EFTA00594729.pdf

PROSPECTUS (Subject to Completion) ON CO ▪ Issued June 8, 2015 = S t, = - •—• 01 ea a C C 0 2 MINDBODY, Inc. is offering 7.150,000 shares of its Clan A common stork. This is our initial public offering, and no • a• public market currently exists for our shares. We anticipate that the initial public offering price per share will be w ▪ m between $13.00 and $15.00. C 0 Following this offering, we wall hare two classes of authorized common stork, Clan A common stork and Class B z common stork. The tights of the holders of our Class A common stork and Class B cannon stork will be identical, '3 2 except with respect to voting and conversion rights. Each share of our Class A common stork will be led to one rote. a " Each share of our Class B ro 000000 on stork will be entitled to 10 votes and trill be convertible at any time into one share .0 GI of our Class A common stork. • g = Al shares of our capital stork outstanding lininediately prior to this offering, including shares held by our • = officers, employees and directors, and their respective affiliates, will be reclassified into shares of our Class B rommon • o stork inunediately prior to this offering. The holders of our outstanding Class B common stork will hold approximately • 97.8% of the voting power of our outstanding capital stock immediately following this offering. a a We hare applied to fist our Class A common stock on The NASDAQ Global Market under the symbol "MB." GI • C 413 Ca CO CI3 = We are an "emerging growth company" as defined under the U.S. federal securities laws and as _ c1) 0, such, are subject to reduced public company reporting requirements. Investing in our Class A 10 0 common stock involves risks. See "Risk Factors" beginning on page 17. CO = V) 0,E W CO 0 • C 0. = Per Share $ e= Total $ E (1)See "Underwriting" beginning on page WS for additional information regarding underwriting compensation, = = co We have granted the underwriters the right to purchase up to an additional 1,072,500 shares of Class el common a stock to cover over-allotments. n Certain entities associated with. Morgan. Investment Management Inc., one of our existing holders of greater a a- than 5% 'four common stock, have indicated an interest in purchasing up to $10.0 million of our Class common O CO 2 .= stock ire. this offering, at the initial public offering price. Because these indications of interest are not binding E agreements or commitments to purchase, such. entities may elect to purchase fewer shares than they indicate an CO ° interest in purchasing or not to purchase any shares in this offering. In addition, the underwriters may elect to a sell fewer shares or not to sell any shares in this offering to such entities. The underwriters will receive the same EL discount from any shares sold to such. entities as they wile front any other shares sold to the public in this offering. .7; F- Neither the Securities and Exchange Commission nor any Other regulatory body has approved or disapproved of ci; ac these securities or passed upon the accuracy or adequacy of this prospectus. dray representation to the contrary is a Criminal Offense. ▪ The underwriters expect to deliver the shares of Class d common stock to purchasers on , 2015. O a, • = E MORGAN STANLEY CREDIT SUISSE UBS INVESTMENT BANK 2 = E PACIFIC CREST SECURITIES MP SECURITIES g , 2015 74501000 Shares MINDBODY CLASS A COMMON STOCK PRICE $ A SHARE Underwriting Price to Discounts and Proceeds to Public Commisrionsue MINDBODY EFTA00594729 MINDBODY LEVERAGING TECHNOLOGY TO IMPROVE THE WELLNESS OF THE WORLD EFTA00594730 THE LEADING ONLINE WELLN 42,000 SUBSCRIBERS ses ATTRACT MORE s?)°c")\‘-mE.S Co A/so4 ickt o G9.. ias cc CJ %C) 14/ ct" Er O a. er O w ce O $4.3 BILLION ilaftillit3/4• 4S "Pe 4 IN PAYMENTS VOLUME 250,000 PRACTITIONERS S MORE LOCAL BUSINESS RE CO 6\)S\ RE IVSUMERS ATTRACT M° For subscribers and practitioners, the data is as of March 31, 2015. For payments volume, the data is for the twelve-month EFTA00594731 JESS SERVICES MARKETPLACE ACTIVE CONSUMERS MINDBODY connect workplace OMINDRODY SOFTWARE AND PAYMENTS PLATFORM 10C MINDBODYconnect period ended March 31, 2015. For active consumers, the data is measured as of the two-year period ended March 31, 2015. EFTA00594732 TABLE OF CONTENTS Page Page Prospectus Summary 1 Management 120 Risk Factors 17 Executive Compensation 128 Special Note Regarding Forward-Looking Certain Relationships and Related Party Statements 48 Transactions 139 Market, Industry and Other Data 50 Principal Stockholders 144 Use of Proceeds 52 Description of Capital Stock 147 Dividend Policy 53 Shares Eligible for Future Sale 152 Capitalization 54 Material U.S. Federal Income Tax Dilution 56 Consequences to Non-U.S. Holders of Our Selected Consolidated Financial and Other Class A Common Stock 154 Data 59 Underwriting 158 Management's Discussion and Analysis of Legal Matters 165 Financial Condition and Results of Experts 165 Operations 63 Where You Can Find Additional Letter from the Co-Founders 91 Information 165 Business 92 Index to Consolidated Financial Statements . . F-I Through and including , 2015 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Our business, financial condition, results of operations and prospects may have changed since that date. For investors outside of the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States. EFTA00594733 [THIS PAGE INTENTIONALLY LEFT BLANK] EFTA00594734 PROSPECTUS SUMMARY This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. You should read this entire prospectus carefully, including the sections titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms "MINDBODY," "the company," "we," "us" and "our" in this prospectus refer to MINDBODY, Inc. and its consolidated subsidiaries. MINDBODY, INC. Our Vision Our vision is to leverage technology to improve the wellness of the world. Overview We are the leading online wellness services marketplace with over 42,000 local business subscribers on our platform in 124 countries and territories employing over 250,000 practitioners who provide a variety of wellness services to over 24 million active consumers. Our integrated cloud-based business management software and payments platform for the wellness services industry helps our subscribers simplify the way they run their businesses, attract and engage more consumers, boost their revenues and focus more on what they love to do — improving people's lives. Moreover, we help consumers more easily evaluate, engage and transact with these subscribers, enabling them to live healthier and happier lives. We are also a leading payments platform dedicated to the wellness services industry. In the 12 months ended March 31, 2015, $6.3 billion in transactions occurred between consumers and subscribers within our marketplace, of which $4.3 billion flowed through our payments platform. Our platform is specifically designed for the wellness services industry. Wellness encompasses multiple dimensions of a person's well-being — physical, emotional, social, occupational and spiritual, among others. As a result, we include health and fitness, integrative health, salon and spa, fine arts and children's activities as categories within the wellness services industry. According to a report that we commissioned from Frost and Sullivan, our addressable market is approximately 4.2 million wellness businesses worldwide. Based on their analysis, Frost and Sullivan estimates a $9.5 billion market for business management software solutions targeted at wellness businesses in 2015 and expects this market to grow to $15.3 billion in 2018, which implies a 17.1% compound annual growth rate, or CAGR. With over 42,000 local business subscribers, we estimate our current market penetration to be less than 1%. We believe millions of wellness businesses around the world are looking for a simple, efficient and reliable way to manage their operations. Through our integrated cloud-based business management software and payments platform, we enable businesses to easily manage class and appointment schedules, staff members, client information, online bookings, inventory, payroll and retail sales — all in a cost-effective manner. At the same time, we connect consumers with local businesses through our MINDBODY Connect platform, which powers a mobile interface that allows consumers to discover, evaluate, book and pay for wellness services, whether they are near their homes or traveling. As employers become increasingly focused on wellness programs to improve the health, fitness and productivity of their employees, our MINDBODY Connect Workplace offering combines the power of our software platform with the ease of our Connect platform to enable employees to choose from a wide variety of 1 EFTA00594735 on-site and local wellness services. We believe Connect Workplace helps employees live healthier, happier and more productive lives, while allowing employers to benefit from greater staff productivity, lower attrition and reduced healthcare costs. We have enabled a rich partner ecosystem of over 600 developers and partners who extend the value of our platform in powerful ways. These developers and partners have built applications that supplement our capabilities in areas such as automation, marketing, mobile and social interaction. Several of these partners have created significant consumer-facing businesses that rely on our unique inventory of classes, scheduling and payments capabilities. All of this is enabled by our application programming interface, or API, through which we grant access to approved developers and partners. We believe that the opportunities and technology provided by our partners enhance the power of our marketplace and contribute to the attractiveness and critical position of MINDBODY within the wellness ecosystem. As more local wellness businesses adopt our business management and payments platform. more subscriber listings appear on Connect. A larger critical mass of local wellness services on Connect attracts more consumers, which in turn attracts more local wellness businesses that want to engage with these consumers, thereby creating powerful network effects that benefit the entire ecosystem. Similarly, as more corporate wellness subscribers adopt Connect Workplace, their employees begin using our platform, which leads to increased demand from local wellness businesses to be listed on Connect. As more local wellness businesses appear on Connect, more employees use our platform to redeem their corporate incentives, which in turn leads to more corporate wellness subscribers being attracted to our platform. Finally, as we add more subscribers, consumers and employees to our wellness ecosystem. we attract more technology developers and partners who can use our API to develop additional apps that extend the capabilities of our open platform. Number of Sobacrlbers As olOcamba 71 000. 50 10 10 I" 10 Paymesta ‘'oluarie Yrvn 1.004‘111,,ar0o 11 100 to to 10 00 tit 5 I Number of Active Comment', As 011kitc0be 31 MM 30 10 0 9.9 1011 2.011 1013 2.014 Total Roesse m40DietOa 31 MM 200 310 700 0 1011 1012 3011 1014 1011 loll NIS 2014 (I) We define active consumers as all unique consumers of our subscribers' services who have used our platform to transact with our subscribers during the immediately preceding two years. 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. Our financial performance reflects our significant subscriber growth and increasing revenue per subscriber. Our total revenue increased from $32.0 million in 2012, to $48.7 million in 2013 to $70.0 million in 2014, representing year-over-year increases of 52% and 44% in 2013 and 2014, respectively. For the three months ended March 31, 2014 and 2015. our revenue was $15.7 million and $22.3 million. respectively, representing a 2 EFTA00594736 42% growth rate. Our net loss was $5.5 million. $16.2 million and $24.6 million for 2012, 2013 and 2014, respectively. For the three months ended March 31, 2014 and 2015, our net loss was $4.8 million and $7.9 million, respectively. Our Adjusted EBITDA was negative $2.5 million, negative $11.5 million and negative $18.8 million for 2012, 2013 and 2014, respectively. For the three months ended March 31, 2014 and 2015, our Adjusted EBITDA was negative $3.8 million and negative $5.3 million, respectively. For a reconciliation of Adjusted EBITDA to net loss, please see the section titled "Summary Consolidated Financial and Other Data— Non-GAAP Financial Measure." Industry Background Increasing Focus on Personal Health and Beauty is Fueling Global Demand for Wellness Services An increased focus on personal health and beauty represents a major global trend among consumers and is driving growth in wellness services worldwide. As the desire for longer, healthier lives, attractive appearance and overall physical and emotional well-being grows, more and more people are adopting a lifestyle that incorporates a healthier diet, regular physical exercise, integrative health, salon, spa and other wellness services. While over 2.1 billion people or nearly 30% of the world's population are overweight, consumers are becoming increasingly aware of the risks accnriated with obesity and the benefits of regular physical exercise and are therefore seeking to achieve a healthy weight and fitness level. In addition, while decades ago individual spending on exercise classes and spa and salon services was minimal, we believe consumers across generations today are increasingly willing to allocate a more significant portion of their disposable income to wellness services. Moreover, people increasingly consume salon, spa and integrative health services to enhance emotional, social and physical wellness. We believe that while in developed markets, the aging population is demanding more salon, spa and integrative health services, in emerging markets, demand is driven by urbanization and the resulting increase in social interactions. Growing Demand for Personalized Wellness Experiences has been Driving Industry Fragmentation We believe consumers are increasingly seeking more personalized and effective wellness experiences and are opting for smaller businesses that are more conveniently located and cater to individual needs and preferences. As a result, the number of small wellness businesses has proliferated over the past decade, while all- inclusive facilities such as large health clubs now comprise only a small percentage of the wellness services industry's aggregate revenue. Meanwhile, the market share of smaller businesses has been growing rapidly, which can be seen in the increasing number of businesses that specialize in practices such as yoga. Pilates, barn, Zumba and CrossFit. Escalating Healthcare Costs are Driving Employers Worldwide to Develop Corporate Wellness Programs that Incentivize the Use of Wellness Services Healthcare costs for employers have been increasing significantly: According to healthcare research foundation The Commonwealth Fund, from 2003 to 2013, the annual cost of family coverage for U.S. employers rose 73% to an average of $16,029. A 2010 study published in the Journal of Occupational and Environmental Medicine estimated that the cost of obesity among full-time employees reaches $73.1 billion each year. To reduce rising healthcare expenses and excessive absenteeism as well as to improve their employees' productivity, more and more organizations are implementing corporate wellness and other incentive programs to encourage healthy behavior. A 2012 study by RAND Health found that participation in a wellness program is associated with lower health care costs. 3 EFTA00594737 Despite the wide availability of corporate wellness programs. the actual participation of employees in such programs remains limited. According to the Business Journal, Gallup reported that although more than 85% of large employers offer wellness programs, only 24% of employees at these companies actually participate in the programs. We believe this is due to the fact that employers lack effective tools to incentivize participation in wellness programs and often fail to satisfy a broad range of employee preferences. Consumers Need a Single, Mobile Enabled Interface for their Wellness Services Needs Due to the fragmented nature of the wellness services industry, consumers often find it complicated and time consuming to find and book wellness services. Consumers increasingly expect to be able to identify, research and schedule the desired wellness services using their mobile devices in a manner that allows them to view class schedules, practitioner details and consumer reviews, make bookings conveniently outside business hours through web or mobile interfaces and pay for these services seamlessly online. Wellness Businesses Need an Integrated Software and Payments Platform that is Designed to Meet their Industry-Specific Needs Wellness businesses have to manage online bookings. staff scheduling and payroll. and resource allocation. They also need to promote their wellness services, attract new consumers and nurture consumer relationships. In addition, business owners need to keep track of key business performance indicators and take action to increase revenue and improve profitability. Many wellness businesses use basic tools like paper forms or Excel spreadsheets to perform some of these functions, which can be time consuming and distracting. We have observed that the inability of business owners to focus on their core business often leads to lost revenue and lower consumer retention. To succeed in the marketplace, wellness businesses need an easy-to-use and integrated cloud-based software and payments solution that is specifically designed for their needs, is cost effective and can he accessed anytime from anywhere and on any device. The MINDBODY Solution Our integrated cloud-based business management software and payments platform is specifically designed to address the unique requirements of the wellness services industry. We help our subscribers simplify their operations, focus on their consumers and grow their revenue by enabling them to attract and retain consumers. Integrated Software and Payments Platform Designed Specifically for the Needs of Local Wellness Businesses We have developed a cloud-based software and payments platform with powerful functionality that addresses key aspects of operating a wellness business, including: • Client Scheduling and Online Booking. We believe we offer subscribers the most complete online client scheduling capability available on the market today. We are the only platform provider that enables all four different types of scheduling that wellness businesses typically encounter: appointments, open classes, enrollments and workshops and resource scheduling. • Staff Management. With our staff and resource scheduling software features, staff management is easy and organized. Subscribers keep the whole schedule in one place, allowing them to manage staff availability, hours, substitutions, commissions and other compensation, all of which is easily linked to payroll records. • Client Relationship Management. With our client relationship management features, subscribers have all their consumer information in one place and can take advantage of powerful consumer relationship and marketing tools. • Integrated Software and Payments. We offer our subscribers payment processing solutions at competitive rates. Our integrated payments platform allows for convenient and secure storage of consumer credit card 4 EFTA00594738 information, which allows for seamless online bookings, recurring membership payments through our business management software and online store purchases through Connect. • Retail Point of Sale. Our point-of-sale capabilities help subscribers sell products and services, contracts and memberships, packages, workshops and store-branded gift cards. • Analytics and Reporting. We track key information that subscribers need to know to achieve their business goals, including revenue growth, contribution margin of classes, consumer retention rates, referral sources, return on investment for consumer retention campaigns and practitioner performance based on consumer loyalty and reviews by class or type of service. • Simple and Intuitive User Experience. We designed our business management software with a focus on developing a visually appealing interface that is simple, easy to use and requires little training, while offering subscribers powerful business management features. • Mobility. Our platform enables our subscribers to manage their operations anytime and anywhere via a number of mobile devices and operating systems, including Mac, iOS, Android and Windows. • Dynamic Cloud-Based Architecture. Our software platform is powered by a dynamic cloud-based architecture that requires low upfront investment and no maintenance and can easily scale with subscribers as their businesses grow. • Security and Compliance. We consistently earn a Level I Payment Card Industry Data Security Standard, or PCI DSS, and Health Insurance Portability and Accountability Act, or HIPAA, compliance rating. Social Integration. Our platform integrates with popular social networks like Facebook and Twitter, allowing our subscribers to publish schedules on their Facebook page and enabling consumers to directly schedule appointments and classes via Facebook. MINDBODY Connect A key component of our platform is Connect, our consumer-facing mobile app. With Connect, consumers have a unified account to manage all aspects of their wellness activities with a single log in. They can discover local wellness services using a geo-located map function, view class and appointment descriptions, schedules and real-time availability, read practitioner biographies and user reviews written by consumers who have actually received the service, and then book and pay for their desired services in a few taps from their mobile device. MINDBODY Connect Workplace Our Connect Workplace offering is designed to allow corporate wellness subscribers to encourage healthy habits for their employees and measure the results. Subscribers to Connect Workplace use our platform to manage on-site wellness services, incentivize employees to take advantage of the local wellness businesses in our network and analyze aggregate employee attendance data. Rich Partner Ecosystem We have enabled a rich partner ecosystem of over 600 developers and partners who extend the value of our platform in powerful ways. • Open Pla#bnn for Third-Parry App Development. We have built an open and extensible platform with an API that offers approved developers access to our unique inventory of classes, scheduling and payments capabilities. • Integration with Other Cloud-Based Partners. Our platform can be integrated with other cloud-based software that our subscribers may be using for critical business management tasks to extend the capabilities of our platform within a variety of focus areas such as automation, marketing, mobile and social. 5 EFTA00594739 Key Benefits to Marketplace Constituents Benefits to Subscribers and Practitioners. Simplify business operations. Focus more attention on clients and the quality of service they receive. Grow loyal client base and recurring revenue. Benefits to Consumers. Convenient single interface that addresses their wellness services needs. Time savings and excellent user experience increase engagement and achievement of wellness goals. Central database for wellness activities facilitates fitness graph tracking. Benefits to Employers. • Improve employee satisfaction and engagement by providing more personalized wellness options and built-in incentives. • Increase employee productivity and reduce long-term group healthcare costs with greater wellness activity participation. • Monitor and improve effectiveness by analyzing engagement and employee feedback. Our Market Opportunity According to IBISWorld, in 2014, the total revenue of gyms, health and fitness clubs in the United States was expected to reach $26.5 billion, and the U.S. salon market, consisting of haircutting services, hair coloring services, nail care services, skin care services and other services, was expected to reach $50.2 billion. The global markets for these services are significantly larger. In addition, the U.S. corporate wellness services market was expected to reach $7.4 billion in 2014, according to IBISWorld. According to a report that we commissioned from Frost and Sullivan, our addressable market is approximately 4.2 million wellness businesses worldwide. Based on their analysis, Frost and Sullivan estimates that the market for business management software solutions targeted at wellness businesses will grow to $9.5 billion in 2015 and expects this market to grow to $15.3 billion in 2018, which implies a 17.1% CAGR. In addition, we believe there are a significant number of individual practitioners worldwide who are not included in the 4.2 million addressable market estimate and can benefit from our business management software and payments platform. With over 42.000 local business subscribers, we estimate our current market penetration to be less than 1%. While we expect competition in the industry to increase and evolve over time, given our current market leadership, we believe that we are well positioned to compete for and capture a significant portion of global software and payments spending in the wellness services industry. Our Competitive Strengths The Leading Online Wellness Services Marketplace. We are the leading online wellness services marketplace with over 42,000 local business subscribers on ow platform in 124 countries and territories employing over 250,000 practitioners who provide a variety of wellness services to over 24 million active consumers. Due to our unmatched global wellness network, Connect has become the go-to destination for consumers to manage their wellness services activities. Industry-Specific Expertise. Our team of experts understands the detailed workflows and needs of each type of business within the wellness services industry, and has designed our integrated cloud-based business management software and payments platform specifically to address the unique requirements of these businesses. 6 EFTA00594740 Powerful Network Effects. As more local wellness businesses use our platform, more subscriber listings appear on Connect. A larger critical mass of local wellness services on Connect attracts more consumers, which in turn attracts more local wellness businesses that want to engage with these consumers, thereby creating powerful network effects that benefit the entire ecosystem. Similarly, as more corporate wellness subscribers adopt Connect Workplace, more employees use our platform to redeem their corporate incentives, which in turn attracts both wellness businesses and corporate wellness subscribers. Finally, as we add more subscribers, consumers and employees to our wellness ecosystem, we attract more technology developers and partners who can use our API to develop additional apps that extend the capabilities of our open platform. Integrated Cloud-Based Business Management Software and Payments Platform. The seamless integration between our business management software and payments platform provides a convenient one-stop solution for ow subscribers. Subscribers save time and resources by avoiding the use of a separate payments platform and the associated burdensome manual reconciliations of transactions that result from a lack of automation. We believe that this integrated software and payments capability leads to higher subscriber engagement with our platform and a larger recurring revenue stream for us. Ability to Scale with Subscribers' Businesses. Our feature-rich software scales from individual practitioners to large, international organizations that have hundreds of locations. It is possible for an independent mobile practitioner starting her small business to begin with our entry level software, upgrade to our more robust offerings as she opens her first brick-and-mortar location, then add locations and ultimately create a substantial chain on our platform. This type of inspirational story has happened many times. Critical Position in the Wellness Ecosystem. We have enabled a rich partner ecosystem of over 600 developers and partners who extend the value of our platform in powerful ways. Many of our technology partners and API platform partners have built successful businesses, or have significantly expanded their existing businesses, to cater to our subscribers and consumers via our platform. We believe the time, effort and dollars spent by these businesses to integrate with our platform point to the critical position that MINDBODY has established in the ecosystem. Proprietary Data and Analytics. Our software and payments platform collects and presents critical information that enables subscribers to fine tune their business operations and enables us to observe macro level wellness services industry trends that inform our business decisions. With our software, subscribers can analyze their consumer data, including demographics, type and frequency of activities and spending habits. In addition, we help subscribers assess the performance of their staff. We also collect and display consumer reviews to both subscribers and consumers. This enables consumers to make more informed buying decisions and helps ow subscribers improve their businesses. Due to ow market leadership position, we have access to more proprietary data than our competitors, which helps us improve our platform and allows us to provide unique insights and analytical capabilities. Exceptional Company Culture that Drives Performance. The MINDBODY team shares an exceptional company culture that incorporates our core values of being purpose driven, humble and helpful, caring and happy, committed to wellness, environmentally conscious, continuously evolving and committed to leadership. According to a report from Mashable based on data from Glassdoor in December 2014, MINDBODY has been named one of the "Top 10 Best Tech Companies To Work For in 2015." We believe ow culture gives us a competitive advantage in recruiting and retaining talent, driving innovation, enhancing productivity and improving customer experience. 7 EFTA00594741 Our Growth Strategy Given the increasing demand for wellness services among consumers today and a largely untapped market, we believe our opportunity is significant and growing. Key elements of our growth strategy include: Continuing to expand our subscriber base, both domestically and internationally; • Deepening relationships with existing subscribers; • Growing consumer adoption of Connect; • Continuing to innovate and broaden our platform; Further developing our partnerships and wellness ecosystem: Increasing our presence in corporate wellness; Making strategic investments and select acquisitions; and Expanding our international reach via partnerships and investments in our salesforce. Risks Associated with Our Business Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled "Risk Factors" immediately following this prospectus summary. These risks include, but are not limited to, the following: • We have a history of losses, and our revenue growth rate may not sustain the levels experienced in recent years. As our costs increase, we may not be able to generate sufficient revenue to achieve and sustain profitability. • We derive, and expect to continue to derive, a majority of our revenue and cash flows from our integrated cloud-based business management software and payments platform for the wellness services industry. If we fail to adapt this platform to changing market dynamics and subscriber preferences or to achieve increased market acceptance of our platform, our business, results of operations. financial condition and growth prospects would be adversely affected. • Our business depends substantially on our subscribers renewing their subscriptions to our platform. Any decline in the rate at which subscribers renew their subscriptions would harm our future operating results. • If we are not able to enhance our platform to achieve market acceptance and keep pace with technological developments, our business would be harmed. • Our payments platform is a core element of ow business, and any failure to grow and develop our payment processing activities, or to anticipate changes in consumer behavior, could materially and adversely affect our business and financial results. • Our payment processing platform is subject to United States and international rules and regulations, many of which are still developing. If we fail to comply with such rules and regulations or if new laws, rules or practices applicable to payment systems restrict our ability to collect fees from our payment processing platform, our financial results could be materially and adversely effected. • If we incur an actual or perceived breach to our payment processing platform, we may incur significant liabilities and our brand and reputations may be damaged. • We are subject to risks related to our reliance on third-party processing partners to perform our payment processing services. 8 EFTA00594742 • We may undertake to directly perform certain payment processing services and expand the scope of payment processing services we provide, which may require a significant investment of time and resources. and expand our exposure to potential liabilities. • The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our executive officers, employees and directors and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change in control. The holders of our outstanding Class B common stock will hold approximately 97.8% of the voting power of our outstanding capital stock following this offering. Corporate Information We were organized as a California limited liability company in February, 2001 and converted into a California corporation in October 2004. We were reincorporated in Delaware in March 2015. Our principal executive offices are located at 4051 Broad Street, Suite 220, San Luis Obispo, California 93401, and our telephone number is (877) 755.4279. Our website address is Information contained on, or that can be accessed through, our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only. Unless expressly indicated or the context requires otherwise, the terms "MINDBODY," "company," "we," "us," and "our" in this prospectus refer to MINDBODY, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries. The Enso design logo, "MINDBODY," "MINDBODY Connect," "Love Your Business," "MINDBODY Connect Workplace" and our other registered and common law trade names, trademarks and service marks are the property of MINDBODY, Inc. Other trademarks and trade names referred to in this prospectus are the property of their respective owners. Emerging Growth Company The Jumpstart Our Business Startups Act, or the JOBS Act, was enacted in April 2012 with the intention of encouraging capital formation in the United States and reducing the regulatory burden on newly public companies that qualify as "emerging growth companies." We are an emerging growth company within the meaning of the JOBS Act. As an emerging growth company, we may take advantage of certain exemptions from various public reporting requirements, including the requirement that our internal control over financial reporting be audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, certain requirements related to the disclosure of executive compensation in this prospectus and in our periodic reports and proxy statements and the requirement that we hold a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; (ii) the date we qualify as a "large accelerated filer," with at least $700 million of equity securities held by non-affiliates; (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (iv) the last day of the fiscal year ending after the fifth anniversary of the completion of this offering. See the section titled "Risk Factors—Risks Related to Ownership of Our Class A Common Stock and this Offering—We are an `emerging growth company' and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors" for certain risks related to our status as an emerging growth company. 9 EFTA00594743 THE OFFERING Class A common stock offered by us Class A common stock to be outstanding after this offering Class B common stock to be outstanding after this offering Over-allotment option offered by us Total Class A common stock and Class B common stock to be outstanding after this offering Use of proceeds Voting rights 7,150.000 shares 7,150.000 shares 31,967,544 shares 1,072,500 shares 39,117,544 shares (40.190,044 shares if the underwriters exercise their over-allotment option in full) We estimate that the net proceeds from the sale of shares of our Class A common stock in this offering will be approximately $89.3 million (or approximately $103.3 million if the underwriters exercise their over- allotment option in full), based upon the assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock and enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire businesses, products, services or technologies. However, we do not have agreements or commitments for any material acquisitions at this time. See the section titled "Use of Proceeds" for additional information. Following this offering, we will have two classes of authorized common stock, Class A common stock and Class B common stock. The holders of our Class A common stock are entitled to one vote per share, and the holders of our Class B common stock are entitled to 10 votes per share, on all matters that are subject to a stockholder vote. All shares of our capital stock outstanding immediately prior to this offering, including all shares held by our executive officers, employees and directors, and their respective affiliates, will be reclassified into shares of our Class B common stock immediately prior to this 10 EFTA00594744 offering. Holders of our Class A common stock and Class B common stock will generally vote together as a single class, unless otherwise required by law or our amended and restated certificate of incorporation. The holders of our outstanding Class B common stock will hold approximately 97.8% of the voting power of our outstanding capital stock following this offering and will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change in control transaction. See the sections titled "Principal Stockholders" and "Description of Capital Stock" for additional information. Directed share program At ow request, the underwriters have reserved up to 5% of the Class A common stock being offered by this prospectus for sale at the initial public offering price to business associates and other parties that have relationships with us or our officers. None of ow directors or executive officers will participate in the directed share program. The sales will be made by UBS Financial Services Inc., a selected dealer affiliated with UBS Securities LLC, an underwriter of this offering, through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of Class A common stock. Proposed NASDAQ trading symbol Certain entities associated with In Morgan Investment Management Inc., one of our existing holders of greater than 5% of our common stock, have indicated an interest in purchasing up to $10.0 million of our Class A common stock in this offering, at the initial public offering price. Because these indications of interest are not binding agreements or commitments to purchase, such entities may elect to purchase fewer shares than they indicate an interest in purchasing or not to purchase any shares in this offering. In addition, the underwriters may elect to sell fewer shares or not to sell any shares in this offering to such entities. The underwriters will receive the same discount from any shares sold to such entities as they will from any other shares sold to the public in this offering. Any shares purchased by such entities will be subject to lock-up restrictions described in the section entitled "Shares Eligible for Future Sale." ll EFTA00594745 The number of shares of our Class A common stock and Class B common stock that will be outstanding after this offering is based on no shares of our Class A common stock and 31,967.544 shares of our Class B common stock (including our redeemable convertible preferred stock on an as•converted basis) outstanding as of March 31, 2015, and excludes: 3,163,039 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock outstanding as of March 31, 2015, with a weighted average exercise price of $7.96 per share; • 89,177 shares of our Class B common stock, on an as-converted basis, issuable upon the exercise of a warrant to purchase shares of our redeemable convertible preferred stock outstanding as of March 31, 2015, with an aggregate exercise price of approximately $151,603; 1,278,000 shares of our Class B common stock issuable upon the exercise of options to purchase shares of ow Class B common stock granted after March 31. 2015, with an exercise price of $14.496 per share: and 5,481,954 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of: • 4,698,818 shares of our Class A common stock reserved for future issuance under ow 2015 Equity Incentive Plan, or our 2015 Plan; and • 783,136 shares of our Class A common stock reserved for future issuance under our 2015 Employee Stock Purchase Plan, or our ESPP. Our 2015 Plan and ESPP each provide for annual automatic increases in the number of shares reserved thereunder, and our 2015 Plan also provides for increases to the number of shares that may be granted thereunder based on shares under our 2009 Plan that expire, are forfeited or otherwise repurchased by us, as more fully described in the section titled "Executive Compensation—Employee Benefit and Stock Plans." Except as otherwise indicated, all information in this prospectus assumes: the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the effectiveness of our amended and restated bylaws. each of which will occur immediately prior to the completion of this offering; • a 2.5-for- I forward stock split of our common stock and our redeemable convertible preferred stock effected on June 4, 2015; the reclassification of all outstanding shares of our common stock into an equivalent number of shares of our Class B common stock and the authorization of our Class A common stock, each of which will occur immediately prior to the completion of this offering; the automatic conversion and reclassification of all outstanding shares of ow redeemable convertible preferred stock into an aggregate of 20,673,680 shares of our Class B common stock, which will occur immediately prior to the completion of this offering; the automatic conversion and reclassification of an outstanding warrant to purchase 87,500 shares of our redeemable convertible preferred stock into a warrant to purchase 89,177 shares of our Class B common stock, which will occur immediately prior to the completion of this offering; and • no exercise by the underwriters of their over-allotment option. 12 EFTA00594746 SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA The summary consolidated statements of operations data for the years ended December 31, 2012, 2013. and 2014 are derived from audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the three months ended March 31, 2014 and 2015 and the consolidated balance sheet data as of March 31, 2015 are derived from unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the unaudited interim consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and are not necessarily indicative of results to be expected for the full year or any other period. The following summary consolidated financial and other data should be read with the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. Year Ended December 31. Three Months Ended March 31. 2012 2013 2014 2014 2015 lin thousands, except share and per share data) Consolidated Statements of Operations Data: Revenue $ 31.999 S 48.687 $ 70,010 $ 15,653 $ 22.263 Cost of revenue"• 13.411 21,890 30.004 6,478 8.693 Gross profit 18.588 26.797 40.006 9,175 13,570 Operating expenses: Sales and marketing". 11,735 20.957 30.922 7,247 9.717 Research and development". 3,741 10,517 16.167 3,594 4,725 General and administrative". 8,111 10.730 18,422 3,530 6380 Change in fair value of contingent consideration — 428 (1,434) (423) — Total operating expenses 23.587 42.632 64,077 13,948 21.222 Loss from operations (4,999) (15,835) (24,071) (4,773) (7,652) Change in fair value of preferred stock warrant (515) (302) (283) (22) (150) Interest income 6 — — — 3 Interest expense (15) (21) (68) (20) (17) Other income (expense). net 17 (26) (68) 5 (39) Loss before provision for income taxes (5,506) (16.184) (24.490) (4,810) (7,855) Provision for income taxes 13 63 116 34 6 Net loss (5,519) (16,247) (24.606) (4,844) (7.861) Accretion of redeemable convertible preferred stock) (13.025) (27.892) (21,311) (5,831) (5.459) Deemed dividend—preferred stock modification 1.748 Net loss attributable to common stockholders+=• $ (18.544) $ (44.139) $ (45.917) $ (10.675)5 (11.572) Net loss per share attributable to common stockholders. basic and diluted'2' $ (1.84) $ (4.10) $ (4.17) $ (0.97)5 (1.03) Weighted-average shams used to compute net loss per share attributable to common stockholders, basic and diluteda, 10.102.216 10.757.938 11,013,658 10.968.167 11.201.755 Pro forma net lass per share attributable to common stockholders, basic and diluted. $ (0.78) S (0.24) Weighted-average shams used to compute pro forma net loss per share attributable to common stockholders. basic and diluted'2• 31.282.660 31.875.435 13 EFTA00594747 (I) Includes stock-based compensation expense as follows: Three Months Ended Year Ended December 31, March 31. 2012 2013 2014 2014 2015 (in thousands) Cost of revenue $ — $ 51 $ 220 $ 24 $ 100 Sales and marketing — 56 196 34 541 Research and development — 68 298 53 96 General and administrative 1,484 252 1,023 225 403 Total stock-based compensation expense $ 1.484 $ 427 $ 1,737 $ 336 $ 1.140 (2) See Note 13 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate our actual and pro forma basic and diluted net loss per share attributable to common stockholders, and the weighted-average number of shares used in the computation of the per share amounts. The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. Consolidated Balance Sheet Data: As of March 31. 2015 Actual Pro Forma"' Pro Forma As AdjasteeP203, (in thousands) Cash and cash equivalents $ 22,099 $22,099 $ 111,403 Working capital 14,142 14,142 103,446 Property and equipment. net 32,487 32,487 32,847 Total assets 71,077 71,077 160,381 Total deferred revenue 2,865 2,865 2,865 Financing obligation on leases 17,002 17,002 17,002 Preferred stock warrant 1,338 — — Redeemable convertible preferred stock 170,159 — — Total stockholders' equity (deficit) (133,828) 37,669 126,973 (I) The pro forma column gives effect to (i) the automatic conversion and reclassification of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 20,673,680 shares of our Class B common stock, which conversion and reclassification will occur immediately prior to the completion of this offering. (ii) the resulting reclassification of the preferred stock warrant liability to stockholders' equity. and (iii) the filing and effectiveness of our amended and restated certificate of incorporation in Delaware. as if such conversion, reclassification and effectiveness had occurred on March 31, 2015. (2) The pro forma as adjusted column gives effect to the pro forma adjustments set forth in footnote 1 above and the sale and issuance by us of 7.150,000 shares of our Class A common stock in this offering, based upon the assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. (3) Each $1.00 increase or decrease in the assumed initial public offering price of ow Class A common stock of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of each of our pro forma as adjusted cash and cash equivalents, working capital. total assets and total stockholders' equity (deficit) by approximately $6.7 million, assuming that the number of shares offered by us. as set forth on the cover 14 EFTA00594748 page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the amount of each of our pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders' equity (deficit) by approximately $13.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Key Metrics We regularly review the following key metrics to measure ow performance, identify trends affecting our business, formulate financial projections, make strategic business decisions and assess working capital needs. As of and for Three Months As of and for Year Ended December 31, Ended March 31, 2012 2013 2014 2015 Subscribers (end of period)o) 22,062 31.043 40,517 42.700 Average monthly revenue per subscribero) $ 131 $ 146 $ 155 $ 174 Payments volume (in millions)o) $ 2,113 $ 3,099 $ 4,121 $ 1,168 Dollar-based net expansion rate (end of period)(4) n/a 103% 109% 109% ( I) Subscribers are defined as unique physical business locations or, in the case of our Solo software level. individual practitioners who have subscribed to our cloud-based business management software platform as of the end of the period. (2) Average monthly revenue per subscriber is calculated by dividing the subscription. 