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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission File Number: 001-39058

Peloton Interactive, Inc.
(Exact name of registrant as specified in its charter)
Delaware
47-3533761
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
125 West 25th Street, 11th Floor10001
New York, New York
(Zip Code)
(Address of principal executive offices)
(866679-9129
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, $0.000025 par value per sharePTONThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes    No    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes     No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes       No  


As of October 31, 2019, the number of shares of the registrant's Class A common stock outstanding was 43,707,400 and the number of shares of the registrant's Class B common stock outstanding was 236,819,100.








TABLE OF CONTENTS
Page
Part I. Financial Information
Part II. Other Information




SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “potential,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan, “target,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statements contained in this Quarterly Report on Form10-Q include, but are not limited to, statements about:

 • our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit, Adjusted EBITDA, operating expenses including changes in sales and marketing, general and administrative expenses (including any components of the foregoing), and research and development, and our ability to achieve and maintain future profitability;
        • our business plan and our ability to effectively manage our growth;

 • anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;

 • our international expansion plans and ability to continue to expand internationally;

 • market acceptance of our Connected Fitness Products and services;

 • beliefs and objectives for future operations;

 • our ability to increase sales of our Connected Fitness Products and services;

 • our ability to further penetrate our existing Subscriber base and maintain and expand our Subscriber base;

 • the effects of seasonal trends on our results of operations;

 • our expectations regarding content costs for past use;

 • our ability to maintain, protect, and enhance our intellectual property;

 • the effects of increased competition in our markets and our ability to compete effectively;

 • our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and internationally; and

 • economic and industry trends, projected growth, or trend analysis.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations, except as required by law.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

In this Quarterly Report on Form 10-Q, the words "we," "us," "our" and "Peloton" refer to Peloton Interactive, Inc. and its wholly owned subsidiaries, unless the context requires otherwise.
3


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)

September 30,June 30,
20192019
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$1,375.9  $162.1  
Marketable securities
100.4  216.0  
Accounts receivable, net of allowances
20.9  18.5  
Inventories, net
205.6  136.6  
Prepaid expenses and other current assets
46.5  48.4  
Total current assets
1,749.3  581.7  
Property and equipment, net
119.7  249.7  
Intangible assets, net
18.3  19.5  
Goodwill
4.3  4.3  
Restricted cash
0.8  0.8  
Right-of-use asset485.5  —  
Other assets
9.9  8.5  
Total assets
$2,387.7  $864.5  
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
90.7  92.2  
Accrued expenses
116.2  104.5  
Customer deposits and deferred revenue
99.2  90.8  
Other current liabilities
21.4  3.3  
Total current liabilities
327.6  290.8  
Deferred rent
—  23.7  
Build-to-suit liability
—  147.1  
Long term lease liability483.8  —  
Other non-current liabilities
0.4  0.4  
Total liabilities
811.8  462.0  
Commitments and contingencies (Note 9)
Redeemable convertible preferred stock, $0.000025 par value, zero and 215,443,468 shares authorized; zero and 210,640,629 shares issued and outstanding as of September 30, 2019 and June 30, 2019, respectively.
  941.1  
Stockholders’ equity (deficit)
Common stock, $0.000025 par value; 2,500,000,000 and zero Class A shares authorized, 43,448,475 and zero shares issued and outstanding as of September 30, 2019 and June 30, 2019, respectively; 2,500,000,000 and 400,000,000 Class B shares authorized, 236,819,100 and 25,301,604 shares issued and outstanding as of September 30, 2019 and June 30, 2019, respectively.
    
Additional paid-in capital
2,249.1  90.7  
Accumulated other comprehensive (loss) income
(1.1) 0.2  
Accumulated deficit
(672.0) (629.5) 
Total stockholders’ equity (deficit)
1,576.0  (538.6) 
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)
$2,387.7  $864.5  
See accompanying notes to these unaudited condensed consolidated financial statements.

