid follow-on public offering costs

 
254

Debt issuance costs included in accounts payable and accrued expenses and
other current liabilities
898

 

Fair value of stock awards assumed in connection with Booker acquisition
498

 

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

8



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 fitness, beauty and wellness services industries and a rapidly growing consumer brand. Its integrated software and payments platform helps business owners in the fitness, beauty and wellness services industries run, market and build their businesses. MINDBODY enables the consumers to evaluate, engage, and transact with local businesses in its marketplace.
Acquisition of Booker
On April 2, 2018, the Company completed the acquisition of Booker, a privately-held company, for a total purchase consideration of $140,429,000, which consisted of $139,931,000 in cash and approximately 73,900 common stock awards assumed with an estimated fair value of $498,000. In addition, the Company simultaneously assumed and subsequently paid off approximately $10,008,000 of long-term debt and $3,047,000 of fees associated with the transaction. 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. See Note 5 – “Business Combination” for further details on the acquisition.
Convertible Senior Notes
In June 2018, the Company offered and issued $310,500,000 aggregate principal amount of 0.375% Convertible Senior Notes due 2023 (the “Notes”), including the initial purchasers’ exercise in full of their option to purchase an additional $40,500,000 principal amount of the Notes. The net proceeds from the issuance of the Notes were approximately $301,790,000, net of initial purchasers’ discounts and transaction costs. Interest on the Notes is payable semiannually in arrears on June 1 and December 1 of each year, commencing on December 1, 2018. To mitigate potential dilution resulting from the issuance of the Notes, the Company paid $36,422,000 and entered into capped call transactions. See Note 7 – “Debt” for further details on the Notes.
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.

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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, fair value of the liability and equity components of the Notes 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 June 30, 2018 and December 31, 2017, one trade receivable represented 17% 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.
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,” and new policies added during the period related to the Company’s recent issuance of convertible senior notes and capped calls, as compared to the significant accounting policies described in the Company’s Annual Report.
Convertible Senior Notes and Capped Call Transactions
The Company accounts for the issued Notes, as separate liability and equity components. The Company determined the carrying amount of the liability component based on the fair value of a similar debt instrument excluding the embedded conversion option. The carrying amount of the equity component representing the conversion option was calculated by deducting the carrying value of the liability component from the principal amount of the Notes as a whole. This difference represents a debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component of the Notes is included in stockholders’ equity and is not remeasured as long as it continues to meet the conditions for equity classification. The Company allocated transaction costs related to the issuance of the Notes to the liability and equity components using the same proportions as the initial carrying value of the Notes. Transaction costs attributable to the liability component are being amortized to interest expense using the effective interest method over the respective term of the Notes, and transaction costs attributable to the equity components were netted with the equity component of the Notes in stockholders’ equity. In connection with the issuance of the Notes, the Company entered into capped call transactions with certain counterparties affiliated with the initial purchasers and others. The Company accounts for the cost of the capped calls as a reduction to additional paid-in capital.
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.

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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.

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. The authoritative guidance will be applied prospectively, and used when the annual impairment test is performed in the current year. The Company does not expect that the adoption of this guidance will have a significant impact on its consolidated financial statements.


11



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 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.

In June 2018, the FASB issued authoritative guidance intended to expand the scope of Share-Based Payment Transactions (Topic 718) to include share-based payment transactions for acquiring goods and services from nonemployees. These share-based payments will now be measured at grant-date fair value of the equity instrument issued. Upon adoption, only liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established should be remeasured through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The new guidance is effective for the Company beginning January 1, 2020 and is applied retrospectively. The Company does not expect that the adoption of this guidance will have a significant impact on its consolidated financial statements.

In June 2018, the FASB issued authoritative guidance intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with the accounting for employee share-based compensation. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. The Company does not expect that the adoption of this guidance will have a significant impact on its consolidated financial statements.

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 June 30, 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.

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.