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, the average monthly revenue per subscriber is the sum of the average monthly revenue per subscriber for each month in the period, divided by the number of months in the period. (3) Payments volume is the total dollar volume of transactions between our subscribers and their consumers utilizing our payments platform. (4) Our dollar-based net expansion rate is based upon our monthly subscription, services and payments revenue for a set of subscriber accounts. We calculate our dollar-based net expansion rate by dividing our retained revenue net of contraction and chum by our base revenue. We define our base revenue as the aggregate monthly subscription, services and payments revenue of our subscriber base as of the date one year prior to the date of calculation. We define our retained revenue net of contraction and chum as the aggregate monthly subscription, services and payments revenue of the same subscriber base included in our measure of base revenue at the end of the annual period being measured. Non-GAAP Financial Measure Adjusted EBITDA To provide investors with additional information regarding our financial results prepared in accordance with U.S. generally accepted accounting principles, or GAAP, we have presented Adjusted EBITDA, which is a non- GAAP financial measure defined by us as our net loss before stock-based compensation expense, depreciation and amortization. change in fair value of contingent consideration, change in fair value of preferred stock warrant, impairment charges, provision for income taxes, and other income (expense), net, which consisted of interest income and expense, and other miscellaneous other income (expense). We have provided below a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. We have 15 EFTA00594749 presented Adjusted EBITDA in this prospectus 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. Our 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: • 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: (1) changes in, or cash requirements for, our working capital needs; (2) the potentially dilutive impact of stock-based compensation; or (3) tax payments that may represent a reduction in cash available to us: and • Other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA along with other GAAP- based financial performance measures, including various cash flow metrics, net loss, and our GAAP financial results. The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods indicated: Year Ended December 31, Three Months Ended March 31, 2012 2013 2014 2014 2015 (in thousands) Net loss $ (5,519) $ (16,247) $ (24.606) $ (4,844) $ (7,861) Stock-based compensation expense 1,484 427 1,737 336 1,140 Depreciation and amortization 1,004 3,479 4,574 1,034 1,218 Change in fair value of contingent consideration - 428 (1,434) (423) - Change in fair value of preferred stock warrant 515 302 283 22 150 Impairment charges - - 426 - - Provision for income taxes 13 63 116 34 6 Other (income) expense. net (8) 47 136 15 53 Adjusted EBITDA (unaudited) $ (2,511) $ (11,501) $ (18,768) $ (3,826) $ (5,294) 16 EFTA00594750 RISK FACTORS Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in this prospectus, including our financial statements and related notes, before making a decision to invest in our Class A common stock. Any of the following risks could have a material adverse effect on our business, operating results, and financial condition and could cause the trading price of our Class A common stock to decline, which would cause you to lose all or pan of your investment. Risks Related to Our Business We have a history of losses, and our revenue growth rate may not sustain the levels experienced in recent years. As our costs increase, we may not be able to generate sufficient revenue to achieve and sustain profitability. We have incurred a net loss in each year since our inception, including a net loss of $16.2 million and $24.6 million in the years ended December 31, 2013 and 2014, respectively, and $4.8 million and $7.9 million in the three months ended March 31, 2014 and 2015, respectively. For the year ended December 31, 2014 and the three months ended March 31, 2015, our Adjusted EBITDA was negative $18.8 million and negative $5.3 million, respectively. For the years ended December 31, 2013 and 2014, our revenue was $48.7 million and $70.0 million, respectively, representing a 44% growth rate. For the three months ended March 31, 2014 and 2015, our revenue was $15.7 million and $22.3 million, respectively, representing a 42% growth rate. In future years, our revenue growth rate may not sustain the levels reflected by our past performance. We may not be able to generate sufficient revenue to achieve and sustain profitability as we also expect ow costs to increase in future periods. We expect to continue to expend substantial financial and other resources on: developing our platform. including investments in our research and development team, the development or acquisition of new products. features and functionality, and improvements to the scalability, availability and security of ow platform; • expenses related to international expansion in an effort to increase our subscriber base; • improving our technology infrastructure and hiring additional employees for our sales, operations and customer support teams; • strategic acquisitions; • sales and marketing expenses, including a significant expansion of our direct sales organization; and • general and administrative expenses, including legal, accounting and other expenses related to being a public company. These investments may not result in increased revenue or growth of our business. If we fail to continue to grow our revenue, our operating results and business will be harmed. We derive, and expect to continue to derive, a majority of our revenue and cash flows from our integrated cloud-based business management software and payments platform for the wellness services industry. If we fail to adapt this platform to changing market dynamics and subscriber preferences or to achieve increased market acceptance of our platform, our business, results of operations, financial condition and growth prospects would be adversely affected. We derive, and expect to continue to derive, a majority of our revenue and cash flows from our integrated cloud•based business management software and payments platform for the wellness services industry. As such, market acceptance of this platform is critical to our success. Demand for ow platform is affected by a number of factors, many of which are beyond our control, such as the timing of development and release of new products, 17 EFTA00594751 features and functionality by our competitors, technological change and growth or contraction in our addressable market. If we are unable to meet the demands of our subscribers for products and services that meet their business needs and are easy to use and deploy, our ability to achieve widespread market acceptance of our platform will be undermined, and our business, results of operations, financial condition and growth prospects will be adversely affected. Our business depends substantially on our subscribers renewing their subscriptions to our platform. Any decline in the rate at which subscribers renew their subscriptions would harm our future operating results. The vast majority of our subscription revenue is derived from subscriptions to our platform that have monthly terms. For us to maintain or improve ow operating results, it is important that our subscribers renew their subscriptions each month. In the past few years, we have expanded ow platform beyond our core cloud- based business management software with the introduction of Connect and Connect Workplace, and in January 2015, we introduced a new tiered pricing model for our subscriptions. While significant planning has gone into the expansion of our platform and the revisions to our pricing model, these changes may adversely impact our ability to accurately predict the rate at which subscribers will renew their subscriptions, which may decline or fluctuate as a result of a number of factors, including our subscribers' satisfaction with our platform, our customer support, our prices, the prices of competing software systems, system uptime, network performance, data breaches, mergers and acquisitions affecting our subscriber base, the effects of global economic conditions and reductions in our subscribers' spending levels. If ow subscribers do not renew their subscriptions or shift to less expensive software subscriptions, our revenue may decline and we may not realize improved operating results from our subscriber base. If we are not able to enhance our platform to achieve market acceptance and keep pace with technological developments, our business would be harmed. Our ability to attract new subscribers and increase revenue from existing subscribers depends in large part on our ability to enhance and improve our existing platform and to introduce new products and services, including products and services designed for a mobile user environment. To grow our business, we must develop products and services that reflect the changing nature of business management software and expand beyond our core scheduling and point-of-sale functionality to other areas of managing relationships with our subscribers, as well as their relationships with consumers. For example, in 2013, we expanded our platform to include Connect, and in 2015, we introduced Connect Workplace and began providing automated marketing functionality with our higher-priced subscriptions. The success of these and any other enhancements to our platform depends on several factors, including timely completion, adequate quality testing and sufficient demand. Any new product or service that we develop may not be introduced in a timely or cost-effective manner, may contain defects or may not achieve the market acceptance necessary to generate sufficient revenue. If we are unable to successfully develop new products or services, enhance ow existing platform to meet subscriber requirements or otherwise gain market acceptance, our business and operating results will be harmed. In addition, because our platform is available over the Internet, we need to continuously modify and enhance our platform to keep pace with changes in Internet-related hardware, software, communications and database technologies and standards. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments and changes in standards, our platform may become less marketable, less competitive, or obsolete, and our operating results will be harmed. If new technologies emerge that are able to deliver competitive products and applications at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete. Our platform must also integrate with a variety of network, hardware, mobile, and software platforms and technologies, and we need to continuously modify and enhance our products and services to adapt to changes and innovation in these technologies. Any failure of ow platform to operate effectively with future infrastructure platforms and technologies could reduce the demand for our platform. If we are unable to respond to these changes in a cost-effective manner, ow platform may become less marketable, less competitive or obsolete, and our operating results may be adversely affected. IS EFTA00594752 Our payments platform is a core element of our business, and any failure to grow and develop our payment processing activities, or to anticipate changes in consumer behavior, could materially and adversely affect our business and financial results. Our payments platform is a core element of ow business. For the years ended December 31, 2013 and 2014. our payments platform generated 35% and 37% of ow total revenue, respectively. For the three months ended March 31, 2014 and 2015. our payments platform generated 38% and 36% of our total revenue, respectively. Ow future success depends in large part on the continued growth and development of our payment processing activities. If such activities are limited, restricted, curtailed or degraded in any way, or if we fail to continue to grow and develop such activities, our business may be materially and adversely affected. The continued growth and development of our payment processing activities will depend on our ability to anticipate and adapt to changes in consumer behavior. For example, consumer behavior may change regarding the use of credit card transactions, including the relative increased use of cash, crypto•currencies, other emerging or alternative payment methods and credit card systems that we or our processing partners do not adequately support or that do not provide adequate commissions to Independent Sales Organizations such as us. Any failure to timely integrate emerging payment methods (e.g. ApplePay or Bitco ) into our software, anticipate consumer behavior changes, or contract with processing partners that support such emerging payment technologies could cause us to lose traction among our subscribers, resulting in a corresponding loss of revenue, in the event such methods become popular among their consumers. Our payment processing platform is subject to United States and international rules and regulation; many of which are still developing. If we fail to comply with such rules and regulations or if new laws, rules or practices applicable to payment systems restrict our ability to collect fees from our payment processing platform, our financial results could be materially and adversely effected. Payments processing is subject to extensive regulation in the United States and other countries where we operate. and presents a wide range of risks. We may encounter increased regulatory scrutiny and new regulatory compliance requirements brought about by evolving laws. rules and regulations. Our payment processing activities are subject to price controls within the United States and other countries, and may be subject to an increase of price controls, including controls limiting the amount we are allowed to charge subscribers for processing credit card and debit card transactions. Certain countries limit the ability of foreign payment companies like us to conduct processing activities, and restrict the transfer of funds out of such countries. Changes in the laws, rules or practices applicable to payment systems such as VISA, MasterCard or American Express, including changes resulting in increased costs that we or our subscribers must pay, may force changes to our payments platform that could adversely affect our business. If we incur an actual or perceived breach to our payment processing platform, we may incur significant liabilities and our brand and reputation may be damaged. We may suffer an attack on our payments platform that results in a breach of consumer cardholder data. We maintain payment information for tens of millions of consumers on our payments platform, and we are a potential target for hackers and other parties attempting to steal credit card data via cyber-attacks or other means. As we increase our consumer base and our brand becomes more widely known and recognized, we may become more of a target for these malicious third parties. If we experience any actual or perceived data breach as a result of third-party actions, employee negligence or error, or malfeasance, whether or not resulting in the unauthorized acquisition of or access to cardholder data, we could incur significant liability, our business may suffer and our brand and reputation may be damaged. We could be required to pay extensive fines and costs related to any such data breach, including costs incurred to replace credit cards and cardholder information and provide security monitoring services, and we could lose future sales and subscribers, any of which could harm our business and operating results. Such fines and costs could become due in one or two business days following such breach and exceed the amount of cash available to us, thereby impacting our ability to operate our business. In addition, a data breach or failure to comply with rules or regulations of payment systems could also result in the termination 19 EFTA00594753 of our status as a registered Independent Sales Organization / Merchant Service Provider. thereby dramatically impairing our ability to continue doing business in the payments industry. We are subject to risks related to our reliance on third-party processing partners to perform our payment processing services. We depend on our third-party processing partners to perform payment processing services, which generate almost all of our payments revenue. Our processing partners may go out of business or otherwise be unable or unwilling to continue providing such services, which could significantly and materially reduce our payments revenue and disrupt ow business. A number of our processing contracts require us to assume liability for any losses our processing partners may suffer as a result of losses caused by our subscribers, including losses caused by chargebacks and subscriber fraud. Thus, in the event of a significant loss by our processing partners, we may be required to pay-out a large amount of cash in one or two business days following such event and, if we do not have sufficient cash on hand, may be deemed in breach of such contracts. A contractual dispute with our processing partners could adversely impact our revenue. Certain contracts may expire or be terminated, and we may not be able to replicate the associated revenue through a new processing partner relationship for a considerable period of time. In addition, the failure of any third-party processing partner to provide accurate and timely reporting could adversely impact our ability to report accurate and timely revenue in accordance with GAAP. We expect to initiate new third-party payment relationships or migrate to other third-party payment partners in the future. The initiation of these relationships and the transition from one relationship to another would require significant time and resources. New third-party payment processing relationships may not be as effective, efficient or well received by subscribers and their consumers, nor is there any assurance that we will be able to reach an agreement with such processing partners. Our contracts with such processing partners may be less lucrative. For instance, we may be required to pay more for payment processing or receive a less favorable revenue arrangement from our payment processing partners. We may also experience the termination of revenue streams due to such migrations. We may undertake to directly perform certain payment processing services and expand the scope of payment processing services we provide, which may require a significant investment of time and resources, and expand our exposure to potential liabilities. In the future, we may undertake to directly perform certain payment processing services that we currently depend upon our processing partners to perform, expand the scope of payment processing services we provide, offer additional payment processing services or otherwise undertake additional responsibilities and liabilities related to such payment processing services. For example, in the future, we may undertake to act as a registered payment facilitator or payment service provider of the payment systems, providing merchants with a suite of services, including payment processing and funding and accepting payments as the merchant of record on behalf of other merchants. Any of these endeavors would require a significant investment of time and effective management of resources before presenting any potential upside for us, and may dramatically expand the scope of our potential contractual liability or exposure in the event of a lawsuit. Further, we may fail to effectively execute in performing such an expansion of services. If our network or computer systems are breached or unauthorized access to subscriber or consumer data is otherwise obtained, our platform may be perceived as insecure, we may lose existing subscribers or fail to attract new subscribers, and we may incur significant liabilities. Use of our platform involves the storage, transmission and processing of ow subscribers' proprietary data, including personal or identifying information regarding their consumers or employees. Unauthorized access to or security breaches of our platform could result in the loss of data, loss of intellectual property or trade secrets, loss 20 EFTA00594754 of business, reputational damage, regulatory investigations and orders, litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws, regulations, or contractual obligations, and significant costs, fees and other monetary payments for remediation. For example, if our platform is breached in a way that constitutes a violation of HIPAA, we could face costs for remediation, criminal penalties. and/or monetary penalties up to $1.5 million per year for violations of an identical provision of the law. If any unauthorized access to our systems or data or any other security breach occurs, or is believed to have occurred, our reputation and brand could be damaged, we could be required to expend significant capital and other resources to alleviate problems caused by such actual or perceived breaches and remediate our systems, we could be exposed to a risk of loss, litigation or regulatory action and possible liability, and our ability to operate our business may be impaired. If subscribers believe that our platform does not provide adequate security for the storage of personal or other sensitive information or its transmission over the Internet, our business will be harmed. Subscribers' concerns about security or privacy may deter them from using our platform for activities that involve personal or other sensitive information. Additionally, actual, potential or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third•party experts and consultants. Our errors and omissions insurance policies covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all potential liability. Although we maintain cyber liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Because the techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We may also experience security breaches that may remain undetected for extended periods of time. Because data security is a critical competitive factor in our industry, we make statements in our privacy policies and terms of service, through our certifications to privacy standards, and in our marketing materials, describing the security of our platform, including descriptions of certain security measures we employ. Should any of these statements be untrue, become untrue, or be perceived to be untrue, even if through circumstances beyond our reasonable control, we may face claims, including claims of unfair or deceptive trade practices, brought by the U.S. Federal Trade Commission, state, local or foreign regulators and private litigants. Because our platform can be used to collect and store personal information, domestic and international privacy and data security concerns could result in additional costs and liabilities to us or inhibit sales of our platform. Personal privacy and data security are significant issues in the United States, Europe and many other jurisdictions where we offer our platform. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. The U.S. federal and various state and foreign governments have adopted or proposed limitations on. or requirements regarding. the collection, distribution, use, security and storage of personally identifiable information and other data relating to individuals, and the Federal Trade Commission and numerous state attorneys general are applying federal and state consumer protection laws to enforce regulations related to the online collection, use and dissemination of personally identifiable information and other data. Some of these requirements include obligations on companies to notify individuals of security breaches involving particular personal information, which could result from breaches experienced by us or our service providers. Even though we may have contractual protections with our service providers, notifications related to a security breach could impact our reputation, harm customer confidence, hurt our sales and expansion into new markets or cause us to lose existing customers. Further, many foreign countries and governmental bodies, including the European Union and Canada. have laws and regulations concerning the collection and use of personally identifiable information obtained from their residents or by businesses operating within their jurisdiction. These laws and regulations often are more 21 EFTA00594755 restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of data that identifies or may be used to identify or locate an individual, such as names, email addresses and, in some jurisdictions, Internet Protocol, or IP, addresses. We certify adherence to the U.S. Department of Commerce's Safe Harbor Privacy Principles and comply with the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks. However, it is not clear whether or for how long applicable data protection authorities in the European Union will continue to recognize such certification as a valid method of compliance with restrictions set forth in EU data protection legislation restricting the transfer of data outside of the European Economic Area. Such uncertainty has increased as a result of a vote by the EU Parliament to suspend the Safe Harbor. We also expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Future laws, regulations, standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could impair our or our subscribers' ability to collect, use or disclose information relating to consumers, which could decrease demand for our platform, increase our costs and impair our ability to maintain and grow our subscriber base and increase our revenue. New laws, amendments to or re-interpretations of existing laws and regulations. industry standards, contractual obligations and other obligations may require us to incur additional costs and restrict our business operations. In view of new or modified federal, state or foreign laws and regulations. industry standards, contractual obligations and other legal obligations, or any changes in their interpretation, we may find it necessary or desirable to fundamentally change our business activities and practices or to expend significant resources to modify our software or platform and othenvise adapt to these changes. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulations, industry standards or other legal obligations, or any actual or suspected security incident, whether or not resulting in unauthorized access to, or acquisition, release or transfer of personally identifiable information or other data, may result in governmental enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity and could cause our subscribers to lose trust in us, which could have an adverse effect on our reputation and business. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to develop new products and features could be limited. Any of these developments could harm our business, financial condition and results of operations. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our subscribers may limit the use and adoption of, and reduce the overall demand for, our platform. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our platform. particularly in certain industries and foreign countries. We are subject to a number of legal requirements, industry standards and contractual obligations regarding security, data protection, and privacy and any failure to comply with these requirements, obligations or standards could have an adverse effect on our reputation, business, financial condition and operating results. As a service provider to our subscribers, we must comply with a number of data protection, security, privacy and other government- and industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. For example, our solutions must conform, in certain circumstances, to requirements set forth in HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and the regulations promulgated thereunder, which collectively govern the privacy and security of protected health information. Through the provision of online scheduling services to certain of our clients, we may collect, access, use, maintain and transmit protected health information in ways that may be subject to certain of these laws and regulations. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. HIPAA applies to covered entities (e.g.. health plans, health care clearinghouses and most health care providers) and to "business associates" of covered entities, which include individuals and entities that provide 22 EFTA00594756 services for or on behalf of covered entities pursuant to which the service providers may access protected health information, as well as subcontractors of business associates who may access such information. We are a subcontractor to certain business associates of covered entities. Under the current HIPAA regulations promulgated by the United States Department of Health and Human Services, if we experience a breach of patient information, the liability rules for business associates and business associates' subcontractors could result in substantial financial and reputational harm to our business. The Standards for Privacy of Individually Identifiable Health Information, or Privacy Rule, and the Security Standards for the Protection of Electronic Protected Health Information, or Security Rule, which jointly govern the privacy and security of protected health information, could significantly affect our business. The Privacy Rule and the Security Rule require the development and implementation of policies, procedures and contracts to assure compliance. We have implemented certain compliance measures, but we may be required to make additional modifications or to document and implement additional policies and procedures to comply with evolving HIPAA rules and our subscribers' business associate agreements with us. We may also be required to perform periodic audits and refinements as required by HIPAA and our subscribers' business associate agreements with us. Additionally, because we process a significant portion of our payments through debit or credit cards and enable our subscribers to engage in payments through our service, we are contractually required to maintain Payment Card Industry Data Security Standard, or PCI DSS, compliance as part of our information security program. We also may find it necessary or desirable to join industry or other self-regulatory bodies or other privacy or data protection-related organizations that require compliance with their rules pertaining to privacy and data protection. We also may be bound by additional, more stringent contractual obligations relating to our collection, use and disclosure of personal, financial and other data. If we cannot comply with or if we incur a violation of any of these regulations or requirements, we could incur significant liability through fines and penalties imposed by credit card associations or other organizations, breach of contracts with our payment processors, or our growth could be adversely impacted, either of which could have an adverse effect on our reputation, business, financial condition and operating results. The market for business management software is intensely competitive, and if we do not compete effectively, our operating results could be harmed. The market for business management software for the wellness services industry is fragmented and rapidly evolving, with relatively low barriers to entry. We face competition from in-house software systems, smaller companies offering alternative SaaS applications and traditional paper-based methods. Our competitors vary in size and in the breadth and scope of the products and services they offer. In addition, there are a number of companies that are not currently direct competitors but that could in the future shift their focus to the wellness services industry and offer competing products and services. Some of these companies, such as Intuit and Square, have or may in the future acquire greater financial and other resources than we do and could bundle competing products and services with their other offerings or offer such products and services at lower prices as part of a larger sale. There is also a risk that certain of our current business partners could terminate their relationships with us and use the insights they have gained from partnering with us to introduce their own competing products. Many of our current and potential competitors have greater name recognition, established marketing relationships. access to larger customer bases and pre-existing relationships with customers, consultants, system integrators and resellers. Additionally. some potential subscribers in the wellness services industry, particularly large organizations, have elected, and may in the future elect, to develop their own business management software. Certain of our competitors have partnered with, or have acquired, and may in the future partner with or acquire, other competitors to offer services, leveraging their collective competitive positions. which makes, or would make, it more difficult to compete with them. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. With the introduction of new technologies, the evolution of our platform and new market entrants, we expect competition to intensify in the future. Pricing 23 EFTA00594757 pressures and increased competition generally could result in reduced sales, reduced margins, increased chum, reduced subscriber retention, further losses or the failure of ow platform to achieve or maintain more widespread market acceptance, any of which could harm our business. For all of these reasons, we may fail to compete successfully against our current and future competitors, and if such failure occurs, our business will be harmed. Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results. Our continued growth depends in part on the ability of our existing and potential subscribers to access our platform at any time and within an acceptable amount of time. Our platform is proprietary, and we rely on the expertise of members of our engineering, operations and software development teams for its continued performance. We have experienced, and may in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users accessing our platform simultaneously, denial of service attacks, or other security related incidents. For example, in 2011, we were subject to a denial-of-service attack that rendered our core software inaccessible for several hours. In addition, from time to time we experience limited periods of server downtime due to server failure or other technical difficulties. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our platform becomes more complex and our user traffic increases. If our platform is unavailable or if our users are unable to access our platform within a reasonable amount of time, or at all, our business would be adversely affected and our brand could be harmed. In the event of any of the factors described above, or certain other failures of our infrastructure, subscriber or consumer data may be permanently lost. Moreover, ow online subscription agreement includes a limited warranty that enables subscribers to be eligible for credits if cumulative service levels over a certain period of time drop below 99.9%. If we experience significant periods of service downtime in the future, we may be subject to claims by our subscribers against these warranties. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected. Real or perceived errors, failures, or bugs in our platform could adversely affect our operating results and growth prospects. Because our platform is complex. undetected errors, failures, vulnerabilities or bugs may occur, especially when updates are deployed. Our platform is often used in connection with computing environments with different operating systems, system management software, equipment and networking configurations, which may cause errors in or failures of our platform or other aspects of the computing environments. In addition, deployment of our platform into complicated, large-scale computing environments may expose undetected errors, failures, vulnerabilities or bugs in our platform. Despite testing by us, errors, failures, vulnerabilities or bugs may not be found in our platform until after it is deployed to our subscribers or their consumers. We have discovered, and expect to discover in the future, software errors, failures, vulnerabilities and bugs in our platform, and we anticipate that certain of these errors, failures, vulnerabilities and bugs will only be discovered and remediated after deployment to subscribers. Real or perceived errors, failures or bugs in our platform could result in negative publicity, loss of or delay in market acceptance of our platform, loss of competitive position or claims by subscribers for losses sustained by them. In such an event, we may be required, or may choose for subscriber relations or other reasons, to expend additional resources in order to help correct the problem. We have limited experience with our expanded platform and revised pricing model, which makes it difficult to evaluate our prospects and future operating results. Although we commenced our business in 2001 and began offering our integrated cloud-based business management software on a subscription basis in 2005, many of the products offered as part of our platform have 24 EFTA00594758 been recently introduced. For example, in 2013, we released Connect, and in 2015, we introduced Connect Workplace and began offering automated marketing functionality with our higher-priced subscriptions. In addition, in January 2015, after careful deliberation, we introduced a new tiered pricing structure for new subscribers. Given the recent introduction of Connect Workplace and our new tiered pricing structure for new subscribers, their contribution to our total revenue has not been meaningful to our financial results to date. As we have a limited operating history with our expanded platform and updated pricing structure, our ability to forecast our future operating results and effectively assess our future prospects is subject to a number of uncertainties, including our ability to plan for and model future growth. Our historical revenue growth should not be considered indicative of our future performance. Further, in future periods, our revenue could decline for a number of reasons, including any further changes in our pricing structure, any reduction in demand for our platform, including our payments platform, decrease in payments processing volume, increase in competition, contraction of our overall market, or our failure, for any reason, to capitalize on growth opportunities. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties, which we use to plan our business, are incorrect or change, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, and our business could suffer. Failure to effectively expand our sales capabilities could harm our ability to increase our subscriber base and achieve broader market acceptance of our platform. Increasing our subscriber base and achieving broader market acceptance of our platform will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities, including internationally. We are substantially dependent on our online marketing efforts and on our direct sales force to obtain new subscribers. From December 31, 2013 to March 31, 2015, our sales and marketing organizations increased from 318 to 376 employees. We plan to continue to expand our direct sales force, both domestically and internationally, and to increase the number of our sales professionals who have experience in selling to larger organizations. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we require, and this competition is particularly acute for us given that our headquarters is located in San Luis Obispo, a small city with fewer resources than the San Francisco Bay Area, where many companies competing for talent are based. Ow ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of experienced sales professionals. New hires require significant training and time before they achieve full productivity, particularly in new sales segments and territories. Our recent and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. Because we do not have a long history of expanding our sales force, we cannot predict whether, or to what extent, our sales will increase as we expand our sales force or how long it will take for sales personnel to become productive. In addition, in January 2015, we introduced a new tiered pricing model for new subscribers. While we believe these changes are reasonable, there is a risk that these changes may impact the ability of our sales professionals to sell subscriptions to our platform. If our sales expansion efforts do not generate a significant increase in revenue, or if ow sales team is unable to increase sales based on our new pricing model, our business and future growth prospects could be harmed. Even if the market for our platform grows as expected, our ability to achieve long-term revenue growth will primarily depend on our ability to sell subscriptions to a large number of new small and medium-sized businesses on a consistent basis and in a cost-effective manner, with each sale constituting only a small portion of our overall revenue. The market for our platform is highly fragmented. As a result, even if this market grows as expected, our ability to achieve long-term revenue growth will largely depend on our sales team's ability to sell subscriptions to a large number of new small and medium-sized businesses on a consistent basis, with each sale constituting only a small portion of our overall revenue. To achieve this type of subscriber growth in a cost-effective manner, it is crucial that our platform is easy to use and implement without the need for excessive post-sale customer 25 EFTA00594759 support. If we are unable to sell a large volume of subscriptions on a consistent basis, or if we are forced to incur excessive costs to provide post-sale customer support, our business, results of operations, financial condition and growth prospects will be adversely affected. Any failure to offer high-quality customer support may adversely affect our relationships with our subscribers and our financial results. In deploying and using our platform, our subscribers depend on our 24/7 customer support team to resolve complex technical and operational issues, including ensuring that our platform is implemented in a manner that integrates with a variety of third-party platforms, including Apple Pay and QuickBooks. We may be unable to respond quickly enough to accommodate short-term increases in subscriber demand for customer support. We also may be unable to modify the nature, scope and delivery of our customer support to compete with changes in customer support services provided by our competitors. Increased subscriber demand for customer support, without corresponding revenue, could increase costs and adversely affect our operating results. Our sales are highly dependent on our business reputation and on positive recommendations from our existing subscribers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high- quality customer support, could adversely affect our reputation and brand, our ability to sell our platform to existing and prospective subscribers, our business, operating results and financial position. Our quarterly results may fluctuate for various reasons, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly financial results fall below the expectations of investors or any securities analysts who follow ow stock, the price of our Class A common stock could decline substantially. Some of the important factors that may cause our revenue, operating results and cash flows to fluctuate from quarter to quarter include: • our ability to attract new subscribers, retain and increase sales to existing subscribers and satisfy our subscribers' requirements; • the volume of transactions processed on our payments platform; • the number of new employees added: • the rate of expansion and productivity of our sales force; • the entrance of new competitors in our market, whether by established companies or new companies; • changes in our or our competitors' pricing policies; • the amount and timing of operating costs and capital expenditures related to the expansion of our business, including our sales force; • new products. features or functionalities introduced by our competitors; • significant security breaches, technical difficulties or interruptions to our platform; • the timing of payments by subscribers and other payment processing partners and payment defaults by subscribers or other payment processing partners; • general economic conditions that may adversely affect either our subscribers' ability or willingness to purchase additional subscriptions, delay a prospective subscriber's purchasing decision, reduce the value of new subscription contracts or affect subscriber retention; • changes in the relative and absolute levels of customer support we provide; • changes in foreign currency exchange rates; • extraordinary expenses such as litigation or other dispute-related settlement payments; • the impact of new accounting pronouncements; and • the timing of the grant or vesting of equity awards to employees. 26 EFTA00594760 Many of these factors are outside of our control, and the occurrence of one or more of them might cause our revenue, operating results and cash flows to vary widely. As such, we believe that quarter•to•quarter comparisons of ow revenue, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance. We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges. We have recently experienced a period of rapid growth in our operations and employee headcount. In particular, we grew from 806 employees as of December 31, 2013 to 1,100 employees as of March 31, 2015, and have also significantly increased the size of our subscriber base. You should not consider our recent growth in revenue as indicative of our future performance. However, we anticipate that we will significantly expand our operations and employee headcount in the near term, both domestically and internationally, particularly with respect to our sales force. This growth has placed. and future growth will place, a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend in part on our ability to manage this growth effectively. To manage the expected growth of our operations and personnel, we will need to scale our technology infrastructure and continue to improve our operational, financial and management controls, and our reporting systems and procedures. Failure to effectively manage growth could result in difficulty or delays in onboarding new subscribers, declines in quality or subscriber satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any of these difficulties could adversely impact our business performance and operating results. If we fail to effectively manage our growth in a manner that preserves the key aspects of our corporate culture, our business and operating results could be hanned. We have experienced and may continue to experience rapid growth, which has placed, and may continue to place, significant demands on ow management. operational and financial resources. For example, our headcount has grown from 806 employees as of December 31, 2013 to 1,100 employees as of March 31, 2015. In addition, since our inception in 2001, we have established subsidiaries in the United Kingdom and Australia. We plan to expand our international operations into other countries in the future, and such expansion may increase the risk that we over hire or over compensate ow employees or fail to effectively integrate our rapidly expanding employee base into our organization. We have also experienced significant growth in the number of subscribers, consumers, transactions and data that our platform and our associated hosting infrastructure support. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining the core values of our corporate culture that have been critical to our growth so far. We believe that our corporate culture fosters innovation, creativity and teamwork. However, as our organization grows, we may find it increasingly difficult to maintain the beneficial aspects of such culture, and the failure to do so could adversely impact our ability to retain and attract the kind of employees necessary for ow future success. If we are unable to manage our anticipated growth and change in a manner that preserves the key aspects of our culture, the quality of our products and services may suffer, which could adversely affect our brand and reputation and harm our ability to retain and attract subscribers. We depend on our executive officers and other key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely affect our business. Our success depends largely upon the continued services of our executive officers and other key employees, including our two founders. Richard L. Stollmeyer. our President and Chief Executive Officer, and Robert Murphy, ow Chief Operating Officer. We rely on ow leadership team in the areas of research and development, operations, security, marketing, sales, support, general and administrative functions, and on individual contributors in our research and development and operations. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our 27 EFTA00594761 business. We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period, and, therefore, they could terminate their employment with us at any time. The loss of one or more of our executive officers, especially ow two founders or other key employees, could have an adverse effect on our business. In addition, to execute our growth plan, we must attract and retain highly qualified personnel, particularly sales professionals and engineers experienced in designing and developing software and SaaS applications. Competition for these personnel in the locations where we maintain offices is intense, especially in the San Luis Obispo area where our headquarters is located, due in part to the relatively close proximity to the San Francisco Bay Area. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. In some cases, we have recruited employees from the San Francisco Bay Area and other regions with a greater supply of sales and engineering talent, and in such cases, we have sometimes found it necessary to offer compensation packages that were larger than would have been necessary if no relocation had been required. Many of the companies with which we compete for experienced personnel have greater resources than we have and are located in areas in which sales and engineering talent is more readily available. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees have breached their legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, our ability to recruit and retain highly skilled employees may be adversely impacted. If we fail to attract new personnel or fail to retain and motivate ow current personnel, our business and future growth prospects could be adversely affected. We do not have the history with our subscription or pricing models necessary to accurately predict optimal pricing necessary to attract new subscribers and retain existing subscribers. We have limited experience with respect to determining the optimal prices for our platform. In January 2015, we introduced changes to our pricing model for new subscribers, and in the future we expect to make further changes to our pricing model from time to time. As the market for our platform matures, or as competitors introduce new products or services that compete with ours, we may be unable to attract new subscribers at the same price or based on the same pricing models that we have used historically. Moreover, we have limited experience selling subscriptions to larger organizations, which may demand substantial price concessions. As a result, in the future, we may be required to reduce our prices, which could adversely affect our revenue, gross margin, profitability, financial position and cash flow. If we are not able to maintain and enhance our brand, our business, operating results, and financial condition may be adversely affected. We believe that maintaining and enhancing our reputation as a differentiated and category•defining business management software company serving the wellness services industry is critical to our relationship with our existing subscribers and to our ability to attract new subscribers. The successful promotion of our brand attributes will depend on a number of factors, including our marketing efforts, ow ability to continue to develop high•quality software, and ow ability to successfully differentiate our platform from competitive products and services. The promotion of our brand requires us to make substantial expenditures. and we anticipate that the expenditures will increase as our market becomes more competitive and as we seek to expand our platform. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors. and we could lose subscribers or fail to attract potential subscribers, all of which would adversely affect our business, results of operations and financial condition. Our financial results may fluctuate due to increasing variability in our sales cycles. We plan our expenses based on certain assumptions about the length and variability of our sales cycle. These assumptions are based upon historical trends for sales cycles and conversion rates associated with our 28 EFTA00594762 existing subscribers, many of whom to date have been small to medium-sized organizations. If we expand the focus of our sales efforts to larger organizations, ow sales cycle could lengthen and become less predictable. Other factors that may influence the length and variability of our sales cycle include: • our pricing terms, which were updated in January 2015 and will continue to vary over time; • the need to educate prospective subscribers about the uses and benefits of our platform; • the discretionary nature of purchasing and budget cycles and decisions; • the competitive nature of evaluation and purchasing processes; • evolving functionality demands; • announcements or planned introductions of new products. features or functionality by us or our competitors; and lengthy purchasing approval processes, particularly among larger organizations. If we are unable to close one or more expected significant transactions with subscribers in a particular period, or if one or more expected transactions are delayed until a subsequent period, our operating results for that period. and for any future periods in which revenue from such transactions would othenvise have been recognized, may be adversely affected. Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and adversely affect our operating results. Our operating results may vary based on the impact of changes in our industry or the global economy on us or our subscribers. The revenue growth and potential profitability of our business depend on demand for business management software generally and for business management software serving the wellness services industry in particular. Historically. during economic downturns, there have been reductions in spending on information technology as well as pressure for extended billing terms and other financial concessions. The adverse impact of economic downturns may be particularly acute among small and medium-sized businesses, which comprise the vast majority of our subscriber base. If economic conditions deteriorate, our current and prospective subscribers may elect to decrease their information technology budgets, which would limit our ability to grow our business and adversely affect our operating results. The market for our integrated cloud-based business management software and payments platform is new and unproven and may not grow. Our addressable market consists primarily of millions of small and medium-sized businesses in the wellness services industry, including businesses that offer yoga, Pilates, bane, indoor cycling, personal training, strength conditioning, martial arts and dance exercise, as well as spas, salons, music instruction studios, dance studios, children's activity centers and integrative health centers. It is difficult to predict adoption and renewal rates, demand for our platform, the growth of this market, the entry of competitive products or services or the success of existing competitive products or services. Any expansion in this market depends on a number of factors, including the cost, performance and perceived value associated with our platform. You should consider our business and prospects in light of the risks and difficulties we encounter in this new and unproven market. Expanding the focus of our sales efforts to include larger organizations could result in higher costs and longer and more unpredictable sales cycles. In the future, we may expand the focus of our sales efforts to include larger organizations, which we believe would result in higher costs and longer and more unpredictable sales cycles. With larger organizations, the /9 EFTA00594763 decision to subscribe to our platform may require the approval of more technical personnel and management levels within a potential subscriber's organization than we have historically encountered, and if so, these types of sales would require us to invest more time educating these potential subscribers. In addition, larger organizations may demand more features and integration and customer support services. We have limited experience in developing and managing sales strategies for larger organizations and in successfully onboarding larger organizations as new subscribers. As a result of these factors, these sales opportunities may not prove to be successful or may require us to devote greater research and development, sales, customer support and professional services resources to individual subscribers, resulting in increased costs and reduced profitability, and will likely lengthen our typical sales cycle, which could strain our resources. Moreover, these larger transactions may require us to delay recognizing the associated revenue we derive from these subscribers until any technical or implementation requirements have been met, and larger subscribers may demand discounts to the prices they pay for our platform. If we are unsuccessful expanding sales to larger organizations, our business and results of operations could be adversely affected. Our future performance depends in part on support from our partner ecosystem. We depend on our partner ecosystem to create apps that will integrate with our platform. This presents certain risks to our business, including: • these apps may not meet the same quality standards that we apply to our own development efforts, and to the extent they contain bugs or defects, they may create disruptions in our subscribers' use of our platform or adversely affect our brand: • we do not currently provide substantive support for software apps developed by our partner ecosystem. and users may be left without adequate support and potentially cease using our platform if our partners do not provide adequate support for these apps: • our partners may not possess the appropriate intellectual property rights to develop and share their apps: • our relationship with our partners may change, which could adversely affect our revenue: and • some of our partners may use the insight they gain from integrating with our software and from information publicly available to develop competing products or product features. The number of actual consumers using our platform may be lower than the number we have estimated. We estimate that 24 million active consumers used our platform in the two years ended December 31, 2014. 