4

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
(in millions, except share and per share amounts)
Three Months Ended September 30,
20192018
Revenue
Connected Fitness Products
$157.6  $77.9  
Subscription
67.2  31.7  
Other
3.3  2.5  
Total revenue
228.0  112.1  
Cost of revenue
Connected Fitness Products
89.8  42.2  
Subscription
29.5  16.3  
Other
3.6  2.1  
Total cost of revenue
122.9  60.6  
Gross profit
105.1  51.5  
Operating expenses:
Sales and marketing
77.6  45.5  
General and administrative
60.9  50.0  
Research and development
17.4  11.6  
Total operating expenses
156.0  107.1  
Loss from operations
(50.9) (55.6) 
Other income, net:
Interest income, net
1.3  1.0  
Other expense, net
(0.1)   
Total other income, net
1.2  1.0  
Loss before provision for income taxes
(49.7) (54.5) 
Provision for income taxes
0.1    
Net loss
$(49.8) $(54.5) 
Net loss attributable to Class A and Class B common stockholders$(49.8) $(54.5) 
Net loss per share attributable to Class A and Class B common stockholders, basic and diluted$(1.29) $(2.18) 
Weighted-average Class A and Class B common shares outstanding, basic and diluted38,453,864  24,999,075  
Other comprehensive income (loss):
Change in unrealized gain (loss) on marketable securities$  $(0.1) 
Change in foreign currency translation adjustment(1.3)   
Total other comprehensive income (loss)(1.3) (0.1) 
Comprehensive loss$(51.1) $(54.6) 

See accompanying notes to these unaudited condensed consolidated financial statements.

5

PELOTON INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)

Three Months Ended September 30,
20192018
Cash Flows from Operating Activities:
Net loss$(49.8) $(54.5) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense7.1  4.2  
Stock-based compensation expense18.7  36.7  
Amortization of debt issuance costs0.1  0.1  
Amortization of premium from marketable securities0.3    
Non-cash operating lease expense9.3  —  
Changes in operating assets and liabilities:
Accounts receivable(2.4) (0.1) 
Inventories(69.1) (25.8) 
Prepaid expenses and other current assets1.9  (8.8) 
Other assets(1.4) (2.4) 
Accounts payable and accrued expenses17.5  21.9  
Customer deposits and deferred revenue8.5  (3.0) 
Operating lease liabilities, net(16.7) —  
Other liabilities(0.1) 1.5  
Net cash used in operating activities(76.2) (30.2) 
Cash Flows from Investing Activities:
Maturities of marketable securities115.3    
Purchases of property and equipment(22.5) (11.2) 
Net cash provided by (used in) investing activities92.8  (11.2) 
Cash Flows from Financing Activities:
Proceeds from issuance of common stock upon initial public offering, net of offering costs1,195.7    
Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs  539.1  
Proceeds from exercise of stock options2.7  0.2  
Net cash provided by financing activities1,198.4  539.3  
Effect of exchange rate changes(1.3) (0.1) 
Net change in cash1,213.7  497.8  
Cash, cash equivalents and restricted cash — Beginning of period163.0  151.6  
Cash, cash equivalents and restricted cash — End of period$1,376.7  $649.5  
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest$  $0.1  
Supplemental Disclosures of Non-Cash Investing and Financing Information:
Conversion of convertible preferred stock to common stock$941.1  $  
Property and equipment accrued but unpaid$8.9  $3.6  
Stock-based compensation capitalized for software development costs$0.4  $0.1  
See accompanying notes to these unaudited condensed consolidated financial statements.

