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 September 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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  
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 November 5, 2018, the registrant had 45,401,442 shares of Class A common stock, and 2,517,684 shares of Class B common stock outstanding.
 

1


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

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, short-term investments, 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.

3



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 provide on the channels listed above.

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.


4



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MINDBODY, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited) 
 
September 30,
 
December 31,
2018
 
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
154,074

 
$
232,019

Short-term investments
171,016

 

Accounts receivable
12,639

 
10,753

Deferred commissions, current portion
2,645

 

Prepaid expenses and other current assets
8,948

 
5,776

Total current assets
349,322

 
248,548

Property and equipment, net
33,001

 
32,871

Deferred commissions, non-current portion
6,926

 

Intangible assets, net
69,272

 
7,377

Goodwill
111,468

 
11,583

Other non-current assets
1,303

 
934

TOTAL ASSETS
$
571,292

 
$
301,313

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,327

 
$
7,448

Accrued expenses and other liabilities
16,595

 
13,099

Deferred revenue, current portion
7,962

 
6,318

Other current liabilities
1,093

 
1,828

Total current liabilities
36,977

 
28,693

Convertible senior notes, net
234,946

 

Deferred revenue, non-current portion
1,339

 
3,201

Deferred rent, non-current portion
2,239

 
1,966

Financing obligation on leases, non-current portion
14,479

 
14,932

Other non-current liabilities
450

 
585

Total liabilities
290,430

 
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, 45,361,076 shares issued and outstanding as of September 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, 2,551,823 shares issued and outstanding as of September 30, 2018; 100,000,000 shares authorized, 3,901,966 shares issued and outstanding as of December 31, 2017

 

Additional paid-in capital
515,334

 
454,196

Accumulated other comprehensive loss
(343
)
 
(108
)
Accumulated deficit
(234,130
)
 
(202,153
)
Total stockholders’ equity
280,862

 
251,936

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
571,292

 
$
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 September 30,
 
Nine Months Ended September 30,
2018
 
2017
 
2018
 
2017
Revenue
$
63,782

 
$
46,612

 
$
179,216

 
$
132,933

Cost of revenue
20,189

 
13,123

 
55,027

 
37,880

Gross profit
43,593

 
33,489

 
124,189

 
95,053

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
25,959

 
18,514

 
68,845

 
52,210

Research and development
18,960

 
8,976

 
48,295

 
26,426

General and administrative
13,175

 
9,763

 
41,913

 
27,807

Total operating expenses
58,094

 
37,253

 
159,053

 
106,443

Loss from operations
(14,501
)
 
(3,764
)
 
(34,864
)
 
(11,390
)
Interest income
1,482

 
485

 
2,581

 
808

Interest expense
(4,040
)
 
(313
)
 
(5,374
)
 
(933
)
Other income (expense), net
(9
)
 
45

 
27

 
(56
)
Loss before provision for income taxes
(17,068
)
 
(3,547
)
 
(37,630
)
 
(11,571
)
Income tax provision (benefit)
169

 
83

 
(1,811
)
 
343

Net loss
(17,237
)
 
(3,630
)
 
(35,819
)
 
(11,914
)
Net loss per share, basic and diluted
$
(0.36
)
 
$
(0.08
)
 
$
(0.75
)
 
$
(0.27
)
Weighted-average shares used to compute net loss per share, basic and diluted
47,808

 
46,460

 
47,491

 
43,475

 
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 September 30,
 
Nine Months Ended September 30,
2018
 
2017
 
2018
 
2017
Net loss
$
(17,237
)
 
$
(3,630
)
 
$
(35,819
)
 
$
(11,914
)
Other comprehensive gain, net of taxes:
 
 
 
 
 
 
 
Net change in cumulative translation adjustment
(14
)
 
22

 
(136
)
 
165

Unrealized loss on available-for-sale securities
(99
)
 

 
(99
)
 

Comprehensive loss
$
(17,350
)
 
$
(3,608
)
 
$
(36,054
)
 
$
(11,749
)
 
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)



 
Nine Months Ended September 30,
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(35,819
)
 
$
(11,914
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Stock-based compensation expense
19,840

 
9,925

Depreciation and amortization
13,544

 
6,736

Amortization of contract acquisition costs
1,009

 

Amortization of debt discount and transaction costs
4,125

 

Partial release of valuation allowance
(2,133
)
 

Accretion of discounts on investments
(199
)
 