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. In calculating this number, we have attempted to avoid duplicative counting of consumers by identifying consumers who may have used our platform through different subscribers. However, in certain cases, a single consumer may have transacted with multiple subscribers under slightly different names, in which case there is a chance that we have counted the same consumer more than once. Given the challenges inherent in identifying whether a single consumer has engaged in transactions on our platform under different names, we do not have a reliable way of identifying the precise number of consumers using our platform. If the number of actual consumers is materially lower than our expectations, our business may not grow as fast as we expect, which could harm ow operating and financial results and cause our stock price to decline. Our international sales and operations subject us to additional risks that can adversely affect our business, operating results and financial condition. In each of the years ended December 31, 2013 and 2014, we derived 14% and 16% of ow revenue from subscribers located outside of the United States, respectively. In the three months ended March 31, 2014 and 2015, we derived 15% and 16% of ow revenue from subscribers located outside of the United States, respectively. We are continuing to expand our international operations as part of our growth strategy. We currently have sales personnel 30 EFTA00594764 and sales and customer support operations in the United States, the United Kingdom and Australia. Our sales organization outside the United States is substantially smaller than ow sales organization in the United States. We believe our ability to convince new subscribers to subscribe to our platform or to convince existing subscribers to renew or expand their use of our platform is directly correlated to the level of engagement we obtain with the subscriber. To the extent we are unable to effectively engage with non•U.S. subscribers due to our limited sales force capacity, we may be unable to effectively grow in international markets. Our international operations subject us to a variety of additional risks and challenges, including: • increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations; longer payment cycles and difficulties in enforcing contracts, collecting accounts receivable or satisfying revenue recognition criteria, especially in emerging markets; • increased financial accounting and reporting burdens and complexities; • requirements or preferences for domestic products; • differing technical standards, existing or future regulatory and certification requirements and required features and functionality; • economic conditions in each country or region and general economic uncertainty around the world; • compliance with foreign privacy and security laws and regulations and the risks and costs of non- compliance; • compliance with laws and regulations for foreign operations. including anti-bribery laws (such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA, the U.S. Travel Act, and the U.K. Bribery Act 2010). import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our platform in certain foreign markets. and the risks and costs of non-compliance; • heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact our financial results and result in restatements of our consolidated financial statements; • fluctuations in currency exchange rates and related effect on our operating results; • difficulties in repatriating or transferring funds from or converting currencies in certain countries; • communication and integration problems related to entering new markets with different languages, cultures and political systems; • differing labor standards, including restrictions related to, and the increased cost of, terminating employees in some countries; • the need for localized software and licensing programs; • the need for localized language support: • reduced protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; and • compliance with the laws of numerous foreign taxing jurisdictions, including withholding obligations, and overlapping of different tax regimes. Any of these risks could adversely affect our international operations, reduce our international revenue or increase ow operating costs, adversely affecting our business, operating results, financial condition and growth prospects. 31 EFTA00594765 Compliance with laws and regulations applicable to our international operations substantially increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. In many foreign countries, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. or other regulations applicable to us. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, partners and agents will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, partners, or agents could result in delays in revenue recognition. financial reporting misstatements, enforcement actions, disgorgement of profits, fines, civil and criminal penalties. damages. injunctions, other collateral consequences, or the prohibition of the importation or exportation of our platform and services and could adversely affect our business and results of operations. If the market for SaaS business software applications develops more slowly than we expect or declines, our business would be adversely affected. The market for SaaS business management software is less mature than the market for on-premise business software, and the adoption rate of SaaS business management software may be slower among subscribers in industries with heightened data security interests or business practices requiring highly customizable software solutions. Our success will depend to a substantial extent on the widespread adoption of SaaS business management software in general and for the wellness services industry in particular. Many organizations have invested substantial personnel and financial resources to integrate traditional on-premise business management software solutions into their businesses. As a result, such organizations may be reluctant or unwilling to migrate to SaaS- based solutions. It is difficult to predict subscriber adoption rates and demand for our platform, the future growth rate and size of the SaaS business software market or the entry of competitive solutions. The expansion of the SaaS business management software market depends on a number of factors, including the cost, performance. and perceived value associated with SaaS, as well as the ability of SaaS providers to address data security and privacy concerns. Additionally. government agencies have adopted. or may adopt. laws and regulations regarding the collection and use of personal information obtained from consumers and other individuals, or may seek to access information in our possession. either of which may reduce the overall demand for our platform. If we or other SaaS providers experience data security incidents, loss of subscriber data, disruptions in delivery, or other problems. the market for SaaS business management software, including our platform, may be adversely affected. If SaaS business management software does not continue to achieve market acceptance, or there is a reduction in demand for SaaS business management software caused by a lack of subscriber acceptance, technological challenges, weakening economic conditions, data security or privacy concerns, governmental regulation, competing technologies and products, or decreases in information technology spending. our revenue could decrease and our business could be adversely affected. We are subject to anti-corruption and anti-money laundering laws with respect to our operations and non- compliance with such laws can subject us to criminal and/or civil liability and harm our business. We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act 2010 and Proceeds of Crime Act 2002. and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. We use third-party representatives to sell our products and services abroad. In addition, as we increase our international sales and business, we may engage with additional business partners and third- party intermediaries to sell our products and services abroad and to obtain necessary permits, licenses, and other regulatory approvals. We or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners. and agents, even if we do not explicitly authorize such activities. 32 EFTA00594766 Noncompliance with anti-corruption and anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management's attention and resources and significant defense costs and other professional fees. Enforcement actions and sanctions could further harm our business, results of operations and financial condition. Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality. We believe there are significant seasonal factors that may cause us to record higher revenue in some quarters compared with others. We believe this variability is largely due to our focus on the wellness services industry, as many of our subscribers experience an increase in demand for their services in the first quarter of each year due to their consumers becoming more motivated to pursue health and fitness goals in the new year. Our rapid growth rate over the last couple years may have made seasonal fluctuations more difficult to detect. If our rate of growth slows over time, seasonal or cyclical variations in ow operations may become more pronounced. and ow business, results of operations and financial position may be adversely affected. Our business and growth depend in part on the success of our strategic relationships with third parties, including API platform partners, technology partners, payments partners and professional services partners. We depend on. and anticipate that we will continue to depend on. various third•party relationships in order to sustain and grow our business. We are highly dependent upon partners for certain critical features and functionality of our platform, including data centers and third•party payment processors supporting our payments platform. Failure of these or any other technology provider to maintain, support or secure its technology platforms in general, and our integrations in particular, or errors or defects in its technology, could materially and adversely impact our relationship with our subscribers, damage our reputation and brand, and harm our business and operating results. Any loss of the right to use any of this hardware or software could result in delays or difficulties in our ability to provide our platform until equivalent technology is either developed by us or, if available, identified, obtained and integrated. Identifying, negotiating and documenting relationships with strategic third parties such as API platform partners, payments partners and technology partners requires significant time and resources. In addition, integrating third-party technology is complex, costly and time-consuming. Our agreements with partners are typically limited in duration, non-exclusive and do not prohibit them from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our platform. In addition, our partners could develop competing products or services. If we are unsuccessful in establishing or maintaining our relationships with these strategic third parties. our ability to compete in the marketplace or to grow our revenue could be impaired and ow operating results could suffer. Even if we are successful, we cannot assure you that these relationships will result in improved operating results. We depend and rely upon SaaS technologies from third parties and on technology systems and electronic communication networks that are supplied and managed by third parties to operate our business, and interruptions or performance problems with these technologies may adversely affect our business and operating results. We rely heavily on hosted SaaS applications from third parties in order to operate critical functions of our business, including sales automation and pipeline management, billing and order management, enterprise 33 EFTA00594767 resource planning, payroll and financial accounting services. If these services become unavailable due to extended outages, interruptions, or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our subscribers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business. Our ability to provide services and solutions to our subscribers also depends on our ability to communicate with our subscribers through the public Internet and electronic networks that are owned and operated by third parties. In addition, in order to provide services on-demand and promptly, our computer equipment and network servers must be functional 24 hours per day, which requires access to telecommunications facilities managed by third parties and the availability of electricity, which we do not control. A severe disruption of one or more of these networks, including as a result of utility or third-party system interruptions, could impair our ability to process information, which could impede our ability to provide services to our subscribers, harm our reputation, result in a loss of subscribers and adversely affect our business and operating results. We have in the past completed acquisitions, and we may in the future acquire or invest in other companies. Such acquisitions and investments divert our management's attention and may in some cases result in additional dilution to our stockholders. In addition, we may be unable to integrate the acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions. We have in the past acquired other companies, and we may in the future evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. We also may enter into relationships with other businesses to expand our platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with our platform or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. The pursuit of potential acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our existing business, whether or not they are consummated. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown risks or liabilities. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to complete these transactions may be subject to approvals that are beyond our control. Consequently, these transactions, even if announced, may not be completed. For one or more of these transactions, we may: • issue additional equity securities that would dilute our existing stockholders; • use cash that we may need in the future to operate our business; • incur large charges or substantial liabilities associated with the acquisition; • incur acquisition-related costs, which would be recognized as current period expenses; • encounter difficulties maintaining relationships with customers and partners of the acquired business; • encounter difficulties incorporating acquired technologies and rights into our platform and of maintaining quality and security standards consistent with our reputation and brand; • incur debt on terms unfavorable to us or that we are unable to repay; 34 EFTA00594768 • encounter difficulties retaining key employees of the acquired company, integrating diverse software codes or business cultures or coordinating organizations that are geographically diverse and that have different business cultures: and • become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. We may be sued by third parties for alleged infringement of their proprietary rights. There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon the intellectual property rights of others. From time to time, we may receive claims from third parties, including our competitors, that our platform and underlying technology infringe or violate a third party's intellectual property rights, and we may be found to be infringing upon such rights. We may be unaware of the intellectual property rights of others that may cover some or all of our technology. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our platform, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our subscribers or business partners in connection with any such litigation and to obtain licenses, modify our platform or refund subscription fees, which could further exhaust our resources. In addition, we may incur substantial costs to resolve claims or litigation, whether or not successfully asserted against us, which could include payment of significant settlement, royalty or license fees, modification of our platform or refunds to subscribers of subscription fees. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and other employees from our business operations. Our use of "open source" software could adversely affect our ability to sell our platform and subject us to possible litigation. We use open source software in our platform and expect to continue to use open source software in the future. We may face claims from others claiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the open source software, derivative works or our proprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our platform, any of which would have a negative effect on our business and operating results. In addition, if the license terms for the open source software we utilize change, we may be forced to reengineer our platform or incur additional costs. Although we have implemented policies to regulate the use and incorporation of open source software into our platform, we cannot be certain that we have not incorporated open source software in our platform in a manner that is inconsistent with such policies. Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand. Our success and ability to compete depend in part upon our intellectual property. We currently have 16 pending patent applications, but there is no guarantee that such applications will result in issued patents. We primarily rely on copyright, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees, subscribers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate. To protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with 35 EFTA00594769 defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect and enforce our intellectual property rights could adversely affect our brand and adversely impact our business. Our subscribers may become dissatisfied with our platform if they receive negative reviews from consumers using Connect. in addition, we may face potential liability and expense for legal claims based on the content of such reviews on Connect. Our subscribers consist of businesses in the wellness services industry, including studios that offer yoga, Pilates, barre, indoor cycling, personal training, strength conditioning, martial arts and dance exercise, as well as spas, salons, music instruction studios, dance studios, children's activity centers and integrative health centers. In addition to the business management software we provide to our subscribers, we also offer Connect, which is a consumer•facing app that allows consumers to discover, book and pay for the wellness services offered by our subscribers. After receiving a service or taking a class booked through Connect, consumers can rate their experience by posting reviews. If consumers use Connect to post negative reviews regarding our subscribers or their practitioners, our subscribers may become dissatisfied with our platform and cancel their subscriptions or not use Connect to market their services to a broader group of consumers. In addition, there is a risk that consumers may post comments on the Connect platform that give rise to potential claims against us, including claims by our subscribers or other third parties for defamation, libel, negligence and copyright or trademark infringement. Any such claims could divert the time and attention of management away from our business and result in significant costs to investigate and defend, regardless of the merits of the claims. In some instances, we may elect or be compelled to remove reviews or other posted content and may be forced to pay substantial damages. If the reviews or other content posted by consumers on our Connect platform gives rise to the consequences described above, our business and financial performance could be adversely affected. We may not be able to secure additional financing on favorable terms, or at all, to meet our Mare capital needs. We have funded our operations since inception primarily through equity financings, loan facilities, financing agreements for software and license maintenance and subscription payments by our subscribers for use of our platform. We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. In the future, we intend to continue to make investments to support our business growth, and we may require additional capital to respond to business opportunities, challenges, acquisitions, a decline in the level of subscriptions for our platform or unforeseen circumstances. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any debt financing obtained by us could involve restrictive covenants relating to financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our Class A common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it. our ability to continue to grow or support ow business and to respond to business challenges could be significantly limited. Our loan agreement contains operating and financial covenants that restrict our business and financing activities. Borrowings under our loan agreement with Silicon Valley Bank are secured by substantially all of our assets, including our intellectual property. In addition, borrowings under our loan agreement are made based on a percentage of our monthly recurring revenue for the prior months, up to $20 million. If our revenue declines, our ability to draw under the loan agreement could be adversely affected. 36 EFTA00594770 Our loan agreement also restricts our ability to. among other things: • sell or otherwise dispose of our assets: • make material changes in our business; • enter into a transaction in which stockholders who were not stockholders immediately prior to such transaction own more than 40% of our voting stock after giving effect to such transaction (other than pursuant to an initial public offering and certain other exceptions); • consolidate, merge with, or acquire other entities: • incur additional indebtedness; • create liens on our assets: • pay dividends or make other distributions on our capital stock: • make investments; • enter into transactions with affiliates: and pay off or redeem subordinated indebtedness. These restrictions are subject to certain exceptions. In addition, ow loan agreement requires us to maintain a certain percentage of ow projected revenue. The operating and financial restrictions and covenants in the loan agreement, as well as any future financing agreements that we may enter into, could restrict our ability to finance our operations and to engage in, expand or otherwise pursue business activities and strategies that we or our stockholders may consider beneficial. Our ability to comply with these covenants may be affected by events beyond our control, and future breaches of any of these covenants could result in a default under the loan agreement. The loan agreement also contains customary events of default, subject to cure periods for certain defaults, including, among others, payment defaults, covenant defaults, the occurrence of a material adverse change in our business, defaults relating to certain legal processes affecting our assets or business, insolvency and bankruptcy defaults, cross•defaults to other material indebtedness, material judgment defaults, and material misrepresentations. Future defaults, if not waived, could cause all of the outstanding indebtedness under our loan agreement to become immediately due and payable and would permit Silicon Valley Bank to terminate all commitments to extend further credit and exercise remedies against the collateral in which we granted Silicon Valley Bank a security interest If we do not have or am unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all. This could materially and adversely affect our liquidity and financial condition and our ability to operate and continue our business as a going concern. We have in the past identified material weaknesses in our internal controls over financial reporting that, if not properly remediated, could result in material misstatements in our financial statements in future periods and impair our ability to comply with the accounting and reporting requirements applicable to public companies. Our independent registered public accounting firm has not conducted an audit of ow internal controls over financial reporting. However, as described below, in connection with the audits of our consolidated financial statements, we identified material weaknesses in the design of our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the U.S. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2012, we discovered two material weaknesses that resulted from (i) a 37 EFTA00594771 lack of a sufficient number of qualified personnel within our accounting department that possessed an appropriate level of expertise to perform certain accounting functions and (ii) the failure to establish proper access controls to our accounting software and proper controls to review and approve manual journal entries. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2013, we discovered a material weakness related to the inadequate design and implementation of controls and procedures with respect to capitalization of development costs for internal use software. Finally, in connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2013 and 2014, we identified a material weakness related to the inadequate design and implementation of controls and procedures with respect to the identification of and evaluation of accounting for certain features, including the related fair value computation, and transactions related to our redeemable convertible preferred stock. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting" for information regarding our remediation efforts. Our management and independent registered public accounting firm did not and were not required to perform an evaluation of our internal control over financial reporting as of and for the years ended December 31, 2013 and 2014 in accordance with the provisions of the JOBS Act. We believe that we have remediated the material weaknesses from our 2012 audit and the material weakness from ow 2013 audit related to capitalization of development costs for internal use software. Although the material weakness from our 2013 and 2014 audit related to the accounting for certain features of and transactions related to our redeemable convertible preferred stock had not been remediated as of December 31, 2014. all shares of redeemable convertible preferred stock will be automatically converted into shares of Class B common stock immediately prior to the completion of this offering. As a result, following the offering. we will no longer be subject to the accounting rules that gave rise to the material weakness. Nevertheless, we cannot be certain that other material weaknesses and control deficiencies will not be discovered in the future. If our remediation efforts are not successful or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately or on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the trading price of our common stock to decline. As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities are listed, the SEC. or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation. financial condition or divert financial and management resources from ow core business. We face exposure to foreign currency exchange rate fluctuations. We conduct transactions in currencies other than the U.S. dollar. While we have primarily transacted with subscribers and vendors in U.S. dollars, we have transacted in foreign currencies for subscriptions to our platform and expect to significantly expand the number of transactions with subscribers for our platform that are denominated in foreign currencies in the future. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our Class A common stock could be adversely affected. We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. We may be subject to additional tax liabilities in connection with our operations or due to future legislation, each of which could materially impact our financial position and results of operation. We are subject to federal and state income, sales, use. value added and other taxes in the United States and other countries in which we conduct business, and such laws and rates vary by jurisdiction. We do not collect 38 EFTA00594772 sales and use, value added and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Certain jurisdictions in which we do not collect sales, use, value added or other taxes on our sales may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Significant judgment is required in determining our worldwide provision for income taxes. We generally conduct our international operations through wholly owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. These determinations are highly complex and require detailed analysis of the available information and applicable statutes and regulatory materials. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax practices and provisions are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical tax practices, provisions and accruals. If we receive an adverse ruling as a result of an audit, or we unilaterally determine that we have misinterpreted provisions of the tax regulations to which we are subject, there could be a material effect on our tax provision, net income or cash flows in the period or periods for which that determination is made, which could materially impact our financial results. Further, any changes in the taxation of our activities, including certain proposed changes in U.S. tax laws, may increase our worldwide effective tax rate and adversely affect our financial position and results of operations. In addition, liabilities associated with taxes are often subject to an extended or indefinite statute of limitations period. Therefore, we may be subject to additional tax liability (including penalties and interest) for a particular year for extended periods of time. Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations. As of December 31, 2014. we had federal and state net operating loss carryfonvards, or NOLs, of $58.8 million and $47.4 million, respectively, due to prior period losses, which, subject to the following discussion, are generally available to be carried forward to offset our future taxable income, if any, until such NOLs are used or expire. Our federal NOLs begin to expire in the year ending December 31, 2025, and our state NOLs begin to expire in the year ending December 31, 2015. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Similar rules may apply under state tax laws. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we have acquired or may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, whether or not we attain profitability. The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The estimates and forecasts in this prospectus relating to the size and expected growth of the market for business management software serving the wellness services industry may prove to be inaccurate. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, if at all. For more information regarding the estimates of market opportunity and the forecasts of market growth included in this prospectus, see the section titled "Market, Industry and Other Data." 39 EFTA00594773 Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our platform, and could have a negative impact on our business. The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify ow platform in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally. or result in reductions in the demand for Internet-based platforms and services such as ours. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by "viruses," "worms" and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our platform could decline. Catastrophic events may disrupt our business. Our corporate headquarters are located in San Luis Obispo, California, and we operate or utilize data centers that are located in North America. Key features and functionality of our platform are enabled by third parties that are headquartered in California and operate or utilize data centers in the United States. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems, and our website for ow development, marketing, operational support, hosted services and sales activities. The west coast of the United States contains active earthquake zones. In addition, the Diablo Canyon nuclear power plant is located a short distance from San Luis Obispo. In the event of a major earthquake, hurricane or other natural disaster, or a catastrophic event such as a nuclear disaster, fire, power loss, telecommunications failure, cyber- attack, war or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our app development, lengthy interruptions in our platform, breaches of data security or data integrity and loss of critical data, all of which could have an adverse effect on our future operating results. We are subject to governmental economic sanctions and export and import controls that could impair our ability to compete in international markets or subject us to liability if we are not in compliance with applicable laws. As a U.S. company, we are subject to U.S. export control and economic sanctions laws and regulations, and we are required to export our technology, software, products and services in compliance with those laws and regulations, including the U.S. Export Administration Regulations and economic embargo and trade sanction programs administered by the Treasury Department's Office of Foreign Assets Control. U.S. economic sanctions and export control laws and regulations prohibit the shipment of certain products and services to countries, governments and persons targeted by U.S. sanctions. While we are currently taking precautions to prevent doing any business, directly or indirectly, with countries, governments and persons targeted by U.S. sanctions and to ensure that our business management software is not exported or used by countries, governments and persons targeted by U.S. sanctions, such measures may be circumvented. Furthermore, if we export our technology, hardware or software, the exports may require authorizations, including a license, a license exception or other appropriate government authorization. Complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Failure to comply with export control and sanctions regulations for a particular sale may expose us to government investigations and penalties, which could have an adverse effect on our business, operating results and financial condition. 40 EFTA00594774 If we are found to be in violation of U.S. sanctions or export control laws, it could result in fines or penalties for us and for individuals, including civil penalties of up to $250,000 or twice the value of the transaction, whichever is greater, per violation, and in the event of conviction for a criminal violation for willful and knowing violations, fines of up to $1 million and possible incarceration for those responsible could be imposed against employees and managers. In addition, we may lose our export or import privileges and suffer reputations] harm. In addition, various countries regulate the import of certain encryption technology, including imposing import permitting and licensing requirements, and have enacted laws that could limit our ability to offer our platform or distribute our platform or could limit our subscribers' ability to implement our platform in those countries. Changes in our platform or future changes in export and import regulations may create delays in the introduction of our platform in international markets or prevent our subscribers with international operations from deploying our platform globally. Any change in export or import regulations, economic sanctions or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of our platform by, or in our decreased ability to export or sell our platform to, existing or potential subscribers with international operations. Any decreased use of our platform or limitation on our ability to export or sell our platform would likely adversely affect our business operations and financial results. Risks Related to Ownership of Our Class A Common Stock and this Offering The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of this offering, including our executive officer; employees and directors and their affiliates, which will limit your ability to influence the outcome of important transactions, including a change in control. Our Class B common stock has 10 votes per share, and our Class A common stock, which is the stock we are offering in this offering. has one vote per share. All shares of our capital stock outstanding immediately prior to this offering, including all shares held by our executive officers, employees and directors, and their respective affiliates, will be reclassified into shares of our Class B common stock immediately prior to this offering. Upon the completion of this offering, holders of our outstanding Class B common stock will collectively hold approximately 97.8% of the voting power of our outstanding capital stock. Because of the ten•toone voting ratio between our Class B common stock and Class A common stock, after the completion of this offering. the holders of our Class B common stock will collectively continue to control a majority of the combined voting power of our capital stock and therefore be able to control all matters submitted to our stockholders for approval so long as the shares of our Class B common stock represent at least 9.1% of all outstanding shares of ow Class A common stock and Class B common stock. These holders of our Class B common stock may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentrated control may have the effect of delaying. preventing or deterring a change in control of our company. could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock. Future transfers by holders of our Class B common stock will generally result in those shares converting into shares of our Class A common stock, subject to limited exceptions, such as certain transfers effected for tax or estate planning purposes. The conversion of shares of our Class B common stock into shares of our Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, Messrs. Stollmeyer and Murphy retain a significant portion of their holdings of our Class B common stock for an extended period of time, they could control a significant portion of the voting power of our capital stock for the foreseeable future. In addition, Messrs. Stollmeyer and Murphy hold an irrevocable proxy to vote shares of our Class B common stock held by certain of our stockholders, as described in the section titled "Principal Stockholders." As board members, Messrs. Stollmeyer and Murphy each owe a fiduciary duty to our stockholders and must act in good faith and in a manner they reasonably believe to be in the best interests of our stockholders. As stockholders. Messrs. Stollmeyer and Murphy are entitled to vote their shares in their own interests, which may not always be in the interests of our stockholders generally. For a description of the dual class structure, see the section titled "Description of Capital Stock." 41 EFTA00594775 Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt. Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain or will contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws will include provisions: • establishing a classified board of directors whose members serve staggered three-year terms; • authorizing "blank check" preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock; limiting the liability of. and providing indemnification to, our directors and officers; • limiting the ability of our stockholders to call and bring business before special meetings: • requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors; • controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings; and • authorizing two classes of common stock, as discussed above. These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents certain stockholders holding more than 15% of our outstanding capital stock from engaging in certain business combinations without approval of the holders of at least two-thirds of our outstanding common stock not held by any such stockholder. Any provision of our amended and restated certificate of incorporation, amended and restated bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock, and could also affect the price that some investors are willing to pay for our Class A common stock. An active trading market for our Class A common stock may never develop or be sustained. We have applied for the listing of our Class A common stock on The NASDAQ Global Market under the symbol "MB." However, we cannot assure you that an active trading market for our Class A common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our Class A common stock when desired or the prices that you may obtain for your shares of our Class A common stock. The market price of our Class A common stock may be volatile, and you could lose all or part of your investment. Prior to the completion of this offering, there has been no public market for shares of our Class A common stock. The initial public offering price of our Class A common stock will be determined through negotiation between us and the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell shares of our Class A common stock following this offering. In addition, the market price of our Class A common stock following this offering is likely to be highly volatile, may be higher or lower than the initial public offering price of our Class A common stock and could be subject to wide 4? EFTA00594776 fluctuations in response to various factors, some of which are beyond our control and may not be related to our operating performance. Fluctuations in the market price of our Class A common stock could cause you to lose all or part of your investment because you may not be able to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of ow Class A common stock include the following: price and volume fluctuations in the overall stock market from time to time; volatility in the market prices and trading volumes of technology securities; changes in operating performance and stock market valuations of other technology companies generally or those in our industry in particular; sales of shares of our Class A common stock by us or our stockholders; • failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow us, or our failure to meet these estimates or the expectations of investors; • the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections; • announcements by us or our competitors of new products or services; • the public's reaction to our press releases, other public announcements and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our operating results or fluctuations in our operating results; • actual or anticipated developments in our business, our competitors' businesses or the competitive landscape generally; • litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary, rights; • announced or completed acquisitions of businesses or technologies by us or our competitors; • new laws or regulations or new interpretations of existing laws or regulations applicable to our business: changes in accounting standards, policies, guidelines, interpretations or principles; any significant change in our management; and general economic conditions and slow or negative growth of our markets. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources. A total of 31,967,544, or 81.7%, of the outstanding shares of our capital stock after this offering will be restricted from immediate resale but may be sold on a stock exchange in the near future. The large number of shares of our capital stock eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our Class A common stock. The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock in the market after this offering, and the perception that these sales could occur 43 EFTA00594777 may also depress the market price of our Class A common stock. Based on shares of our capital stock outstanding as of March 31, 2015, we will have 39,117,544 shares of our capital stock outstanding after this offering. Our executive officers, directors and the holders of substantially all of our capital stock and securities convertible into or exchangeable for our capital stock have entered into market standoff agreements with us or lock-up agreements with the underwriters under which they have agreed, subject to specific exceptions, not to sell any of our capital stock for 180 days following the date of this prospectus. Morgan Stanley & Co. LLC, however, on behalf of the underwriters, may permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the end of the lock-up period. As a result of these agreements and the provisions of Rule 144 or Rule 701 under the Securities Act of 1933, as amended, or the Securities Act, shares of our capital stock will be available for sale in the public market as follows: • beginning on the date of this prospectus, all 7,150,000 shares of our Class A common stock sold in this offering will be immediately available for sale in the public market; and • beginning ISO days after the date of this prospectus, the remainder of the shares of our capital stock will be eligible for sale in the public market from time to time thereafter, subject in some cases to the volume and other restrictions of Rule 144 and our insider trading policy. Following the expiration of the market standoff and lock-up agreements referred to above, stockholders owning an aggregate of up to 27,543,986 shares of our Class B common stock can require us to register shares of ow capital stock owned by them for public sale in the United States. In addition, we intend to file a registration statement to register approximately 9,922,993 shares of our capital stock reserved for future issuance under our equity incentive plans. Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and expiration of the market standoff agreements and lock-up agreements referred to above, the shares of our capital stock issued upon exercise of outstanding options to purchase shares of our Class B common stock will be available for immediate resale in the United States in the open market. Sales of our Class A common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the market price of our Class A common stock to decline and make it more difficult for you to sell shares of our Class A common stock. In making your investment decision, you should understand that we and the underwriters have not authorized any other party to provide you with information concerning us or this offering. You should carefully evaluate all of the information in this prospectus. We have in the past received, and may continue to receive, a significant degree of media coverage, including coverage that is not directly attributable to statements made by our officers or employees, that incorrectly reports on statements made by our officers or employees or that is misleading as a result of omitting information provided by us, our officers or employees. We and the underwriters have not authorized any other party to provide you with information concerning us or this offering. We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return. Our net proceeds from the sale of shares of our Class A common stock in this offering will be used for general corporate purposes, including working capital, operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire businesses, products, services or technologies. However, we do not have agreements or commitments for any material acquisitions at this time. We will have broad discretion in using these proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value. 44 EFTA00594778 The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain qualified board members. As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the listing requirements of the securities exchange on which our common stock will be traded and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time- consuming or costly, and increase demand on our systems and resources. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to ow business and results of operations and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management's attention may be diverted from other business concerns, which could harm our business and results of operations. Although we have already hired additional employees to comply with these requirements, we may need to hire even more employees in the future, which will increase our costs and expenses. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment will increase our general and administrative expense and a diversion of management's time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards are unsuccessful, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly to serve on our audit committee and compensation committee. In addition, as a result of our disclosure obligations as a public company, we will have reduced strategic flexibility and will be under pressure to focus on short-term results, which may adversely impact our ability to achieve long-term profitability. We are an "emerging growth company," and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors. For so long as we remain an "emerging growth company," as defined in the JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to public companies that are not "emerging growth companies," including not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will remain an "emerging growth company" until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (ii) the last day of the first fiscal year in which our annual gross revenue is $1 billion or more, (iii) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities or (iv) the date on which we are deemed to be a "large accelerated filer" as defined in the Exchange Act We cannot predict 45 EFTA00594779 if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile and may decline. In addition, the JOBS Act also provides that an "emerging growth company" can take advantage of an extended transition period for complying with new or revised accounting standards. However, we have chosen to "opt out" of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. As a result of becoming a public company, we will be obligated to implement and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock. We will be required. pursuant to the Exchange Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by ow management in our internal control over financial reporting. We are currently evaluating our internal controls, identifying and remediating deficiencies in those internal controls and documenting the results of our evaluation, testing and remediation. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting that we are unable to remediate before the end of the same fiscal year in which the material weakness is identified, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors, when required. are unable to attest to management's report on the effectiveness of ow internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline. As a public company, we will be required to disclose material changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of ow internal control over financial reporting pursuant to Section 404 of the Sarbanes•Oxley Act until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an "emerging growth company" as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment. The assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, is substantially higher than the pro forma net tangible book value per share of our outstanding capital stock upon the completion of this offering. Therefore, if you purchase shares of our Class A common stock in this offering, you will incur immediate dilution of $10.99 in the net tangible book value per share from the price you paid. In addition, investors purchasing shares of our Class A common stock from us in this offering will have contributed 49.5% of the total consideration paid to us by all stockholders who purchased shares of our common stock, in exchange for acquiring approximately 18.3% of the outstanding shares of our common stock as of March 31, 2015 after giving effect to this offering. The exercise of outstanding options to purchase shares of our Class B common stock or the warrant to purchase shares of our redeemable convertible preferred stock will result in further dilution. 