6

PELOTON INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(unaudited)
(in millions)
Redeemable Convertible
Preferred Stock
Class A and Class B Common StockAdditional Paid-In CapitalOther Comprehensive IncomeAccumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
Balance – June 30, 2018176.3  $406.3  25.9  $  $20.5  $  $(336.1) $(315.6) 
Issuance of Series F redeemable convertible preferred stock, net38.1  539.1  —  —  —  —  —  —  
Exercise of stock options—  —  0.2  —  0.8  —  —  0.8  
Stock-based compensation expense—  —  —  —  0.8  —  —  0.8  
Other comprehensive income—  —  —  —  —  (0.1) —  (0.1) 
Net loss—  —  —  —  —  —  (54.5) (54.5) 
Balance – September 30, 2018214.4  $945.4  26.1  $  $22.0  $(0.1) $(390.6) $(368.7) 
Balance – June 30, 2019210.6  $941.1  25.3  $—  $90.7  $0.2  $(629.5) $(538.6) 
Initial public offering, net of issuance costs of $6.3 million
—  —  43.4  —  1,195.7  —  —  1,195.7  
Conversion of redeemable convertible preferred stock to common stock(210.6) (941.1) 210.6  —  941.1  —  —  941.1  
Exercise of stock options—  —  0.6  —  2.5  —  —  2.5  
Exercise of stock warrants—  —  0.2  —  —  —  —  —  
Stock-based compensation expense—  —  —  —  19.0  —  —  19.0  
Other comprehensive income—  —  —  —  —  (1.3) —  (1.3) 
Net loss—  —  —  —  —  —  (49.8) (49.8) 
Cumulative effect adjustment in connection with adoption of ASU 2016-02—  —  —  —  —  —  7.2  7.2  
Balance – September 30, 2019  $  280.3  $  $2,249.1  $(1.1) $(672.0) $1,576.0  

See accompanying notes to these unaudited condensed consolidated financial statements.




7

PELOTON INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in millions)




1. Description of Business and Basis of Presentation
Description and Organization
Peloton Interactive, Inc. ("Peloton" or the “Company”) is the largest interactive fitness platform in the world with a loyal community of Members, which we define as any individual who has a Peloton account. The Company pioneered connected, technology-enabled fitness with the creation of its interactive fitness equipment ("Connected Fitness Products") and the streaming of immersive, instructor-led boutique classes to its Members anytime, anywhere. The Company makes fitness entertaining, approachable, effective and convenient while fostering social connections that encourage its Members to be the best versions of themselves.
The Company organizes its business into the following three reportable segments: Connected Fitness Products, Subscription and Other. See Note 14 of the notes to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of the Company's segment reporting structure.
Initial Public Offering and Concurrent Private Placement
In September 2019, the Company closed its initial public offering ("IPO") and a concurrent private placement, in which it issued and sold 43,448,275 shares of its authorized Class A common stock. The price per share to the public in the IPO and in the concurrent private placement was $29.00 per share. The Company received aggregate proceeds of $1.2 billion from the IPO and the concurrent private placement, net of the underwriting discount and before deducting offering costs of approximately $6.3 million. Prior to the closing of the IPO, all shares of the Company's common stock then outstanding were reclassified into 25,301,604 shares of Class B common stock, and upon the closing of the IPO, all shares of the Company's then outstanding preferred stock automatically converted into 210,640,629 shares of Class B common stock on a one-to-one basis.
Basis of Presentation and Consolidation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC") regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the final prospectus dated September 25, 2019 and filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, (the "Securities Act"), on September 26, 2019 (the "Prospectus"). However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet as of June 30, 2019, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis.

In the opinion of management, the accompanying interim condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, cash flows and the changes in equity for the interim periods. The results for the three months ended September 30, 2019 are not necessarily indicative of the results to be expected for any subsequent quarter, the fiscal year ending June 30, 2020, or any other period.

Certain monetary amounts, percentages, and other figures included elsewhere in these financial statements have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

Except as described elsewhere in Note 2 of the notes to our condensed consolidated financial statements in the section titled "—Recently Issued Accounting Pronouncements" in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes to the Company's significant accounting policies as described elsewhere in the Prospectus.