Other
(5
)
 
17

Changes in operating assets and liabilities net of effects of acquisitions:
 
 
 
Accounts receivable
306

 
(839
)
Deferred commissions
(9,657
)
 

Prepaid expenses and other assets
(2,406
)
 
(1,897
)
Accounts payable
(1,077
)
 
1,661

Accrued expenses and other liabilities
3,224

 
265

Deferred revenue
1,375

 
1,152

Deferred rent
362

 
418

Net cash provided by (used in) operating activities
(7,511
)
 
5,524

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of short-term investments
(171,102
)
 

Purchase of property and equipment
(5,927
)
 
(4,781
)
Additions to internally developed software
(1,366
)
 
(1,011
)
Acquisition of business, net of cash acquired
(151,765
)
 
(1,450
)
Net cash used in investing activities
(330,160
)
 
(7,242
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from issuance of convertible senior notes, net of initial purchasers’ discounts and transaction costs
301,848

 

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

Net proceeds from follow-on public offering

 
134,277

Proceeds from exercise of equity awards
6,182

 
5,619

Proceeds from employee stock purchase plan
4,261

 
3,238

Payment related to shares withheld for taxes
(4,391
)
 
(1,563
)
Repayment of Booker long-term debt
(10,008
)
 

Repayment on financing and capital lease obligations
(384
)
 
(321
)
Payment of financing obligations related to Lymber and HealCode acquisitions
(1,250
)
 
(250
)
Other

 
(33
)
Net cash provided by financing activities
259,836

 
140,967

Effect of exchange rate changes on cash and cash equivalents
(110
)
 
199

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(77,945
)
 
139,448

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
232,019

 
85,864

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
154,074

 
$
225,312

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
180

 
$
212

Cash paid for interest
899

 
934

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

 
$
5,142

Unpaid equipment purchases
1,545

 
1,664

Acquisition consideration held back to satisfy potential indemnification claims

 
500

Unpaid follow-on public offering costs

 
11

Debt issuance costs included in accounts payable and accrued expenses and
other current liabilities
120

 

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.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements are presented in accordance with United States generally accepted accounting principles (“GAAP”), which include the accounts of MINDBODY and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP, and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments consisting only of normal recurring adjustments that are necessary for a fair statement of the Company’s financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2018. The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted under the rules and regulations of the SEC.
These condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2017 included in the Annual Report on Form 10-K (“Annual Report”), which was filed with the SEC on March 1, 2018.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include the capitalization and estimated useful life of the Company’s internally developed software, useful lives of property and equipment, the period of benefit that deferred commissions are amortized over, the determination of fair value of stock awards issued and forfeiture rates, a valuation allowance for deferred tax assets, contingencies, 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 September 30, 2018 and December 31, 2017, one trade receivable represented 9% 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.

9


Summary of Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies as compared to those described in the Company’s Annual Report, 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,” new policies related to the Company’s recent issuance of convertible senior notes and capped calls, and new policies related to the Company’s purchases of short-term investments.
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.
Short-term Investments
The Company classifies its investments in marketable securities as available-for-sale and presents them within current assets since these investments are available to fund current operations. Investments with an original maturity of three months or less at the date of purchase are considered cash equivalents. Investments with an original maturity of greater than three months and equal to or less than one year are classified as short-term investments. The Company does not currently hold any investments with maturities greater than one year.
The Company carries its available-for-sale investments at fair value. Fair value is calculated based on publicly available market information or other estimates determined by management. Unrealized gains and losses are reported as a component of other comprehensive loss. Realized gains and losses are determined based on the specific identification method and are reflected in its Consolidated Statements of Operations.
There were no realized gains or losses on available-for-sale investments for the three and nine months ended September 30, 2018. The Company regularly reviews its investment portfolio to identify and evaluate investments that have indicators of possible impairment. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include, but are not limited to: the length of time and extent a security’s fair value has been below its cost, the financial condition and near-term prospects of the investee, the credit quality of the security’s issuer, likelihood of recovery and the Company’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in value. For its debt instruments, the Company evaluates whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to other income (expense) and a new cost basis in the investment is established.
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.