46 EFTA00594780 If securities or industry analysts do not publish or cease publishing research or reports about us, our business, our market or our competitors, or if they adversely change their recommendations regarding our Class A common stock, the market price of our Class A common stock and trading volume could decline. The trading market for our Class A common stock will be influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who cover us adversely change their recommendations regarding our Class A common stock or provide more favorable recommendations about our competitors, the market price of our Class A common stock would likely decline. If any of the analysts who cover us were to cease coverage of ow company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price of our Class A common stock and trading volume to decline. We do not expect to declare any dividends on our Class A common stock in the foreseeable friture. We do not anticipate declaring any cash dividends on our Class A common stock in the foreseeable future. In addition, our existing loan agreement with Silicon Valley Bank imposes restrictions on our ability to pay dividends. Consequently, investors may need to rely on sales of ow Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase shares of our Class A common stock. Prior to the completion of this offering, there has been limited trading of our securities at prices that may be higher than what our Class A common stock will trade at once it is listed. Prior to the completion of this offering, our securities have not been listed on any stock exchange or other public trading market, but there has been some trading of our securities in private transactions. These transactions were speculative, and the trading prices of our securities in these transactions were privately negotiated. We cannot assure you that the market price of our Class A common stock will equal or exceed the price at which our securities have traded prior to the completion of this offering. 47 EFTA00594781 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains fonvard-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about: • our ability to attract and retain subscribers; • our ability to deepen our relationships with existing subscribers; • our expectations regarding our subscriber growth rate and the usage of our payment platform; • our business plan and beliefs and objectives for future operations: • trends associated with our industry, target consumer behaviors and potential market: • benefits associated with use of our products and services; • our ability to 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 ability to further develop strategic relationships; • our ability to increase our presence in corporate wellness; • our ability to achieve positive returns on investments; • our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments: • our ability to timely and effectively scale and adapt our existing technology; • our ability to increase our revenue and our revenue growth rate; • our future financial performance, including trends in revenue, cost of revenue. operating expenses, other income and expenses, income taxes, subscribers. average monthly volume per subscriber and payments volume; • the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and capital expenditure requirements; • the sufficiency of our efforts to remediate our material weaknesses; • our ability to attract and retain qualified employees and key personnel; • our ability to successfully identify, acquire and integrate companies and assets; • our ability to successfully enter new markets and manage our international expansion; • our ability to maintain, protect and enhance our intellectual property and not infringe upon others' intellectual property; and • our anticipated uses of the net proceeds from this offering. We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus. 48 EFTA00594782 You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled "Risk Factors" and elsewhere in this prospectus. 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 prospectus. We cannot assure you that the results, events and circumstances reflected in the fonvard-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 fonvard-looking statements made in this prospectus 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 prospectus to reflect events or circumstances after the date of this prospectus 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 fonvard-looking statements and you should not place undue reliance on our forward-looking statements. Our fonvard-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. 49 EFTA00594783 MARKET, INDUSTRY AND OTHER DATA Market and Industry Data This prospectus contains estimates and information concerning our industry, including market size and growth rates of the markets in which we participate, that are based on industry publications and reports. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the section tided "Risk Factors." These and other factors could cause results to differ materially from those expressed in these publications and reports. Certain information in the text of this prospectus is contained in industry publications. The source of these industry publications is provided below: (I) Frost & Sullivan, Analysis of the Global Wellness Business Management Solutions Market. March 2015. (2) IBISWorld, Gym, Health & Fitness Clubs in the US, September 2014. (3) IBISWorld, Hair & Nail Salons in the US, October 2014. (4) IBISWorld, Corporate Wellness Services in the US. December 2014. (5) Industrial Data Corporation, Worldwide Wearable Computing Device 2014-2018 Forecast Update: December 2014, December 2014. (6) The Commonwealth Fund, National Trends in the Cost of Employer Health Insurance Coverage, 2003- 2013, December 2014. (7) Eric A. Finkelstein, et al., The Costs of Obesity in the Workplace, Journal of Occupational and Environmental Medicine, October 2010. (8) Institute for Health Metrics and Evaluation at the University of Washington, Global, regional, and national prevalence of overweight and obesity in children and adults during 1980-2013: a systematic analysis for the Global Burden of Disease Study 2013, May 2014. (9) American Society of Clinical Oncology, Media Fact Sheet — Obesity and Cancer: The Science behind the Connection. (10) Katherine M. Flegal, et al., Journal of the American Medical Association, Prevalence and Trends in Obesity among US Adults, 1999-2008, January 2010. (11) RAND Health, A Review of the U.S. Workplace Wellness Market, 2012. (12) National Business Group on Health and Fidelity Investments, Employer Investments in Improving Employee Health: Results from the Fifth Annual NBGH/Fidelity Investments Benefits Consulting Survey, February 2014. (13) Business Journal, Why Your Workplace Wellness Program Isn't Working, May 2014. 50 EFTA00594784 Company Data In this prospectus, when we use the term "active consumers" as of a given date, we are referring to the estimated number of unique consumers of our subscribers' services who have used our platform to transact with our subscribers 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. In calculating this number, we have attempted to avoid duplicative counting of consumers by identifying consumers who may have used our platform through different subscribers. However, in certain cases, a single consumer may have transacted with multiple subscribers under different names or using different email addresses, in which cases they may be counted more than once. For a discussion of risks related to our calculation of active consumers, see the section titled "Risk Factors — The number of actual consumers using our platform may be lower than the number we have estimated." 51 EFTA00594785 USE OF PROCEEDS We estimate that the net proceeds to us from the sale of shares of our Class A common stock in this offering will be approximately $89.3 million, based upon the assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' over-allotment option is exercised in full, we estimate that the net proceeds to us would be approximately $103.3 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds that we receive from this offering by approximately $6.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares of our Class A common stock offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $13.0 million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock and enable access to the public equity markets for us and our stockholders. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds to acquire businesses, products, services or technologies. However, we do not have agreements or commitments for any material acquisitions at this time. Accordingly, we will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering in short-term and long-term interest-bearing obligations, including government and investment-grade debt securities and money market funds. 52 EFTA00594786 DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. In addition, our ability to pay dividends on our capital stock is subject to restrictions under the terms of our loan agreement with Silicon Valley Bank. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including ow financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. 53 EFTA00594787 CAPITALIZATION The following table sets forth cash and cash equivalents, as well as our capitalization, as of March 31. 2015 as follows: • on an actual basis; • on a pro forma basis, giving effect to (i) the automatic conversion and reclassification of all outstanding shams of our redeemable convertible preferred stock into an aggregate of 20,673,680 shares of our Class B common stock, which conversion and reclassification will occur immediately prior to the completion of this offering. (ii) the resulting reclassification of the preferred stock warrant liability to stockholders' equity. and (iii) the filing and effectiveness of our amended and restated certificate of incorporation in Delaware, as if such conversion, reclassification and effectiveness had occurred on March 31. 20151 and • on a pro forma as adjusted basis, giving effect to the pro forma adjustments set forth above and the sale and issuance by us of shares of 7,150,000 our Class A common stock in this offering, based upon the assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated undenvriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with our consolidated financial statements and related notes. and the sections titled "Selected Consolidated Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are included elsewhere in this prospectus. As of March 31.2015 Actual Pro Forma Pro Forma As Adjusted, (in thousands, except share and per share data) Cash and cash equivalents $ 22,099 $ 22,099 $111,403 Financing obligation on leases $ 17,002 $ 17,002 $ 17,002 Preferred stock warrant 1,338 Redeemable convertible preferred stock, par value $0.000004 per share: 20,542,012 shares authorized, 20,454,489 issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted 170,159 Stockholders' equity (deficit): Preferred stock, par value $0.000004 per share: no shares authorized, issued and outstanding. actual; 100,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted Common stock, par value $0.000004 per sham: 50,000,000 shares authorized, 11,293,864 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted Class A common stock, par value $0.000004 per share: no shares authorized, issued and outstanding. actual; 1,000,000,000 shares authorized, no shares issued and outstanding, pro forma and 1,000,000,000 shares authorized, 7,150,000 shares issued and outstanding, pro forma as adjusted Class B common stock, par value $0.000004 per share: no shares authorized, issued and outstanding. actual; 100,000.000 shares authorized, 31,967,544 shares issued and outstanding. pro forma and pro forma as adjusted Additional paid•in capital 171,497 260,801 54 EFTA00594788 As of March 31. 2015 Actual Pro Forma Pro Forma As Adjusted, I, (in thousands, except share and per share data) Accumulated other comprehensive loss $ (194) S (194) $ (194) Accumulated deficit (133,634) (133,634) (133,634) Total stockholders' equity (deficit) (133,828) 37,669 126,973 Total capitalization $ 54,671 $ 54,671 $ 143,975 (1) Each $1.00 increase or decrease in the assumed initial public offering price of ow Class A common stock of $14.00 per sham, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of each of our pro forma as adjusted cash and cash equivalents, working capital. total assets and total stockholders' equity (deficit) by approximately $6.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the amount of each of our pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders' equity (deficit) by approximately $13.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma and pro forma as adjusted columns in the table above are based on no shares of our Class A common stock and 31,967,544 shams of our Class B common stock (including our redeemable convertible preferred stock on an as-converted basis) outstanding as of March 31, 2015, and exclude: • 3,163.039 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock outstanding as of March 31, 2015, with a weighted-average exercise price of $7.96 per sham; • 89,177 shares of our Class B common stock, on an as-converted basis, issuable upon the exercise of a warrant to purchase shares of our redeemable convertible preferred stock outstanding as of March 31, 2015, with an aggregate exercise price of approximately $151,603; • 1,278,000 shares of our Class B common stock issuable upon the exercise of options to purchase shares of ow Class B common stock granted after March 31. 2015, with an exercise price of $14.496 per share: and • 5,481,954 shares of our common stock reserved for future issuance under our equity compensation plans which will become effective prior to the completion of this offering, consisting of: • 4,698,818 shares of our Class A common stock reserved for future issuance under our 2015 Plan; and • 783,136 shares of our Class A common stock reserved for future issuance under our ESPP. Our 2015 Plan and ESPP each provide for annual automatic increases in the number of shares reserved thereunder and our 2015 Plan also provides for increases to the number of shares that may be granted thereunder based on shares under our 2009 Plan that expire, am forfeited or otherwise repurchased by us, as more fully described in the section titled "Executive Compensation—Employee Benefit and Stock Plans." 55 EFTA00594789 DILUTION If you invest in our Class A common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering. Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock outstanding. Our historical net tangible book value as of March 31, 2015 was $27.1 million, or $2.40 per share. Our pro forma net tangible book value as of March 31, 2015 was $28.5 million, or $0.89 per share, based on the total number of shares of our Class A common stock and Class B common stock outstanding as of March 31, 2015, after giving effect to the automatic conversion and reclassification of all outstanding shares of our redeemable convertible preferred stock as of March 31, 2015 into an aggregate of 20,673,680 shares of ow Class B common stock, and the resulting reclassification of the redeemable convertible preferred stock warrant liability to stockholders' equity. After giving effect to the sale by us of 7,150,000 shares of our Class A common stock in this offering at the assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2015 would have been $117.8 million, or $3.01 per share. This represents an immediate increase in pro forma net tangible book value of $2.12 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $10.99 per share to investors purchasing shares of our Class A common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution: Assumed initial public offering price per share Pro forma net tangible book value per share as of March 31, 2015 $0.89 Increase in pro forma net tangible book value (deficit) per share attributable to new investors in this offering 2.12 Pro forma as adjusted net tangible book value per share immediately after this offering $14.00 3.01 Dilution in pro forma net tangible book value per share to new investors in this offering $10.99 Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $0.17, and would increase or decrease, as applicable, dilution per share to new investors in this offering by $0.83, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly. each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $0.25 per share and increase or decrease, as applicable, the dilution to new investors by $0.25 per share, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full. the pro forma as adjusted net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $3.28 per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $10.72 per share. The following table presents. as of March 31, 2015, after giving effect to the automatic conversion and reclassification of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 56 EFTA00594790 20,673,680 shares of our Class B common stock immediately prior to the completion of this offering, the differences between the existing stockholders and the new investors purchasing shares of our Class A common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our common stock and preferred stock, cash received from the exercise of stock options and the average price per share paid or to be paid to us at the assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us: Shares Purchased Total Consideration %vertigo Price Number Percent Amount Percent Per Share Existing stockholders 31.967.544 81.7% $102,230,497 50.5%$ 3.20 New investors 7,150,000 18.3 100,100,000 49.5 $ 14.00 Totals 39,117,544 100% $202,330,497 100% Each $1.00 increase or decrease in the assumed initial public offering price of $14.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $7.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters' over- allotment option. If the underwriters exercise their over-allotment option in full, our existing stockholders would own 79.5% and our new investors would own 20.5% of the total number of shares of our common stock outstanding upon completion of this offering. The number of shares of our Class A common stock and Class B common stock that will be outstanding after this offering is based on no shares of our Class A common stock and 31,967,544 shares of our Class B common stock (including our redeemable convertible preferred stock on an as-converted basis) outstanding as of March 31, 2015, and excludes: • 3,163,039 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock outstanding as of March 31, 2015, with a weighted-average exercise price of $7.96 per share; • 89,177 shares of our Class B common stock, on an as-converted basis, issuable upon the exercise of a warrant to purchase shares of our redeemable convertible preferred stock outstanding as of March 31. 2015, with an aggregate exercise price of approximately $151,603; • 1.278,000 shares of our Class B common stock issuable upon the exercise of options to purchase shares of our Class B common stock granted after March 31, 2015, with an exercise price of $14.496 per share; and • 5,481,954 shares of our common stock reserved for future issuance under our equity compensation plans which will become effective prior to the completion of this offering, consisting of: • 4,698,818 shares of our Class A common stock reserved for future issuance under our 2015 Plan; and • 783,136 shares of our Class A common stock reserved for future issuance under our ESPP. Our 2015 Plan and ESPP each provide for annual automatic increases in the number of shares reserved thereunder and our 2015 Plan also provides for increases to the number of shares that may be granted thereunder 57 EFTA00594791 based on shares under our 2009 Plan that expire, are forfeited or otherwise repurchased by us, as mom fully described in the section titled "Executive Compensation—Employee Benefit and Stock Plans." To the extent that any outstanding options to purchase shares of our Class B common stock or a warrant to purchase our redeemable convertible preferred stock are exercised, or new awards are granted under our equity compensation plans, there will be further dilution to investors participating in this offering. 58 EFTA00594792 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following selected consolidated statement of operations data for the years ended December 31, 2012, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2014 and 2015 and the consolidated balance sheet data as of March 31, 2015 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the unaudited interim consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and are not necessarily indicative of results to be expected for the full year or any other period. You should read the following selected consolidated financial and other data below in conjunction with the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. Consolidated Statements of Operations Data: Year Ended December 31, Three Months Ended March 31, 2012 2013 2014 2014 2015 (in thousands, except share and per share data) Revenue $ 31,999 $ 48.687 $ 70,010 $ 15.653 S 22.263 Cost of revenue') 13,411 21,890 30.004 6,478 8,693 Gross profit 18,588 26.797 40.006 9,175 13.570 Operating expenses: Sales and marketing" 11,735 20,957 30.922 7,247 9.717 Research and development" 3,741 10,517 16.167 3,594 4.725 General and administrative,' 8,111 10,730 18.422 3,530 6,780 Change in fair value of contingent consideration — 428 (1,434) (423) — Total operating expenses 23,587 42,632 64,077 13,948 21,222 Loss from operations (4,999) (15,835) (24,071) (4,773) (7,652) Change in fair value of preferred stock warrant (515) (302) (283) (22) (150) Interest income 6 — — — 3 Interest expense (15) (21) (68) (20) (17) Other income (expense), net 17 (26) (68) 5 (39) Loss before provision for income taxes (5,506) (16,184) (24.490) (4,810) (7,855) Provision for income taxes 13 63 116 34 6 Net loss (5,519) (16,247) (24.606) (4,844) (7,861) Accretion of redeemable convertible preferred stock" (13,025) (27,892) (21.311) (5,831) (5,459) Deemed dividend-p referred stock modification — — — — 1,748 Net loss attributable to common stockholders" $ (18,544)$ (44.139)$ (45,917) $ (10,675) S (11.572) Net loss per share attributable to common stockholders. basic and diluted" $ (1.84)$ (4.10)$ (4.17) $ (0.97) S (1.03) Weighted-average shares used to compute net loss per share attributable to common stockholders. basic and diluted" 10,102,216 10,757,938 11.013,658 10.968,167 11,201.755 Pro forma net loss per share attributable to common stockholdeis, basic and dilute" $ (0.78) S (0.24) Weighted-average shares used to compute pro forma net lass per share attributable to common stockholders. basic and diluted" 31,282,660 31,875,435 59 EFTA00594793 (1) Includes stock-based compensation expense as follows: Year Ended December 31. Three Months Ended March 31. 2012 2013 2014 2014 2015 lin thousands) Cost of revenue $ — $ 51 $ 220 $ 24 S 100 Sales and marketing — 56 1% 34 541 Research and development — 68 298 53 96 General and administrative 1,484 252 1,023 225 403 Total stock-based compensation expense $ I A84 $ 427 $ 1,737 $ 336 $ 1,140 (2) See Note 13 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate our actual and pro forma basic and diluted net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts. Consolidated Balance Sheet Data: As of December 31, As of March 31, 2015 2013 2014 lin thousands) Cash and cash equivalents $ 9,545 $ 34,675 $ 22,099 Restricted cash 2,533 772 Working capital 3,359 26,962 14,142 Property and equipment, net 12,161 28,568 32,487 Total assets 30,735 73,051 71,077 Total deferred revenue 2,002 2,756 2,865 Total financing obligation 3,872 15,654 17,002 Preferred stock warrant 905 1,188 1,338 Redeemable convertible preferred stock 95,224 166,448 170,159 Total stockholders' deficit (81,115) (124,925) (133,828) 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 Year Ended December 31, As of and for Three Months Ended March 31. 2012 2013 2014 2015 Subscribers (end of period)It 1 22.062 31,043 40,517 42.700 Average monthly revenue per subscriberm $ 131 $ 146 $ 155 $ 174 Payments volume (in millions)13) $ 2,113 $ 3.099 $ 4,121 $ 1.168 Dollar-based net expansion rate (end of period$4) n/a 103% 109% 109% Subscribers are defined as unique physical business locations or, in the case of our Solo software level, individual practitioners who have subscribed to our cloud-based business management software platform as of the end of the period. Average monthly revenue per subscriber is calculated by dividing the subscription, 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, the average monthly revenue per subscriber is the sum of the average monthly revenue per subscriber for each month in the period, divided by the number of months in the period. 60 EFTA00594794 (3) (4) Payments volume is the total dollar volume of transactions between our subscribers and their consumers utilizing our payments platform. Our dollar-based net expansion rate is based upon our monthly subscription, services and payments revenue for a set of subscriber accounts. We calculate our dollar-based net expansion rate by dividing our retained revenue net of contraction and chum by our base revenue. We define our base revenue as the aggregate monthly subscription, services and payments revenue of our subscriber base as of the date one year prior to the date of calculation. We define our retained revenue net of contraction and chum as the aggregate monthly subscription, services and payments revenue of the same subscriber base included in our measure of base revenue at the end of the annual period being measured. Non-GAAP Financial Measure Adjusted EBITDA To provide investors with additional information regarding our financial results prepared in accordance with U.S. generally acceptable accounting principles, or GAAP, we have presented Adjusted EBITDA, which is a non-GAAP financial measure defined by us as our net loss before stock-based compensation expense, depreciation and amortization, change in fair value of contingent consideration, change in fair value of preferred stock warrant, impairment charges, provision for income taxes and other income (expense), net, which consisted of interest income and expense and other miscellaneous other income (expense). 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 prospectus 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. Our 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: • Although depreciation and amortization expense is 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: (1) changes in, or cash requirements for, our working capital needs; (2) the potentially dilutive impact of stock-based compensation; or (3) tax payments that may represent a reduction in cash available to us: 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. 61 EFTA00594795 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: Yen Faded December 31, Three Months Ended March 31, 2012 2013 2014 2014 2015 (ht thousands) Net loss $(5,519) $(16,247) $(24,606) $(4,844) $(7,861) Stock-based compensation expense 1,484 427 1,737 336 1,140 Depreciation and amortization 1,004 3,479 4,574 1,034 1,218 Change in fair value of contingent consideration — 428 (1,434) (423) — Change in fair value of preferred stock warrant 515 302 283 22 150 Impairment charges — — 426 — — Provision for income taxes 13 63 116 34 6 Other (income) expense, net (8) 47 136 15 53 Adjusted EB1TDA (unaudited) $(2,511) $(11,501) $(18,768) $(3,826) $(5,294) 62 EFTA00594796 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 the section titled "Selected Consolidated Financial and Other Data" and our consolidated financial statements and related notes included elsewhere in this prospectus. 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 elsewhere in this prospectus. Overview We are the leading online wellness services marketplace with over 42,000 local business subscribers on our platform in 124 countries and territories employing over 250,000 practitioners who provide a variety of wellness services to over 24 million active consumers as of March 31, 2015. Our integrated cloud-based business management software and payments platform for the wellness services industry helps our subscribers simplify the way they run their businesses, attract and engage more consumers, boost their revenues and focus more on what they love to do — improving people's lives. Moreover, we help consumers more easily evaluate, engage and transact with these subscribers, enabling them to live healthier and happier lives. We are also a leading payments platform dedicated to the wellness services industry. In the 12 months ended March 31, 2015, $6.3 billion in transactions occurred between consumers and subscribers within our marketplace, of which $4.3 billion flowed through our payments platform. We were founded in 2001 with a vision to address the vast and growing demand for business management software for the wellness services industry. We started as a hybrid desktop-web solution focused on yoga, Pilates and spinning businesses. In 2005, we released our software as a service platform and began to scale ow business into adjacent fitness categories, increasing our total addressable market and fueling growth in consumer online bookings. Since then, we have made significant investments in our platform to enable increased penetration and continued growth in consumer online bookings. In 2009, we released MINDBODY Finder, enabling available classes and appointments to be aggregated for consumer search; released ow API Platform, enabling developers and integration partners to build custom private apps and consumer-facing businesses on our platform; and released aggregated consumer facing-scheduling capabilities to our consumer-facing partners. In 2011, Fitness Mobile Apps used our API platform to build subscriber-branded apps that enabled consumers to search for and book classes easily from their mobile phones. In 2013, we launched our MINDBODY Express mobile app for businesses and our Connect mobile offering for consumers, thus connecting consumers with local businesses and allowing them to discover, evaluate, book and pay for wellness services nearby. When we released Connect in 2013, we introduced centralized consumer login, account management, consumer reviews and multiple credit card storage capabilities and released these capabilities exclusively on our own branded consumer app. All of these milestones accelerated consumer engagement and ultimately established us as a powerful consumer brand. International expansion has been an important growth driver for us. In 2008, we completed our first integration of payments functionality into our platform for subscribers in Canada. In 2011, we opened our London sales office and integrated payments functionality into our platform for subscribers in the United Kingdom. In 2012, we opened a customer support office in the United Kingdom and integrated payments functionality into our platform for subscribers in Australia and New Zealand. In 2013, we opened our Sydney sales office, and by the end of 2014, we had complete payments integration in 41 countries and territories. 63 EFTA00594797 The following graphic highlights key milestones in our history: MINDBODY MILESTONES Subscribers (000's) 2015: Launch MINDBODY Connect Workplace. 2014: Launch advanced marketing module. 2013: Expand 24/7 support Launch MINDBODY Connect. Open AUS office. Launch MINDBODY Express 2012: Launch integrated payments in AUS/N2. 2011: Expand into spa/salon. Launch integrated parents in UK. Open UK office. 2009: Release API Platform aggregating inventory for consumer search. 2008: Launch integrated payments in Canada. 2006: Expand into all fitness categories. 2005: Launch Sass. 0.5 1.3 2.5 15.7 22 31.0 0 4.1 6.8 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 We primarily market and sell subscriptions to our integrated cloud-based business management software and payments platform to small and medium-sized businesses in the wellness services industry, including businesses that offer yoga, Pilates, bane, indoor cycling, personal training, martial arts and dance exercise, as well as spas. salons, music instruction studios, dance studios, children's activity centers and integrative health centers. We offer our software platform to our subscribers as a subscription-based service. Historically, our software subscription pricing was based on the number of professionals employed by our subscribers. In 2015, after substantial market testing and development, we began pricing our software subscriptions for new subscribers based on software functionality. The vast majority of our subscribers subscribe to our software platform through one month contracts that are billed in advance. We recognize software subscription revenue ratably over the term of the subscription period. Additionally, we earn revenue based on the value of transactions processed by our subscribers utilizing our payments platform, net of the costs charged to us by our processing partners. We have achieved rapid subscriber growth through our effective sales model. We sell ow subscriptions through a direct sales team with our primary sales operations in San Luis Obispo, California, New York, London and Sydney. Our sales team qualifies and manages prospective and current subscribers, aiming to initiate, retain, and expand their use of our platform over time. We benefit from organic search and positive word of mouth as well as network effects from practitioners who often recommend MINDBODY to their employers. In addition, through MINDBODY University events, subscriber conferences and webinars, we help our subscribers optimize their businesses and grow their revenue, which benefits us through improved subscriber retention and an increase in payments revenue. 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 subscriber growth. As more local wellness businesses adopt our platform, more subscriber listings appear on MINDBODY Connect. A larger critical mass of local wellness services on Connect attracts more consumers, which in turn attracts more local wellness businesses that want to engage with these consumers, thereby creating powerful network effects that benefit the entire ecosystem. We believe these network effects have been enhanced by our recent introduction of MINDBODY Connect Workplace. As more corporate wellness subscribers adopt MINDBODY Connect Workplace, their employees begin using our platform, which leads to increased demand from local wellness businesses to be listed on Connect. As more local wellness businesses appear on Connect. 64 EFTA00594798 more employees use our platform to redeem their corporate incentives, which in turn leads to more corporate wellness subscribers being attracted to our platform. Finally, as we add more subscribers, consumers and employees to our wellness ecosystem, we attract more technology developers and partners who can use our 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 growing subscriber base. We have invested and expect to continue to invest in our sales and marketing teams to sell our software and payments platform services globally. Our sales organization headcount grew at a compound annual growth rate of 39% from 2012 to 2014. A key element of our growth strategy is the continuous enhancement and expansion of our software and payments platform by developing and implementing new features and functionality. Through consistent innovation, we have increased both the number of subscribers and the revenue we generate from our subscribers over time. We plan to continue to enhance our software architecture and enhance and expand our platform through increased investments in research and development 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 significant investments in both our data center infrastructure and our customer service and subscriber 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, in advance of, and in preparation for, ow expected increase in sales, 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. As a result, we do not expect to be profitable in the current three-year planning window. Our financial performance reflects our significant subscriber growth and increasing revenue per subscriber. Our total revenue increased from $32.0 million in 2012, to $48.7 million in 2013 to $70.0 million in 2014, representing year-over-year increases of 52% and 44%, respectively. Our total revenue increased from $15.7 million in the three months ended March 31, 2014 to $22.3 million in the three months ended March 31, 2015, representing an increase of 42%. Our net loss was $5.5 million, $16.2 million and $24.6 million in 2012, 2013 and 2014, respectively. Adjusted EBITDA was negative $2.5 million, negative $11.5 million and negative $18.8 million for 2012, 2013 and 2014, respectively. For the three months ended March 31, 2014 and 2015, our net loss was $4.8 million and $7.9 million, respectively, and Adjusted EBITDA was negative $3.8 million and negative $5.3 million, respectively. For a reconciliation of Adjusted EBITDA to net loss, please see the section titled "Summary Consolidated Financial and Other Data—Non-GAAP Financial Measure." During 2014 and the three months ended March 31, 2015, approximately 84% of ow revenue came from the United States. Our employee headcount has increased from 806 employees as of December 31, 2013 to 1,035 as of December 31, 2014, and to 1,100 as of March 31, 2015, of which approximately 28% are engaged in supporting existing subscribers and approximately 51% are engaged in increasing our subscriber base, growing our consumer brand or developing future products. Our Business Model Our business model focuses on maximizing the lifetime value of a subscriber relationship. We make significant investments in acquiring and onboarding new subscribers and believe that we will be able to achieve a positive return on these investments by retaining subscribers and expanding the revenue derived from our subscribers over the lifetime of the relationship. In connection with the acquisition of new subscribers, we incur and recognize significant upfront costs. These costs include sales; onboarding and marketing costs associated with acquiring new subscribers, such as sales commission expenses, which are expensed upfront; the cost of the onboarding personnel who provide the initial onboarding training to ow new subscribers; marketing costs, which are expensed as incurred; and the cost associated with converting and importing subscriber data from competitors' products. Due to our subscription model, we recognize software subscription revenue ratably over the monthly term of the subscription period, which commences when all of the revenue recognition criteria have been met. We recognize revenue from our payments platform on a net basis when the transactions occur. 65 EFTA00594799 Although our objective is for each subscriber to be profitable for us over the duration of our relationship, the costs we incur with respect to any subscriber relationship, whether a new subscriber or an upsell to an existing subscriber, may exceed revenue in early periods of the relationship because we recognize those costs faster than we recognize the associated revenue. As a result, an increase in the mix of new subscribers as a percentage of total subscribers will initially have a negative impact on our operating results. We realize different levels of profitability from our subscribers in large part depending on the fee level of their software subscription and the volume of transactions they process through our payments platform. For new subscribers, our accnriated sales, onboarding and marketing expenses typically exceed the first year revenue we recognize from those subscribers. For typical subscribers, their monthly subscriptions automatically renew each month. As a result, our sales and marketing expenses accnriated with renewals for our existing subscribers have been de minimis. Over the lifetime of the subscriber relationship. we incur sales and marketing costs to upset' the subscriber to higher levels of software functionality, to our payments platform. to our Premium Services and to our partners' software offerings. However, these costs are significantly less than the casts initially incurred to acquire the subscriber. We believe that the lifetime value of our subscribers has consistently exceeded five times the cost of acquiring them. To illustrate the economics of ow subscriber relationships, we are providing an analysis of the subscribers we acquired in fiscal year 2011, which we will refer to as the 2011 Cohort. We selected the 2011 Cohort as a representative set of subscribers for this analysis because we believe the perspective of time is important to help investors understand the long-term value of our subscriber base and because we believe the 2011 Cohort is representative of our other cohorts. The 2011 Cohort includes all subscribers acquired in 2011. In fiscal year 2011, we recognized $3.7 million in subscription, services and payments revenue from the 2011 Cohort and incurred associated costs that resulted in a negative contribution margin for the 2011 Cohort. Since we acquired this 2011 Cohort of subscribers through the course of the year, less than a full year's revenue is reflected in 2011. Starting in fiscal year 2012, our contribution margin from the 2011 Cohort turned positive, at 61%. By fiscal year 2014, we recognized $8.5 million in revenue from the 2011 Cohort, and ow contribution margin grew to 75%. The contribution margin of our cohorts will fluctuate from one period to another depending upon various factors. FY2011 Subscriber Cohort Contribution Margins $ millions $7.4 $3.7 (254%) FY'11 $8.1 $8.5 FY'12 FY113 Fr14 Subscription, Services and Payments Revenue Cost of Revenue Sales & Marketing -4—Contribution Margin 66 EFTA00594800 Contribution margin is the subscription, services and payments revenue for a group of subscribers in excess of the estimated costs with respect to the same subscriber group, expressed as a percentage of associated revenue. Costs include sales and marketing costs incurred to acquire and upsell that subscriber, onboarding, operations, professional services subscriber support costs and costs associated with use of technology infrastructure. The expenses allocated to the subscriber include estimates for personnel costs such as salaries and commissions, direct costs, allocated overhead expenses and depreciation. We excluded stock-based compensation and amortization for purposes of this calculation. In addition, we exclude all research and development and general and administrative expenses from this analysis because these expenses support the overall growth of our business and benefit our subscribers, partners and consumers. We consider the sales and marketing costs we incur in any fiscal year to be primarily the cost of acquiring ow new subscribers in that fiscal year, with the exception of estimated sales costs related to expanding our subscriber relationships and promoting our consumer brand, which are attributed to each fiscal year in accordance with internal estimates. The costs for subscriber onboarding, operations, professional services, and subscriber support are accounted for as cost of revenue. We cannot assure you that we will experience similar financial outcomes from subscribers added in other years or in future periods. We believe the estimates and assumptions we used to allocate costs are reasonable, but the allocated costs could have varied significantly from the amounts disclosed above had we used different estimates and assumptions. You should not rely on the allocated expenses or relationship of expenses to subscription. services and payments revenue as being indicative of ow current or future performance. We cannot predict whether revenue from the 2011 Cohort will continue to grow at the rate of growth experienced through December 31. 2014, or whether the growth rate of other cohorts will be similar to that of the 2011 Cohort. While the growth rate of revenue contribution from other cohorts has historically been similar to that of the 2011 Cohort, the growth rate may change as a result of our new tiered pricing model. We may not achieve profitability even if our revenue exceeds costs from our subscribers over time. We encourage you to read our consolidated financial statements that are included in this prospectus. 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 Three Months As of and for Year Ended December 31, Ended March 31, 2012 2013 2014 2015 Subscribers (end of period) 22,062 31,043 40,517 42.700 Average monthly revenue per subscriber $ 131 $ 146 $ 155 $ 174 Payments volume (in millions) $ 2,113 $ 3,099 $ 4,121 $ 1.168 Dollar-based net expansion rate (end of period) 103% 109% 109% Subscribers. Subscribers are defined as unique physical business locations or, in the case of our Solo software subscriptions, individual practitioners who have active subscriptions to our cloud-based business management software platform as of the end of the period. We believe the number of subscribers is a key indicator of the growth of our platform. Growth in the number of subscribers depends, in part, on our ability to successfully develop and market our platform to local wellness businesses and their consumers who have not yet become part of our network. While growth in the number of subscribers is an important indicator of expected revenue growth, it also informs our management's decisions with respect to the areas of our business that will require further investment to support expected future subscriber growth. For example. as the number of subscribers increases, we will need to increase the headcount in our customer support organization and our IT infrastructure capital expenditures to maintain the effectiveness of our platform and the performance of our software for our subscribers and their consumers. The number of subscribers increased in 2013 and 2014, and we expect the number of subscribers to continue to increase in the future. The growth rate of the number of subscribers declined in 2013 and 2014 and may continue to do so in the future as the size of our subscriber base increases. 67 EFTA00594801 Average Monthly Revenue per Subscriber. We believe that our ability to increase the average monthly revenue per subscriber is an indicator of our ability to increase the long-term value of our existing subscriber relationships. Average monthly revenue per subscriber 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, the average monthly revenue per subscriber is the sum of the average monthly revenue per subscriber for each month in the period, divided by the number of months in the period. Average monthly revenue per subscriber increased in 2013 and 2014, and we expect it to continue to increase in the future, although we expect the growth rate to fluctuate over time. Payments Volume. We believe that payments volume is an indicator of the underlying current health of our subscribers' 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 subscribers and their consumers utilizing our payments platform. Payments volume increased in 2013 and 2014, and we expect it to continue to increase in the future. The growth rate declined in 2013 and 2014 and may continue to do so in the future due to the increasing base amount of payments volume. • Dollar-Based Net Expansion Rate. Our business model focuses on maximizing the lifetime value of a subscriber relationship. We can achieve this by focusing on delivering value and functionality that retains our existing subscribers and by expanding the revenue derived from our subscribers over the lifetime of the relationship by upselling the subscriber to higher priced subscription plans, utilization of our Premium Services, subscription to our technology partners' software offerings and increasing the value of transactions that they process through our payments platform. 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, as offset by chum, downgrades in subscriptions, reduction in services utilization and reductions in the value of transactions that our subscribers process through our payments platform. Our dollar-based net expansion rate is based upon our monthly subscription. services and payments revenue for a set of subscriber accounts. We calculate our dollar-based net expansion rate by dividing our retained revenue net of contraction and chum by our base revenue. We define our base revenue as the aggregate monthly subscription, services and payments revenue of our subscriber base as of the date one year prior to the date of calculation. We define our retained revenue net of contraction and chum as the aggregate monthly subscription, services and payments revenue of the same subscriber base included in our measure of base revenue at the end of the annual period being measured. Components of Statements of Operations Revenue We generate revenue primarily from providing an integrated cloud-based business management software and payments platform for the wellness services industry. As discussed further in "Critical Accounting Policies and Estimates—Revenue Recognition" below, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or deterrninable and collectability is reasonably assured. Our total revenue consists of the following: Subscription and services. Subscription and services revenue is generated primarily from sales of subscriptions to our cloud-based business management software for the wellness services industry. The majority of subscription fees are prepaid by subscribers on a monthly basis via a credit card and, to a lesser extent, billed to subscribers on an annual or quarterly basis. Additionally, our subscribers can choose to enter into a separate contract with the technology partners to purchase additional features and functionalities. We receive a revenue share from these arrangements from our technology partners, which is recorded when earned. We also earn revenue from API platform partners for subscriber site access, data query, and consumer bookings. The revenue from API platform partners is recorded when earned. Subscription revenue is recognized ratably over the term of the subscription agreement. Amounts invoiced in excess of revenue recognized are deferred. Service revenue is generated primarily through our premium customer support offering and is recognized in the period in which it is earned. 