The Company generates revenue primarily from providing an integrated cloud-based business management software and payments platform for the fitness, beauty and wellness services industries 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

12



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 fitness, beauty and wellness services industries. 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, appointments, 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 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, heart-rate monitors, 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 (in thousands):


13



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Primary geographical markets
 
 
 
 
 
 
 
United States
$
50,392

 
$
35,585

 
$
93,657

 
$
70,011

Other
11,219

 
8,522

 
21,777

 
$
16,310

Total revenue
$
61,611

 
$
44,107

 
$
115,434

 
$
86,321


The following table provides information about disaggregated revenue by major product line (in thousands);

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Primary product lines
 
 
 
 
 
 
 
Subscription and services
$
38,541

 
$
25,992

 
$
71,283

 
$
50,945

Payments
22,266

 
17,619

 
42,495

 
34,369

Product and other
804

 
496

 
1,656

 
1,007

Total revenue
$
61,611

 
$
44,107

 
$
115,434

 
$
86,321


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

June 30, 2018
124

 
74

 
7,241

 
1,451


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. Deferred revenue at June 30, 2018 includes current and non-current deferred revenue related to the acquisition of Booker of $905,000 and $87,000, respectively.
 
Revenue recognized during the three and six months ended June 30, 2018 from performance obligations satisfied or partially satisfied in previous periods was not significant. Movements between contract assets and receivables was not significant during the three and six months ended June 30, 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.

Contract acquisition costs for the three and six months ended June 30, 2018 were $3,107,000 and $5,957,000, respectively. Amortization expenses for contract acquisition costs for the three and six months ended June 30, 2018 were $326,000 and $464,000, respectively. There was no impairment loss in relation to costs capitalized.


14



Practical Expedients and Exemptions
The Company has elected the following additional practical expedients in applying Topic 606:

Portfolio Approach: The Company is utilizing the 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 for performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands):

 
2018 (Remaining six months)
 
2019
 
2020
 
Thereafter
Payments revenue
$
1,031

 
$
2,062

 
$
2,062

 
$
1,547


The transaction price for all unsatisfied performance obligations related to subscription and service revenue is not shown in the table above as it is included in deferred revenue - current on the condensed consolidated balance sheet.


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 June 30,
 
2018
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
Revenues
 
 
 
 
 
Subscription and services
$
38,540

 
$
38,540

 
$

Payments
22,266

 
22,313

 
(47
)
Product and Other
805

 
767

 
38

 
 
 
 
 
 
Cost and Expenses
 
 
 
 
 
Sales and marketing
24,781

 
27,562

 
(2,781
)
Net loss
(16,891
)
 
(19,663
)
 
2,772




15



 
Six Months Ended June 30,
 
2018
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
Revenues
 
 
 
 
 
Subscription and services
$
71,283

 
$
71,283

 
$

Payments
42,495

 
42,553

 
(58
)
Product and Other
1,656

 
1,530

 
126

 
 
 
 
 
 
Cost and Expenses
 
 
 
 
 
Sales and marketing
42,886

 
48,374

 
(5,488
)
Net loss
(18,582
)
 
(24,138
)
 
5,556


The adoption of Topic 606 has the following impact to the Company’s Condensed Consolidated Balance Sheet (in thousands):

 
June 30,
 
2018
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
ASSETS
 
 
 
 
 
Prepaid expenses and other current assets
$
9,617

 
$
9,493

 
$
124

Other non-current assets
1,528

 
1,454

 
74

Deferred commissions, current portion
1,702

 

 
1,702

Deferred commissions, non-current portion
4,640

 

 
4,640

 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Deferred revenue, current portion
$
7,241

 
$
8,166

 
$
(925
)
Deferred revenue, non-current portion
1,451

 
3,337

 
(1,886
)
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
Accumulated deficit
$
(216,893
)
 
$
(207,542
)
 
$
(9,351
)

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):
 
 
June 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 
 
 
 
 
 
Money market funds(1)
$
307,348

 
$

 
$

 
$
307,348

 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Acquisition-related contingent consideration(2)
$

 
$

 
$
5,143

 
$
5,143


16




 
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 June 30, 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.

 Convertible Senior Notes

The estimated fair value of the Notes as of June 30, 2018 was determined to be $312,410,000 based on quoted market prices. The Company considers the fair value of the Notes to be a Level 2 measurement as they are not actively traded. The Company carries the Notes at face value less unamortized discount on its consolidated balance sheet. For further information on the Notes see Note 7 – “Debt”.