10


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

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

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

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

 
 
As Reported
 
Revenue Standard Adjustments

 
As Adjusted
 
 
December 31, 2017
 
 Payments Contract
 
Product and Other
 
 Cost to obtain a Contract
 
January 1, 2018
ASSETS
 
 
 
 
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
5,612

 
$

 
$
38

 
$

 
$
5,650

Other non-current assets
 
934

 

 
33

 

 
967

Deferred commissions, current portion
 

 

 

 
224

 
224

Deferred commissions, non-current portion
 

 

 

 
677

 
677

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
Deferred revenue, current portion
 
$
6,318

 
$
(958
)
 
$

 
$

 
$
5,360

Deferred revenue, non-current portion
 
3,201

 
(1,912
)
 

 

 
1,289

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

 
$
72

 
$
900

 
$
(198,312
)

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

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

11


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.

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 August 2018, the FASB issued authoritative guidance on customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The new guidance is effective for the Company beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact of the new standard on its consolidated financial statements.

In August 2018, the FASB issued authoritative guidance on fair value measurement. The guidance eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The guidance adds new disclosure requirements for Level 3 measurements. The new guidance is effective for the Company beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the impact of the new standard 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 (the “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. 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 September 30, 2018 and December 31, 2017.

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 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 Company expects to adopt this guidance effective January 1, 2019. In addition, the FASB issued ASU 2018-11, Leases Targeted Improvements, which provides an additional transition method that allows entities to apply the new leases standard at adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has elected this new transition method when it adopts this guidance on 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.


12


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
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 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.

13



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):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Primary geographical markets
 
 
 
 
 
 
 
United States
$
52,017

 
$
37,284

 
$
145,675

 
$
107,295

Other
11,765

 
9,328

 
33,541

 
25,638

Total revenue
$
63,782

 
$
46,612

 
$
179,216

 
$
132,933


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Primary product lines
 
 
 
 
 
 
 
Subscription and services
$
40,792

 
$
28,283

 
$
112,075

 
$
79,228

Payments
22,037

 
17,786

 
64,532

 
52,155

Product and other
953

 
543

 
2,609

 
1,550

Total revenue
$
63,782

 
$
46,612

 
$
179,216

 
$
132,933


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

September 30, 2018
142

 
64

 
7,962

 
1,339


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 or invoiced 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 September 30, 2018 includes current and non-current deferred revenue related to the acquisition of Booker of $1,043,000 and $107,000, respectively.

Movement between contract assets and receivables was not significant during the three and nine months ended September 30, 2018.


14


Deferred Commissions Costs (Contract Acquisition Costs)
Contract acquisition costs, which primarily consists of sales commissions paid, are considered 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 that were capitalized and deferred for the three and nine months ended September 30, 2018 were $3,793,000 and $9,750,000, respectively. Amortization expenses for contract acquisition costs for the three and nine months ended September 30, 2018 were $545,000 and $1,009,000, respectively. There was no impairment loss in relation to costs capitalized.

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

Portfolio Approach: The Company is utilizing 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 three months)
 
2019
 
2020
 
Thereafter
Payments revenue
$
516

 
$
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. Revenue recognized during the three and nine months ended September 30, 2018 from performance obligations satisfied or partially satisfied in previous periods was not significant.


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


15


 
Three Months Ended September 30,
 
2018
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
Revenues
 
 
 
 
 
Subscription and services
$
40,792

 
$
40,792

 
$

Payments
22,037

 
22,120

 
(83
)
Product and Other
953

 
953

 

 
 
 
 
 
 
Operating Expenses and Net Loss
 
 
 
 
 
Sales and marketing
25,959

 
29,206

 
(3,247
)
Net loss
(17,237
)
 
(20,447
)
 
3,210



 
Nine Months Ended September 30,
 
2018
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
Revenues
 
 
 
 
 
Subscription and services
$
112,075

 
$
112,075

 
$

Payments
64,532

 
64,673

 
(141
)
Product and Other
2,609

 
2,609

 

 
 
 
 
 
 
Operating Expenses and Net Loss
 
 
 
 
 
Sales and marketing
68,845

 
77,581

 
(8,736
)
Net loss
(35,819
)
 
(44,548
)
 
8,729


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

 
September 30,
 
2018
 
As Reported
 
Balances without adoption of Topic 606
 
Effect of Change Higher/(Lower)
ASSETS
 
 
 
 
 
Prepaid expenses and other current assets
$
8,948

 
$
8,806

 
$
142

Other non-current assets
1,303

 
1,239

 
64

Deferred commissions, current portion
2,645

 

 
2,645

Deferred commissions, non-current portion
6,926

 

 
6,926

 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
Deferred revenue, current portion
$
7,962

 
$
8,871

 
$
(909
)
Deferred revenue, non-current portion
1,339

 
3,158

 
(1,819
)
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
Accumulated deficit
$
(234,130
)
 
$
(246,635
)
 
$
(12,505
)


16


3. FAIR VALUE MEASUREMENTS

The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis, whereby the inputs used in our valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; benchmark yields, reported trades, broker/dealer quotes, inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, the Company’s own or the counterparty’s non-performance risk is considered in measuring the fair values of assets.