68 EFTA00594802 Payments. We earn payments revenue from revenue share arrangements with third-party payment processors on transactions between our subscribers who utilize our payments platform and their consumers. These payment transactions are generally related to purchases of classes, goods or services through a subscriber's website, at its business location or through Connect. These transaction fees are recorded as revenue on a net basis when the payment transactions occur. We expect our payments revenue to increase both in absolute dollars and as a percentage of total revenue as we add new subscribers who utilize our payments platform, as existing subscribers increase the volume of transactions that they process through our payments platform and as our aggregate volume of payments reduces our related costs and increases margins. Product and other. We offer various point of sale system products and physical gift cards to our subscribers. Product and other revenue is recognized upon the delivery of these products to our subscribers. We expect product and other revenue to decline both in absolute dollars and as a percentage of total revenue as mobile point of sale systems and electronic gift cards become more prevalent in the marketplace. Cost of Revenue Our cost of revenue primarily consists of costs associated with personnel and related infrastructure for operation of our cloud-based business management platform, global customer support and onboarding services, costs related to processing the payments of subscribers that pay via credit card and allocated overhead costs. Personnel costs consist of salaries, benefits, bonuses and stock-based compensation. Allocated overhead costs consist of certain facilities, depreciation and amortization of internally developed software costs. Operating Expenses Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses, and the change in the fair value of contingent consideration. • 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, promotional and other marketing activities, and allocated overhead. Sales and marketing expense is our largest operating expense, and we expect it to continue to increase in absolute dollars as we increase our sales and marketing efforts and expand our international operations, although such expense may fluctuate as a percentage of total revenue. • Research and development. Research and development expense consists primarily of personnel costs, including salaries, benefits, bonuses, and stock-based compensation for our development personnel. Research and development expense also includes outsourced software development costs and allocated overhead. We expect research and development expense to continue to increase in absolute dollars as we continue to invest in our research and product development efforts to enhance our product capabilities and access new markets, although such expense may fluctuate as a percentage of total revenue. • General and administrative. General and administrative expense consists primarily of personnel costs, including salaries, benefits, bonuses, and stock-based compensation for our executive, finance, legal, human resources, information technology, and other administrative personnel. General and administrative expense also includes consulting, legal and accounting services and allocated overhead. We expect general and administrative expense to continue to increase in absolute dollars as we grow our operations and prepare to operate as a public company, although such expense may fluctuate as a percentage of total revenue. • Change in fair value of contingent consideration. We recognized a contingent consideration liability related to an earn-out provision from our acquisition of Jill's List in 2013, which was subsequently remeasured to fair value at each balance sheet date with a corresponding charge recorded within operating expenses. The period during which earn-out consideration can be earned will end in the second quarter of 2015, at which 69 EFTA00594803 time the associated liability will be permanently extinguished and no longer be subject to fair value accounting. We do not expect to recognize significant changes in the fair value of the contingent consideration during 2015. Other Income and Expenses Our other income and expenses line items consist of fair value remeasurement charges for our preferred stock warrant liability, interest income and expense, and other income (expense), net. • Change in fair value of preferred stock warrant. The preferred stock warrant is classified as a liability on our consolidated balance sheet and remeasured to fair value at each balance sheet date with the corresponding charge recorded as change in fair value of preferred stock warrant. Upon the earlier of exercise of the outstanding warrant or the completion of a liquidation event, including the completion of this offering, the preferred stock warrant liability will be reclassified to stockholders equity, at which time it will no longer be subject to fair value accounting. • Interest income. Interest income consists of interest earned on our cash and cash equivalent balances. Interest income has not been material to our operations. • Interest expense. Interest expense consists primarily of the interest incurred on ow financing obligations. Interest expense has not been material to our operations, but we expect it to increase in future periods as we recently entered into a build•to•suit lease agreement that includes an interest component. In addition, we entered into a line of credit agreement in January 2015, and any future draws on this agreement will incur interest expense and result in increased interest expense in future periods. • Other income (expense), net. Other income (expense), net consists primarily of gains and losses from foreign currency transaction and other income and expenses. Provision for Income Taxes Provision for income taxes consists primarily of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We have a full valuation allowance for deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development. We expect to maintain this full valuation allowance for the foreseeable future. 70 EFTA00594804 Results of Operations The following tables set forth our results of operations data in dollars and as a percentage of revenue for those periods. The period•taperiod comparison of results of operations is not necessarily indicative of results to be expected for future periods. Consolidated Statements of Operations Data: Year Ended December 31. Three Months Ended March 31. 2012 2013 2014 2014 2015 (in thousands) Revenue $31,999 $ 48,687 $ 70.010 $ 15,653 $22,263 Cost of revenue 13,411 21,890 30.004 6,478 8,693 Gross profit 18,588 26,797 40.006 9,175 13,570 Operating expenses: Sales and marketing 11,735 20,957 30,922 7,247 9,717 Research and development 3,741 10,517 16,167 3,594 4,725 General and administrative 8,111 10,730 18,422 3,530 6,780 Change in fair value of contingent consideration — 428 (1,434) (423) — Total operating expenses 23,587 42,632 64,077 13,948 21,222 Loss from operations (4,999) (15,835) (24,071) (4,773) (7,652) Change in fair value of preferred stock warrant Interest income (515) 6 (302) — (283) — (22) (150) 3 Interest expense (15) (21) (68) (20) (17) Other income (expense), net 17 (26) (68) 5 (39) Loss before provision for income taxes (5,506) (16,184) (24,490) (4,810) (7,855) Provision for income taxes 13 63 116 34 6 Net loss $ (5,519) $(16,247) $(24,606) $ (4,844) $ (7,861) Consolidated Statements of Operations Data: Revenue Cost of revenue Gross profit Operating expenses: Year Ended December 31. Three Months Ended March 31. 2012 2013 2014 2014 2015 100% 42% (as a percentage of revenue) 100% 100% 100% 45% 43% 41% 100% 39% 58% 55% 57% 59% 61% Sales and marketing 37% 43% 44% 46% 44% Research and development 12% 22% 23% 23% 21% General and administrative 25% 22% 26% 23% 30% Change in fair value of contingent consideration 1% (2)% (3)% Total operating expenses 74% 88% 91% 89% 95% Loss from operations (16)% (32)% (34)% (30)% (34)% Change in fair value of preferred stock warrant (1)% (1)% (1)% (1)96 Interest income Interest expense Other income (expense), net Loss before provision for income taxes (17)% (33)% (35)% (30)% (35)% Provision for income taxes Net loss (17)% (33)% (35)% (30)% (35)% 71 EFTA00594805 Comparison of the Three Months Ended March 31, 2014 and 2015 Revenue Three Months Ended March 31. Change 2014 2015 Revenue: (dollars in thousands) Subscription and services $ 8,869 $ 13,461 $ 4,592 52% Payments 5,902 8,022 2,120 36% Product and other 882 780 (102) (12)% Total revenue $ 15,653 $ 22,263 $ 6,610 42% Revenue increased $6.6 million, or 42%, in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. Subscription and services revenue increased $4.6 million, or 52%, of which $3.3 million was due to a 26% increase in our number of subscribers from 33,951 as of March 31, 2014 to 42,700 as of March 31, 2015. In addition, revenue from arrangements with our API platform and technology partners increased $1.2 million. Payments revenue increased $2.1 million, or 36%, primarily due to an increase in the number of subscribers that utilize ow payments platform. Cost of Revenue and Gross Margin Three Months Ended March 31, Change 2014 2015 (dollars in thousands) Costs of revenue $ 6.478 $ 8.693 $ 2.215 34% Gross margin 59% 61% Cost of revenue increased $2.2 million, or 34%. in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The increase in cost of revenue was primarily attributable to a $1.8 million increase in personnel-related expenses and infrastructure costs due to an increase in headcount to support our growing number of subscribers. As of March 31, 2015, we had 428 employees dedicated to data center operations, global customer support and onboarding services as compared to 321 employees as of March 31, 2014. The increase in gross margin, or gross profit as a percentage of revenue, in the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily driven by our ability to efficiently increase our revenue while realizing cost efficiencies associated with such increase. Operating Expenses Sales and Marketing Three Months Ended March 31, Change 2014 2015 (dollars in thousands) Sales and marketing $ 7,247 $ 9.717 $ 2,470 34% Sales and marketing expense increased $2.5 million, or 34%, in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The increase in sales and marketing expense was primarily attributable to a $2.2 million increase in personnel-related expenses due to an increase in headcount as we 72 EFTA00594806 expanded our sales efforts and incurred additional personnel costs, such as sales commissions. As of March 31, 2015, we had 376 employees dedicated to sales and marketing as compared to 340 employees as of March 31, 2014. Research and Development Three Months Ended March 31. Change 2014 2015 (dollars in thousands) Research and development $ 3,594 $ 4.725 S 1.131 31% Research and development expense increased $1.1 million, or 31%, in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The increase in research and development expense was primarily attributable to a $1.6 million increase in personnel-related expenses as we continued to add headcount to support our increased product development activities. The increase in personnel-related costs was partially offset by a $0.6 million decrease in outsourced development costs. As of March 31, 2015, we had 182 employees dedicated to research and development as compared to 137 employees as of March 31, 2014. General and Administrative Three Months Ended March 31. Change 2014 2015 $ (dollars in thousands) General and administrative S 3,530 5 6.780 S 3.250 92% General and administrative expense increased $3.2 million, or 92%, in the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The increase in general and administrative expense was primarily attributable to a $1.5 million increase in legal and other professional services, a $1.1 million increase in personnel-related expenses as we continued to add headcount, and a $0.6 million increase in facilities and other costs related to increases in headcount. As of March 31, 2015, we had 114 employees dedicated to general and administrative as compared to 68 employees as of March 31, 2014. Change in Fair Value of Contingent Consideration Three Months Ended March 31. Change 2014 2015 (dollars in thousands) Change in fair value of contingent consideration (423) $ — S 423 100% There was no change in the fair value of the contingent consideration during the three months ended March 31. 2015 because the value of the contingent consideration as of December 31, 2014 and March 31, 2015 was immaterial. 73 EFTA00594807 Other Income (Expense) and Income Taxes Three Months Ended March 31, Change 2014 2015 (dollars in thousands) Change in fair value of preferred stock warrant (22) (150) (128) (582)% Interest income 3 3 100% Interest expense (20) (17) 3 (15)% Other income (expense), net 5 (39) (44) (880)% Provision for income taxes 34 6 (28) (82)% The changes in the fair value of the preferred stock warrant, interest income, interest expense, other income (expense), net, and the provision for income taxes in the three months ended March 31, 2015 compared to the three months ended March 31, 2014 were not significant. Comparison of the Years Ended December 31, 2013 and 2014 Revenue Year Ended December 31. Change 2013 2014 (dollars in thousands) Revenue: Subscription and services $ 28,225 $ 40,501 $ 12,276 43% Payments 17,122 26,060 8,938 52% Product and other 3,340 3,449 109 3% Total revenue $ 48,687 $ 70,010 $ 21,323 44% Revenue increased $21.3 million, or 44%, in 2014 compared to 2013. Subscription and services revenue increased $12.3 million, or 43%, of which $10.2 million was due to a 31% increase in our number of subscribers from 31,043 as of December 31, 2013 to 40,517 as of December 31, 2014. In addition, revenue from arrangements with our technology partners increased $1.3 million and revenue from our premium support services increased $0.8 million. Payments revenue increased $8.9 million, or 52%, primarily due to an increase in the number of subscribers that utilize our payments platform. Cost of Revenue and Gross Margin Year Ended December 31. Change 2013 2014 (dollars in thousands) Costs of revenue $ 21.890 $ 30.004 S 8.114 37% Gross margin 55% 57% Cost of revenue increased $8.1 million, or 37%, in 2014 compared to 2013. The increase in cost of revenue was primarily attributable to a $6.4 million increase in personnel•related expenses and infrastructure costs due to an increase in headcount to support our growing number of subscribers. As of December 31, 2014, we had 410 employees dedicated to data center operations, global customer support and onhoarding services as compared to 301 employees as of December 31, 2013. In addition, we recognized a $1.1 million increase in depreciation and amortization expense during 2014 due to increased asset purchases primarily related to the expansion of ow data centers. The increase in the gross margin, or gross profit as a percentage of revenue, in 2014 was primarily driven by our ability to efficiently increase our revenue while realizing cost efficiencies associated with such increase. 74 EFTA00594808 Operating Expenses Sales and Marketing Year Ended December 31, ❑range 2013 2014 (dollars in thousands) Sales and marketing $ 20,957 $ 30,922 $ 9,965 48% Sales and marketing expense increased $10.0 million, or 48%, in 2014 compared to 2013. The increase in sales and marketing expense was primarily attributable to a $7.3 million increase in personnel-related expenses due to an increase in headcount as we expanded our sales efforts and incurred additional personnel costs, such as sales commissions, as well as a $2.2 million increase in tmdeshow and other marketing activities. As of December 31, 2014, we had 358 employees dedicated to sales and marketing as compared to 318 employees as of December 31, 2013. Research and Development Year Faded December 31, Change 2013 2014 $ (dollars in thousands) Research and development $ 10,517 $ 16.167 $ 5,650 54% Research and development expense increased $5.7 million, or 54%, in 2014 compared to 2013. The increase in research and development expense was primarily attributable to a $6.0 million increase in personnel-related expenses as we continued to add headcount to support our increased product development activities. As of December 31, 2014, we had 168 employees dedicated to research and development as compared to 122 employees as of December 31, 2013. General and Administrative Year Faded December 31, Change 2013 2014 $ (dollars in thousands) General and administrative $ 10,730 $ 18.422 $ 7,692 72% General and administrative expense increased $7.7 million, or 72%, in 2014 compared to 2013. The increase in general and administrative expense was primarily attributable to a $3.5 million increase in personnel-related expenses as we continued to add headcount. a $2.2 million increase in legal and other professional services, and a $1.6 million increase in facilities and other costs related to increases in headcount. As of December 31, 2014. we had 99 employees dedicated to general and administrative as compared to 65 employees as of December 31, 2013. Change in Fair Value of Contingent Consideration Year Ended December 31, Change 2013 2014 $ (dollars in thousands) Change in fair value of contingent consideration S 428 $ (1.434) $ (1,862) (435)% The decrease in the change in fair value of contingent consideration was due to earn-out targets related to our acquisition of Jill's List in 2013 not being met during 2014. Upon expiration of the contingency in April 2015. the associated liability will be permanently extinguished and we will no longer recognize any fair value remeasurements related to the contingent consideration. 75 EFTA00594809 Other Income (Expense) and Income Taxes Year Ended December 31. Change 2013 2(114 S 70 (dollars in thousands) Change in fair value of preferred stock warrant 302 283 (19) (6)% Interest expense 21 68 47 224% Other income (expense), net (26) (68) (42) 162% Provision for income taxes 63 116 53 84% The changes in the fair value of the preferred stock warrant, interest income, interest expense, other income (expense), net, and the provision for income taxes in 2014 compared to 2013 were not significant. Comparison of the Years Ended December 31, 2012 and 2013 Revenue Year Ended December 31. Change 2012 2013 S Ho (dollars in thousands) Revenue: Subscription and services $ 19,707 $ 28,225 $ 8,518 43% Payments 9,515 17,122 7,607 80% Product and other 2,777 3,340 563 20% Total revenue $ 31,999 $ 48,687 $ 16,688 52% Revenue increased $16.7 million, or 52%, in 2013 compared to 2012. Subscription and services revenue increased $8.5 million, or 43%, of which $7.1 million was due to a 41% increase in our number of subscribers from 22,062 as of December 31, 2012 to 31,043 as of December 31, 2013. In addition, revenue from arrangements with ow technology partners increased $0.9 million. Payments revenue increased $7.6 million, or 80%, primarily due to the increase in the number of subscribers that utilize our payments platform. Product and other revenue increased $0.6 million, or 20%, primarily due to the increase in sales of various point•of•sale system products and physical gift cards to our subscribers in 2013. Cost of Revenue and Gross Margin Year Ended December 31. Change 2012 2013 (dollars in thousands) Costs of revenue S 11411 $ 21.890 $ 8,479 63% Gross margin 58% 55% Cost of revenue increased $8.5 million, or 63%, in 2013 compared to 2012. The increase in cost of revenue was primarily attributable to a $5.9 million increase in personnel•related expenses and infrastructure costs due to an increase in headcount to support our growing number of subscribers. As of December 31, 2013, we had 301 employees dedicated to data center operations, global customer support and onboarding services as compared to 199 employees as of December 31, 2012. In addition, we recognized a $1.8 million increase in depreciation and amortization expense during 2013 due to increased asset purchases primarily related to the expansion of ow data centers in 2013. The decrease in the gross margin, or gross profit as a percentage of revenue, in 2013 was primarily driven by our investment in growing our customer support team in 2013 to support the growth of our subscriber base. 76 EFTA00594810 Operating Expenses Sales and Marketing Year Ended December 31. Change 2012 2013 $ (dollars in thousands) Sales and marketing $ 11,735 $ 20.957 $ 9222 79% Sales and marketing expenses increased $9.2 million, or 79%, in 2013 compared to 2012. The increase in sales and marketing expense was primarily attributable to a $6.7 million increase in personnel-related expenses due to an increase in headcount as we expanded our sales efforts and incurred additional personnel costs, such as sales commissions, a $0.9 million increase in tradeshow and other marketing activities, and a $0A million increase in allocated depreciation and amortization expenses due to increased headcount. As of December 31, 2013, we had 318 employees dedicated to sales and marketing as compared to 186 employees as of December 31, 2012. Research and Development Year Ended December 31, Change 2012 2013 (dollars in thousands) Research and development $ 3,741 $ 10,517 $ 6,776 181% Research and development expense increased $6.8 million, or 181%, in 2013 compared to 2012. The increase in research and development expense was primarily attributable to a $4.0 million increase in personnel- related expenses as we continued to add headcount to support our increased research and development activities and a $2.3 million increase in research and development cost. As of December 31, 2013, we had 122 employees dedicated to research and development as compared to 82 employees as of December 31, 2012. General and Administrative Year Ended December 31, Change 2012 2013 (dollars in thousands) General and administrative $ 8,111 $ 10.730 $ 2.619 32% General and administrative expense increased $2.6 million, or 32%, in 2013 compared to 2012. The increase in general and administrative expense was primarily attributable to a $1.1 million increase in personnel-related expenses as we continued to add headcount. a $1.1 million increase in facilities and other related casts due to the increase in headcount, a $0.7 million increase in legal and other professional service costs, partially offset by a $1.2 million decrease in stock-based compensation expense as in 2012 we incurred $1.4 million stock-based compensation expense related to sales of common stock by certain of ow executive employees. As of December 31, 2013, we had 65 employees dedicated to general and administrative as compared to 36 employees as of December 31, 2012. Change in Fair Value of Contingent Consideration Year Ended December 31, Change 2012 2013 $ (dollars in thousands) Change in fair value of contingent consideration S — $ 428 $ 428 100% 77 EFTA00594811 The increase in fair value of contingent consideration was related to an earn-out provision associated with the acquisition of Jill's List in 2013. Other Income (Expense) and Income Taxes Year Ended December 31. Change 2012 2013 (dollars in thousands) Change in fair value of preferred stock warrant 515 302 (213) (41)% Interest expense 15 21 6 40% Interest income 6 — (6) (100)% Other income (expense), net 17 (26) (43) (253)% Provision for income taxes 13 63 50 385% The changes in the fair value of preferred stock warrant, interest income, interest expense. other income (expense), net, and the provision for income taxes were not significant during 2013. Quarterly Results of Operations The following tables set forth our unaudited consolidated statements of operations data for each of the nine quarters in the period ended March 31, 2015, as well as the percentage that each line item represents of total revenue for each quarter. The unaudited quarterly statements of operations data set forth below have been prepared on a basis consistent with our audited annual consolidated financial statements and include, in our opinion, all normal recurring adjustments necessary for a fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this prospectus. Three Months Ended March 31, June 30. Sept. 30. Dec. 31, March 31. June 30. Sept. 30. Dec. 31, March 31. 2013 2013 2013 2013 2014 2014 2014 2014 2015 (in thousands) Revenue 510.267 511.291 $12,828 514.301 515.653 $16.571 $17.618 520.168 522.263 Cost of revenueth 4.670 5.122 5.653 6.445 6.478 6.998 8.146 8.382 8.693 Gross profit 5.597 6.169 7.175 7.856 9.175 9.573 9.472 11.786 13.570 Operating expenses: Sales and marketing'', 4.362 4.957 5.665 5.973 7.247 7.047 8.451 8.177 9.717 Research and development[" 2.004 2.377 2.916 3.220 3.594 4.033 4.416 4.124 4.725 General and administrative'', 2.042 2.632 2.815 3.241 3.530 4.483 4.777 5.632 6.780 Change in fair value of contingent consideration 176 155 97 (423) (415) (543) (53) Total operating expenses 8.408 10.142 11.551 12.531 13.948 15.148 17.101 17.880 21222 Loss from operations (2.811) (3.973) (4.376) (4.675) (4.773) (5.575) (7.629) (6.094) (7.652) Change in fair value of preferred stock warrant (56) (7) (165) (74) (22) 81 (18) (324) (ISO) Interest income - - - - - - 3 Interest expense (10) (1) (1) (9) (20) (5) (21) (22) (17) Other income (expense), net (26) (8) (8) 16 5 21 (52) (42) (39) Income (loss) before provision for income taxes (2.903) (3.989) (4.550) (4.742) (4.810) (5.478) (7.720) (6.482) (7.855) Provision for income taxes 3 12 48 34 29 24 29 6 Net income (loss) S(2.906) 5(3.989) S(4.562) S(4.790) 5(4.844) S (5.507) S (7.744) 5(6.511) S (7.861) 78 EFTA00594812 (I) Stock-based compensation expense included above was as follows: Three Months Ended March 31, June 30, Sept. 30. Dec. 31, March 31. June 30. Sept. 30. Dec. 31, March 31. 2013 2013 2013 2013 2014 2014 2014 2014 2015 (in thousands) Cost of revenue 5 6 $ 6 $ 20 $ 19 $ 24 $ 48 $ 73 $ 75 $ 100 Sales and marketing 4 4 24 24 34 45 58 59 541 Research and development 6 6 29 27 53 70 87 88 96 General and administrative 2 7 121 122 225 225 287 286 403 — — $194 $192 $336 $388 $505 $508 51.140 Total stock-based compensation expense $18 $23 Three Months Ended March 31. June 30, Sept. 30, Dec. 31. March 31, June 30, Sept. 30, Dec. 31, March 31, 2013 2013 2013 2013 2014 2014 2014 2014 2015 (percentage of revenue) Revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of revenue 45% 45% 44% 455E 41% 42% 46% 42% 39% Gross margin 55% 55% 56% 55% 59% 58% 54% 58% 61% — — — — — — — Operating expenses: Sales and marketing 42% 44% 44% 42% 46% 43% 48% 41% 44% Research and development 21% 23% 23% 23% 24% 25% 20% 21% 20% General and administrative 23% 22% 23% 23% 27% 27% 28% 30% 20% Change in fair value of contingent consideration 2% 1% 1% (3)% (3)% (3)% — Total operating expenses 82% 90% 90% 89% 89% 91% 97% 89% 95% Loss from operations (27)% (35)% (34)% (33)% (30)% (33)% (43)% (30)% (34)% Change in fair value of preferred stock warrant (1)% — (0% — (2)% (1)% Interest income Interest expense Other income (expense), net Income (loss) before provision for income taxes (28)% (35)% (35)% (33)% (30)% (33)% (43)% (32)% (35)% Provision for income taxes — — — — — — — — — Net income (loss) (28)% (35)% (35)% (33)% (30)% (33)% (43)% (32)% (35)% = = = = = = = = = Adjusted EMMA Three Months Ended March 31. June 30, Sept. 30, Dec. 31. March 31, June 30, Sept. 30, Dec. 31, March 31, 2013 2013 2013 2013 2014 2014 2014 2014 2015 (in thousands) Net income (loss) 5(2.906) 5(3.989) 5(4.562) 5(4390) 5(4.844) 5(5.507) 5(7.744) 5(6.511) 5(7.861) Stock-based compensation 18 23 194 192 336 388 505 508 1.140 Depreciation and amortization 578 882 944 1.075 1.034 1.116 1220 1.204 1.218 Change in fair value of contingent consideration 176 155 97 (423) (415) (543) (53) Change in fair value of preferred stock warrant 56 7 165 74 22 (81) 18 324 150 Impairment changes - - - - _ - 426 Provision for income tax 3 - 12 48 34 29 24 29 6 Other (income) expense. net 36 9 9 (7) 15 (16) 73 64 53 Adjusted EBITDA 5(2.215) 5(2.892) 5(3.083) 5(3.311) 5(3.826) $(4,486) 5(6.021) 5(4.435) $(5.294) 79 EFTA00594813 Quarterly Trends We have recently experienced rapid growth, which has resulted in a sequential increase in our revenue and a corresponding increase in our cost of revenue and operating expenses to support our growth. The sequential increases in quarterly revenue were mainly due to an increase in our number of subscribers, expansion of revenue sharing arrangements with our API platform partners and technology partners, an increase in premium support services and an increase in payments revenue from existing subscribers. The sequential increase in quarterly operating expenses was primarily due to increased expenses related to the continued expansion of our technical infrastructure and expenses related to increases in employee headcount. Our historical results should not be considered a reliable indicator of our future results of operations. Liquidity and Capital Resources Since our incorporation in 2004, we have financed our operations and capital expenditures primarily through private sales of preferred stock, including through the receipt of proceeds in the amount of $74.7 million from the issuance of our Series F and G redeemable convertible preferred stock in the three year period ended December 31, 2014. As of December 31, 2014 and March 31, 2015, we had cash and cash equivalents of $34.7 million and $22.1 million, respectively. Cash and cash equivalents consist of cash on deposit and money market funds. We believe that our existing cash and cash equivalents balance will be sufficient to meet our working capital requirements for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section of this prospectus entitled "Risk Factors." We cannot assure you that we will be able to raise additional capital on acceptable terms or at all. In addition, if we fail to meet our operating plan during the next 12 months, our liquidity and ability to operate our business could be adversely affected. In January 2015, we entered into a loan agreement with Silicon Valley Bank for a secured revolving credit facility that allows us to borrow up to $20.0 million for working capital and general business requirements. Borrowings under our loan agreement are available based on a percentage of our monthly recurring revenue for the prior months. Amounts outstanding under the credit facility will bear interest at the greater of the prime rate (3.25% as of January 12, 2015) plus 0.5%, or 3.25% with accrued interest payable on a monthly basis and outstanding and unpaid principal due upon maturity of the credit facility in January 2018. There are no prepayment penalties if we repay principal and interest prior to maturity. The credit facility is secured by substantially all of our corporate assets. We also granted and pledged a security interest to the lender in all rights, title, and interest in our intellectual property. We are also subject to certain reporting and financial performance covenants, which require us to meet certain revenue targets. We did not draw down any amounts under the loan agreement during the three months ended March 31, 2015. The following table summarizes our cash flows for the periods presented: Three Months Ended Year Ended December 31, March 31. 2012 2013 2014 2014 2015 (is thousands) (unaudited) Cash used in operating activities $ (1,913) $(8,228) $(17,928) $ (3,681) $(6,544) Cash used in investing activities (5,031) (8,008) (5,668) (845) (5,616) Cash provided by (used in) financing activities 25,270 (48) 48,802 49,834 (343) 80 EFTA00594814 Operating Activities During the three months ended March 31, 2015, operating activities used $6.5 million, primarily as a result of our net loss of $7.9 million, partially offset by $2.7 million of non-cash charges, primarily consisting of $1.2 million of depreciation and amortization expense and $1.1 million of stock-based compensation expense, and a $1.4 million net decrease in our operating assets and liabilities. The net decrease in our net operating assets and liabilities was primarily a result of a $1.0 million increase in accounts receivable due to an increase in payments revenue and revenue from technology partner arrangements and a $0.5 million increase in prepaid expenses and other current assets, which was primarily due to the timing of payments to our vendors. During the three months ended March 31, 2014, operating activities used $3.7 million, primarily as a result of our net loss of $4.8 million, partially offset by $1.1 million of non-cash charges, primarily consisting of depreciation and amortization expense. During the year ended December 31, 2014, operating activities used $17.9 million, primarily as a result of our net loss of $24.6 million, partially offset by $6.1 million of non-cash charges, primarily consisting of depreciation and amortization expense of $4.6 million and stock-based compensation expense of $1.7 million. The net increase in operating assets and liabilities of $0.6 million was primarily a result of a $2.1 million increase in accounts payable due to a higher level of expenses consistent with the overall growth of our business, a $1.4 million increase in prepaid expenses and other current assets due to the timing of payments to our vendors, a $1.1 million increase in accounts receivable and a $0.7 million increase in deferred revenue. The increase in accounts receivable and deferred revenue was primarily due to increased sales of subscriptions. During the year ended December 31, 2013, operating activities used $8.2 million, primarily as a result of our net loss of $16.2 million, offset by $4.8 million in non-cash charges, primarily consisting of depreciation and amortization expense of $3.5 million, and a $3.2 million net increase in our operating assets and liabilities. The net increase in operating assets and liabilities was primarily a result of a $1.8 million decrease in prepaid expenses and other current assets and a $1.4 million increase in accounts payable due to the timing of the payments to ow vendors, partially offset by a $1.6 million increase in accounts receivable due to increased sales of subscriptions. During the year ended December 31, 2012, operating activities used $1.9 million, primarily as a result of our net loss of $5.5 million, offset by $3.0 million of non-cash charges, primarily consisting of stock-based compensation of $1.5 million and depreciation and amortization expense of $1.0 million, and a $0.6 million net increase in our operating assets and liabilities. The net increase in operating assets and liabilities was primarily a result of a $2.4 million increase in accounts payable and accrued expenses and other current liabilities primarily due to increased expenses and the timing of payments to ow vendors, partially offset by a $2.2 million increase in prepaid expenses due to increased expenses consistent with our business growth. Investing Activities During the three months ended March 31, 2015, investing activities used $5.6 million, primarily as a result of purchases of property and equipment of $3.4 million and cash paid to acquire a business of $3.0 million. During the three months ended March 31, 2014, investing activities used $0.8 million, primarily as a result of purchases of property and equipment. During the year ended December 31, 2014, investing activities used $5.7 million. primarily as a result of purchases of property and equipment of $7.3 million, which were partially offset by a decrease in restricted cash of $1.6 million. 81 EFTA00594815 During the year ended December 31, 2013, investing activities used $8.0 million, primarily as a result of purchases of property and equipment of $5.1 million and an increase in restricted cash of $2.6 million. During the year ended December 31, 2012, investing activities used $5.0 million, primarily as a result of purchases of property and equipment. Financing Activities During the three months ended March 31, 2015, financing activities used $0.3 million, primarily as a result of payment of deferred offering costs. During the three months ended March 31, 2014, financing activities provided $49.8 million, primarily from proceeds of $49.9 million from the issuance of Series G redeemable convertible preferred stock. During the year ended December 31, 2014, financing activities provided $48.8 million, primarily from proceeds of $49.9 million from the issuance of Series G redeemable convertible preferred stock. During the year ended December 31, 2013, cash used in financing activities was not significant. During the year ended December 31, 2012, financing activities provided $25.3 million, primarily from proceeds of $24.8 million from the issuance of Series F redeemable convertible preferred stock. Contractual Obligations and Commitments Our principal commitments consist of obligations under non-cancelable operating leases for our office space in San Luis Obispo, California. The following summarizes ow contractual obligations and commitments as of December 31, 2014: Payment Due by Period Less Than 1 More Than 5 Total Year 1-3 Years 3-5 Years Years (in thousands) Operating leases') $28,159 $3,442 $ 8313 $4,464 $11,940 Finance obligation, building leases(2) 29,495 1,586 5,048 3,623 19,238 Total minimum payments $57,654 $5,028 $13,361 $8,087 $31,178 (1) We lease office facilities under various non-cancelable operating lease agreements. (2) For certain build-to-suit lease arrangements where we have concluded that we are the "deemed owner" of a building (for accounting purposc-s only) during the construction period. we are required to record an asset with a corresponding construction financing obligation for the costs incurred by the landlord. During the three months ended March 31. 2015. there were no significant changes to our contractual obligations and commitments. Off Balance Sheet Arrangements As of December 31, 2014 and March 31, 2015, we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other purposes. Segment Information We have one primary business activity and operate in one reportable segment. 82 EFTA00594816 Quantitative and Qualitative Disclosures about Market Risk We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and foreign exchange risks. Interest Rate Risk Our cash and cash equivalents consist of cash on deposit and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Because ow cash equivalents have a short maturity, our portfolio's fair value is relatively insensitive to interest rate changes. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our operating results or financial condition. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives. Foreign Currency Exchange Risk We have foreign currency risks related to our revenue and expenses denominated in currencies other than the U.S. Dollar, principally British Pounds Sterling, the Euro and Australian Dollar, which are subject to fluctuations due to changes in foreign currency exchange rates. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statements of operations. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in currency rates. Internal Control Over Financial Reporting Prior to this offering. we were a private company and had limited accounting and financial reporting personnel and other resources with which to address our internal controls and procedures. In connection with the audits of our consolidated financial statements, we identified material weaknesses in our internal control over financial reporting. as defined in the standards established by the Public Company Accounting Oversight Board of the U.S. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2012, we discovered two material weaknesses that resulted from (i) a lack of a sufficient number of qualified personnel within our accounting department that possessed an appropriate level of expertise to perform certain accounting functions and (ii) the failure to establish proper access controls to our accounting software and proper controls to review and approve manual journal entries. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2013, we discovered a material weakness related to the inadequate design and implementation of controls and procedures with respect to capitalization of development costs for internal use software. Finally, in connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2013 and 2014, we identified a material weakness related to the inadequate design and implementation of controls and procedures with respect to the identification of and evaluation of accounting for certain features, including the related fair value computation, and transactions related to our redeemable convertible preferred stock. Our management and independent registered public accounting firm did not and were not required to perform an evaluation of our internal control over financial reporting as of and for the years ended December 31, 2013 and 2014 in accordance with the provisions of the JOBS Act. We believe that we have remediated the material weaknesses from our 2012 audit. In addition, during 2013, we put in place additional controls over how ow software is capitalized, and as such, we believe that we have remediated the material weakness from our 2013 audit related to capitalization of development costs for internal use software. Although the material weakness resulting from errors in the accounting for certain features of and 83 EFTA00594817 transactions related to our redeemable convertible preferred stock had not been remediated as of December 31, 2014, all shares of redeemable convertible preferred stock will be automatically converted and reclassified into shares of Class B common stock immediately prior to the completion of this offering. As a result, following the offering, we will no longer be subject to the accounting rules that gave rise to the material weakness. Nevertheless, we cannot be certain that other material weaknesses and control deficiencies will not be discovered in the future. If our remediation efforts are not successful or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately or on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the trading price of our Class A common stock to decline. As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities am listed, the SEC. or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation, financial condition or divert financial and management resources from our core business. See "Risk Factors—We have in the past identified material weaknesses in our internal controls over financial reporting that, if not properly remediated, could result in material misstatements in our financial statements in future periods and impair our ability to comply with the accounting and reporting requirements applicable to public companies." Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the assumptions and estimates associated with revenue recognition, internal-use software development costs and the useful life of that software, income taxes, stock-based compensation expense and valuation assumptions have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to our consolidated financial statements. Revenue Recognition We recognize revenue on a transaction when all of the following conditions have been satisfied: persuasive evidence of an agreement exists; the service has been or is being provided to the subscriber or delivery of the product has occurred; fees are fixed or determinable; and • the collection of the fees is reasonably assured. Our primary sources of revenue are derived from monthly subscription and support services and revenue share arrangements with the technology partners and third party payment processors. The subscription revenue for the monthly service fees is recognized on a straight-line basis over the term of the agreement, which is most often monthly but can be quarterly or annual. Our subscribers enter into separate arrangements with technology partners and third party payment processors. Revenue derived from revenue shares arrangements with technology partners and third party payment processors is recognized when earned on a net basis. We also earn revenue from API platform partners for subscriber site access, data query, and consumer bookings. The revenue from API platform partners is recorded when earned. In certain circumstances, our arrangements include multiple elements which may consist of some or all of subscription services, support services, and hardware products, which are included in Product and other. When 84 EFTA00594818 multiple-element arrangements exist, we evaluate whether any of these deliverables should be accounted for as separate units of accounting. Our support services do not have standalone value because we and other vendors do not sell support services separately. Such support services are therefore combined with our subscription services as a single unit of accounting. Our hardware products, such as point of sale systems, have standalone value because we and other vendors sell the same products separately. Additionally, while there is a general right of return relative to our hardware products, which are generally delivered upfront, performance of the subscription and support services is considered probable and substantially in our control. Accordingly, we consider the separate units of accounting in our multiple-element arrangements to be the hardware products and subscription and support services. For arrangements with multiple elements which can be separated into different units of accounting, we allocate the arrangement fee to the separate units of accounting based on vendor-specific objective evidence, as demonstrated by separate sales with sufficient concentration in selling prices. Capitalized Software Costs We capitalize certain development costs incurred in connection with internal use software. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, it is probable the project will be completed, and the software will be used to perform the functions intended and certain functional and quality standards have been meL Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Research and development costs incurred during the preliminary project stage or costs incurred for training, maintenance, and general and administrative or overhead costs are expensed as incurred. Capitalized software costs are amortized to cost of revenue using the straight-line method over an estimated useful life of the software of two to three years, commencing when the software is ready for its intended use. Income Taxes We account for income taxes under the asset and liability method of accounting for income taxes. Under this method, deferred taxes are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets, unless it is more likely than not such assets will be realized. We also apply the provisions for uncertainty of income taxes. This guidance prescribes a recognition threshold and measurement attribute for consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. This guidance also applies to various related matters, such as derecognition. interest, penalties, and required disclosures. We recognize interest and penalties, if any, related to unrecognized tax benefits in our income tax provision. Stock-Based Compensation Stock-based compensation expense is measured and recognized in the financial statements based on the fair value of the awards granted. The fair value of each option award is estimated on the grant date using the Black- Scholes option-pricing model and a single option award approach. Stock-based compensation expense is recognized, net of forfeitures, over the requisite service period of the awards, which is generally four years. Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, expected term of the option, expected volatility of the 85 EFTA00594819 price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management's best estimates. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. These assumptions and estimates are as follows: Fair value of common stock. As our stock is not publicly traded, we must estimate the fair value of common stock, as discussed in "Common Stock Valuations" below. Expected term. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. Volatility. As we do not have a trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in our industry which are similar in size, stage of life cycle, and financial leverage. We did not rely on implied volatilities of traded stock options in our industry peers' common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be used in the calculation. Risk-free interest rate. We base the risk-free interest rate used in the Black-Scholes option-pricing model on the yields of U.S. Treasury securities with maturities appropriate for the term of employee stock option awards. • Dividend yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends on our common stock in the foreseeable future. Consequently, we used an expected dividend yield of zero. The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine the fair value of our stock options as follows: Three Months Ended Year Ended December 31. March 31. 2012 2013 2014 2014 2015 Expected term (in years) 4.0 - 6.1 5.9 5.8 - 5.9 5.9 5.8 Expected volatility 55% 55% 48% - 51% 50% 46% Risk-free interest rate 0.5 - 0.9% 1.6% 1.7% - 1.9% 1.7% 1.4% Expected dividend yield 0% 0% 0% 0% 0% In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation expense for our awards. Our forfeiture rate is based on historical experience and expected employee attrition rates. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements. 86 EFTA00594820 We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense. Common Stock Valuations The fair value of the common stock underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of ow common stock underlying those options on the date of grant. The valuations of ow common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or AICPA Practice Aid. The assumptions we use in the valuation model are based on future expectations combined with management judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors: • contemporaneous valuations performed by unrelated third-party specialists; • the prices, rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock; • the prices of our redeemable convertible preferred stock and common stock sold to outside investors in arm's-length transactions; • the lack of marketability of our common stock: • our actual operating and financial performance; • current business conditions and projections; • our hiring of key personnel and the experience of our management; • our history and the timing of the introduction of new products and services; • our stage of development; • the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions; • the illiquidity of stock-based awards involving securities in a private company: • the market performance of comparable publicly traded companies; and • the U.S. and global capital market conditions. Historically, a third-party valuation firm has been engaged by our board of directors as needed to assist with the setting of the exercise price for our option grants. If a grant of options occurred between valuation report dates, the board of directors would assess if there had been any significant changes to the business and adjust the exercise price accordingly; however, historically our board of directors has determined that there has not been any significant changes and used the fair value of the common stock as of the date of the most recent, prior valuation as the exercise price for these grants. In valuing the common stock, the fair value of our business, or Enterprise Value, was determined by using the value indications under a combination of valuation approaches, including an income approach and various market approaches, and under five different possible future scenarios: a high and low IPO scenario; a high and low scenario; and a scenario in which we remain a private company. Prior to 2013, IPO and scenario fair values were determined using the Guideline Public Company Method of the market approach. In 2013, we expanded our approach to include the Recent Transaction Method of the market approach for 87 EFTA00594821 scenarios. The Guideline Public Company Method of the market approach analyzes the financial performance of our Guideline Companies while utilizing selected multiples of market value of invested capital, or MVIC, compared to our twelve months trailing and projected revenue, as of the estimated IPO date. The Recent Transaction Method of the market approach analyzes recent acquisitions of companies similar to our business while utilizing selected multiples of MVIC compared to the twelve months trailing revenue, as of the estimated transaction date. Stay private scenario fair value was determined using a discounted cash flow analysis under the income approach. Each of the above valuations was prepared on a minority, non-marketable interest basis. The Enterprise Values determined above are then adjusted to: (1) add back cash on hand and (2) remove outstanding debt obligations: in order to determine an equity value, or Equity Value. The resulting Equity Values are then allocated to the common stock using an option pricing method, or OPM, and a Probability Weighted Expected Return Method, or PWERM. After the Equity Value is determined and allocated to the various classes, a discount for lack of marketability, or DLOM, is applied to arrive at the fair value of the common stock. A DLOM is applied based on the theory that as a private company an owner of the stock has limited opportunities to sell this stock and any such sale would involve significant transaction costs, thereby reducing overall fair market value. The valuations are highly complex and subjective. Following the completion of this offering, common stock valuations will no longer be necessary as we will rely on market prices to determine the fair value of our common stock. Summary of Options Granted Our board of directors granted options to purchase common stock with the following exercise prices and deemed fair values since January 1, 2014: (;rant Date February 6, 2014 369,250 $ 11.52 $ 11.52 May 14, 2014 421,250 $ 9.936 $ 9.936 September 20, 2014 211,625 $10.616 $10.616 November 6, 2014 7,500 $10.624 $10.624 February 3, 2015 614,375 $14.476 $14.476 April 6, 2015 270,000 $14.496 $15.496 May 22, 2015 1,008,000 $14.496 $14.496 Shares Underlying Options Exercise Price per Share Deemed Fair Value per Share Our assessments of the fair value of our common stock for grant data between the dates of the valuations were based in part on the current available financial and operational information and the common stock value provided in the most recent valuation as compared to the timing of each grant. As of December 31, 2014 and March 31. 2015. we had $5.9 million and $9.2 million of unrecognized stock- based compensation, net of estimated forfeitures, that we expect to recognize over a weighted-average period of 3.0 and 3.1 years. In future periods, we expect our stock-based compensation to increase as we grant additional equity-based awards and as we recognize the remaining stock-based compensation from awards granted prior to this point. Redeemable Convertible Preferred Stock We record the carrying value of redeemable convertible preferred stock at fair value upon issuance, net of issuance costs, accreted to its estimated redemption value using the effective interest method. Accretion to the carrying value is being recorded as an increase in the carrying value of the redeemable convertible preferred stock and a reduction of stockholder's deficit. 