There were no transfers of financial instruments between the three levels of the fair value hierarchy during the six months ended June 30, 2018. As of June 30, 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
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 
June 30,
 
December 31,
2018
 
2017
Prepaid expenses
6,913

 
5,342

Other current assets(1)
2,704

 
434

Prepaid expenses and other current assets
$
9,617

 
$
5,776

(1) Other receivables, which used to be presented with accounts receivable, is now presented with other current assets. Certain immaterial reclassifications have been made to the prior year amounts to conform with current year presentation.

17



Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
 
June 30,
 
December 31,
2018
 
2017
Computer equipment
$
23,029

 
$
20,671

Leasehold improvements
12,469

 
11,386

Office equipment
3,628

 
2,702

Software licenses
6,188

 
5,378

Building, leased
16,438

 
16,438

Property and equipment, gross
61,752

 
56,575

Less: accumulated depreciation and amortization
(28,238
)
 
(23,704
)
Property and equipment, net
$
33,514

 
$
32,871

Depreciation of property and equipment was $2,092,000 and $1,895,000 for the three months ended June 30, 2018 and 2017, respectively. Depreciation of property and equipment was $4,159,000 and $3,804,000 for the six months ended June 30, 2018 and 2017, respectively.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
June 30,
 
December 31,
2018
 
2017
Accrued payroll
$
10,279

 
$
7,591

Accrued vacation
3,659

 
2,400

Employee stock purchase plan contributions
1,767

 
1,548

Other liabilities
1,738

 
1,560

Total accrued expenses and other liabilities
$
17,443

 
$
13,099


5. BUSINESS COMBINATION
Booker
On April 2, 2018, the Company completed the acquisition of Booker, a privately-held company. 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 acquisition of Booker added additional high-value salons and spas to the Company’s marketplace, combining MINDBODY’s leadership in boutique fitness studios and its vast consumer network with Booker's leadership in high value salons and spas. The Company expects that the combination of the two businesses will deliver more value to its customers by connecting them to larger consumer audiences, helping them grow their businesses.
    
The acquisition of Booker 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 total purchase consideration of $140,429,000 consisted of $139,931,000 in cash, subject to net-working capital adjustments, and approximately 73,900 common stock awards assumed with an estimated fair value of $498,000. In addition, the Company simultaneously assumed and subsequently paid off approximately $10,008,000 of long-term debt and $3,047,000 of assumed fees associated with the transaction. The purchase price was allocated as follows: $58,260,000 to identifiable intangible assets acquired and $9,094,000 in net liabilities acquired, with the excess $91,263,000 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

18



integrating Booker and Frederick’s technology solution with the Company’s other offerings and the associated assembled workforce acquired. Goodwill is not expected to be deductible for U.S. federal income tax purposes.

The fair value of the acquired intangible assets are amortized on straight-line basis over the remaining useful life, which approximates the expected use of these assets. The estimated useful lives and fair values of the identifiable intangible assets are as follows (in thousands):
 
Amount
Estimated Useful Life (in years)
Trade names
$
3,720

7
Customer relationships
48,400

3 to 8
Developed technology
5,740

5
Covenants-not-to-compete
400

2
Total intangible assets acquired
$
58,260

 
    
The results of operations of Booker since the acquisition are included in the Company's consolidated statements of operations for the three and six months ended June 30, 2018. Booker’s portion of the revenue and net loss, excluding acquisition related expenses, in the period from the acquisition date of April 2, 2018 through June 30, 2018, were $6,860,000 and $4,450,000, respectively.

Acquisition-related expenses incurred, including legal and accounting fees and other external costs directly related to the acquisition, were expensed as incurred. Acquisition-related expenses of $2,976,000 and $4,287,000 for the three and six months ended June 30, 2018, respectively, are included in general and administrative expense in our condensed combined statement of operations.