Available-for-sale investments within cash equivalents and investments consist of the following (in thousands):

 
September 30, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
Money market funds
$
138,927

 
$

 
$

 
$
138,927

U.S. Government bonds
74,255

 

 
(74
)
 
74,181

Commercial paper
58,705

 

 

 
58,705

Corporate bonds
23,301

 

 
(22
)
 
23,279

Treasury bills
14,854

 

 
(3
)
 
14,851

Total
$
310,042

 
$

 
$
(99
)
 
$
309,943


Unrealized losses related to these investments are due to interest rate fluctuations as opposed to credit quality. In addition, the Company does not intend to sell, and it is not more likely than not that the Company would be required to sell, these investments before recovery of their cost basis. As a result, there is no other-than-temporary impairment for these investments as of September 30, 2018.

The following table presents the fair value of the Company’s financial instruments by level within the fair value hierarchy (in thousands):
 

17


 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-sale investments included in cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
138,927

 
$

 
$

 
$
138,927

 
 
 
 
 
 
 
 
Available-for-sale investments included in short-term investments:
 
 
 
 
 
 
 
U.S. Government bonds
$

 
$
74,181

 
$

 
$
74,181

Commercial paper

 
58,705

 

 
58,705

Corporate bonds

 
23,279

 

 
23,279

Treasury bills
14,851

 

 

 
14,851

Total
$
14,851

 
$
156,165

 
$

 
$
171,016

 
 
 
 
 
 
 


Equity:
 
 
 
 
 
 
 
Acquisition-related contingent consideration(1)
$

 
$

 
$
5,143

 
$
5,143


All available-for-sale securities have been classified as current, based on management's intent and ability to use the funds in current operations.
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Available-for-sale investments included in cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
224,165

 
$

 
$

 
$
224,165

 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Acquisition-related contingent consideration(1)
$

 
$

 
$
5,143

 
$
5,143

 
(1)
The contingent consideration related to the acquisition of Lymber Wellness, Inc. (“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 Company carries the Notes at face value less unamortized debt discount and issuance costs on its consolidated balance sheet and presents the fair value for disclosure purposes only. The estimated fair value of the Notes as of September 30, 2018 was determined to be $319,256,000. The Company classifies the Notes as Level 2 financial instruments and calculates the fair value based on the quoted bid price of comparable instruments in an over-the-counter market on the last trading day of the reporting period. 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 nine months ended September 30, 2018. As of September 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.

18



4. BALANCE SHEET COMPONENTS
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 
September 30,
 
December 31,
2018
 
2017
Prepaid expenses
$
7,789

 
$
5,342

Other current assets(1)
1,159

 
434

Prepaid expenses and other current assets
$
8,948

 
$
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.
Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
 
September 30,
 
December 31,
2018
 
2017
Computer equipment
$
24,122

 
$
20,671

Leasehold improvements
12,761

 
11,386

Office equipment
3,714

 
2,702

Software licenses
6,336

 
5,378

Building, leased
16,438

 
16,438

Property and equipment, gross
63,371

 
56,575

Less: accumulated depreciation and amortization
(30,370
)
 
(23,704
)
Property and equipment, net
$
33,001

 
$
32,871

Depreciation of property and equipment was $2,196,000 and $1,921,000 for the three months ended September 30, 2018 and 2017, respectively. Depreciation of property and equipment was $6,355,000 and $5,725,000 for the nine months ended September 30, 2018 and 2017, respectively.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in thousands):
 
September 30,
 
December 31,
2018
 
2017
Accrued payroll
$
10,303

 
$
7,591

Accrued vacation
3,497

 
2,400

Employee stock purchase plan contributions
824

 
1,548

Other liabilities
1,971

 
1,560

Total accrued expenses and other liabilities
$
16,595

 
$
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, an 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

19


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 $9,051,000 in net liabilities acquired, with the excess $91,220,000 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 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 are included in the Company's consolidated statements of operations, commencing on the acquisition date, April 2, 2018. In the three and nine months ended September 30, 2018, the Company’s condensed consolidated statement of operations includes revenues of $7,004,000 and $13,860,000, respectively, and net loss of $4,330,000 and $8,780,000, respectively, associated with the operations of Booker.