88 EFTA00594822 We review the rights and preferences of our redeemable convertible preferred stock for any changes in terms, rights or preferences to determine if such change is a modification or an extinguishment. An amendment that, based on either quantitative or qualitative considerations, changes a substantive contractual term or fundamentally changes the nature of the preferred share is considered an extinguishment. We consider both expected economics as well as the business purpose of the amendment. If considered an extinguishment. we remove the carrying value of the old securities and recognize the new securities at their current fair value. If considered a modification, we recognize the change in the fair value of the security immediately before and after the amendment as either a deemed dividend or a deemed capital contribution. Preferred Stack Warrant We account for freestanding warrants to purchase shares of our redeemable convertible preferred stock as liabilities in the consolidated balance sheets at their estimated fair value. Our outstanding preferred stock warrant is subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of other expense, net, in the consolidated statements of operations. We will continue to adjust the liability for changes in fair value until the earlier of: (i) the exercise or expiration of the warrant, or (ii) the completion of a liquidation event, including the completion this offering, at which time the preferred stock warrant will be converted into a warrant to purchase common stock. Upon such an event, the fair value of the warrant will be remeasured one final time with the related liability being reclassified to stockholders' equity. Recently Issued and Adopted Accounting Pronouncements In April 2015, the Financial Accounting Standards Board, or FASB, issued authoritative guidance. which changes the presentation of debt issuance costs in financial statements. Under this authoritative guidance, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The new guidance is effective for us beginning January 1, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. In November 2014, FASB issued authoritative guidance to clarify how current GAAP should be interpreted in evaluating the economic characteristics and risk of a host contract in a hybrid financial instrument that is issued in the form of a share. In addition, the new authoritative guidance was issued to clarify that in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (that is. the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The effects of initially adopting the new authoritative guidance should be applied on a modified retrospective basis to existing hybrid financial instruments issued in a form of a share as of the beginning of the fiscal year for which the amendments are effective, with retrospective application permitted to all relevant prior periods. The new authoritative guidance is effective for the years beginning after December 15, 2015; however, early adoption is permitted. We elected to early adopt the new authoritative guidance on a retrospective basis for all periods presented with the earliest period being January 1, 2012. Under this new guidance, certain features embedded in certain series of preferred stock that were previously bifurcated and recognized as derivative liabilities within the consolidated financial statements are no longer bifurcated. We believe retrospective adoption provides users of the financial statements the most comparable and useful financial information and better reflects the underlying performance of our business. In May 2014, FASB issued authoritative guidance that provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance as currently issued is effective for us beginning January 1, 2017. On April 1, 2015, the FASB voted to propose a one-year deferral to the effective date, but to permit entities to adopt the original effective date if they choose. We are currently evaluating the impact of the adoption of this guidance. 89 EFTA00594823 In August 2014, the FASB issued authoritative guidance that provides guidance on management's responsibility in evaluating whether there is substantial doubt about an entity's ability to continue as a going concern and by providing related footnote disclosure requirements. This new guidance is effective for us prospectively beginning January 1, 2016 with early adoption permitted. We are currently evaluating the impact of the adoption of this guidance but it is not expected to have a material impact on our consolidated financial statements. 90 EFTA00594824 LETTER FROM THE CO-FOUNDERS Dear Prospective Investor, Bob Murphy and I first met on the phone in early 2002. I was running MINDBODY from my garage in San Luis Obispo, California. Bob and his wife Bev were running five yoga studios in New York. They were searching for software that could display integrated schedules for their five studios and help them simplify operations, better engage with consumers, boost revenues and improve profitability. Bob ordered the software on that first call and we met face to face soon thereafter. Over the next two years, we spent many hours together — on the phone and behind the front desks of the studios — troubleshooting the early desktop software and brainstorming ways to make it better. When MINDBODY needed growth capital in 2004, I approached Bob and we became business partners. Our unique experiences gained on the front lines of studio management software, combined with a shared vision for the future of the wellness services industry, led us to reimagine MINDBODY in the summer of 2004. We envisioned a different business model — one where all of the functionality of desktop software could be delivered via a web browser and sold by monthly subscription, rather than an up-front license. Thanks to the exceptional skills of our lead developer, and now Chief Product Officer, Chet Brandenburg, our first subscription software was released in February 2005. We didn't fully realize it at the time, but we were among a small group of entrepreneurs pioneering a powerful new business model — Software as a Service (SaaS). The SaaS vision we crafted in 2004 was fueled by our common belief that a global wellness revolution had started and that it would grow for many years to come. We further believed that the wellness revolution would cause the creation of millions of small fitness, spa, salon and integrative health businesses worldwide and that the owners of these businesses had a common set of complex business problems that we could solve with online software. We had personally met hundreds of these wellness business owners in the early years and understood that most of them were non-technical by nature and had the majority of their net worth at risk in their businesses. Understanding their high stakes, we concluded that we would need to build a highly engaged sales and customer service team to meet their expectations of service and support. Finally, we imagined a day when the collective offerings of this market could be made accessible in a single, online marketplace, and that this might become one of the most important business opportunities of our age. With recent changes in healthcare, the proliferation of powerful mobile and wearable devices, and the advent of the cloud, everything we believed in 2004 is even truer today. We have created the leading online wellness services marketplace serving over 42,000 local business subscribers employing over 250,000 practitioners on our platform. These practitioners have delivered wellness services to 24 million active consumers in 124 countries and territories. We've come a long way since the release of our first SaaS solution in 2005, but our mission is not yet complete. There are powerful applications and impactful connections yet to be made, millions of businesses to be served and hundreds of millions of additional consumers to be engaged to realize MINDBODY's full potential. To achieve our goals and maximize our value, our team must keep its eyes on our long-term vision. If you share our long-term vision, it would be our pleasure to welcome you as a new stockholder of MINDBODY. Sincerely, Rick and Bob 91 EFTA00594825 BUSINESS Our Vision Our vision is to leverage technology to improve the wellness of the world. Overview We are the leading online wellness services marketplace with over 42,000 local business subscribers on our platform in 124 countries and territories employing over 250,000 practitioners who provide a variety of wellness services to over 24 million active consumers. Our integrated cloud-based business management software and payments platform for the wellness services industry helps our subscribers simplify the way they run their businesses, attract and engage more consumers, boost their revenues and focus more on what they love to do — improving people's lives. Moreover, we help consumers more easily evaluate, engage and transact with these subscribers, enabling them to live healthier and happier lives. We are also a leading payments platform dedicated to the wellness services industry. In the 12 months ended March 31, 2015, $6.3 billion in transactions occurred between consumers and subscribers within our marketplace, of which $4.3 billion flowed through our payments platform. Our platform is specifically designed for the wellness services industry. Wellness encompasses multiple dimensions of a person's well-being — physical, emotional, social, occupational and spiritual, among others. As a result, we include health and fitness, integrative health, salon and spa, fine arts and children's activities as categories within the wellness services industry. According to a report that we commissioned from Frost and Sullivan. ow addressable market is approximately 4.2 million wellness businesses worldwide. Based on their analysis, Frost and Sullivan estimates a $9.5 billion market for business management software solutions targeted at wellness businesses in 2015 and expects this market to grow to $15.3 billion in 2018. which implies a 17.1% compound annual growth rate, or CAGR. With over 42,000 local business subscribers, we estimate our current market penetration to be less than 1%. We believe millions of wellness businesses around the world are looking for a simple, efficient and reliable way to manage their operations. Management tasks are generally time consuming, preventing business owners from focusing on delivering their core services. This results in a loss of revenue-generating opportunities, lower client satisfaction and lower client retention. We founded MINDBODY to enable these business owners to focus on what they do best — whether it is creating beautiful hair, helping their clients lose weight and increase strength and flexibility, or teaching yoga, meditation, dance or music. Through our integrated cloud-based business management software and payments platform, we enable businesses to easily manage class and appointment schedules, staff members, client information, online bookings, inventory, payroll and retail sales — all in a cost- effective manner. We also offer advanced marketing and client retention capabilities to help businesses acquire and retain their clients, and analytics capabilities to help them improve their businesses and plan for the future. At the same time, we connect consumers with local businesses through our MINDBODY Connect platform, which powers a mobile interface that allows consumers to discover, evaluate, book and pay for wellness services, whether they are near their homes or traveling. Connect also gives these consumers a unified account that allows them to access and manage multiple wellness services with one sign in and provides them with access to authentic consumer reviews. The net effect of ow Connect offering is to increase the number of wellness services purchased and used by consumers, thereby improving their lives while driving more business to ow subscribers. As employers become increasingly focused on wellness programs to improve the health, fitness and productivity of their employees, our MINDBODY Connect Workplace offering combines the power of our software platform with the ease of ow Connect platform to enable employees to choose from a wide variety of on-site and local wellness services. Employees can book on-site classes and appointments, discover wellness services offered by MINDBODY subscribers in their area, and pay for those services using an employer-funded wellness debit card. Employers then use the Connect Workplace Corporate Dashboard to gain insights into employee engagement and analyze usage of corporate incentives and class participation at a macro level. We 92 EFTA00594826 believe Connect Workplace helps employees live healthier, happier and more productive lives, while allowing employers to benefit from greater staff productivity, lower attrition and reduced healthcare costs. We have enabled a rich partner ecosystem of over 600 developers and partners who extend the value of our platform in powerful ways. These developers and partners have built applications that supplement our capabilities in areas such as automation, marketing, mobile and social interaction. Several of these partners have created significant consumer-facing businesses that rely on our unique inventory of classes, scheduling and payments capabilities. All of this is enabled by our application programming interface, or API, through which we grant access to approved developers and partners. We also integrate with partners that provide email marketing, customer survey, events management and other functionality to augment the capabilities of our platform for the benefit of our subscribers. We believe that the opportunities and technology provided by our partners enhance the power of ow marketplace and contribute to the attractiveness and critical position of MINDBODY within the wellness ecosystem. \ cal businesses attract more , ‘unstbers ottcv a":. ovate wellness sub ky•fr. 42,000 BUSINESSES worldwide 0 coo, MINDBODY Wellness Services Marketplace <Is>"Iesses Mote ers attract more local 1 24 million d" ACTIVE CONSUMERS Worldwide 4‘ kv As more local wellness businesses adopt our business management and payments platform. more subscriber listings appear on Connect. A larger critical mass of local wellness services on Connect attracts more consumers, which in turn attracts more local wellness businesses that want to engage with these consumers, thereby creating powerful network effects that benefit the entire ecosystem. Similarly, as more corporate wellness subscribers adopt Connect Workplace, their employees begin using our platform, which leads to increased demand from local wellness businesses to be listed on Connect. As more local wellness businesses appear on Connect, more employees use our platform to redeem their corporate incentives, which in turn leads to more corporate wellness subscribers being attracted to our platform. Finally, as we add more subscribers, consumers and employees to our wellness ecosystem, we attract more technology developers and partners who can use our API to develop additional apps that extend the capabilities of our open platform. Over the last few years. we have significantly increased our subscriber base, the number of practitioners on our platform. the number of unique consumers engaged and the resulting volume of payments. We believe that 93 EFTA00594827 we have the largest global database of wellness practitioners, including personal trainers, group exercise instructors, integrative health specialists, massage therapists. stylists, and dance and music instructors. Number of SobscrUmn As of Mamba 31 SO 40 yo 20 )0 20 a 10 0 Number of Attlee Comagnersm As of Mambo El MM 30 :Mt Paymesm Volume Von rna,111,dtha !I Min SO 40 30 20 10 00 IA 2013 loll 2011 2012 2011 2011 20I1 2012 201) Tout Remus. Von 100011:110•61,31 MM ea 20 1:0 200 IAS 2E1 Atli 00 a :411 2012 2013 2011 (I) We define active consumers as all unique consumers of our subscribers' services who have used our platform to transact with our subscribers during the immediately preceding two years. 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. Our financial performance reflects ow significant subscriber growth and increasing revenue per subscriber. Our total revenue increased from $32.0 million in 2012, to $48.7 million in 2013 to $70.0 million in 2014, representing year-over-year increases of 52% and 44% in 2013 and 2014, respectively. Our total revenue increased from $15.7 million in the three months ended March 31, 2014 to $22.3 million in the three months ended March 31, 2015, representing a quarter-over-quarter increase of 42%. Our net loss was $5.5 million. $16.2 million and $24.6 million for 2012, 2013 and 2014, respectively. Our Adjusted EBITDA was negative $2.5 million, negative $11.5 million and negative $18.8 million for 2012, 2013 and 2014, respectively. For the three months ended March 31, 2014 and 2015, our net loss was $4.8 million and $7.9 million, respectively, and Adjusted EBITDA was negative $3.8 million and negative $5.3 million, respectively. For a reconciliation of Adjusted EBITDA to net loss, please see the section titled "Summary of Consolidated Financial and Other Data—Non-GAAP Financial Measure." Industry Background Increasing Focus on Personal Health and Beauty is Fueling Global Demand for Wellness Services An increased focus on personal health and beauty represents a major global trend among consumers and is driving growth in wellness services worldwide. As the desire for longer, healthier lives, attractive appearance and overall physical and emotional well-being grows, more and more people are adopting a lifestyle that incorporates a healthier diet, regular physical exercise, integrative health, salon, spa and other wellness services. Improving physical fitness and nutrition is becoming a global imperative. Obesity, sedentary lifestyle and associated diseases have become some of the world's most pressing public health concerns. According to the Institute for Health Metrics and Evaluation at the University of Washington, over 2.1 billion people or nearly 30% of the world's population are overweight. The highest proportion of the world's obese people. over 13%, live in the United States. Obesity significantly increases health risks such as cardiovascular disease, cancer, diabetes, osteoarthritis and chronic kidney disease. According to a policy statement issued 94 EFTA00594828 by the American Society of Clinical Oncology, obesity is poised to overtake tobacco as the leading preventable cause of cancer in the United States. A number of public health initiatives have helped shed light on the central role that fitness plays in fighting obesity, diabetes and other health problems. As a result, we believe fitness is becoming a top priority in the modem world: people are becoming increasingly health conscious, recognizing the benefits of regular physical exercise and therefore seeking to achieve a healthy weight and fitness level, thus driving the demand for health and fitness services such as CrossFit, yoga, Pilates and various others contemporary workout methods. Consumers are increasingly willing to spend more of their disposable income on wellness services. While decades ago individual spending on exercise classes and spa and salon services was minimal, we believe consumers across generations today are increasingly willing to allocate a more significant portion of their disposable income to wellness services. Spending habits have remained resilient even in recessionary environments. For example, during the recent economic downturn, the yoga and Pilates industry continued to exhibit strong growth. Similarly, we observed significant gains in CrossFit, bane, Zumba and other group exercise activities in the same period. People increasingly consume salon, spa and integrative health services to enhance emotional, social and physical wellness. In addition to health and fitness, the global market for salon, spa and other wellness services is large and growing. In developed markets, we believe the aging population is demanding more of these services. In the United States, the aging baby boomer generation is expected to be a source of accelerating growth for the industry going forward. In emerging markets, we believe urbanization is driving demand for these services since there are more social interactions that result in greater spending on salon and spa services. Steady product innovation and the increased use of eco-friendly, non-toxic products represent additional growth drivers. Traditional salon and spa establishments have steadily broadened their product and service offerings to include facial products and services, Botox, hair and eyelash extensions, teeth whitening, and integrative health services like acupuncture. chiropractic and homeopathy. Growing Demand for Personalized Wellness Experiences has been Driving Industry Fragmentation We believe consumers are increasingly seeking more personalized and effective wellness experiences and are opting for smaller businesses that are more conveniently located and cater to individual needs and preferences. As a result, the number of small wellness businesses has proliferated over the past decade, while all- inclusive facilities such as large health clubs now comprise only a small percentage of the wellness services industry's aggregate revenue. For example, according to industry research firm IBIS World, the top five national chains in the gym, health and fitness clubs industry comprised an estimated 15.7% of total health and fitness club revenue in 2014, with no single national chain holding more than a 5% market share. Meanwhile, the market share of smaller businesses has been growing rapidly. This trend can be seen in the popularity of practices such as yoga, Pilates, personal training, group exercise, indoor cycling, barre, Zumba and CrossFit. A large number of these smaller businesses either employ only one person or are single practitioner establishments, such as personal trainers and other mobile practitioners. According to IBISWorld, in the United States, 36% of health and fitness businesses were operated by single practitioners in 2014. Escalating Healthcare Costs are Driving Employers Worldwide to Develop Corporate Wellness Programs that Incentivize the Use of Wellness Services • Healthcare costs are increasing significantly and employers around the world are increasingly turning to corporate wellness programs as a way to reduce these costs. According to an article published in the Journal of the American Medical Association, 68% of American adults are either overweight or obese. According to healthcare research foundation The Commonwealth Fund, from 2003 to 2013, the annual cost U.S. employers paid for family coverage rose 73% to an average of $16,029. A 2010 study published in the Journal of Occupational and Environmental Medicine estimates that the cost of obesity among full-time employees reaches $73.1 billion each year. To reduce rising healthcare expenses and excessive absenteeism as well as to improve their employees' productivity, more and more organizations are implementing 95 EFTA00594829 corporate wellness and other incentive programs to encourage healthy behavior. Organizations can also receive a discount on insurance if they implement health and wellness programs. The Patient Protection and Affordable Care Act, or PPACA, also supports these initiatives with numerous provisions intended to leverage workplace health promotion and prevention as a means to reduce the burden of chronic illness and to limit the growth of health care costs. A 2012 study by RAND Health found that participation in a wellness program is associated with lower health care costs. As a result, over the last five years, employers have increased their investments in employee health and are becoming more willing to incentivize health improvements. In a Fidelity Investments Benefits Consulting Survey about employers' investments in employee health, 74% of the 151 respondents across various industries reported that they will offer incentives for health improvement programs to employees in 2014 versus only 57% in 2009. The survey found that median incentive offered to employees increased to $500 per annum in 2014, up from $338 in 2010. According to IBIS World, employers are expected to spend over $11 billion on corporate wellness by 2019. • Despite the wide availability of corporate welhwss programs, the actual participation of employees in such programs remains limited. According to the Business Journal, Gallup reported that although more than 85% of large employers offer wellness programs, only 24% of employees at these companies actually participate in the programs. We believe that there are two principal reasons for this dynamic. First, most employers and their employees are lacking the right tools to incentivize participation in wellness programs. Rand Health found that making wellness activities convenient and accessible for all employees is a key success factor for corporate wellness programs. Second, many corporate wellness programs fail to provide access to offerings that would suit diverse preferences and instead offer one-dimensional incentives like gym membership subsidies, which may not appeal to the entire employee base. Consumers Need a Single, Mobile Enabled Interface for their Wellness Services Needs Changes in technology have led to an evolution in consumer expectations. Over the last decade, advances in information technology have dramatically changed the way consumers interact with businesses. Consumers have more choices, are better informed and are more connected than ever before. Due to the proliferation of the mobile Internet, consumers have become accustomed to using their mobile phones to gain instant and convenient access to information about local businesses and the services they offer. Consumers increasingly take advantage of user reviews and recommendations and share information on social media sites. When it comes to online payments, consumers expect to have a complete set of payment options and a seamless process. However, consumers often find it complicated and time consuming to find and book wellness services due to the fragmented nature of the wellness services industry. Browsing through wellness businesses on search engines or physically comparing prices and quality of service as well as booking classes and appointments in person or over the phone can be frustrating. Consumers increasingly expect to be able to identify, research and schedule the desired wellness services using their mobile devices in a manner that allows them to view class schedules, practitioner details and consumer reviews, make bookings conveniently outside business hours through web or mobile interfaces and pay for these services seamlessly online. In addition, consumers are increasingly leveraging technology to track their overall wellness. Over the last few years, there has been a proliferation of wearable devices that track users' physical activity, heart rate, sleep quality and other health indicators throughout the day. According to IDC, the market for wrist-worn wearable devices is expected to grow rapidly, with units shipped growing by a 77% CAGR from 2013 to 2018. We believe that over the next few years a significant number of U.S. consumers will begin to wear devices to track diet, exercise, heart rate and other vital signs. Fuelled by advancements in fitness tracking technology, mobile apps within the health and fitness category grew faster than the overall market in 2014. The rise of consumer interest in improving wellness and tracking progress through wearable devices and mobile applications supports the need for a broad wellness services platform that can help consumers achieve their goals. 96 EFTA00594830 Wellness Businesses Need an Integrated Software and Payments Platform that is Designed to Meet their Industry-Specific Needs Wellness businesses have to manage online bookings, staff scheduling and payroll, and resource allocation. They also need to promote their wellness services, attract new consumers and nurture consumer relationships. In addition, business owners need to keep track of key business performance indicators and take action to increase revenue and improve profitability. Many wellness businesses use basic tools like paper forms or Excel spreadsheets to perform some of these functions, which can be time consuming and distracting. We have observed that the inability of business owners to focus on their core business often leads to lost revenue and lower consumer retention. Some of the specific challenges facing wellness businesses include: • Consumer Scheduling. Many wellness businesses struggle with the complexity of scheduling appointments. enrolling participants in classes and managing cancellations and wait lists. • Staff Management. Managing staff, scheduling resources and tracking practitioner schedules, pay rates and commissions to accurately make payroll decisions is often challenging. • Payments. Wellness businesses often have to use different software, point of sale and payment processing solutions that do not integrate with each other, which requires time-consuming and cumbersome manual reconciliation between services delivered and payment records. • Analytics and Insights. To make critical business decisions, wellness businesses need to be able to track key performance indicators, such as the return rate of first-time consumers, consumer lifetime value, class popularity and staff performance. Demand Generation. Small and medium-sized wellness businesses need effective but inexpensive marketing tools to promote their services in an increasingly competitive environment. Consumer Engagement and Retention. For wellness businesses, keeping consumers coming back on a regular basis is essential for success. However, consumer relationship management is often time consuming and challenging. Ability to Expand Business on Same Software Platform. Whether hiring more practitioners or opening new facilities, wellness businesses seek a business management solution that can support their growth with minimal time and financial investment. Wellness businesses need an easy-to-use and integrated cloud-based software and payments solution that is specifically designed for their needs, is cost effective and can be accessed anytime from anywhere and on any device. Existing Of Do Not Address the Needs of Wellness Businesses and Consumers Many wellness businesses still use basic tools like pen and paper and Excel spreadsheets to manage their operations. Legacy on-premise software vendors and emerging cloud software providers have developed tools that attempt to address the need for efficient business management. but these tools often lack the depth of functionality and industry expertise required to meet the unique needs of the wellness services industry. In addition, none of these tools feature a large consumer network that can help wellness businesses drive demand. At the same time, the process of discovering and booking wellness services for consumers is often time consuming and frustrating because consumers lack a single interface that can address their wellness service needs. Basic Management Tools: Pen, Paper and Excel Spreadsheets. Many wellness businesses today still use paper books and loose sign-in sheets to schedule appointments and classes along with Excel spreadsheets to track client data. The functionality of these legacy tools is limited — scheduling appointments and classes is manual, time consuming and static because the data cannot be easily updated and shared. Apart from scheduling, pen, paper and spreadsheets cannot effectively address any of the other business management tasks that modem wellness businesses require — such as staff management, client relationship management, marketing, analytics and payments integration. 97 EFTA00594831 • Legacy On-Premise Software Offerings. We believe that legacy on-premise software offerings do not adequately address the specific needs of wellness businesses because they are: • Difficult and expensive to deploy and use. Wellness businesses are often small or medium sized, have a limited number of practitioners and do not have an IT department in charge of managing complex software. The process to implement disparate on-premise software applications requires significant resources, including costs associated with training and performance maintenance. • Static and inflexible. The introduction of new features in on-premise software offerings is often cumbersome and inflexible, and such software does not easily scale with the dynamic growth and constantly evolving nature of these wellness businesses. In addition, legacy on-premise software offerings are also rarely adaptable or customizable to a variety of specific use cases, such as not being well suited for both fitness studios and salons. • Limited online booking and demand generation capabilities. It is difficult to integrate consumer online booking or synchronize multiple locations with an on-premise software offering. On-premise software offerings also tend to lack demand generation or marketing capabilities, which small wellness businesses need in order to succeed. • Not suited for mobile-only businesses. A large number of wellness practitioners are mobile practitioners who need a mobile-only, easy-to-use business management solution that legacy on- premise offerings do not provide. Emerging Cloud-Based Software Offerings. There are a number of cloud-based offerings on the market today that address some of the pain points associated with legacy on-premise software. However, we believe that none of the existing offerings sufficiently address the needs of wellness businesses. • Lack of industry expertise and feature depth. There are a number of cloud-based appointment scheduling software offerings on the market today. However, few of them cater to the specific needs of wellness businesses, which include the ability to track different pay rates, commissions, and appointment length for each individual staff member to calculate payroll correctly. Another challenge is the tracking of pay and inventory used when staff members perform multiple services for different clients simultaneously, such as cutting and coloring hair. • Lack of large scale access to consumers looking to address their wellness service needs. Emerging cloud-based offerings do not offer wellness businesses access to consumers at scale and typically do not provide consumers with access to a variety of wellness services. Therefore, they are not positioned to be the go-to place for consumers to address their wellness service needs. • Lack of integration between demand generation, workflow management and point of sale. Some providers connect consumers and businesses through a local review platform. However, online booking and payments options are limited, while workflow management is non-existent. Some payments processing vendors have begun to offer basic online scheduling features, but the depth of these features is not sufficient for the complex operations of wellness businesses. Other software offerings provide business management tools but lack a proprietary payments processing solution, which makes manual and cumbersome reconciliations necessary. • Lack of social media integration and mobile applications. To attract consumers, wellness businesses are increasingly interested in using social networks to promote their services. However, many business management software offerings on the market today do not integrate with social media. For example, most wellness businesses are not able to connect their class schedules with their Facebook pages. In addition, while there are a large number of mobile practitioners who are looking for ways to manage their wellness business on the go, existing cloud-based solutions lack effective mobile applications. Limitations of Consumer Facing Applications. Despite the increasing interest in wellness and the proliferation of wellness tracking devices and applications, consumers lack a single interface to connect 98 EFTA00594832 them to local wellness services. Most consumers find wellness services through outdoor advertising, word- of-mouth or online search. Online search is often time consuming and frustrating since consumers have to click through different websites, evaluate services, prices and locations as well as call the front desk to schedule appointments or enroll in classes. In some cases, consumers use local business review platforms to help them evaluate and choose between wellness service providers. However, these platforms typically lack online booking and payment functionality. In addition, consumer reviews may lack credibility because users are able to post reviews without actually having consumed the service. The MINDBODY Solution Our integrated cloud-based business management software and payments platform is specifically designed to address the unique requirements of the wellness services industry. We help our subscribers simplify their operations. focus on their consumers and grow their revenue by enabling them to attract and retain consumers. We have a deep understanding of the specific workflows that are required to operate various categories of wellness businesses. In addition, we help consumers find, evaluate, book and pay for the wellness services they need. Our Connect platform provides consumers with real-time class schedules, service descriptions, practitioner biographies and consumer reviews, thereby empowering them to make chokes on an informed and efficient basis. Our Connect Workplace offering extends ow platform to corporate employers. We help employees live healthier, happier and more productive lives, while enabling employers to reap greater staff productivity, lower attrition and reduced healthcare costs. In addition, we have developed a rich partner ecosystem with more than 600 developers and partners leveraging our platform to build unique and customized apps and services. Integrated Software and Payments Platform Designed Specifically for the Needs of Local Wellness Businesses. We have developed a cloud-based software and payments platform with powerful functionality that addresses key aspects of operating a wellness business, including: • Client Scheduling and Online Booking. We believe we offer subscribers the most complete online client scheduling capability available on the market today. Our subscribers can give their consumers the opportunity to book their next visit wherever and whenever it is most convenient for them, whether through the subscribers' websites, which are powered by MINDBODY, or through Connect. We are the only platform provider that enables all four different types of scheduling that wellness businesses typically encounter: • Appointments. One-on-one appointments typically require preparation time before the appointment as well as finish-off time after the appointment. Our software can manage practitioner availability as well as gaps between appointments in a time-efficient manner. • Open classes. Open classes offer reserved or drop-in attendance on a first-come, first-serve basis. Ow software can record different price points, send automatic check-in and cancellation confirmations, and manage waitlists. • Enrollments and workshops. Enrollments and workshops are pre-registered events or series of classes with the same group of attendees. Our software offers the ability to set separate pricing outside of pre- paid packages and track absences, make-ups and various payment plans. • Resource scheduling. To effectively manage their day-to-day business, wellness service providers need to manage and allocate their equipment and facilities. Our software can easily track, manage and allocate equipment and facilities for the classes and services these businesses provide. • Staff Management. With our staff and resource scheduling software features, staff management is easy and organized. Subscribers keep the whole schedule in one place, allowing them to manage staff availability, hours, substitutions, commissions and other compensation, all of which is easily linked to payroll records. The tracking features for hours worked and automatic payroll calculation facilitate efficient and accurate resource planning for ow subscribers. 99 EFTA00594833 • Client Relationship Management. With our client relationship management features, subscribers have all their consumer information in one place and can take advantage of powerful consumer relationship and marketing tools. Subscribers can securely store their consumers' personal information in a unique profile and keep track of account, visit and purchase history for more effective service. Our platform also helps subscribers target new consumers nearby, keep in touch with loyal members, and offer promotions and discounts to a targeted audience. • Integrated Software and Payments. We offer our subscribers payment processing solutions at competitive rates. The seamless integration between point of sale and payment processing saves our subscribers time by eliminating the need for error-prone manual reconciliations. In addition, our integrated payments platform allows for convenient and secure storage of consumer credit card information, which allows for seamless online bookings, recurring membership payments through our business management software and online store purchases through Connect. • Retail Point of Sale. Our point-of-sale capabilities help subscribers sell products and services, contracts and memberships, packages, workshops and store-branded gift cards. Our point-of-sale feature tracks product inventory levels and automatically issues purchase orders when product levels reach a re-order point. In addition, our point-of-sale capabilities can be used to track the cost of goods sold and gross margin for various products. • Analytics and Reporting. We track key information that subscribers need to know in order to achieve their business goals, including revenue growth, contribution margin of classes, consumer retention rates, referral sources, return on investment for consumer retention campaigns and practitioner performance based on consumer loyalty and reviews by class or type of service. Our platform also generates reports that help our subscribers allocate their resources, budget effectively and measure their success. By leveraging our analytics capabilities, subscribers are empowered to make smarter decisions. Simple and Intuitive User Experience. We designed our business management software with a focus on developing a visually appealing interface that is simple, easy to use and meets the demands our subscribers have for modern web and mobile applications. Because we focus on a simple and intuitive user experience, our software platform requires little training and is easy to adopt for users across the entire organization, an important feature given the high employee turnover in the wellness services industry. At the same time, the intuitive interface of our platform is supported by complex underlying technology that powers efficient business management. • Mobility. Our platform enables our subscribers to manage their operations anytime and anywhere via a number of mobile devices and operating systems, including Mac, iOS, Android and Windows. • Dynamic Cloud-Based Architecture. Our software platform is powered by a dynamic cloud-based architecture that allows our subscribers to manage their operations as efficiently as possible, while requiring low upfront investment and no maintenance. This architecture allows for automatic software updates and rapid launch of new product features while also allowing our platform to easily scale with subscribers as their businesses grow. • Security and Compliance. Data security is one of our top priorities. We consistently pass our Level I Payment Card Industry Data Security Standard, or PCI DSS, audits, indicating our compliance with the most rigorous level of credit card security standard available. In addition, we in certain instances collect, access, use, maintain and/or transmit protected health information in connection with providing services to subscribers who are subject to the requirements of the Health Insurance Portability and Accountability Act, or HIPAA. Our platform is engineered to provide high reliability and availability. Our uptime service-level agreement (SLA) is 99.90%. We continually monitor our infrastructure for any sign of failure or pending failure and we take preemptive action to minimize or prevent downtime. We maintain the reliability of our service by utilizing redundant network infrastructure, clusters that tolerate failure of individual nodes, and deploying high availability server pairs. We also implement various disaster recovery measures, including full replication of hardware and data in our geographically distinct data centers, to minimize data loss in the event of a data center disaster. 100 EFTA00594834 Social Integration. Our platform integrates with popular social networks like Facebook and Twitter, allowing our subscribers to publish schedules on their Facebook page and enabling consumers to directly schedule appointments and classes via Facebook. MINDBODY Connect A key component of our platform is Connect, our consumer-facing offering. With Connect. consumers have a unified account to manage all aspects of their wellness activities with a single log in. They can discover local wellness services using a gealocated map function, view class and appointment descriptions, schedules and real-time availability, read practitioner biographies and user reviews written by consumers who have actually received the service, and then book and pay for their desired services in a few taps from their mobile devices. Through Connect. consumers can also receive appointment reminders and check in to classes before they arrive, receive real-time updates regarding changes in class schedules and access their account profile to review their class visit and payment history. MINDBODY Connect Workplace Our Connect Workplace offering is designed to allow corporate wellness subscribers to encourage healthy habits for their employees and measure the results. Subscribers to Connect Workplace use our platform to manage on-site wellness services. incentivize employees to take advantage of the local wellness businesses in our network, and analyze aggregate employee attendance data. Employers can offer their employees a subsidy — either by providing a MINDBODY debit card or an electronic direct debit option — to incentivize them to use wellness services. Employers can also use the Connect Workplace Corporate Dashboard to manage employee accounts, make changes to payment schedules and amounts, track employee participation to measure engagement either by individual or in the aggregate. and gain insight into employee preferences. frequency of use and reviews of local wellness businesses. Employees can search. evaluate, book and pay for services at any "green dot" business available on Connect. Green dot businesses are subscribers identified as being part of the employer's wellness network and accept an employer-funded subsidy. While the number of corporate wellness subscribers has been immaterial to date, we believe that as more corporate wellness subscribers adopt Connect Workplace. their employees will begin using our platform. which will lead to increased demand from local wellness businesses to be listed on Connect. Rich Partner Ecosystem Open Platform for Third-Party Application Development. We have built an open and extensible platform with an API that offers developers access to our inventory, of classes, payments and scheduling capabilities. Approved developers can pull information from and post data to our platform and use that capability to create a variety of unique applications with custom interfaces. For example. some of our partners have leveraged our platform to create business models that enable wellness businesses to monetize their excess capacity. Integration With Other Cloud-based Partners. Our platform can be integrated with other cloud-based software that our subscribers may be using for critical business management tasks to extend the capabilities of our platform within a variety of focus areas such as automation, marketing, mobile and social. Key Benefits to Marketplace Constituents Benefits to Subscribers and Practitioners Simplify Operations. Our business management software and payments platform allows subscribers and practitioners to significantly streamline and simplify their operations. MINDBODY automates a large number of time-consuming workflows, thus dramatically reducing the administrative effort and time subscribers and their employees have to invest into business operations. The associated time savings enable greater staff productivity and more efficient allocation of resources, which can result in significant cost savings. Our subscription-based software is cost effective. We offer different pricing plans that are intended to accommodate the needs of ow subscribers as they grow and provide full price transparency relative to legacy vendors by eliminating hidden fees for installation, training, ongoing maintenance or software updates. 101 EFTA00594835 Focus on Clients. By simplifying the operations of wellness businesses, we enable subscribers and practitioners to focus on what they love to do — helping their clients achieve their goals, whether it is to lose weight, learn yoga or dance or reduce pain through acupuncture or chiropractic services. We give subscribers the freedom to focus on their consumers — and by serving their consumers better, subscribers can dramatically increase consumer satisfaction and loyalty. In addition, our powerful analytical tools provide critical insights that help subscribers focus on optimizing their business and achieving their goals. • Grow Client Base and Revenue. We help our subscribers increase their consumer base by taking advantage of a free listing on Connect, which makes them visible to a larger pool of local consumers. Moreover, by having the ability to send reminders, promotions and special offers to consumers based on a record of their past interactions, subscribers can significantly increase their consumer engagement and loyalty. We help subscribers sell their products and services through a variety of channels — an online store, their website or Connect, thus helping them to increase their revenue. Finally, as our subscribers' businesses grow, MINDBODY scales with them by providing subscribers an opportunity to upgrade their subscription to access advanced features and functionality that are well suited to their growing business needs. Benefits to Consumers Convenient Single Interface that Addresses Welhress Services Needs for Consumers. We offer consumers a single platform to easily discover, evaluate and book wellness services for the entire family. Our subscribers include a large variety of wellness businesses such as fitness studios, yoga, Pilates, massage, salons, spas and more, to which we provide convenient "one-stop-shop" access through a single searchable interface. By being able to easily find and compare local wellness services, consumers feel informed and empowered to choose the services that suit them best. In addition, reviews on our platform can only be written by consumers who have actually participated in a class or used a service. As a result, consumers are able to access credible reviews that provide a basis for informed decisions. Time Savings and Excellent Consumer Experience Lead to Higher Engagement and Achievement of Wellness Goals. We believe that our platform for seamlessly managing class or appointment bookings, cancellations, reminders and payments for wellness services from mobile devices saves consumers time that would otherwise be required to perform online searches, browse through numerous websites and make phone calls to schedule or manage their desired wellness services. Our ability to allow consumers to more easily manage their wellness routine and consume more wellness services on a regular basis, increases their engagement and brings them closer to their goal of living a healthy lifestyle. Central Database for Wellness Activities Facilitates Fitness Graph Tracking. New technologies, including wearable fitness trackers provided by third parties and mobile apps within the health and fitness categories, are enabling consumers to track various aspects of their health and fitness. As part of this trend, Connect offers consumers a powerful way to track their fitness graph. On Connect, consumers can access their wellness activity history, such as class attendance frequency. class duration and more, thus providing valuable intelligence that empowers them to adjust their activities to meet their individual goals. Benefits to Employers • Empower Employees and Offer Chokes. Connect Workplace enables employees to access a wide variety of wellness services that can be subsidized by their employers. Employees are not limited to on-site services or receiving a subsidy at a local gym that has little appeal. With the wide variety of wellness businesses on our platform, employees have the freedom to select from a broad range of wellness services to fulfill their health and fitness objectives. • Analyze Engagement and Effectiveness. The Connect Workplace Corporate Dashboard enables employers to gain insights into employee engagement and aggregate usage of corporate incentives for further analysis. We believe ow Connect Workplace offering helps employees live healthier, happier and more productive lives, while enabling employers to reap greater staff productivity, lower attrition and reduced healthcare costs. 