The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the acquisition occurred on January 1, 2017 and includes pro forma adjustments related to the amortization of acquired intangible assets, share-based compensation expense and incremental contract acquisitions costs (commissions) to conform with the Company’s presentation of Topic 606. The unaudited pro forma results have been prepared based on estimates and assumptions, which the Company believes are reasonable, however, they are not necessarily indicative of the consolidated results of operations had the acquisition occurred on January 1, 2017, or of future results of operations (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue (1)
$
61,611

 
$
52,604

 
$
122,102

 
$
101,162

Net loss attributable to common shareholders
(16,891
)
 
(6,587
)
 
(23,726
)
 
(14,418
)
Net loss per share attributable to common shareholders - basic and diluted.
(0.36
)
 
(0.15
)
 
(0.50
)
 
(0.34
)

(1) The following table shows adjusted unaudited pro forma information excluding the revenue from one Booker terminated non-recurring contract, a transition services arrangement, that was not related to Booker’s core product offering on an ongoing basis. The Company believes that this adjustment provides a useful basis for understanding the performance of its business as the terminated contract is not indicative of its ongoing business (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
61,611

 
$
52,604

 
$
122,102

 
$
101,162

Less: revenue from Booker terminated contract

 
2,444

 

 
2,875

Revenue excluding Booker terminated contract
$
61,611

 
$
50,160

 
$
122,102

 
$
98,287



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FitMetrix
On February 19, 2018, the Company completed the acquisition of 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 the FitMetrix technology solution with the Company’s other offerings and the associated assembled workforce acquired and is not expected to be deductible for U.S. federal income tax purposes.
The acquisition provided the Company with acquired intangible assets representing trade names, customer relationships, and developed software/technology. The fair value of the acquired intangible assets is amortized on straight-line basis over the 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 fair value of the acquired intangible assets are amortized on straight-line basis over the remaining useful life, which approximates the expected use of these assets. The estimated useful lives and fair values of the identifiable intangible assets are as follows (in thousands):
 
Amount
Estimated Useful Life (in years)
Trade names
$
1,800

10
Customer relationships
5,800

5
Developed technology
1,940

5
Total intangible assets acquired
$
9,540

 
The results of FitMetrix 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.
Lymber
In March 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.


20



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 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.

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):
 
June 30, 2018
 
Useful Life
(Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Acquired technology
3 to 5
 
$
15,209

 
$
(3,206
)
 
$
12,003

Acquired trade names
7 to 10
 
5,520

 
(156
)
 
5,364

Acquired customer relationships
2 to 8
 
54,620

 
(2,629
)
 
51,991

Internally developed software
2 to 3
 
4,921

 
(2,032
)
 
2,889

Covenants not-to-compete
2
 
400

 
(49
)
 
351

Total intangible assets
 
 
$
80,670

 
$
(8,072
)
 
$
72,598


21



 
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 capitalized software development costs of $70,000 and $237,000 for the three months ended June 30, 2018 and 2017, respectively. The Company capitalized software development costs of $1,218,000 and $237,000 for the six months ended June 30, 2018 and 2017, respectively.

The Company has internally developed software in process, for development projects that qualify for capitalization, of zero and $1,559,000 as of June 30, 2018 and December 31, 2017, respectively.

Amortization of intangible assets (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Amortization of acquired intangible assets
$
2,970

 
$
407

 
$
3,516

 
$
581

Amortization of internally developed software
246

 
7

 
280

 
14

Total amortization of intangible assets
$
3,216

 
$
414

 
$
3,796

 
$
595

The expected future annual amortization expense of intangible assets as of June 30, 2018 is presented below (in thousands):
Year Ending December 31,
 
2018 (Remaining six months)
$
6,634

2019
13,168

2020
13,041

2021
10,488

2022
8,746

Thereafter
20,521

Total expected future amortization expense of intangible assets
$
72,598


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 “senior secured credit facility”). The Company has not drawn down any amounts under the senior secured credit facility, which is secured by substantially all of the Company’s corporate assets.

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 the satisfaction of certain conditions and approval by Silicon Valley Bank, 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 June 30, 2018) or 4.5%. The credit facility is secured by substantially all of the Company’s corporate assets. On April 2, 2018, the Company entered into a consent and fourth loan agreement with