Acquisition-related expenses, including legal and accounting fees and other external costs directly related to the acquisition, were expensed as incurred. Acquisition-related expenses of $579,000 and $4,867,000 for the three and nine months ended September 30, 2018, respectively, are included in general and administrative expense in our condensed consolidated 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, except per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue (1)
$
63,782

 
$
53,242

 
$
185,884

 
$
154,404

Net loss attributable to common shareholders
(17,237
)
 
(7,110
)
 
(40,963
)
 
(21,529
)
Net loss per share attributable to common shareholders - basic and diluted.
$
(0.36
)
 
$
(0.15
)
 
$
(0.86
)
 
$
(0.50
)


20


(1) The following table shows adjusted unaudited pro forma information excluding the revenue from one terminated non-recurring transition services arrangement that was not related to its 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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
63,782

 
$
53,242

 
$
185,884

 
$
154,404

Less: revenue from Booker terminated contract

 

 

 
2,875

Revenue excluding Booker terminated contract
$
63,782

 
$
53,242

 
$
185,884

 
$
151,529


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 a 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, 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. 


21


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 was included in other current liabilities. This hold-back amount was paid to Lymber in April 2018.

The acquisition of Lymber was accounted for in accordance with the acquisition method of accounting for business combinations with MINDBODY as the accounting acquirer. Acquisition-related costs incurred and expensed by the Company were immaterial and were included within general and administrative expenses on the consolidated statements of operations. Under the acquisition method of accounting, the total purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. Goodwill of $2,544,000 was allocated to the Company’s one operating segment and represents 35% of the total purchase consideration. Goodwill is primarily attributable to expanded market opportunities from selling and integrating Lymber’s yield management solution with the Company’s other offerings and the associated assembled workforce acquired. Goodwill is amortized over 15 years for tax purposes.

The 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):

22


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

 
$
(3,927
)
 
$
11,282

Acquired trade names
7 to 10
 
5,520

 
(370
)
 
5,150

Acquired customer relationships
2 to 8
 
54,620

 
(4,772
)
 
49,848

Internally developed software
2 to 3
 
4,988

 
(2,297
)
 
2,691

Covenants not-to-compete
2
 
400

 
(99
)
 
301

Total intangible assets
 
 
$
80,737

 
$
(11,465
)
 
$
69,272

 
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 $67,000 and $774,000 for the three months ended September 30, 2018 and 2017, respectively. The Company capitalized software development costs of $1,285,000 and $1,011,000 for the nine months ended September 30, 2018 and 2017, respectively.

The Company has internally developed software in process, for development projects that qualify for capitalization, of $67,000 and $1,559,000 as of September 30, 2018 and December 31, 2017, respectively.

Amortization of intangible assets (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Amortization of acquired intangible assets
$
3,128

 
$
410

 
$
6,644

 
$
991

Amortization of internally developed software
265

 
6

 
545

 
20

Total amortization of intangible assets
$
3,393

 
$
416

 
$
7,189

 
$
1,011

The expected future annual amortization expense of intangible assets as of September 30, 2018 is presented below (in thousands):
Year Ending December 31,
 
2018 (Remaining three months)
$
3,357

2019
13,322

2020
13,195

2021
10,641

2022
8,900

Thereafter
19,790

Total expected future amortization expense of intangible assets, excluding internally developed software in process.
$
69,205



23


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 (5.25% as of September 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 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 $301,728,000, 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

24


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 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 September 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 $6,710,000 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 $2,062,000 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):

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

Less: unamortized debt discount
69,136

Less: unamortized transaction costs
6,418

Net carrying amount
$
234,946



The unamortized issuance costs as of September 30, 2018 will be amortized over a weighted-average remaining period of approximately 4.13 years.