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2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosures. On an ongoing basis, the Company evaluates its estimates, including, among others, those related to income taxes, the realizability of inventory, stock-based compensation, contingencies, revenue related reserves, content costs for past use reserve, fair value measurements, the incremental borrowing rate associated with lease liabilities, useful lives of property and equipment as well as intangible assets, and impairment of goodwill, intangible and long-lived assets. The Company bases its estimates on historical experience, market conditions, and on various other assumptions that are believed to be reasonable. Actual results may differ from these estimates.
Stock-Based Compensation
In August 2019, the Board of Directors adopted the 2019 Employee Stock Purchase Plan ("ESPP"), which was subsequently approved by the Company’s stockholders in September 2019. The Company recognizes stock-based compensation expenses related to shares issued pursuant to its ESPP on a straight-line basis over the offering period, which is twenty-four months. The ESPP allows employees to purchase shares of the Company's Class A common stock at a 15 percent discount. The ESPP also includes a look-back provision for the purchase price if the stock price on the purchase date is less than the stock price on the offering date.

Recently Issued Accounting Pronouncements
Accounting Pronouncements Recently Adopted
ASU 2016-02
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases, which introduced and codified new lease accounting guidance under ASC 842. ASU 2016-02 requires a lessee to separate the lease components from the non-lease components in a contract and recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The Company adopted this ASU and related amendments as of July 1, 2019 under the modified retrospective approach, whereby all prior periods continue to be reported under previous lease accounting guidance. The Company elected the package of practical expedients and, as permitted, the Company did not assess whether existing contracts are or contain leases, the lease classification for any existing leases, and identification of initial direct costs for any existing leases. Adoption of the new standard resulted in the recognition of right-of-use assets and operating lease liabilities on the Company's consolidated balance sheet. In addition, the Company de-recognized a build-to-suit arrangement in accordance with the transition requirements, which resulted in an adjustment to retained earnings. The standard did not materially impact the Company's consolidated statements of operations. See Note 7 for further discussion of the Company's accounting for leases under ASC 842.

ASU 2018-07
In June 2018, the FASB issued ASU 2018-07 to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted this ASU on July 1, 2019. The standard did not materially impact the Company's consolidated statements of operations.


3. Revenue
The Company’s primary source of revenue is from sales of its Connected Fitness Products and associated recurring subscription revenue.

The Company determines revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the Company satisfies a performance obligation.

Revenue is recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.  The Company's revenue is reported net of sales returns and discounts. The Company estimates its liability for product returns based on historical return trends by product category, impact of seasonality, and an evaluation of current economic and market conditions and records the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of revenue.  If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur.

9


Some of the Company’s contracts with customers contain multiple performance obligations.  For customer contracts that include multiple performance obligations, the Company accounts for individual performance obligations if they are distinct. The transaction price is then allocated to each performance obligation based on its standalone selling price.  The Company generally determines standalone selling price based on prices charged to customers.

Connected Fitness Products

Connected Fitness Products include the Company’s Bike and Tread, related accessories, associated fees for delivery and installation, and extended warranty agreements. The Company recognizes Connected Fitness Product revenue net of sales returns and discounts when the product has been delivered to the customer. The Company generally allows customers to return products within thirty days of purchase, as stated in its return policy.

The Company records fees paid to third-party financing partners in connection with its consumer financing program as a reduction of revenue, as it considers such costs to be a customer sales incentive. The Company records payment processing fees for its credit card sales for Connected Fitness Products within selling and marketing expenses.

Subscription

The Company’s subscriptions provide unlimited access to content in its library of live and on-demand fitness classes. The Company’s subscriptions are offered on a month-to-month basis.

Historically, the Company offered a prepaid subscription option where Subscribers earned one free month or three free months of subscription with the purchase of a 12-month subscription or 24-month subscription, respectively. The Company also offered Subscribers the ability to finance the prepaid subscription with the purchase of a Connected Fitness Product as part of its financing program. The associated financing fees were paid to the Company’s third-party partner at the outset of the arrangement and are recorded as a reduction to subscription revenue. The Company terminated both programs in July 2018.

Amounts paid for subscription fees are included within customer deposits and deferred revenue and recognized ratably on a month-to-month basis. The Company records payment processing fees for its monthly subscription charges within cost of revenue.