22



Silicon Valley Bank, pursuant to which, among other amendments, Silicon Valley Bank consented to the Booker acquisition and the Notes and added Booker as a new borrower under the senior secured credit facility.
Convertible Senior Notes
In June 2018, the Company issued $310,500,000 aggregate principal amount of 0.375% convertible senior notes due 2023 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds from the issuance of the Notes were $301,790,000, after deducting the initial purchasers’ discounts and transaction costs.
The Notes are governed by an indenture (the “Indenture”) between the Company, as the issuer, and U.S. Bank National Association, as trustee. The Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s unsecured indebtedness that existing and future liabilities that are not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness, including the Company’s indebtedness under the senior secured credit facility, to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries. The Indenture does not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Notes mature on June 1, 2023 unless earlier repurchased or redeemed by the Company or earlier converted in accordance with their terms prior to the maturity date. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018.
The Notes have an initial conversion rate of 20.1898 shares of Class A common stock per $1,000 principal amount of Notes, which is equal to an initial conversion price of approximately $49.53 per share of Class A common stock, and is subject to adjustment in some events. Following certain corporate events that occur prior to the maturity date or following the Company’s issuance of a notice of redemption, the Company will, in certain circumstances, increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or during the related redemption period in certain circumstances. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” per the Indenture, holders of the Notes may require the Company to repurchase for cash all or a portion of their Notes at a purchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest.
On or after December 1, 2022, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at any time regardless of whether the conditions set forth below have been met. Upon conversion, holders will receive cash, shares of the Company’s Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. The Company intends to settle the principal of the Notes in cash.
Holders of the Notes may convert all or any portion of their Notes at any time prior to the close of business on the business day immediately preceding December 1, 2022, in integral multiples of $1,000 principal amount, only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the Notes on each applicable trading day;
during the five business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day;
if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
upon the occurrence of corporate events, specified in the Indenture.

The Company may not redeem the notes prior to June 6, 2021. The Company may redeem for cash all or any portion of the Notes, at the Company’s option, on or after June 6, 2021 if the last reported sale price of the Company’s Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the

23



principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes.

As of June 30, 2018, the condition allowing holders of the Notes to convert have not been met and therefore the Notes are not yet convertible. The notes are classified as long-term debt.

Transaction costs attributable to the liability component were $6,664,000 and are being amortized to interest expense using the effective interest method over the term of the Notes, and transaction costs attributable to the equity components were $2,047,000 and netted with the equity component of the Notes in stockholders’ equity.
The net carrying value of the liability component of the Notes was as follows (in thousands):

 
June 30,
 
2018
Liability component:
 
Principal
$
310,500

Less: unamortized debt discount
72,335

Less: unamortized transaction costs
6,616

Net carrying amount
$
231,549


The net carrying amount of the equity component of the Notes was as follows (in thousands):

 
June 30,
 
2018
Proceeds allocated to the conversion option (debt discount)
$
72,969

Less: transaction cost
2,047

Net carrying amount
$
70,922


The following table sets forth total interest expense recognized related to the Notes (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest expense
$
58

 
$

 
$
58

 
$

Amortization of debt discount
634

 

 
634

 

Amortization of transaction costs
48

 

 
48

 

Total
$
740

 
$

 
$
740

 
$


The effective interest rate of the liability component for the three months ended June 30, 2018 was 6.50%.
Based on the closing price of our Class A common stock of $38.60 on June 30, 2018, the if-converted value of the Notes was less than their respective principal amounts.
Capped Call
In connection with the offering of the Notes, the Company paid $36,422,000 to enter into Capped Calls. The Capped Calls each have an initial strike price of approximately $49.53 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $76.20 per share, subject to certain adjustments (the “Cap Price”). The Capped Calls cover, subject to anti-dilution adjustments, approximately 6.3 million shares of Class A common stock. The Capped Calls are intended to reduce or offset the potential dilution of the Company’s Class A common stock upon any conversion of the Notes, and/or offset any cash payments the Company is required to make in excess of the principal amount of

24



converted Notes, with such reduction and/or offset subject to a cap based on the Cap Price. The Capped Calls are recorded as a reduction to additional paid-in capital and are not accounted for as derivatives.
Impact on Earnings Per Share
The Notes will not have an impact on the Company’s diluted earnings per share until the average market price of its Class A common stock exceeds the conversion price of $49.53 per share, as the Company intends to settle the principal amount of the Notes in cash upon conversion. The Company is required under the treasury stock method to compute the potentially dilutive shares of common stock related to the Notes for periods the Company reports net income. However, upon conversion, there will be no economic dilution from the Notes until the average market price of the Company’s Class A common stock exceeds the Cap Price of $76.20 per share, as exercise of the Capped Calls offsets any dilution from the Notes from the conversion price up to the Cap Price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive under the treasury stock method.

8. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company has operating lease agreements with lease periods expiring between 2019 and 2030. Rent expense was $2,283,000 and $1,527,000 for the three months ended June 30, 2018 and 2017, respectively. Rent expense was $4,074,000 and $2,870,000 for the six months ended June 30, 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 $8,520,000 to be recognized over the remainder of the initial term of the lease agreement. The total financing obligation as of June 30, 2018 is $15,197,321, of which $563,000 is recorded as a current obligation.
Future Minimum Lease Payments
Future minimum lease payments under non-cancellable lease agreements as of June 30, 2018 were as follows (in thousands):
Year Ending December 31,
 
Operating
Leases
 
Financing
Obligation,
Building-
Leased
 
Total
2018 (Remaining six months)
 
$
3,110

 
$
846

 
$
3,956

2019
 
6,061

 
1,729

 
7,790

2020
 
5,850

 
1,781

 
7,631

2021
 
4,579

 
1,835

 
6,414

2022
 
3,269

 
1,890

 
5,159

Thereafter
 
10,134

 
15,637

 
25,771

Total minimum lease payments
 
$
33,003

 
$
23,718

 
$
56,721

 

25



Purchase Commitments
 
Future unconditional purchase commitments for software subscriptions and data center and communication services as of June 30, 2018 were as follows (in thousands):
Year Ending December 31,
 
2018 (Remaining six months)
$
2,517

2019
4,952

2020
2,067

2021
594

Total purchase commitments
$
10,130

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.

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 June 30, 2018, there were 6,766,140 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 June 30, 2018, options to purchase 1,557,261 shares of

26



Class A common stock and 2,317,784 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 June 30, 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 $2,007,000 under the ESPP during the six months ended June 30, 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 June 30, 2018, options to purchase 1,959,468 shares of Class B common stock remained outstanding under the 2009 Plan.

Booker Equity Incentive Plan
In connection with the acquisition of Booker, the Company assumed each outstanding and unexercised vested option to purchase Booker common stock. All such securities, or approximately 73,900 common stock awards, became issuable for shares of the Company’s Class A common stock. Booker’s Equity Incentive Plan is no longer active.

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):
 
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
1,401,605

 
38.34

 
 
Vested
(306,690
)
 
22.50

 
 
Forfeited
(99,781
)
 
26.13

 
 
Unvested balance – June 30, 2018
2,317,784

 
$
32.29

 
$
89,466


27




As of June 30, 2018, there was a total of $69,213,000 in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of approximately 3.2 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
660,747

 
35.32

 
$
12.46

 
 
 
 
Exercised
(394,355
)
 
12.27

 
 
 

 
10,383

Forfeited or canceled
(112,136
)
 
20.87

 
 
 

 
 
Outstanding – June 30, 2018
3,590,304

 
$
17.36

 
 
 
6.8
 
$
76,904

Exercisable – June 30, 2018
2,001,630

 
$
10.18

 
 
 
5.4
 
$
56,884

Vested and expected to vest – June 30, 2018
3,569,036

 
$
17.30

 
 
 
6.8
 
$
76,649


The total fair value of options vested during the three and six months ended June 30, 2018 was $1,683,000 and $3,761,000, respectively, and during the three and six months ended June 30, 2017 was $1,108,000 and $2,693,000, respectively.

As of June 30, 2018, the total unrecognized stock-based compensation expense for unvested stock options, net of expected forfeitures, was $16,025,000, which is expected to be recognized over a weighted-average period of 2.7 years.
Other Stock-Based Compensation
The Company recorded stock-based compensation expense during the three and six months ended June 30, 2018 of $262,000 and $521,000, respectively, and during the three and six months ended June 30, 2017 of $262,000 and $277,000, respectively, attributed to post-acquisition services that are payable in shares of the Company’s common stock.
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:

 
Six Months Ended June 30,
2018
 
2017
Expected term (in years)
5.2
 
5.8
Expected volatility
37% - 38%
 
42% - 44%
Risk-free interest rate
2.6% - 2.9%
 
1.9% - 2.0%
Dividend yield
0%
 
0%
 

28



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:

 
Six Months Ended June 30,
2018
 
2017
Expected term (in years)
0.5 - 2.0
 
0.5 - 2.0
Expected volatility
33% - 37%
 
35% - 50%
Risk-free interest rate
1.7% - 2.3%
 
0.45% - 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 June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
Cost of revenue
$
658

 
$
366

 
$
1,082

 
$
627

Sales and marketing
2,241

 
671

 
3,385

 
1,177

Research and development
2,048

 
980

 
3,360

 
1,507

General and administrative
2,455

 
1,496

 
4,391

 
2,699

Total stock-based compensation expense
$
7,402

 
$
3,513

 
$
12,218

 
$
6,010


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 expense of $78,000 for the three months ended June 30, 2018 is primarily attributable to the deferred tax liability associated with the amortization of indefinite lived intangible assets, foreign income taxes associated with the Company’s operations in the United Kingdom and Australia, and U.S. state income taxes. The Company’s effective tax rate for the three months ended June 30, 2018 and 2017 was negative 0.5% and negative 2.8%, respectively.

The income tax benefit of $1,980,000 for the six months ended June 30, 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 six months ended June 30, 2018 and 2017 was 9.6% and negative 3.2%, respectively.

 

29



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 June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
Net loss attributable to common stockholders
$
(16,891
)
 
$
(4,375
)
 
$
(18,582
)
 
$
(8,284
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.36
)
 
$
(0.10
)
 
$
(0.39
)
 
$
(0.20
)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted
47,552

 
43,147

 
47,330

 
41,958

 
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 June 30,
2018
 
2017
Shares subject to outstanding stock options and employee stock purchase plan
3,691
 
3,962

Shares subject to outstanding restricted stock units
2,318
 
1,221

Total
6,009
 
5,183


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 June 30, 2018 and December 31, 2017.

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 technology platform for the fitness, beauty and wellness services industries and a rapidly growing marketplace for these services. As of June 30, 2018, our customers employed approximately 465,000 wellness practitioners serving approximately 57 million active consumers in more than 100 countries. We are also a leading payments platform dedicated to the fitness, beauty and wellness services industries transacting approximately $2,716 million and $1,950 million on our payments platform for the three months ended June 30, 2018 and 2017, respectively, representing a 39% increase year over year.

30



We provide our software as a subscription-based service to our 68,142 subscribers, as of June 30, 2018. We market and sell subscriptions for our platform to small and medium-sized businesses within the fitness, beauty and wellness services industries, targeting the United States, Canada, the United Kingdom, Ireland, Australia, New Zealand, Hong Kong, and Singapore. In the first quarter of 2018 we simplified our MINDBODY software packaging, offering the following three software levels to our customers: Essential, Accelerate and Ultimate.
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 referred to as 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.
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.
On April 2, 2018, we completed the acquisition of Booker, Inc. (“Booker”), a privately-held company and a leading cloud-based business management platform for salons and spas. Booker is also the provider of Frederick, a fast-growing, automated marketing software for wellness businesses. We believe the acquisition of Booker expands our value proposition for salons and spas worldwide, while also helping us attract new high value subscribers. On July 1, for new customers, we aligned Booker software levels and pricing with MINDBODY software levels and pricing.
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 fitness, beauty and 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 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.
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.

31



Set forth below are summary financial highlights for the three and six months ended June 30, 2018:

 
Three Months Ended June 30,
 
Change
 
Six Months Ended June 30,
 
Change
2018
 
2017
 
%
 
2018
 
2017
 
%
(dollars in millions)
Revenue
$
61.6

 
$
44.1

 
40%
 
$
115.4

 
$
86.3

 
34%
Net loss
(16.9
)
 
(4.4
)
 

 
(18.6
)
 
(8.3
)
 

Adjusted EBITDA(1)
$
(0.5
)
 
$
1.7

 

 
$
4.1

 
$
2.8

 

(1) For a reconciliation of Adjusted EBITDA to net loss, see the section below titled “Non-GAAP Financial Measure.”
During the three months ended June 30, 2018 and 2017, approximately 82% and 81% of our revenue came from the United States, respectively. During the six months ended June 30, 2018 and 2017, approximately 81% and 81% of our revenue came from the United States, respectively.
Our employee headcount increased to 1,661 employees as of June 30, 2018, from 1,454 as of June 30, 2017.
Recent Developments
In June 2018, we issued $310.5 million aggregate principal amount of 0.375% convertible senior notes due 2023 (the “Notes”) and received proceeds of $301.8 million, net of initial purchasers’ discounts and transaction costs. We used a portion of the net proceeds of the offering of the Notes to pay the cost of certain capped call transactions and plan to use the remainder for working capital and general corporate purposes. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business. For further discussion, see Note 7 in Part I, Item 1 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 June 30,
 