102 EFTA00594836 Market Opportunity According to IBISWorld, in 2014, the total revenue of gyms, health and fitness clubs in the United States was expected to reach $26.5 billion, and the U.S. salon market, consisting of haircutting services, hair coloring services, nail care services, skin care services and other services, was expected to reach $50.2 billion. The global markets for these services are significantly larger. In addition, the U.S. corporate wellness services market was expected to reach $7.4 billion in 2014, according to IBISWorld. According to a report that we commissioned from Frost and Sullivan, our addressable market is approximately 4.2 million wellness businesses worldwide. Based on their analysis, Frost and Sullivan estimates that the market for business management software solutions targeted at wellness businesses will grow to $9.5 billion in 2015 and expects this market to grow to $15.3 billion in 2018, which implies a 17.1% CAGR. In addition, we believe there are a significant number of individual practitioners worldwide who are not included in the 4.2 million addressable market estimate and can benefit from our business management software and payments platform. With over 42.000 local business subscribers, we estimate our current market penetration to be less than 1%. While we expect competition in the industry to increase and evolve over time, given our market leadership, we believe that we are well positioned to compete for and capture a significant portion of global software and payments spending in the wellness services industry. Our Competitive Strengths The Leading Online Wellness Services Marketplace. We are the leading online wellness services marketplace with over 42,000 local business subscribers on our platform in 124 countries and territories employing over 250,000 practitioners who provide a variety of wellness services to over 24 million active consumers. Due to our unmatched global wellness network, Connect has become the go-to destination for consumers to manage their wellness services activities. We are also a leading payments platform dedicated to the wellness services industry. In the 12 months ended March 31, 2015, $6.3 billion in transactions occurred between consumers and subscribers within our marketplace, of which $4.3 billion flowed through our payments platform. Industry-Specific Expertise. We focus exclusively on the wellness services industry. Our team of experts understands the detailed workflows and needs of each type of business within the wellness services industry, and has designed our integrated cloud-based business management software and payments platform specifically to address the unique requirements of these businesses. In addition, we host MINDBODY University events, client conferences and webinars to help business owners navigate challenges and opportunities specific to their wellness category, optimize their business operations and maximize their profitability. Broad based solutions that do not focus on a particular industry lack the depth of understanding and functionality necessary to be able to meet the unique demands of wellness businesses. Powerful Network Effects. As more local wellness businesses use our platform, more subscriber listings appear on Connect. A larger critical mass of local wellness services on Connect attracts more consumers, which in turn attracts more local wellness businesses that want to engage with these consumers, thereby creating powerful network effects that benefit the entire ecosystem. Similarly, as more corporate wellness subscribers adopt Connect Workplace, their employees begin using our platform, which leads to increased demand from local wellness businesses to be listed on Connect. As more local wellness businesses appear on Connect, more employees use our platform to redeem their corporate incentives, which in turn leads to more corporate wellness subscribers being attracted to our platform. Finally, as we add more subscribers, consumers and employees to our wellness ecosystem, we attract more technology developers and partners who can use our API to develop additional applications that extend the capabilities of our open platform. 103 EFTA00594837 42,000 Businesses Worldwide us S MINDBODY Wellness Services Marketplace 24 million Active Consumers Worldwide Integrated Cloud-Based Business Management Software and Payments Platform. The seamless integration between our business management software and payments platform provides a convenient one-stop solution for our subscribers. Subscribers save time and resources by avoiding the use of a separate payments platform and the associated burdensome manual reconciliations of transactions that result from a lack of automation. We believe that this integrated software and payments capability leads to higher subscriber engagement with our platform and a larger recurring revenue stream for us. Our payments platform enables swiped transactions at the front desk between consumers and subscribers, transactions with securely stored credit card data and ecommerce transactions through web and mobile interfaces. This integrated capability vastly simplifies back office administration and accounting, while enabling our subscribers to boost their revenue. Ability to Scale with Our Subscribers' Businesses. Our feature-rich software scales from individual practitioners to large, international organizations that have hundreds of locations. It is possible for an independent mobile practitioner starting her small business to begin with our entry level software, upgrade to our more robust offerings as she opens her first brick-and-mortar location, then add locations and ultimately create a substantial chain on our platform. This type of inspirational story has happened many times. Critical Position in the We//Hess Ecosystem. Over 42,000 wellness businesses use our platform to manage their business operations. attract and engage consumers, boost their revenue and focus on what they love to do. At the same time, we have enabled a rich partner ecosystem of over 600 developers and partners who extend the value of our platform in powerful ways. Many of our partners have also built successful businesses, or have significantly expanded their existing businesses, to cater to ow subscribers and consumers via our platform. For example, some partners have developed business models that depend on ow real-time inventory of classes and appointments to enable health and fitness businesses to monetize their excess capacity, while providing consumers with greater access to a variety of classes. We believe the time, effort and dollars spent by these businesses to integrate with ow platform point to the critical position that MINDBODY has established in the ecosystem. Proprietary Data and Analytics. Our software and payments platform collects and presents critical information that enables subscribers to fine tune their business operations. With our software, subscribers can analyze their consumer data, including demographics, type and frequency of activities and spending habits. In addition, we help subscribers assess the performance of their staff. For example, a subscriber can run client 104 EFTA00594838 retention statistics to determine the effectiveness of a specific practitioner based upon location or types of services delivered. We also have unique insights into anonymized macro level data that indicate global preferences and trends in the wellness services industry by geography, which informs our business decisions. In addition, we collect and display consumer reviews to both subscribers and consumers. This enables consumers to make more informed buying decisions and helps our subscribers improve their businesses. Since only consumers who have purchased and attended a class or appointment can write a review, consumers rely on us for authentic and informative consumer review data. Due to our market leadership position, we have access to more proprietary data than our competitors in the wellness services industry, which helps us improve our platform and offer us the ability to provide unique insights and analytical capabilities. Exceptional Company Culture that Drives Performance. The MINDBODY team shares an exceptional company culture that incorporates our core values of being purpose driven, humble and helpful, caring and happy, committed to wellness, environmentally conscious, continuously evolving and committed to "Five C" leadership. We believe that each team member may practice leadership, daily, regardless of position or title, and we promote people who best demonstrate: • Competence — they make the effort to be true experts in what they do. • Character — they do the right thing, even when it is not convenient. • Compassion — they care as much about others as they do about themselves. • Catalyst — they remove obstacles and make things happen. • Courage — they stand up for what they believe in and take responsibility for their team. Our employees thrive in a nurturing environment that is driven by innovation, passion for health and wellness and dedication towards excellent subscriber experience. According to a report from Mashable based on data from Glassdoor in December 2014, MINDBODY has been named one of the "Top 10 Best Tech Companies To Work For in 2015." In addition, Outside Magazine has named MINDBODY one of America's best places to work for two years in a row. We believe our culture gives us a competitive advantage in recruiting and retaining talent, driving innovation, enhancing productivity and improving customer experience. Growth Strategy Given the increasing demand for wellness services among consumers today and a largely untapped market, we believe our opportunity is significant and growing. Key elements of our growth strategy include: Continuing to Expand Our Subscriber Base, both Domestically and Internationally. We believe the global market for a cloud•based business management and payments platform within the wellness services industry is large and underserved. We will continue to make investments in our business to acquire more subscribers and expand our reach, both domestically and internationally. Deepening Relationships with Existing Subscribers. We intend to deepen our relationships with existing subscribers by offering additional value-added functionality and upselling subscription plans that mirror the growth stage of their businesses. Moreover, we plan to convert more of our existing subscribers to our integrated payments capability and increase the percentage of their revenue that flows through our platform. Growing Consumer Adoption of MINDBODY Connect. Connect has a critical position in our wellness ecosystem, yielding powerful network effects with increasing adoption among consumers. We are focused on attracting more consumers to our platform through word of mouth, referral marketing programs, social media and embedded community building features in Connect. Continuing to Innovate and Broaden Our Platform. We will continue to make significant investments in research and development to strengthen our technology platform, and develop additional functionality to better serve the needs of subscribers and consumers, while striving to provide the best user experience possible. 105 EFTA00594839 Further Developing Our Partnerships and Wellness Ecosystem. Through our numerous partners and developers who build third•party applications on our platform, we have built a flourishing ecosystem that creates value for subscribers and partners. We plan to continue to expand and further monetize our ecosystem by further developing existing strategic relationships and building new ones. Increasing Our Presence in Corporate Wellness. We believe our Connect Workplace offering is well positioned to boost the success of corporate wellness programs worldwide. We plan to increase our subscriber footprint in corporate wellness and leverage these corporate relationships to further drive subscriber growth and Connect consumer engagement. Making Strategic Investments and Select Acquisitions. We will continue to enhance our technology, accelerate our network effect and expand our leadership position by pursuing acquisitions of complementary businesses, technologies and teams. Expanding Our International Reach via Partnerships and Investments in Our Salesforce. We are focused on growing our international offices and establishing partnerships that extend our reach and facilitate our entrance into new markets, in particular in Europe, Latin America and selected countries in Asia Pacific. 106 EFTA00594840 FOR CONSUMERS FOR EMPLOYERS The MINDBODY Software and Payments Platform Our platform is designed to cater to the needs of subscribers, consumers, employers and partners. FOR SUBSCRIBERS e anon* tit E • • MINDBODYconnect ; Liston walverking Perkville etiveEdit Cassaitaintoctnifi '". 17 1•7-• FOR PARTNERS C) MINDBODY Opt' API $2.016 -••••• SSW 4 — yew connect workplace' CLASS fltmob* totalV/OD -1'5'2<ftrociPr fitn Software and Payments Platform for Subscribers Our integrated clouchbased business management software and payments platform for the wellness services industry helps our subscribers simplify the way they run their businesses, attract and engage more consumers, boost their revenues, and focus more on what they love to do — improve people's lives. Until the end of 2014, our software subscription pricing was based on the number of professionals employed by our subscribers. However, because each of our subscribers is unique and at a different stage of their respective professional journey, in January 2015. we 107 EFTA00594841 introduced a new tiered pricing model based upon four software functionality levels—Solo, Grow, Pro and Accelerate. Each of these levels has been carefully crafted to give just the functionality needed for subscribers to optimize their business at their respective stage in the journey. For the three months ended March 31, 2015, revenue from our new tiered pricing model did not constitute a material portion of our total revenue. Solo Simple, mobile-first solution for independent practitioners Key Features: Full listing in Connect Express app + web software Single practitioner scheduling • Ability to sell services, products and gift cards • Consumer profiles • Google Calendar integration Grow Entry level solution for brick and mortar businesses Key Features: All Solo features, plus • Unlimited practitioner profiles and payroll • Appointment and class scheduling • Track pay. tips and commissions Pro Robust solution for multi-service businesses with substantial retail presence Key Features: All Grow features, plus • Full staff management • Four mode scheduling • Full consumer CRM • Promotions and loyalty rewards tracking • Advanced analytics Accelerate Automated marketing platform for businesses looking to accelerate their growth Key Features: All Pro features, plus • Advanced marketing dashboard • Automated consumer retention and win- back campaigns • 2-way SMS confirmations • Marketing analytics • Custom API access With MINDBODY Integrated Payments, all Software Levels gain: • Integrated point of sale credit and debit card acceptance from smartphone, iPad and PC • Consumer booking and e-commerce payments from the Conned mobile interface • Secured stored credit/debit cards and ACH for automated recurring billing • Automatic nightly settlement with audit trail to sales records Scheduling • Appointments. Refers to one-on-one appointments that typically require preparation time before the appointment as well as finish-off time after the appointment. Requires software features that can manage practitioner availability as well as gaps between appointments in a time-efficient manner. • Open Classes. Refers to recurring classes that offer reserved or drop-in attendance on a first-come, first-serve basis. Requires software features that can record different price points, send automatic check-in and cancellation confirmations and manage waitlists. • Enrollments and Workshops. Refers to pre-registered events or a series of classes with the same group of attendees. Requires software that offers the ability to set separate pricing outside of pre-paid packages and track absences, make-ups and various payment plans. • Resource Scheduling. With our business management software, subscribers can easily manage room and equipment allocations for the classes and services they provide. Staff Management Subscribers can assign tasks, follow up and send notifications via the staff dashboard. By giving each staff member a unique login, subscribers can allow staff members to update their own availability on the 108 EFTA00594842 schedule. Moreover, subscribers can have staff clock in and out through MINDBODY so their work hours and gross wages can be tracked automatically as well as their compensation for classes and appointments delivered and sales commissions. Subscribers and their managers can run analytics to assess individual productivity and make informed decisions. Subscribers have the ability to set pay rates per class, per appointment, per hour, or by percentage of consumer payment for each individual staff member, as well as track and add tips a staff member receives into the payroll report. Additionally, subscribers can offer commissions to their staff for retail sales or promotions. Payroll is calculated automatically and exported to any of several popular payroll service formats, including ADP, Paychex and Exact Payroll Services. Client Relationship Management Subscribers can maintain a comprehensive client profile, including contact information, photos. birthdays, preferences, purchase and visit histories, payment information and future schedules. Subscribers can also track the sales cycle and conversion of prospective clients. Clients have the ability to create accounts and log in directly, allowing them to browse products and services and make purchases from mobile devices and the web. Point of Sale Subscribers can sell products and services as well as memberships, monthly contracts and packages that combine products and services at their place of business and online. Subscribers can securely store consumer billing information to facilitate quicker transactions. Payments for classes or appointments can be applied before or after consumer check-in, and before or after the session is complete. Our point of sale functionality allows the easy assignment of staff commissions, whether to the staff member providing the service or to a different staff member who completes the sale. Our payments platform provides instant authorization and nightly settlement of credit card, debit card and ACH transactions. Once a sale is complete, staff can void, edit or return the sale, and all of these changes are recorded in an auditable fashion. All consumer payment information is protected behind PCI Level I Data Security Standards, the most rigorous credit card certification standard available. Subscribers have the ability to set inventory re-order points, automatically generate purchase orders and easily log arriving inventory. As a result, subscribers always know how much inventory is on hand and inbound and can easily calculate gross margin and inventory shrinkage. Subscribers have the ability to accept any type of cash or non-cash equivalent payment method, including ACH, debit and credit cards. They can also set up payment plans and schedule recurring payments automatically from securely stored credit cards on file. Marketing Capabilities Subscribers can pull email addresses en masse, or pull targeted segments according to the demographics that matter to the individual business. They also have the option to sync to a Constant Contact account with MINDBODY, and create email lists that update automatically whenever client contact information changes in their site. To reward consumers, subscribers can build a point-based client loyalty program. and set point values and minimum redemption requirements. Similarly, subscribers can set up promotions to attract new consumers and give current ones an incentive to try something new. Subscribers have the ability to sell products through an online store and ship them to consumers, or set them aside for consumers to pick up. 109 EFTA00594843 Advanced marketing automation tools enable subscribers to manage automated win hack campaigns and two way SMS and email confirmations. Automation MINDBODY empowers business owners to spend less time at the front desk. Subscribers can send text message alerts and reminders to consumers about upcoming classes, appointments and more. Further automation examples include sending purchase receipts directly to consumers' email addresses, receiving notifications when consumers book an appointment, confirm, cancel, and more, tracking online orders as they come in, and print packing slips automatically as well as printing sign•in sheets for class, or use an iPad or tablet to set up a self check•in station. MINDBODY offers businesses an easy way to manage their memberships. With MINDBODY's automation tools, subscribers can manage membership contracts and waivers, collect membership fees automatically through recurring payments, offer special discounts for products and services as well as create membership tiers to extend rewards and perks to their most loyal consumers. Analytics and Reporting Tools Our platform enables subscribers to identify trends and opportunities for improvement in their businesses using the following analytics and marketing tools: • Last Visit and No Return. Subscribers can pull the list of consumers who haven't come back to the business for a given period of time designated by the business owner. • Best Sellers. Subscribers have the ability to view best-selling products and services, as well as profit margins. • Cancellations and No Shows. Subscribers can check which consumers cancel or do not arrive for a scheduled visit, charge cancellation fees, or suspend consumer scheduling privileges. • Referral Sources. Subscribers can gain valuable insights into their most effective marketing channels for attracting new consumers. • Sales Forecast. Gauge future sales revenue based on current prospects. • Attendance with Revenue. Break down revenue by each client visit, staff person, type of service, and date • Attendance Analysis. Determine busiest hours and the lulls in a day, too. • Gross Margin. See the gross margin for each product. • Promotions. Subscribers can tie every redeemed promotion code back to the client who used it. or analyze the overall success of any promotion effort. • Account Balances. Subscribers can see if consumers currently have a positive or negative balance, and create a statement for consumers with negative balances. • Retention. Subscribers can check client retention rate overall, or by individual staff member. • Memberships and New Members. Subscribers can find out how many consumers are members, which members are active, and how much revenue memberships generate, and how many new memberships have been sold. • Commission. See how much staff is owed for the sales they make. • Transactions. Sort all past transactions by what's settled, pending, voided, and returned. 110 EFTA00594844 Apps & Add-ons • MINDBODY Express. MINDBODY Express is our native business-subscriber facing mobile app that enhances our core offering by allowing our subscribers to easily run their business, book consumers and sell products and services while on the go. • Engage by MINDBODY Connect. Our Engage by MINDBODY Connect offering allows our subscribers to have their own native apps to create a unique branded experience for their consumers. MINDBODY Connect for Consumers Connect is our consumer-facing mobile app with over 1.6 million unique users that lets consumers discover local wellness services, view class descriptions, read instructor bios and reviews, as well as book appointments and make payments right from the app. MINDBODY Connect Workplace for Employers The Connect Workplace platform utilizes MINDBODY software to enable the tracking of on-site corporate wellness programs, such as fitness classes and massage services, as well as Connect and Engage by Connect to promote those classes to their employees. Connect Workplace also utilizes an integrated debit card through which employers fund a monthly wellness stipend for their employees. Finally, Connect Workplace provides a web-based dashboard that summarizes and analyzes the resulting employee wellness activities. MINDBODY API Platform for Partners The MINDBODY API platform includes an extensive set of web services APIs that extend key functionality to credentialed partners. This enables ow partners to access real-time inventory as well as specific subscriber data for the purpose of creating value-added solutions for our subscribers and consumers. Subscriber Services and Support We are passionate about supporting our subscribers from the moment we first engage with them and throughout the lifetime of their subscriptions with us. We have multiple teams within our customer support organization dedicated to maintaining a high level of subscriber satisfaction: welcome team, data conversion and import, direct technical support, self-service and client care. Our operations are structured with the subscriber experience in mind, and we strive to create smooth process for our subscribers. We believe that providing a premium level of support to our subscribers is critical to enhancing ow brand as a superior provider of business management software for the wellness services industry. Subscriber Onboarding. MINDBODY typically boards new subscribers with live training sessions delivered by via telephone and web conference. These trainings are supplemented by self-service setup checklists, online help materials, and webinars. Ongoing Subscriber Support. Inclusive with our base subscription fees, MINDBODY offers 24/7 customer service and support to all subscribers with in-house personnel who are invested in MINDBODY Core Values and closely connect to our Product Development team. We do not outsource our customer service. • Professional Services. Our premium support services enable subscribers to access dedicated, advanced product and business operations support from software and business experts. This service is usually chosen by our higher-end small businesses and multi-location chains or franchises. • MINDBODY University. or MBU. MBU is a multi-day advanced subscriber education event held multiple times per year in various destination locations around the world (i.e., London. New York, San Diego and Sydney). This high-impact business conference teaches advanced software skills and best business practices that help subscribers increase revenues and improve their bottom line. Ill EFTA00594845 Hardware & Merchandise. We offer point of sale hardware, such as cash drawers, receipt printers and bar code scanners, as well as branded key chain tags and gift cards our clients require. We also offer smart phone and tablet credit card swipers, which are rapidly supplanting these legacy point of sale devices. Our Technology We have developed ow proprietary technology platform over the last decade, with a focus on delivering industry-leading breadth and flexibility of functionality. Demands and expectations are ever increasing and through continuous innovation and iteration we strive to delight our users. Our platform is built API first with a service oriented multi-tenant architecture, making it fully extensible to ow business and consumer web and mobile applications, as well as complimentary technology partner integrations. Maintaining the integrity and security of our technology platform is mission critical to our business and our subscribers' success. Reliable. Our platform is engineered to provide high reliability and availability. Our uptime service-level agreement (SLA) is 99.90%. Our infrastructure is hosted in two dual redundant Tier 4 (the highest rating available) data centers separately located in North America. Our network operations center provides 24/7 monitoring of hundreds of sensors on all systems, including global synthetic and real user monitoring to ensure we have complete visibility into our platform and instantly respond to any potential service issue. Secure. Our platform hosts a large quantity of subscriber data and processes a large volume of business to consumer transactions. We therefore maintain a comprehensive security program designed to help safeguard the confidentiality, integrity and availability of our subscribers' data, which includes both organizational and technical control measures. Our platform includes a host of third-party encryption, malware prevention, firewall and intrusion detection, data loss detection and patch management technologies to protect and maintain all systems. We routinely audit and review our security program. In addition, we regularly obtain third-party security audits of our technical operations and procedures covering data security to include the Payment Card Industry Data Security Standard, or PCI-DSS, as well as Statement on Standards for Attestation Engagements No. 16, or SSAE 16. and Service Organizations Controls 2, or SOC 2 Type I Attestation. Scalable. We have developed a robust and scalable platform that processes more than 30 million queries per day. By leveraging best-in-breed technology components, server virtualization, and a service oriented architecture, we believe we can seamlessly scale our compute and storage capacity. Our Subscribers We have a diverse subscriber base with over 42,000 subscribers located in 124 countries and territories across a variety of industries within the wellness services industry. No single subscriber represented more than 2% of our total revenue in 2012, 2013 or 2014. The following table sets forth a list of representative subscribers. organized by industry: Wellness Services Categories Types of Businesses Served Representative Subscribers Health & Fitness • Barre • Personal training Aspen Club & Spa • CrossFit • Pilates Orangetheory Fitness • Health Clubs • Strength conditioning • Physique 57 • Indoor cycling • Yoga • Pure Barre • Martial arts • Zumba • The Bar Method Integrative Health • Acupuncture • Omni Wellness NYC • Ayurveda • Toumesol Wellness • Chiropractic • United Medical Gym • Homeopathy • Nutrition education 112 EFTA00594846 Salon / Spa • • • • • Blow-dry bars Day spas Hair, nail and skincare salons Hair waxing Laser hair removal Cutler Salon in New York and Florida Jonathan & George Salon in Beverly Hills • Massage therapy Lavish Salon & Spa • Medical spas Meche Fine Arts / Instruction • Dance studios • ABC Academy of • Music instruction Music and Dance • Photography • Avalon School of • Tutoring Music • Broadway Dance Center • San Francisco Ballet Association • Street Heat Dance Studio • Tippi Toes Children's Activities • Camps. classes and play time for children • Romp n' Roll Kids Gym • Young Chef's Academy • Zoom Room Corporate Wellness • Corporate wellness programs that subscribers offer • Linkedln (Connect Workplace) subscribers to their employees using Connect Workplace. ProCore Raleigh Orthopaedic Clinic By using our software and payments platform, our subscribers achieve significant cost and time savings, as well as operational efficiencies that allow them to focus more on delivering an exceptional experience to their customers. As a result, our subscribers benefit from an increase in consumer satisfaction, consumer retention, revenue and profitability. Case Studies We believe that the following case studies are representative examples of how our subscribers have benefited from our platform: Cutler Salons Situation: In 2011, Cutler Salons had three locations in New York City and one in Miami. Each location operated as a separate entity, which made remote management of the salons as a group incredibly difficult and time consuming for Cutler's general manager. To run a report on any given salon, book an appointment or view client files, the general manager had to log in to each location's server, pull the desired information, email it to himself and print it out to review. Cutler needed to link all of their locations together under a centralized management system. Solution and benefits: After serving as the flagship beta tester for a competing management system. Cutler's general manager chose to implement our platform across all of their locations. Our platform's multi-location 113 EFTA00594847 functionality and capabilities are able to adapt with the salon as it grows, adding new locations that can all be managed remotely. Previously, to add a new location, the manager had to request that a new client list and management system be created for each salon. Now, adding a location is just a matter of a few clicks in the software, with client lists and management preferences automatically transferred to the new location. In addition, performance metrics for each location can be viewed from anywhere, online or via the Express app, all in real time. Our platform has made the client experience at Cutler more convenient as well. Stylists are able to access client notes from a master database that isn't tied to one location, making it possible for them to work at any Cutler salon. Each stylist's clientele can schedule an appointment with them at whichever location best suits their schedule. Customized email marketing through our platform also helps Cutler cut back on no-shows with automated email reminders, contributing to over 88% of clients showing up for their appointments. Cutler encourages return visits with incentive emails, contributing to a 52% client retention rate in 2014, which we believe is significantly higher than the salon industry average. Cutler has added a fourth location in New York since adopting our platform and did away with the front desk entirely at another, in favor of a fully mobile check in and check out experience. enabled by ow Express app. Orangetheory Fitness Situation: In 2009. Orangetheory Fitness was just one gym looking to expand fast into a global franchise with over 200 locations. The chain's primary service is quite simple: a workout regimen that includes intervals of cardio and weight lifting designed around a participant's monitored heart rate, making the program safe for athletes of all levels. Rapid growth for a chain this big requires software that can scale just as rapidly. accommodating cross•regional needs and providing robust membership management and reporting features. Solution and benefits: Orangetheory Fitness has used our platform since the beginning. Today the chain has over 220 locations in 41 states and 5 countries, all operating on the MINDBODY platform. To manage growth at this scale, the chain utilizes our API to create a customized corporate dashboard with unique reports that track the health of the business's entire network, from sales and franchise royalties to conversion rates and membership terminations. These reports inform key management decisions at the highest level, helping the chain sustain rapid expansion that continues to drive impressive revenue growth, up 204% in 2014 from 2013. Orangetheory also uses our platform to manage its payroll and class and instructor schedules, supporting hundreds of employees worldwide. Once a member, an athlete can visit any Orangetheory location, booking classes online via the chain's main website or the Connect app. In 2014, 55% of all Orangetheory class bookings came from MINDBODY's consumer web and mobile booking capability. In addition, with a majority of members enrolled in automatic monthly memberships via MINDBODY's payments platform, recurring revenue accounted for 87% of the chain's total revenue in 2014. Crowdflower Situation: Crowdflower, a crowd•sourced data mining and enrichment platform, operates out of San Francisco and competes with other high-tech companies in the area for top talent. Prior to implementing Connect Workplace, Crowdflower's benefits package included traditional insurance benefits but little else to demonstrate the company's commitment to employee wellness and work•life balance. Solution and benefits: With Connect Workplace, Crowdflower is able to demonstrate to its current and potential employees its commitment to the well-being of each employee. Each employee receives a monthly wellness subsidy of $50 to spend at any wellness business in the MINDBODY wellness marketplace, redeemable through his or her MINDBODY Card. Employees can use the Connect app to find local businesses that accept their card, and use the app to book and pay for eligible services. Crowdflower has also brought a massage therapist from the MINDBODY wellness marketplace onsite who accepts payments through the MINDBODY card. 114 EFTA00594848 Crowdflower's Human Resources staff can track subsidy usage and identify popular activities and businesses through the Connect Workplace dashboard, providing them with valuable insight into the return on investment of their wellness program. Rather than purchasing monthly memberships to the local gym, Connect Workplace allows Crowdflower to offer its employees choice when it comes to their preferred method for staying healthy—whether that's acupuncture, massage, yoga, indoor cycling, CrossFit, bane, martial arts, Pilates or Tai Chi. Moreover, because the MINDBODY marketplace is worldwide, employees are able to use their wellness benefits at home or while traveling. Black Label Yoga Situation: Black Label Yoga, a studio located in Gladbeck, Germany, is owned and operated by husband and wife team, Michael and Nina Klumpp. When they opened their studio in April 2013, the owners knew they needed a business management solution that could do everything they needed to run their business: class scheduling, online booking, sales reporting, automated payment processing and client management. They also wanted a retail point-of-sale system that would allow them to sell their line of organic clothing both in-studio and online. Solution and benefits: We make Black Label Yoga's class schedule accessible online via the studio's website and on mobile devices using the Connect app. These online and mobile sites make it possible for consumers to book a class at any time of day or night—and the studio's clientele appreciate the convenience: 45% of total class bookings in 2014 came through online sites or mobile devices. The owners also use our platform's client management tools (e.g., client notes and customized email marketing) to better communicate with their clients, which contributed to a 55% client retention rate in 2014, which we believe is significantly higher than the industry average. The owners use a reporting dashboard within our platform to track sales trends, best performing pricing points and inventory, as well as attendance and class popularity. They can view many of these reports on the Express app—allowing them to check in on the health of their business while away from the studio. The ability to analyze sales has allowed the owners to make more informed business decisions about what price points to set, what classes to offer and when. In addition, by using our payments platform to implement automatic payments for monthly dues, Black Label Yoga benefits from a steady and reliable cash flow that contributed to a 140% increase in total revenue for 2014 compared to 2013, with 46% of that revenue coming from recurring payments. Avalon School of Musk Situation: The Avalon School of Music in Orlando, Florida serves approximately 800 students with a staff of nearly 60 across three separate locations. The school offers students a variety of services, including music lessons for over twenty instruments, voice lessons, instrument rentals, DJ lessons, piano tuning and studio recording. When the school opened, the owners (a father and son team) used spreadsheets and a combination of other programs to track student dues and class usage, and to manage teacher pay and class schedules. This disjointed system made it difficult to track student payments and the number of classes each student had already taken. The school's rapid growth from roughly 50 to 200 students in just two months also demonstrated that this system could not effectively scale with the business. Solution and benefits: With our platform, Avalon students and staff can easily go online to view their schedules and track the number of lessons taken. New students are encouraged to enroll in automated payments, which provide stable revenue and eliminate the need to manually track the status of any given student's payments. This recurring revenue accounted for 82% of Avalon's total revenue in 2014. In addition, with our payments platform, alerts are automatically sent to students when their credit cards are about to expire, and students are automatically rebilled if initial transactions are not successful. This automation streamlines a number of time-consuming management tasks, eliminates the need to track down payments and provides seamless convenience for students—contributing to Avalon's 47% retention rate in 2014, which we believe is significantly higher than the music industry average. 115 EFTA00594849 Savvi Skin & Body Studio Situation: When Savvi Skin & Body Studio opened in San Luis Obispo, CA in 2007, the owner took appointments over the phone, recording them in an appointment book. Much of her time was spent on the phone scheduling and confirming or rescheduling appointments. This made it difficult to find the time to track sales, inventory and client information (all by hand) while also performing the services her clients were paying for: facials, massage, lash extensions, spray tans, body scrubs, etc. Solution and benefits: Since 2008, our platform has helped to streamline these day-to-day activities for Savvi, eliminating almost entirely the time spent scheduling appointments over the phone that plagued the owner in her early days. With online booking, Savvi's clients can view her schedule and book and pay for appointments straight from the studio's website or Facebook page. This helps to keep her schedule full, contributing to the 28% increase in revenue Savvi enjoyed in 2014 compared to 2013. Client management and communication is also easier with a system that links every client's purchase history and service preference to his or her profile where owner and staff can also track special occasions like birthdays and anniversaries. Savvi uses our email marketing tools to delight clients by automatically sending emails with special promotions to encourage them to celebrate their milestones with a visit to Savvi. The studio's owner attributes the growth of her business to her use of MINDBODY's business management software, which helps her maintain continuous contact with her clients. In 2014, Savvi utilized the client data stored on our platform to better target email campaigns to specific client groups, promoting memberships, holiday gift cards, products or services based on a client's past history. This has allowed Savvi to better target its marketing efforts and continue to grow its revenue. Savvi also started a membership program in 2014 to stabilize revenue, implementing an automatic payment model for the first time via MINDBODY's payments platform, which now represents nearly 5% of Savvi's total revenue. That same year, Savvi became a practitioner within the MINDBODY Connect Workplace network. Participation in area wellness programs through this program has made it possible for the studio to reach more people in the local community. In addition, the Connect app has brought more visibility to Savvi among out-of- town visitors and made Savvi's services more convenient to existing clients. Our Culture and Employees Our company and employees share an exceptional corporate culture that incorporates our core values of being purpose driven, humble and helpful, caring and happy, committed to wellness, environmentally conscious, continuously evolving and committed to "Five C" leadership. We believe that each team member may practice leadership, daily, regardless of position or title, and we promote people who best demonstrate: • Competence — they make the effort to be true experts in what they do. • Character — they do the right thing, even when it is not convenient. • Compassion — they care as much about others as they do about themselves. • Catalyst — they remove obstacles and make things happen. • Courage — they stand up for what they believe in and take responsibility for their team. Our employees thrive in a nurturing environment that is driven by innovation, passion for health and wellness and dedication towards excellent subscriber experience. According to a report from Mashablc based on data from Glassdoor in December 2014, MINDBODY has been named one of the `Top 10 Best Tech Companies To Work For in 2015." In addition, Outside Magazine has named MINDBODY one of America's best places to work for two years in a row. We believe our culture gives us a competitive advantage in recruiting and retaining talent, driving innovation, enhancing productivity and improving customer experience. 116 EFTA00594850 As of December 31. 2014 and March 31, 2015, we had 1,035 and 1,100 employees, respectively. None of ow employees is represented by a labor organization or is a party to any collective bargaining arrangement. We have never had a work stoppage, and we consider our relationship with ow employees to be good. Competition The market for business management software and payments solutions for wellness businesses is highly competitive, fragmented and rapidly evolving due to technological innovations. We believe our competitors fall into the following primary categories: • On-premise software providers and small cloud-based providers that typically focus on a specific vertical like salon or spa and not the full breadth of wellness services: and • Cloud-based software providers that offer generic scheduling and point-of sale capabilities like Intuit and payments providers with basic scheduling tools like Square. The principal competitive factors in our market include: • Industry expertise • Depth of product functionality • Brand recognition and reputation • Ability to drive consumer demand via a large and rapidly growing consumer network • 24/7 customer service • Product extensibility via APIs • Integration with mobile devices • Integration with payments processing • Marketing capabilities and analytics • Strong company culture • Security and reliability • Global presence We believe that we compete favorably on the factors described above. However, many of our competitors have greater financial, technical and other resources, greater name recognition and larger sales and marketing budgets, therefore we may not always compare favorably with respect to some or all of the factors above. Sales and Marketing We deploy a direct sales approach driven by an inside sales team based in San Luis Obispo, California. East Hampton, New York, London, United Kingdom, and Sydney, Australia. Our sales team qualifies and manages prospective and current subscribers, aiming to initiate, retain, and expand their use of our platform over time. Our sales team partners with sales engineers to provide consultation and product demonstration to prospects to accelerate the onboarding of new subscribers. Since the introduction of Connect Workplace, we have begun to develop and expand a field sales team responsible for discovery, qualification, and account management for larger organizations. Our marketing efforts are focused on generating awareness of our platform, creating sales leads, establishing and promoting our brand, and cultivating a community of successful and vocal subscribers and consumers. We utilize both online and offline marketing initiatives, including search engine and email marketing, online display and print advertising, participation in trade shows, events and conferences, permission marketing. social media and media outreach, and strategic partnerships and endorsements. 117 EFTA00594851 Our sales prospecting, lead qualification and lead development functions are performed by sales associates. the majority of whom work part-time schedules. Our full-time equivalent sales and marketing headcount as of December 31, 2014 and March 31, 2015 was 319 and 340. respectively. Our sales and marketing expenses were $21.0 million, $30.9 million, $7.2 million and $9.7 million for the years ended December 31, 2013 and 2014. and for the three months ended March 31.2014 and 2015, respectively. Research and Development Our research and development organization is responsible for the ideation, research, design, development and testing of all aspects of our platform. To create a roadmap that meets the needs of our subscribers, we emphasize collaboration during the development process. Subscribers provide direct input through dialog with our customer support. product management, and user experience teams, as well as our community forum and feature utilization data. We deploy new features, functionality, and technologies for our platform through monthly software releases or updates to minimize disruption and deliver continuous improvement. As of December 31. 2014 and March 31. 2015, we had 168 and 182 employees, respectively, in ow research and development organization. which is based in San Luis Obispo, California. Our research and development expenses were $3.7 million, $10.5 million. $16.2 million, $3.6 million and $4.7 million for the years ended December 31, 2012, 2013 and 2014, and for the three months ended March 31, 2014 and 2015, respectively. Intellectual Property We rely on a combination of trade secret, copyright, and trademark laws, a variety of contractual arrangements, such as license agreements, assignment agreements, confidentiality and non-disclosure agreements, and confidentiality procedures and technical measures to gain rights to and protect the intellectual property used in our business. We have also developed a patent program and a strategy to identify, apply for, and secure patents for innovative aspects of our platform and technology. We have II U.S. patent applications pending. We also have five pending patent applications in jurisdictions outside of the United States. We intend to pursue additional patent protection to the extent we believe it would be beneficial and cost-effective. We actively pursue registration of our trademarks, logos, service marks, and domain names in the United States and in other key jurisdictions. We are the registered holder of a variety of U.S. and international domain names that include the term MINDBODY and similar variations. We use several trademarks for our products and services, including "MINDBODY," "Connect," "Connect Workplace" and several logos and images, such as the Enso logo, as well as the slogan "Love Your Business." We also rely on certain intellectual property rights that we license from third parties, including under certain open source licenses. Though such third-party technologies may not continue to be available to us on commercially reasonable terms, we believe that alternative technologies would be available to us if needed. Our policy is to require employees and independent contractors to sign agreements assigning to us any inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf and agreeing to protect our confidential information. All of our key employees and contractors have done so. In addition, we generally enter into confidentiality agreements with our vendors and subscribers. We also control and monitor access to, and distribution of our software, documentation, and other proprietary information. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. 118 EFTA00594852 Some license provisions protecting against unauthorized use, copying, transfer and disclosures of our products may be unenforceable under the laws of certain jurisdictions and foreign countries. In addition, the laws of some countries do not protect proprietary rights to as great of an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States. To the extent that we expand our international activities, our exposure to unauthorized copying and use of our products and misappropriation of our proprietary information may increase. We expect that software and other solutions in our industry may be increasingly subject to third•party infringement claims as the number of competitors grows and the functionality of products in different industry segments overlap. Government Regulation Our business is subject to extensive, complex and rapidly changing federal and state laws and regulations. HIPAA, Privacy and Data Security Regulations In connection with providing online scheduling services for certain subscribers, we may be subject to specific compliance obligations under privacy and data security laws, including but not limited to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and similar state laws that govern the collection, use, protection, and disclosure of personally identifiable information. HIPAA imposes specific requirements regarding data privacy and security on covered entities (providers, health plans, and health care clearinghouses); business associates (entities that may perform services for covered entities, pursuant to which they may access personal information); and business associates' subcontractors, including us. We are therefore required to adopt certain practices and enter into certain contracts agreeing to protect personal information in specific ways. There may be civil and criminal penalties, as well as contractual ramifications, for violating HIPAA. Facilities Our corporate headquarters are located in San Luis Obispo. California. where we operate under various leases for an aggregate of approximately 170,000 square feet of space. These leases expire between January 2017 and June 2030. We also lease office space in New York. the United Kingdom and Australia. We lease all of our facilities and do not own any real property. We intend to procure additional space as we add employees and expand geographically. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate any such expansion of our operations. Legal Proceedings From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We may in the future receive claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves, our partners and our subscribers by determining the scope, enforceability and validity of third•party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. 