The Company generates a small portion of its revenue from the sale of studio credits to attend and participate in a live, instructor-led class at its New York City studios. Studio revenue is recognized at the time the credits are used.

Product Warranty
The Company offers a standard product warranty that its Connected Fitness Products will operate under normal, non-commercial use for a period of one-year from the date of original delivery. The Company has the obligation, at its option, to either repair or replace the defective product. At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenue. Factors that affect the warranty obligation include historical as well as current product failure rates, service delivery costs incurred in correcting product failures, and warranty policies. The Company’s products are manufactured by contract manufacturers, and in certain cases, the Company may have recourse to such contract manufacturers.

The Company also offers the option for customers in some markets to purchase a third-party extended warranty and service contract that extends or enhances the technical support, parts, and labor coverage offered as part of the base warranty included with the Connected Fitness Product for an additional period of 12 to 27 months.

Revenue and related fees paid to the third-party provider are recognized on a gross basis as the Company has a continuing obligation to perform over the service period. Extended warranty revenue is recognized ratably over the extended warranty coverage period and is included in Connected Fitness Product revenue in the consolidated statement of operations.

Disaggregation of Revenue
The Company's revenue from contracts with customers disaggregated by major product lines, excluding sales-based taxes, are included in Note 14 under the heading "Segment Information".

The Company's revenue disaggregated by geographic region, based on ship-to address, were as follows:
Three Months Ended September 30,
2019  2018  
(in millions)
North America (1)
$221.7  $112.1  
United Kingdom6.3  0.1  
Total revenue$228.0  $112.1  
_________________________  
(1) Consists of United States and Canada

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Customer Deposits and Deferred Revenue
Deferred revenue is recorded for nonrefundable cash payments received for the Company’s performance obligation to transfer, or stand ready to transfer, goods or services in the future. Deferred revenue consists of subscription fees billed that have not been recognized. Customer deposits represent payments received in advance before the Company transfers a good or service to the customer and are refundable.

As of September 30, 2019 and June 30, 2019, customer deposits of $88.6 million and $81.3 million, respectively, and deferred revenue of $10.6 million and $9.5 million, respectively, were included in customer deposits and deferred revenue on the Company's condensed consolidated balance sheet.

In the three months ended September 30, 2019, the Company recognized $9.5 million of revenue that was included in the deferred revenue balance as of June 30, 2019.

4. Investments in Marketable Securities
The following table summarizes the Company's investments in marketable securities:
September 30, 2019
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
(in millions)
Commercial paper$55.9  $  $  $55.9  
Corporate bonds51.1  0.1    51.2  
U.S. treasury securities29.7  0.1    29.8  
Certificates of deposit4.6      4.6  
Total marketable securities (1)
$141.3  $0.2  $  $141.5  

_________________________
(1) Includes $41.1 million included within cash and cash equivalents.


5. Fair Value Measurements
The following table summarizes the Company's assets that are measured at fair value on a recurring basis, by level, within the fair value hierarchy:

As of September 30, 2019
Level 1Level 2Level 3Total
Cash equivalents(1):
(in millions)
Commercial paper$41.1  $  $  $41.1  
Marketable securities:
Corporate bonds51.2      51.2  
U.S. treasury securities29.8      29.8  
Commercial paper14.9      14.9  
Certificates of deposit4.6      4.6  
Other:
Cost-method investments    0.6  0.6  
Total assets$141.5  $  $0.6  $142.1  
_________________________
(1) Included in cash and cash equivalents.

Cash equivalents are highly liquid investments with maturities of three months or less when purchased. These investments are carried at cost, which approximates fair value. All investments classified as available-for-sale are recorded at fair value within marketable securities in
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the condensed consolidated balance sheets. The Company’s investments classified as Level 1 are based on quoted prices that are available in active markets.