2018
 
2017
Subscribers (end of period)
68,142

 
59,345

Average monthly revenue per subscriber
$
293

 
$
244

Payments volume (in millions)
$
2,716

 
$
1,950

Dollar-based net expansion rate (average for the quarter)
103
%
 
108
%
 

32



Subscribers. Subscribers are defined as unique physical locations or individual practitioners who have active subscriptions to our services, including MINDBODY, Booker or FitMetrix, as of the end of the period. Subscribers or customers do not include locations or practitioners who only use Frederick (our marketing automation software). The overall number of subscribers has increased year over year from 59,345 to 68,142. 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 Booker customers, exclusive of those customers on the Solo software level. The number of subscribers on our Solo software level has decreased from 4,979 as of June 30, 2017 to 1,015 as of June 30, 2018, and the number of our high value subscribers increased from 54,366 as of June 30, 2017 to 67,127 as of June 30, 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 June 30, 2018 and 2017. ARPS increased for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. ARPS decreased sequentially from $302 for the three months ended March 31, 2018 to $293 for the three months ended June 30, 2018 because of the lower ARPS of Booker subscribers. We expect ARPS to fluctuate in the short term before increasing.

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 June 30, 2018 compared to the three months ended June 30, 2017, and we expect it to continue to increase in the future.  

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. We expect our dollar based net expansion rate to fluctuate over time.

33



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 (“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 and integration expenses, (4) income tax provision (benefit), and (5) other expense, net, which consisted of interest income, interest expense, 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 June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
(in thousands)
Net loss
$
(16,891
)
 
$
(4,375
)
 
$
(18,582
)
 
$
(8,284
)
Stock-based compensation expense
7,402

 
3,513

 
12,218

 
6,010

Depreciation and amortization
5,308

 
2,309

 
7,955

 
4,399

Acquisition-related expenses
2,976

 

 
4,288

 

Income tax provision (benefit)
78

 
118

 
(1,980
)
 
260

Other (income) expense, net
604

 
104

 
199

 
398

Adjusted EBITDA
$
(523
)
 
$
1,669

 
$
4,098

 
$
2,783

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.

34



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 (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. Interest income consists primarily of the interest earned on our cash and cash equivalent balances.
Interest expense. Interest expense consists primarily of interest expense associated with the 0.375% convertible senior notes due 2023 (the “Notes”) and the interest incurred on the financing obligation associated with our build-to-suit lease arrangement. We entered into a loan agreement with Silicon Valley Bank in 2015 for a secured revolving credit facility (the “senior secured 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 and gains and losses from foreign currency transactions.

35



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 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 June 30,
 
Six Months Ended June 30,
2018
 
2017
 
2018
 
2017
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenue
$
61,611

 
$
44,107

 
$
115,434

 
$
86,321

Cost of revenue(1)
19,417

 
12,738

 
34,838

 
24,757

Gross profit
42,194

 
31,369

 
80,596

 
61,564

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing(1)
24,781

 
17,362

 
42,886

 
33,696

Research and development(1)
17,547

 
8,802

 
29,335

 
17,450

General and administrative(1)
16,075

 
9,358

 
28,738

 
18,044

Total operating expenses
58,403

 
35,522

 
100,959

 
69,190

Loss from operations
(16,209
)
 
(4,153
)
 
(20,363
)
 
(7,626
)
Interest income
436

 
227

 
1,099

 
324

Interest expense
(1,037
)
 
(310
)
 
(1,334
)
 
(621
)
Other income (expense), net
(3
)
 
(21
)
 
36

 
(101
)
Loss before provision for income taxes
(16,813
)
 
(4,257
)
 
(20,562
)
 
(8,024
)
Income tax provision (benefit)
78

 
118

 
(1,980
)
 
260

Net loss
$
(16,891
)
 
$
(4,375
)
 
$
(18,582