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

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

Less: transaction cost
2,062

Net carrying amount
$
70,907


The following table sets forth total interest expense recognized related to the Notes (in thousands):

25


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest expense
$
291

 
$

 
$
349

 
$

Amortization of debt discount
3,198

 

 
3,833

 

Amortization of transaction costs
245

 

 
293

 

Total
$
3,734

 
$

 
$
4,475

 
$


The effective interest rate of the liability component for the nine months ended September 30, 2018 was 6.50%.
Based on the closing price of our Class A common stock of $40.65 on September 28, 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 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 $2,262,000 and $1,705,000 for the three months ended September 30, 2018 and 2017, respectively. Rent expense was $6,336,000 and $4,575,000 for the nine months ended September 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 $8,229,000 to be recognized over the remainder of the initial term of the lease agreement. The total financing obligation as of September 30, 2018 is $15,065,951, of which $587,000 is recorded as a current obligation.

26



Future Minimum Lease Payments
Future minimum lease payments under non-cancellable lease agreements as of September 30, 2018 were as follows (in thousands):
Year Ending December 31,
 
Operating
Leases
 
Financing
Obligation,
Building-
Leased
 
Total
2018 (Remaining three months)
 
$
1,575

 
$
423

 
$
1,998

2019
 
6,051

 
1,729

 
7,780

2020
 
5,840

 
1,781

 
7,621

2021
 
4,573

 
1,835

 
6,408

2022
 
3,269

 
1,890

 
5,159

Thereafter
 
10,134

 
15,637

 
25,771

Total minimum lease payments
 
$
31,442

 
$
23,295

 
$
54,737

 
Purchase Commitments
 
Future unconditional purchase commitments for software subscriptions and data center and communication services as of September 30, 2018 were as follows (in thousands):
Year Ending December 31,
 
2018 (Remaining three months)
$
742

2019
3,703

2020
2,188

2021
676

Total purchase commitments
$
7,309

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.


27


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 September 30, 2018, there were 6,780,316 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 September 30, 2018, options to purchase 1,506,491 shares of Class A common stock and 2,278,153 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 September 30, 2018, there were 1,256,244 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 245,914 shares of Class A common stock for an aggregate cost of $4,261,000 under the ESPP during the nine months ended September 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 September 30, 2018, options to purchase 1,900,671 shares of Class B common stock remained outstanding under the 2009 Plan.

Booker Equity Incentive Plan

28


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
1,514,316

 
38.43

 
 
Vested
(356,557
)
 
22.90

 
 
Forfeited
(202,256
)
 
28.03

 
 
Unvested balance – September 30, 2018
2,278,153

 
$
32.91

 
$
92,607


As of September 30, 2018, there was a total of $65,382,000 in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted average period of approximately 2.8 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
670,039

 
35.34

 
$
14.30

 
 
 
 
Exercised
(483,975
)
 
12.77

 
 
 

 
13,492

Forfeited or canceled
(149,321
)
 
20.96

 
 
 

 
 
Outstanding – September 30, 2018
3,472,791

 
$
17.43

 
 
 
6.7
 
$
80,700

Exercisable – September 30, 2018
2,096,794

 
$
10.69

 
 
 
5.4
 
$
62,816

Vested and expected to vest – September 30, 2018
3,457,102

 
$
17.38

 
 
 
6.6
 
$
80,526


The total fair value of options vested during the three and nine months ended September 30, 2018 was $2,305,000 and $6,066,000, respectively, and during the three and nine months ended September 30, 2017 was $977,000 and $3,670,000, respectively.

As of September 30, 2018, the total unrecognized stock-based compensation expense for unvested stock options, net of expected forfeitures, was $14,491,000, which is expected to be recognized over a weighted-average period of 2.6 years.
Other Stock-Based Compensation
The Company recorded stock-based compensation expense during the three and nine months ended September 30, 2018 of $265,000 and $787,000, respectively, and during the three and nine months ended September 30, 2017 of $265,000 and $543,000, respectively, attributed to post-acquisition services that are payable in shares of the Company’s common stock.

29


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:
 
Nine Months Ended September 30,
2018
 
2017
Expected term (in years)
5.2
 
5.8
Expected volatility
37% - 38%
 
40% - 44%
Risk-free interest rate
2.6% - 3.0%
 
1.8% - 2.0%
Dividend yield
0%
 
0%
 
The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine fair value of common shares to be issued under the ESPP:

 
Nine Months Ended September 30,
2018
 
2017
Expected term (in years)
0.5 - 2.0
 
0.5 - 2.0
Expected volatility
33% - 38%
 
31% - 50%
Risk-free interest rate
1.7% - 2.8%
 
0.5% - 1.3%
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 September 30,
 
Nine Months Ended September 30,
2018
 
2017
 
2018
 
2017
Cost of revenue
$
680

 
$
287

 
$
1,762

 
$
914

Sales and marketing
2,015

 
836

 
5,400

 
2,013

Research and development
2,381

 
1,167

 
5,741

 
2,674

General and administrative
2,546

 
1,625

 
6,937

 
4,324

Total stock-based compensation expense
$
7,622

 
$
3,915

 
$
19,840

 
$
9,925


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.


