REVENUE RECOGNITION

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

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

The Company determines revenue recognition through the following steps:


i.	Identification of the contract, or contracts, with a customer


ii.	Identification of the performance obligations in the contract


iii.	Determination of the transaction price


iv.	Allocation of the transaction price to the performance obligations in the contract


v.	Recognition of revenue when, or as, the Company satisfies a performance obligation

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

Components of revenue

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

•

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

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

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

•

Payments. The Company earns payments revenue from revenue share arrangements with third-party payment processors on transactions between its customers who utilize the Company’s payments platform and their consumers. These payment transactions are generally related to purchases of classes, memberships, goods or services through a customer’s website, at its business location, and through the MINDBODY app. These transaction fees are recorded as revenue on a net basis when the payment transactions occur. The Company satisfies its performance obligation by providing access to its platform and processing transactions for payment-related services. Payment fees are variable consideration that meet the “as invoiced” practical expedient as they are specific to the month that the usage occurs.


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

Disaggregation of Revenue

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



	Three Months Ended March 31,
	2018
	Subscription & Services		Payments		Products & Other		Total

Primary geographical markets
United States	$	25,153	$	17,320	$	791	$	43,264
Other	7,590		2,909		60		10,559
Total	$	32,743	$	20,229	$	851	$	53,823

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

Contract balances

The following table provides information about contract assets and deferred revenue from contracts with customers (in thousands):



	Contract Assets				Deferred Revenue
	Prepaid expenses and other current assets		Other non-current assets		Current		Non-Current
January 1, 2018	$	38	$	33	$	5,360	$	1,289
March 31, 2018	$	77	$	101	$	5,949	$	1,499

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

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

Deferred commissions costs (contract acquisition costs)

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

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

Practical Expedients and Exemptions

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

•

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


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

Transaction price allocated to the remaining performance obligations

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



	2018 (Remaining nine months)		2019	2020	Thereafter
Payments revenue	$	1,547	2,062	2,062	$	1,547

Comparative GAAP Financials

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



	Three Months Ended March 31,
	2018
	As Reported			Balances without adoption of Topic 606		Effect of Change Higher/(Lower)
Revenues
Subscription and services	$	32,743		32,743		—
Payments	20,229			20,240		(11	)
Product and Other	851			763		88

Cost and Expenses
Sales and marketing	18,105			20,810		(2,705	)
Net loss	(1,691		)	(4,473	)	2,782

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



	Three Months Ended March 31,
	2018
	As Reported		Balances without adoption of Topic 606		Effect of Change Higher/(Lower)
ASSETS
Prepaid expenses and other current assets	$	6,393	$	6,316	$	77
Other non-current assets	1,246		1,145		101
Deferred commissions, current portion	938		—		938
Deferred commissions, non-current portion	2,668		—		2,668

LIABILITIES
Deferred revenue, current portion	$	5,949	$	6,874	$	(925	)
Deferred revenue, non-current portion	1,499		$	3,413	(1,914		)

STOCKHOLDERS' EQUITY
Accumulated deficit	200,002		206,626		(6,624		)