119 EFTA00594853 MANAGEMENT Executive Officers and Directors The following table provides information regarding our executive officers and directors as of March 31, 2015: Name Age Position Executive Officers: Richard L. Stollmeyer 49 President, Chief Executive Officer and Chairman of the Board of Directors Robert Murphy 58 Chief Operating Officer and Director Brett White 52 Chief Financial Officer Chet Brandenburg 37 Chief Product Officer William Donohue 58 Chief Information Officer Bradford L. Wills 38 Chief Strategy Officer Kimberly Lytikainen 48 Senior Vice President, General Counsel and Secretary Non-Employee Directors: Katherine Blair Christiejett3t 43 Director Jeremy Levine') 41 Director Eric Liawo x2) 37 Director Tyler Newtonam3) 42 Director Graham Smithas3) 55 Director (I) Member of our nominating and corporate governance committee. (2) Member of our audit committee. (3) Member of our compensation committee. Executive Officers Richard L. Stollmeyer. Mr. Stollmeyer is one of our founders and has served as our President and Chief Executive Officer and as Chairman of our board of directors since October 2004. Mr. Stollmeyer holds a B.S. degree in Political Science and Russian Language, with a concentration in International Relations, from the United States Naval Academy. Mr. Stollmeyer was selected to serve on our board of directors because of the perspective and experience he brings as our President and Chief Executive Officer. As one of our founders, Mr. Stollmeyer also brings historical knowledge. operational expertise and continuity to ow board of directors. Robert Murphy. Mr. Murphy is one of our founders and has served as our Chief Operating Officer since November 2011, and as a member of our board of directors since October 2004. Mr. Murphy also served as our Chief Financial Officer from October 2004 to August 2010. Prior to joining our company, Mr. Murphy owned and operated several yoga studios in the New York City area. Mr. Murphy holds a B.S. degree in Communications from Boston University. Mr. Murphy was selected to serve on our board of directors because of the perspective and experience he brings as our Chief Operating Officer and his background in the health and wellness services industry. As one of our co- founders, Mr. Murphy also brings historical knowledge, operational expertise and continuity to ow board of directors. Brett White. Mr. White has served as our Chief Financial Officer since July 2013. From January 2008 to July 2013, Mr. White served as Chief Financial Officer at Meru Networks, Inc., a provider of Wi-Fi solutions. 120 EFTA00594854 From November 2005 to December 2007, Mr. White served as Chief Financial Officer at Fortinet, Inc., a provider of network security solutions. Mr. White holds a B.A. degree in Business Economics from the University of California, Santa Barbara. Chet Brandenburg. Mr. Brandenburg has served as our Chief Product Officer since July 2011. Mr. Brandenburg also served as our Chief Technology Officer from May 2006 to July 2011 and as our Vice President, Development from October 2004 to May 2006. Mr. Brandenburg holds a B.S. degree in Computer Science from California Polytechnic State University, San Luis Obispo. William Donohue. Mr. Donohue has served as our Chief Information Officer since September 2011. From March 2010 to September 2011, Mr. Donohue provided technology consulting services for several companies, including ours. From February 2005 to March 2010, Mr. Donohue served as Senior Vice President and Chief Information Officer at 24 Hour Fitness, Inc., a privately owned commercial health club company. Mr. Donohue holds a B.S. degree in Biology from the University of La Verne. Bradford L Wills. Mr. Wills has served as our Chief Strategy Officer since November 2014. From May 2013 to November 2014, Mr. Wills served as our Senior Vice President of Corporate Development. From July 2006 to May 2013, Mr. Wills served as Vice President, Corporate Development, Mergers and Acquisitions at Active Network, a software-as-a-service company. Mr. Wills holds a B.S. degree in Finance and International Business from Georgetown University and an degree from the University of Texas at Austin. Kimberly Lytikainen. Ms. Lytikainen has served as our Senior Vice President, General Counsel since July 2014 and as our Secretary since March 2015. From June 2013 to July 2014, Ms. Lytikainen served as Associate General Counsel at Pivotal Software, Inc., a provider of computer software. From April 2006 to June 2013, Ms. Lytikainen served as Vice President, Assistant General Counsel at NVIDIA Corporation, a visual computing company. Ms. Lytikainen holds a B.A. degree in Political Science and Government from Florida State University and a M. degree from Loyola Law School, Loyola Marymount University. Non-Employee Directors Katherine Blair Christie. Ms. Christie has served as a member of our board of directors since March 2015. Since January 2011, Ms. Christie has served as the Chief Marketing Officer at Cisco Systems, Inc., a networking equipment company. From January 2008 to January 2011, Ms. Christie served as Senior Vice President. Global Corporate Communications at Cisco Systems. Ms. Christie holds a B.S. degree in Marketing and Business Administration and an M. degree from Drexel University. Ms. Christie was selected to serve on our board of directors because of her operating and management experience in the technology industry. Jeremy Levine. Mr. Levine has served as a member of ow board of directors since August 2010. Since January 2007. Mr. Levine has served as a Partner at Bessemer Venture Partners, a venture capital firm he joined in May 2001. Mr. Levine currently serves on the board of directors of Yelp Inc., a local directory and user review service, and a number of privately held companies. Mr. Levine holds a B.S. degree in Computer Science from Duke University. Mr. Levine was selected to serve on our board of directors because of his experience in the venture capital industry and as a director of both publicly and privately held technology companies. Eric Liaw. Mr. Liaw has served as a member of our board of directors since February 2014. Since March 2011, Mr. Liaw has served in several roles at Institutional Venture Partners, a venture capital firm, where he currently serves as a General Partner. From August 2003 to January 2011, Mr. Liaw served in several roles at Technology Crossover Ventures, a venture capital firm, including most recently as a Vice President. Mr. Liaw 121 EFTA00594855 serves on the boards of directors of a number of privately held companies. Mr. Liaw holds a B.A. degree in Economics with a minor in Computer Science and an M. degree in Management Science and Engineering from Stanford University. Mr. Liaw was selected to serve on our board of directors because of his experience in the venture capital industry and as a director of high growth technology companies. Tyler Newton. Mr. Newton has served as a member of our board of directors since March 2009. Since December 2006, Mr. Newton has served as a Partner at Catalyst Investors, a growth equity investment firm he joined in April 2000. Mr. Newton has also served on the boards of directors of a number of privately held companies. Mr. Newton holds a B.A. degree in Economics from Middlebury College and is a CFA Charter holder. Mr. Newton was selected to serve on our board of directors because of his growth investing experience as a director of numerous technology companies. Graham Smith. Mr. Smith has served as a member of our board of directors since January 2015. From March 2008 to August 2014, Mr. Smith served as the Chief Financial Officer of inc., a global cloud computing company, where he currently serves as Executive Vice President of Finance. Mr. Smith currently serves on the board of directors of Splunk Inc., a provider of data analytics software. Mr. Smith holds a B.Sc. degree in Economics and Politics from Bristol University in England and qualified as a member of the Institute of Chartered Accountants in England and Wales. Mr. Smith was selected to serve on our board of directors because of his financial expertise and extensive experience in the software industry. Code of Business Conduct and Ethics Our board of directors intends to adopt a code of business conduct and ethics that will apply to all of our employees, officers and directors, including our President and Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of our code of business conduct and ethics will be posted on the investor relations page on our website. We intend to disclose any amendments to our code of business conduct and ethics, or waivers of its requirements, on our website or in filings under the Exchange Act. Board of Directors Our business and affairs are managed under the direction of our board of directors. Our board of directors consists of seven directors, five of whom qualify as "independent" under the listing standards of the NASDAQ Stock Market. Pursuant to our current amended and restated voting agreement, our current directors were elected as follows: • Richard L. Stollmeyer, Robert Murphy and Graham Smith were elected as the designees nominated by holders of our common stock; • Tyler Newton was elected as the designee nominated by holders of our Series C redeemable convertible preferred stock; Jeremy Levine was elected as the designee nominated by holders of our Series D redeemable convertible preferred stock; Eric Liaw was elected as the designee nominated by holders of our Series F redeemable convertible preferred stock: and Katherine Blair Christie was elected by holders of our capital stock. 122 EFTA00594856 Our amended and restated voting agreement will terminate in connection with this offering. After the completion of this offering, the number of directors will be fixed by our board of directors, subject to the terms of our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the completion of this offering. Each of our current directors will continue to serve as a director until the election and qualification of his or her successor, or until his or her earlier death, resignation or removal. Classified Board of Directors Our amended and restated certificate of incorporation that will become effective immediately prior to the completion of this offering will provide that, immediately after the completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective three-year terms. Upon the completion of this offering, our current directors will be divided among the three classes as follows: • The Class I directors will be Jeremy Levine and Tyler Newton. and their terms will expire at the annual meeting of stockholders to be held in 2016; • The Class II directors will be Eric Liaw and Robert Murphy. and their terms will expire at the annual meeting of stockholders to be held in 2017; and • The Class III directors will be Katherine Blair Christie, Graham Smith and Richard L. Stollmcycr. and their terms will expire at the annual meeting of stockholders to be held in 2018. Each director's term will continue until the election and qualification of his or her successor, or his or her earlier death, resignation or removal. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our company. Director Independence Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, our board of directors has determined that Katherine Blair Christie, Jeremy Levine. Eric Liaw, Tyler Newton and Graham Smith do not have relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is "independent" as that term is defined under the listing standards of the NASDAQ Stock Market. In making these determinations, ow board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances ow board of directors deemed relevant in determining their independence, including the beneficial ownership of ow capital stock by each non-employee director, and the transactions involving them described in the section titled "Certain Relationships and Related Party Transactions." Lead Independent Director Prior to the completion of this offering, our board of directors intends to adopt corporate governance guidelines that will provide that one of our independent directors will serve as our Lead Independent Director at any time when our Chief Executive Officer serves as the Chairman of our board of directors or if the Chairman is not otherwise independent. Because Richard L. Stollmeyer is our Chairman and Chief Executive Officer, our board of directors has appointed Graham Smith to serve as our Lead Independent Director. As Lead Independent Director, Mr. Smith will preside over periodic meetings of our independent directors, serve as a liaison between our Chairman and our independent directors and perform such additional duties as our board of directors may otherwise determine and delegate. 123 EFTA00594857 Committees of Our Board of Directors Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our board of directors are described below. Members serve on these committees until their resignation or removal or until otherwise determined by our board of directors. Audit Committee Our audit committee is comprised of Eric Liaw, Tyler Newton and Graham Smith, each of whom satisfies the requirements for independence and financial literacy under the applicable rules and regulations of the SEC and listing standards of the NASDAQ Stock Market. Mr. Smith serves as the chair of our audit committee, qualifies as an "audit committee financial expert" as defined in the rules of the SEC, and satisfies the financial sophistication requirements under the listing standards of the NASDAQ Stock Market. Following the completion of this offering, our audit committee will, among other things, be responsible for: • selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements; helping to ensure the independence and performance of the independent registered public accounting firm; • discussing the scope and results of the audit with the independent registered public accounting firm. and reviewing, with management and the independent registered public accounting firm, our interim and year-end operating results; • developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters; • reviewing our policies on risk assessment and risk management; • reviewing related party transactions; and approving or, as required. pre-approving. all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm. Upon the completion of this offering, our audit committee will operate under a written charter that satisfies the applicable rules and regulations of the SEC and the listing standards of the NASDAQ Stock Market. Compensation Committee Our compensation committee is comprised of Katherine Blair Christie, Tyler Newton and Graham Smith, each of whom satisfies the requirements for independence under the applicable rules and regulations of the SEC and listing standards of the NASDAQ Stock Market. Mr. Newton serves as the chair of our compensation committee. Each member of our compensation committee is also a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Exchange Act, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code. Upon the completion of this offering, our compensation committee will, among other things, be responsible for: • reviewing, approving and determining, or making recommendations to our board of directors regarding, the compensation of our executive officers; • administering our equity compensation plans; • reviewing, approving and making recommendations to our board of directors regarding incentive compensation and equity compensation plans; and • establishing and reviewing general policies relating to compensation and benefits of our employees. 124 EFTA00594858 Upon the completion of this offering, our compensation committee will operate under a written charter that satisfies the applicable rules and regulations of the SEC and the listing standards of the NASDAQ Stock Market. Nominating and Corporate Governance Committee Our nominating and corporate governance committee consists of Katherine Blair Christie, Jeremy Levine and Eric Liaw, each of whom satisfies the requirements for independence and financial literacy under the applicable rules and regulations of the SEC and listing standards of the NASDAQ Stock Market. Mr. Levine serves as the chair of our nominating and corporate governance committee. Following the completion of this offering, our nominating and corporate governance committee will, among other things, be responsible for: identifying, evaluating and selecting, or making recommendations to our board of directors regarding, nominees for election to our board of directors and its committees; • evaluating the performance of our board of directors and of individual directors; • considering and making recommendations to our board of directors regarding the composition of our board of directors and its committees; • reviewing developments in corporate governance practices; • evaluating the adequacy of our corporate governance practices and reporting; and developing and making recommendations to our board of directors regarding corporate governance guidelines and matters. Upon the completion of this offering, our nominating and corporate governance committee will operate under a written charter that satisfies the applicable listing standards of the NASDAQ Stock Market. Compensation Committee Interlocks and Insider Participation During 2014, our compensation committee was comprised of Jeremy Levine, Robert Murphy and Tyler Newton. None of the current members of our compensation committee is or has been an officer or employee of ow company. However, during 2014, Robert Murphy was an officer of ow company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee (or other board committee performing equivalent functions) of any entity that has one or more of its executive officers serving on our board of directors or compensation committee. During October 2012, we sold 537,199 shares and 386,783 shares of our Series F redeemable convertible preferred stock to entities affiliated with Bessemer Venture Partners and Catalyst Investors, respectively, for an aggregate purchase price of approximately $5,000,000 and $3,600,009, respectively. Jeremy Levine is a Partner at Bessemer Venture Partners and Tyler Newton is a Partner at Catalyst Investors. The sale of our Series F redeemable convertible preferred stock to Bessemer Venture Partners and Catalyst Investors was made in connection with ow Series F redeemable convertible preferred stock financing and on substantially the same terms and conditions as all other sales of our Series F redeemable convertible preferred stock by us. During February 2014, we sold 777,984 shares and 147,580 shares of our Series G redeemable convertible preferred stock to entities affiliated with Bessemer Venture Partners and Catalyst Investors, respectively, for an aggregate purchase price of approximately $10,543,253 and $2,000,004, respectively. Jeremy Levine is a Partner at Bessemer Venture Partners and Tyler Newton is a Partner at Catalyst Investors. The sale of our Series G redeemable convertible preferred stock to Bessemer Venture Partners and Catalyst Investors was made in connection with our Series G redeemable convertible preferred stock financing and on substantially the same terms and conditions as all other sales of our Series G redeemable convertible preferred stock by us. 125 EFTA00594859 During February 2014, we entered into a letter agreement, which was amended in March 2014, with certain holders of ow capital stock, pursuant to which we agreed to waive certain transfer restrictions in connection with, and assist in the administration of, a tender offer that such holders proposed to commence. In February 2014, these holders commenced a tender offer to purchase shares of our capital stock from certain of our security holders, including Robert Murphy. In addition, Mr. Murphy and entities affiliated with Messrs. Levine and Newton are party to our investors' rights agreement, right of first refusal and co-sale agreement and voting agreement. See the section titled "Certain Relationships and Related Party Transactions" for additional information about these transactions. Non-Employee Director Compensation Our non-employee directors do not currently receive, and did not receive in 2014, any cash compensation for their service on our board of directors and committees of our board of directors. As of December 31, 2014, none of our non-employee directors held shares of our Class B common stock or options to purchase shares of our Class B common stock. Directors who are also our employees receive no additional compensation for their service as directors. During 2014, Messrs. Stollmeyer and Murphy were our employees. See the section titled "Executive Compensation" for additional information about their compensation. Outside Director Compensation Policy On May 22, 2015, our board of directors adopted our Outside Director Compensation Policy. Members of our board of directors who are not employees are eligible for awards under our Outside Director Compensation Policy. Our Outside Director Compensation Policy is effective as of the effective date of the registration statement of which this prospectus forms a part. Under our Outside Director Compensation Policy, outside directors will receive compensation in the form of equity and cash, as described below: Cash Compensation Effective as of our first annual meeting of our stockholders following the effectiveness of our Outside Director Compensation Policy, non-employee directors will receive annual cash retainers for service in the following positions: Position Annual Cash Retainer Board member 532.000 Lead independent director 10,000 Chairperson of the board 20,000 Audit committee chair 20,000 Audit committee member other than chair 7.500 Compensation committee chair 10.500 Compensation committee member other than chair 5.000 Nominating and corporate governance committee chair 6.500 Nominating and corporate governance committee member other than chair 3.000 Cash retainers will be paid quarterly in arrears on pro-rated basis. A non-employee director may elect that payment of the cash retainers under our Outside Director Compensation Policy be paid in the form of fully- vested restricted stock under our 2015 Plan. 126 EFTA00594860 Equity Compensation Non-employee directors are eligible to receive all types of equity awards (except incentive stock options) under our 2015 Plan, including discretionary awards not covered under our Outside Director Compensation Policy. All grants of awards under our Outside Director Compensation Policy will be automatic and non- discretionary. Upon joining our board, and beginning with our first annual meeting of our stockholders following the effectiveness of our Outside Director Compensation Policy, each newly-elected non•employee director will receive an initial equity award, or the initial award, under our 2015 Plan with a value of $350,000. This award will vest in approximately equal installments annually over a four-year period, subject to continued service through each vesting date. The initial award will be in the form of restricted stock units, unless otherwise determined by our board of directors or our compensation committee. On the date of each annual meeting of our stockholders following the effective date of our Outside Director Compensation Policy, each non-employee director who is continuing as a director following the applicable meeting will be granted an annual equity award, or the annual award, or a pro-rated annual award under our 2015 Plan with a value of $180,000. If the non-employee director had not been a non•employee director as of the previous annual meeting of our stockholders, then the annual award will be pro-rated based on the number of months served as a non-employee director for the previous year. Each annual award will fully vest on the earlier to occur of: (i) the day prior to the next annual meeting following the date of grant or (ii) the first anniversary of the grant date, in each case, subject to continued service through the vesting date. The annual award will be in the form of restricted stock units, unless otherwise determined by our board of directors or our compensation committee. For purposes of our Outside Director Compensation Policy, value means generally (x) with respect to any award of restricted stock units, the fair market value of the shares on the grant date of the award, or (y) with respect to a stock option, the grant date fair value calculated in accordance with ASC Topic 718. Notwithstanding the vesting schedules described above, the vesting of all equity awards granted to a non- employee director, including any award granted outside of our Outside Director Compensation Policy, will vest in full upon a "change in control" (as defined in our 2015 Plan) if the non-employee director's service as a director terminates on or following the change in control other than pursuant to a voluntary resignation. As described in "Executive Compensation—Employee Benefit and Stock Plans" below, our 2015 Plan contains maximum limits, which will be approved by our stockholders prior to the 2015 Plan becoming effective, on the size of the equity awards that can be granted to each of our non•employee directors in any fiscal year, but those maximum limits do not reflect the intended size of any potential grants or a commitment to make any equity award grants to our non•employee directors in the future. 127 EFTA00594861 EXECUTIVE COMPENSATION Summary Compensation Table The following table provides information regarding the total compensation for services rendered in all capacities that was earned by each individual who served as our principal executive officer at any time in 2014, and our two other most highly compensated executive officers who were serving as executive officers as of December 31, 2014. These individuals are our named executive officers for 2014. Non-Equity Incentive Plan All Other Option Compensation Compensation Name and Principal Position Year Salary ($) Bonus ($) Awards ($)tt) (SI"' (5) Total (S) Richard L. Stollmeyer President and Chief Executive Officer 2014 360,000 - 699,668 89,734 16,7500) 1,166,152 Robert Murphy Chief Operating Officer 2014 330,000 - 699,668 89,734 10,5410) 1,129,943 Kimberly Lytikainen Senior Vice President. General Counsel and Secretary 2014 121,314 31,4600) 803,071 16,257 2,654(6) 974,756 (I) The amounts reported represent the aggregate grant-date fair value of the stock options awarded to the named executive officer in 2014, calculated in accordance with ASC Topic 718. Such grant-date fair value does not take into account any estimated forfeitures related to service-vesting conditions. (2) The amounts reported represent the amounts earned in 2014 under our Executive Bonus Plan. (3) Consists of Health Savings Account contributions and 401(k) matching contributions. (4) Consists of 401(k) matching contributions. (5) Consists of a sign-on bonus of $22,717 awarded in connection with Ms. Lytikainen's hiring in 2014 and a discretionary bonus of $8,743 awarded for her performance in 2014. The discretionary bonus was not paid in accordance with any formal plan document. (6) Consists of 401(k) matching contributions. Non-Equity Incentive Plan Compensation Our compensation committee has adopted our Executive Bonus Plan. See the disclosure under "Executive Bonus Plan" for a description of this plan. 2014 Performance Targets under our Executive Bonus Plan For 2014, our compensation committee approved the performance targets under our Executive Bonus Plan for Richard L. Stollmeyer, Robert Murphy and Kimberly Lytikainen. Incentives under our Executive Bonus Plan were payable based on our achievement of targets related to certain performance metrics, including revenue growth, sales efficiency, certain subscriber-related measures and earnings before interest, taxes, depreciation and amortization. Subject to achieving the applicable performance targets, each participant was eligible to receive a target incentive payment. For 2014, the target incentive was $130,000 for each of Messrs. Stollmeyer and Murphy and $25,000 for Ms. Lytikainen. For Messrs. Stollmeyer and Murphy, half of the target incentive was to be paid in equal installments on a quarterly basis during the year, subject to the achievement of the applicable quarterly performance targets. The other half of the target incentive was to be payable at the end of the year, subject to the achievement of the applicable annual performance targets. For Ms. Lytikainen, the target incentive was to be paid in equal installments over the last two quarters of the year. Performance in excess of the performance targets was to result in payments in excess of the target incentive, subject to a cap of 200% of the target incentive. During 2014, we achieved the performance targets at a level that triggered the payments set forth in the Summary Compensation Table under the column "Non-Equity Incentive Plan Compensation." 128 EFTA00594862 Named Executive Officer Employment Arrangements Richard L Stollmeyer We entered into an employment agreement with Richard L. Stollmeyer, our President and Chief Executive Officer, effective as of May 22, 2015. The employment agreement has a term of three years, with automatic renewals for additional three-year terms, unless either party provides notice not to renew the agreement within 90 days of the end of such three-year term. Mr. Stollmeyer's employment is at-will. Mr. Stollmeyer's current annual base salary is $370,000, and he is currently eligible to earn annual incentive compensation with a target equal to 50% of his base salary, based upon achievement of milestones determined by our board of directors or compensation committee for each fiscal year. Pursuant to his employment agreement, effective July 1, 2015, Mr. Stollmeyer's annual base salary will be $410,000, and he will be eligible to earn annual incentive compensation with a target no less than 90% of his base salary, or target bonus. Mr. Stollmeyer will be eligible to earn up to 200% of the target bonus for 2015. Mr. Stollmeyer's employment agreement provides that if his employment is terminated by us or our successor without "cause" (as defined below), by Mr. Stollmeyer for "good reason" (as defined below) or on account of death or disability (each, a "qualifying termination"), upon his executing a general release and waiver of claims against us (or our successor) in the form provided by us or our successor that becomes effective and irrevocable within the time period prescribed in his employment agreement, Mr. Stollmeyer will receive (I) continuing payments of severance equal to 18 months of Mr. Stollmeyer's annual base salary as then in effect; (2) a lump-sum amount equal to Mr. Stollmeyer's target annual incentive compensation, pro-rated for the days served during the year of employment; (3) reimbursement of COBRA continuation premiums for up to 18 months for Mr. Stollmeyer and his eligible dependents (provided he is eligible for and timely elects COBRA continuation coverage), or cash payments in lieu thereof; and (4) acceleration of 100% of the then-unvested shares subject to Mr. Stollmeyer's equity awards granted prior to May 22, 2015. If the qualifying termination occurs during the period that commences upon a change in control (as defined in the 2015 Plan) and ends on the first anniversary following a change in control, then in addition to the benefits described above, 100% of Mr. Stollmeyer's equity awards granted on or after May 22, 2015 will vest. Additionally, notwithstanding the standard vesting schedule of each applicable stock option, Mr. Stollmeyer's stock option grant (x) on June 23, 2013 covering 25,000 shares vests as to 100% of the shares on a sale of the company (as defined in the option agreement) and (y) on February 6, 2014 covering 125,000 shares vests as to 100% of the shares on the date that is six months following our initial public offering. In the event any of the payments provided for under the employment agreement or otherwise payable to Mr. Stollmeyer would constitute "parachute payments" within the meaning of Section 28W of the Internal Revenue Code and could be subject to the related excise tax under Section 4999 of the Internal Revenue Code, he would be entitled to receive either full payment of benefits or such lesser amount that would result in no portion of the benefits being subject to the excise tax, whichever results in the greater amount of after-tax benefits to him. This employment agreement does not require us to provide any tax gross-up payments. Subsequent to the end of fiscal 2014, Mr. Stollmeyer received the following additional stock option grants: (I) an option to purchase up to 162,500 shares of our Class B common stock in February 2015 at an exercise price of $14.476 per share; and (2) an option to purchase up to 100,000 shares of our Class B common stock in May 2015 at an exercise price of $14.496 per share. Robert Murphy We entered into an employment agreement with Robert Murphy, our Chief Operating Officer, effective as of May 22, 2015. The employment agreement has a term of three years, with automatic renewals for additional three-year terms, unless either party provides notice not to renew the agreement within 90 days of the end of such three-year term. Mr. Murphy's employment is at-will. Mr. Murphy's current annual base salary is $340,000. and he is currently eligible to earn annual incentive compensation with a target equal to 56% of his base salary. based 129 EFTA00594863 upon achievement of milestones determined by our board of directors or compensation committee for each fiscal year. Pursuant to his employment agreement, effective July 1, 2015, Mr. Murphy's annual base salary will be $350,000. he will be eligible to earn annual incentive compensation with a target no less than 65% of his base salary, or target bonus. Mr. Murphy will be eligible to earn up to 200% of the target bonus for 2015. Mr. Murphy's employment agreement provides that if his employment is terminated by us or our successor without "cause" (as defined below), by Mr. Murphy for "good reason" (as defined below) or on account of death or disability (each, a "qualifying termination"), upon his executing a general release and waiver of claims against us (or our successor) in the form provided by us or our successor that becomes effective and irrevocable within the time period prescribed in his employment agreement, Mr. Murphy will receive (I) continuing payments of severance equal to 18 months of Mr. Murphy's annual base salary as then in effect; (2) a lump-sum amount equal to Mr. Murphy's target annual incentive compensation, pro-rated for the days served during the year of employment; (3) reimbursement of COBRA continuation premiums for up to 18 months for Mr. Murphy and his eligible dependents (provided he is eligible for and timely elects COBRA continuation coverage), or cash payments in lieu thereof; and (4) acceleration of 100% of the then-unvested shares subject to Mr. Murphy's equity awards granted prior to May 22, 2015. If the qualifying termination occurs during the period that commences upon a change in control and ends on the first anniversary following a change in control, then in addition to the benefits described above, 100% of Mr. Murphy's equity awards granted on or after May 22, 2015 will vest. Additionally, notwithstanding the standard vesting schedule of each applicable stock option, Mr. Murphy's stock option grant (x) on June 23. 2013 covering 25,000 vests as to 100% of the shares on a sale of the company (as defined in the option agreement) and (y) on February 6, 2014 covering 125,000 shares vests as to 100% of the shares on the date that is six months following our initial public offering. In the event any of the payments provided for under the employment agreement or otherwise payable to Mr. Murphy would constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code and could be subject to the related excise tax under Section 4999 of the Internal Revenue Code, he would be entitled to receive either full payment of benefits or such lesser amount that would result in no portion of the benefits being subject to the excise tax, whichever results in the greater amount of after-tax benefits to him. This employment agreement does not require us to provide any tax gross-up payments. Subsequent to the end of fiscal 2014, Mr. Murphy received the following additional stock option grants: (I) an option to purchase up to 81,250 shares of our Class B common stock in February 2015 at an exercise price of $14.476 per share; and (2) an option to purchase up to 25,000 shares of our Class B common stock in May 2015 at an exercise price of $14.496 per share. Kimberly Lylikainen We entered into an employment agreement with Kimberly Lytikainen. our Senior Vice President, General Counsel and Secretary. effective as of May 22, 2015. The employment agreement has a term of three years, with automatic renewals for additional three-year terms, unless either party provides notice not to renew the agreement within 90 days of the end of such three-year term. Ms. Lytikainen's employment is at-will. Ms. Lytikainen's current annual base salary is $263,000, and she is currently eligible to earn annual incentive compensation with a target equal to 19% of her base salary, based upon achievement of milestones determined by our board of directors or compensation committee for each fiscal year. Pursuant to her employment agreement. effective July 1, 2015, Ms. Lytikainen's annual base salary will be $290,000, and she will be eligible to earn annual incentive compensation with a target equal to 50% of her base salary. Ms. Lytikainen's employment agreement provides that if her employment is terminated by us or our successor without "cause" (as defined below), by Ms. Lytikainen for "good reason" (as defined below) or on account of death or disability (each, a "qualifying termination"), upon her executing a general release and waiver of claims against us (or our successor) in the form provided by us or our successor that becomes effective and irrevocable within the time period prescribed in her employment agreement, Ms. Lytikainen will receive 130 EFTA00594864 (I) continuing payments of severance equal to 18 months of Ms. Lytikainen's annual base salary as then in effect; (2) reimbursement for all reasonable relocation costs; (3) reimbursement of COBRA continuation premiums for up to 18 months for Ms. Lytikainen and her eligible dependents (provided she is eligible for and timely elects COBRA continuation coverage), or cash payments in lieu thereof; and (4) acceleration of 50% of the then-unvested shares subject to Ms. Lytikainen's equity awards granted prior to May 22, 2015. If the qualifying termination occurs during the period that commences upon a change in control and ends on the first anniversary following a change in control, then in addition to the benefits described above, 100% of all of Ms. Lytikainen's equity awards will vest. In the event any of the payments provided for under the employment agreement or otherwise payable to Ms. Lytikainen would constitute -parachute payments" within the meaning of Section 280G of the Internal Revenue Code and could be subject to the related excise tax under Section 4999 of the Internal Revenue Code, she would be entitled to receive either full payment of benefits or such lesser amount which would result in no portion of the benefits being subject to the excise tax, whichever results in the greater amount of after-tax benefits to her. This employment agreement does not require us to provide any tax gross-up payments. Subsequent to the end of fiscal 2014, Ms. Lytikainen received the following additional stock option grants: (I) an option to purchase up to 12,500 shares of our Class B common stock in February 2015 at an exercise price of $14.476 per share; and (2) an option to purchase up to 75,000 shares of our Class B common stock in May 2015 at an exercise price of $14.496 per share. For purposes of the employment agreements with our named executive officers, "cause" means generally: • executive's conviction of, or plea of nolo contendere, to a felony (excluding negligent driving offenses or driving offenses solely related to the speed limit) and which has an adverse effect on our business or affairs: • executive's gross and willful misconduct; • executive's unauthorized and intentional use or disclosure of any of our proprietary information or trade secrets or any other party to whom executive owes an obligation of nondisclosure; • executive's willful breach of any material obligations under any material written agreement or covenant with us; • executive's refusal to perform his or her employment duties after receiving notice and an opportunity to cure; or • a failure to cooperate in good faith with a governmental or internal investigation. No termination for cause is effective unless executive is given written notice from the board of the condition that could constitute cause and, if capable of being cured, at least 30 days to cure. For purposes of the employment agreements with our named executive officers, "good reason" means generally a resignation within 30 days following the expiration of any cure period following the occurrence of one or more of the following, without executive's consent: • a material reduction of executive's duties, authority or responsibilities; • a material reduction in executive's base salary (except where there is a reduction to the management team generally, not to exceed 15%); • a material change in the geographic location of executive's work location (a relocation of less than 30 miles will not be considered material). A resignation for good reason requires informing us within 90 days of the initial existence of the grounds for good reason and a cure period of 30 days following the date we receive such notice. 131 EFTA00594865 Outstanding Equity Awards at 2014 Year-End The following table sets forth information regarding outstanding stock options held by our named executive officers as of December 31, 2014: Name Option Awards Number of Securities Underlying Unexercised Options (#) Grant DateO' Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price (SY2' Option Expiration Date Richard L. Stollmeyer 11/19/2010(31 358,252 - 0.544 11/18/2020 11/15/2011(3) 197,017 - 1.392 11/14/2021 6/23/2013(4' 9,375 15,625 7.708 6/23/2023 2/6/201O' - 125,000 11.52 2/5/2024 Robert Murphy 11/15/2011(3) 196,727 - 1.392 11/14/2021 6/23/2013(4' 9,375 15,625 7.708 6/23/2023 2/6/201O' - 125,000 11.52 2/5/2024 Kimberly Lytikainen 9/20/2014(6' - 162,500 10.616 9/19/2024 (I) Each of the outstanding equity awards was granted pursuant to our 2009 Plan. (2) This column represents the fair market value of a share of our common stock on the date of grant. as determined by our board of directors. (3) 100% of the shares subject to the option were vested as of December 31, 2014. (4) 25% of the shares subject to the option vested on June 27, 2014, and 2.0833% of the shares subject to the option vest monthly thereafter, subject to continued service with us on each such vesting date. This option includes accelerated vesting, as described in the section titled "Named Executive Officer Employment Arrangements" above. (5) 10% of the shares subject to the option vested on January 1, 2015, 20% of the shares subject to the option will vest on January 1, 2016, 30% of the shares subject to the option will vest on January 1, 2017, and 40% of the shares subject to the option will vest on January I. 2018, subject to continued service with us on each such vesting date. This option includes accelerated vesting, as described in the section titled "Named Executive Officer Employment Arrangements" above. (6) 25% of the shares subject to the option will vest on July 7, 2015, and 2.0833% of the shares will vest monthly thereafter, subject to continued service with us on each such vesting date. Employee Benefit and Stock Plans 2015 Equity Incentive Plan In June 2015, our board of directors adopted and our stockholders approved our 2015 Plan. Our 2015 Plan will be effective one business day prior to the effective date of the registration statement of which this prospectus forms a part but is not expected to be utilized until after the completion of this offering. Our 2015 Plan will provide for the grant of incentive stock options, within the meaning of Section 422 of the Code, to our employees and any parent and subsidiary corporations' employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to our employees, directors and consultants and our parent and subsidiary corporations' employees and consultants. Authorized Shares. A total of (i) 4,698,818 shares of our Class A common stock will be reserved for issuance pursuant to ow 2015 Plan plus (ii) shares of our Class B common stock returned to our 2009 Plan as the result of expiration or termination of awards after the effective date of the registration statement of which this prospectus forms a part (provided that the maximum number of shares that may be added to our 2015 Plan pursuant to (ii) is 4,439,615 shares). Any such shares under the provision above that had covered shares under our 2009 Plan as shares of Class B common stock will, under our 2015 Plan, become issuable instead as Class A 132 EFTA00594866 common stock on a one•for•one basis. The number of shams available for issuance under our 2015 Plan will also include 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 our immediately preceding fiscal year; or • such other amount as our board of directors or compensation committee may determine. Plan Administration. Our board of directors or one or more committees appointed by our board of directors, will administer our 2015 Plan. We currently anticipate that our board of directors will delegate authority to administer the 2015 Plan to our compensation committee, which will have full but non-exclusive authority to administer and interpret the terms of the 2015 Plan. In the case of awards intended to qualify as "performance- based compensation" within the meaning of Section 162(m) of the Code, our compensation committee will consist of two or more "outside directors" within the meaning of Section 162(m) of the Code. In addition, if we determine it is desirable to qualify transactions under our 2015 Plan as exempt under Rule 166.3 of the Securities Exchange Act of 1934. as amended, or Rule 16b-3, such transactions will be structured to satisfy the requirements for exemption under Rule 16b•3. Subject to the provisions of our 2015 Plan, the administrator will have the power to administer the plan, including but not limited to, the power to interpret the terms of the 2015 Plan and awards granted thereunder, to create, amend and revoke rules relating to our 2015 Plan, including creating sub•plans, and to determine the terms of the awards, including the exercise price, the number of shares subject to each such award, the exercisability of the awards, and the form of consideration, if any, payable upon exercise. The administrator will also have the authority to amend existing awards to reduce or increase their exercise price, to allow participants the opportunity to transfer outstanding awards to a financial institution or other person or entity selected by the administrator, and to institute an exchange program by which outstanding awards may be surrendered in exchange for awards of the same type. which may have a higher or lower exercise price or different terms, awards of a different type and/or cash. Stock Options. Stock options may be granted under our 2015 Plan. The exercise price of options granted under our 2015 Plan must at least be equal to the fair market value of our Class A common stock on the date of grant. The term of an incentive stock option may not exceed 10 years. except that with respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment of the exercise price of an option, which may include cash. shares or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law. After the termination of service of an employee, director or consultant, he or she may exercise his or her option for the period of time stated in his or her option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, the option will generally remain exercisable for three months following the termination of service. However, in no event may an option be exercised after the expiration of its term. Subject to the provisions of our 2015 Plan, the administrator determines the other terms of options. Stock Appreciation Rights. Stock appreciation rights may be granted under our 2015 Plan. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our Class A common stock between the exercise date and the date of grant. Stock appreciation rights may not have a term exceeding 10 years. After the termination of service of an employee, director or consultant, he or she may exercise his or her stock appreciation right for the period of time stated in his or her stock appreciation right agreement. However, in no event may a stock appreciation right be exercised after the expiration of its term. Subject to the provisions of our 2015 Plan, the administrator determines the other terms of stock appreciation rights, including when such rights become exercisable and whether to pay any increased appreciation in cash or with shares of our common stock, or a combination thereof, except that the per share exercise price for the shares to be issued pursuant to the exercise of a stock appreciation right will be no less than 100% of the fair market value per share on the date of grant. 133 EFTA00594867 Restricted Stock. Restricted stock may be granted under our 2015 Plan. Restricted stock awards are grants of shares of our common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the number of shares of restricted stock granted to any employee, director or consultant and, subject to the provisions of our 2015 Plan, will determine the terms and conditions of such awards. The administrator may impose whatever conditions to vesting it determines to be appropriate. For example, the administrator may set restrictions based on the achievement of specific performance goals or continued service to us; provided, however, that the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed. Recipients of restricted stock awards generally will have voting and dividend rights with respect to such shares upon grant without regard to vesting, unless the administrator provides otherwise. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture. Restricted Stock Units. Restricted stock units may be granted under our 2015 Plan. Restricted stock units are bookkeeping entries representing an amount equal to the fair market value of one share of our Class A common stock. Subject to the provisions of our 2015 Plan, the administrator will determine the terms and conditions of restricted stock units, including the vesting criteria, which may include accomplishing specified performance criteria or continued service to us, and the form and timing of payment. Notwithstanding the foregoing, the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed. Performance Units and Performance Shares. Performance units and performance shares may be granted under our 2015 Plan. Performance units and performance shares arc awards that will result in a payment to a participant only if performance goals established by the administrator are achieved or the awards othenvise vest The administrator will establish organizational or individual performance goals or other vesting criteria in its discretion, which, depending on the extent to which they are met, will determine the number and the value of performance units and performance shares to be paid out to participants. After the grant of a performance unit or performance share, the administrator, in its sole discretion, may reduce or waive any performance criteria or other vesting provisions for such performance unit or performance share. Performance units shall have an initial dollar value established by the administrator prior to the grant date. Performance shares shall have an initial value equal to the fair market value of our Class A common stock on the grant date. The administrator, in its sole discretion, may pay earned performance units or performance shares in the form of cash, in shares or in some combination thereof. Outside Directors. Our 2015 Plan will provide that all non-employee directors will be eligible to receive all types of awards, except for incentive stock options, under our 2015 Plan. During any fiscal year, a non-employee director may not be granted (1) cash-settled awards with a grant date fair value (determined in accordance with generally accepted accounting principles) of more than $500,000, increased to $1,000.000 in connection with his or her initial service, or (2) stock-settled awards with a grant date fair value of more than $500,000, increased to $1,000,000 in connection with his or her initial service. Non•Transferabilirs Unless the administrator provides otherwise, our 2015 Plan generally will not allow for the transfer of awards and only the recipient of an award may exercise an award during his or her lifetime. Certain Adjustments. In the event of certain changes in our capitalization, to prevent diminution or enlargement of the benefits or potential benefits available under our 2015 Plan, the administrator will adjust the number and class of shares that may be delivered under our 2015 Plan and the number, class, and price of shares covered by each outstanding award, and the numerical share limits set forth in our 2015 Plan. In the event of our proposed liquidation or dissolution, the administrator will notify participants as soon as practicable, and all awards will terminate immediately prior to the consummation of such proposed transaction. Merger or Change in Control. Our 2015 Plan will provide that in the event of a "merger" or "change in control," as defined under ow 2015 Plan, each outstanding award will be treated as the administrator determines, except that if a successor corporation or its parent or subsidiary does not assume or substitute an equivalent 134 EFTA00594868 award for any outstanding award, then such award will fully vest, all restrictions on such award will lapse, all performance goals or other vesting criteria a