30


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 $169,000 for the three months ended September 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 September 30, 2018 and 2017 was negative 1.0% and negative 2.3%, respectively.

The income tax benefit of $1,811,000 for the nine months ended September 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 nine months ended September 30, 2018 and 2017 was 4.8% and negative 3.0%, respectively.
 
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 September 30,
 
Nine Months Ended September 30,
2018
 
2017
 
2018
 
2017
Net loss attributable to common stockholders
$
(17,237
)
 
$
(3,630
)
 
$
(35,819
)
 
$
(11,914
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.36
)
 
$
(0.08
)
 
$
(0.75
)
 
$
(0.27
)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted
47,808

 
46,460

 
47,491

 
43,475

 
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 September 30,
2018
 
2017
Shares subject to outstanding stock options and employee stock purchase plan
3,520
 
3,876

Shares subject to outstanding restricted stock units
2,278
 
1,293

Total
5,798
 
5,169


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.

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Substantially all of the Company’s assets were attributable to operations in the United States as of September 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 September 30, 2018, our customers employed more than 469,000 wellness practitioners serving more than 58 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 $2,674 million and $1,971 million on our payments platform for the three months ended September 30, 2018 and 2017, respectively, representing a 36% increase year over year.
We provide our software as a subscription-based service to our 67,364 subscribers, as of September 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.
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 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.

32



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

 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
2018
 
2017
 
%
 
2018
 
2017
 
%
(dollars in millions)
Revenue
$
63.8

 
$
46.6

 
37%
 
$
179.2

 
$
132.9

 
35%
Net loss
(17.2
)
 
(3.6
)
 

 
(35.8
)
 
(11.9
)
 

Adjusted EBITDA(1)
$
(0.7
)
 
$
2.5

 

 
$
3.4

 
$
5.3

 

(1) For a reconciliation of Adjusted EBITDA to net loss, see the section below titled “Non-GAAP Financial Measure.”
During the three months ended September 30, 2018 and 2017, approximately 82% and 80% of our revenue came from the United States, respectively. During the nine months ended September 30, 2018 and 2017, approximately 81% of our revenue came from the United States, respectively.
Our employee headcount increased to 1,802 employees as of September 30, 2018, from 1,440 as of September 30, 2017.
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 September 30,
 
2018
 
2017
Subscribers (end of period)
67,364

 
59,028

Average monthly revenue per subscriber
$
309

 
$
259

Payments volume (in millions)
$
2,674

 
$
1,971

Dollar-based net expansion rate (average for the quarter)
101
%
 
108
%
 
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 59,028 to 67,364. 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 4,370 as of September 30, 2017 to 456 as of September 30, 2018, and the number of our high value subscribers increased from 54,658 as of September 30, 2017 to 66,908 as of September 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 September 30, 2018 and 2017. ARPS increased for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. We expect ARPS to increase over the long term.


33



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 September 30, 2018 compared to the three months ended September 30, 2017. We expect payments volume to continue to increase over the long term.  

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 more value and improved 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.
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.

34



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 September 30,
 
Nine Months Ended September 30,
2018
 
2017
 
2018
 
2017
(in thousands)
Net loss
$
(17,237
)
 
$
(3,630
)
 
$
(35,819
)
 
$
(11,914
)
Stock-based compensation expense
7,622

 
3,915

 
19,840

 
9,925

Depreciation and amortization
5,589

 
2,337

 
13,544

 
6,736

Acquisition-related expenses
579

 

 
4,867

 

Income tax provision (benefit)
169

 
83

 
(1,811
)
 
343

Other (income) expense, net
2,567

 
(217
)
 
2,766

 
181

Adjusted EBITDA
$
(711
)
 
$
2,488

 
$
3,387

 
$
5,271

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.
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.

35



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 legal, corporate insurance and accounting expenses. We also expect to incur further 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 short-term investments and cash and cash equivalent balances.