6. Inventory

Inventories were as follows:

September 30,
2019
June 30,
2019
(in millions)
Raw materials$2.2  $  
Finished products216.6  152.0  
Total inventories218.7  152.0  
Less: Reserves(13.1) (15.4) 
Total inventories, net$205.6  $136.6  


7. Leases
The Company leases facilities under operating leases with various expiration dates through 2039. The Company’s corporate headquarters is located in New York, New York. The Company also leases space for the operation of its production studio facilities, retail showrooms, microstores, warehouses, and office spaces.
Right-of-use assets and lease liabilities are established on the unaudited condensed consolidated balance sheets for leases with an expected term greater than one year. As the rate implicit in the lease is not determinable, the Company uses its secured incremental borrowing rate to determine the present value of the lease payments.
Leases with an initial term of 12 months or less are not recorded on the unaudited condensed consolidated balance sheets; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has elected to not separate lease and non-lease components.
The Company's lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The operating lease arrangements included in the measurement of lease liabilities do not reflect options to extend or terminate, as management does not consider the exercise of these options to be reasonably certain.
Variable lease payments include, but are not limited to, percentage of sales, common area charges, taxes paid by the landlord that are charged to the Company, and changes to the consumer price index. Variable lease payments are expensed as incurred.
As of September 30, 2019, the total remaining lease payments included in the measurement of lease liabilities for operating leases were as follows:
Fiscal Year Ending June 30,
(in millions) 
The remainder of 2020$1.3  
202154.3  
202262.0  
202362.4  
202460.0  
Thereafter563.0  
Total$802.9  

Supplemental balance sheet information related to leases was as follows:
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Three Months Ended September 30, 2019
Reconciliation of Lease Liabilities(dollars in millions)
Weighted-average remaining lease term (years)13.4
Weighted-average discount rate5.84 %
Total Undiscounted Lease Liability$802.9  
Less: Imputed interest(289.4) 
Total Discounted Lease Liability$513.5  
Current portion of lease liability$29.7  
Non-current portion of lease liability$483.8  

Supplemental cash flow and other information related to leases was as follows:
Three Months Ended September 30, 2019
Cash Paid For Amounts Included In Measurement of Liabilities(in millions) 
Operating cash flows from operating leases$8.3  
Right-of-use assets obtained in exchange for new operating lease liabilities (non-cash)$307.0  

As of September 30, 2019, the Company had additional operating lease obligations that had not yet commenced of approximately $4.6 million for equipment and real estate leases to be delivered in fiscal 2020 with lease terms up to fiscal 2030.
Total operating lease expense was $16.8 million for the three months ended September 30, 2019, of which $1.7 million was attributable to variable lease expense. During the three months ended September 30, 2018, rent expense was $5.7 million.

8. Debt and Financing Arrangements
Amended and Restated Credit Agreement
In June 2019, the Company entered into an amended and restated loan and security agreement (“Amended Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, lead arranger and bookrunner and Bank of America, N.A., Barclays Bank PLC, Goldman Sachs Lending Partners LLC and Silicon Valley Bank, as joint syndication agents, which amended and restated the Company's 2018 secured revolving credit facility. The Amended Credit Agreement provides for a $250.0 million secured revolving credit facility, including up to the lesser of $150.0 million and the aggregate unused amount of the facility for the issuance of letters of credit. Interest on the Amended Credit Agreement is paid based on LIBOR plus 2.75% or an Alternative Base Rate plus 1.75%. The Company is required to pay an annual commitment fee of 0.375% on a quarterly basis based on the unused portion of the revolving credit facility.

The Company incurred total commitment fees of $0.2 million and $0.1 million during the three months ended September 30, 2019 and 2018, respectively, which are included in interest expense in the statements of operations.

The principal amount, if any, is payable in full in June 2024. As of September 30, 2019, the Company had not drawn on the credit facility and did not have outstanding borrowings under the Amended Credit Agreement.
In connection with the execution of the Amended Credit Agreement, the Company incurred debt issuance costs of $0.9 million, which are capitalized and are being amortized to interest expense using the effective interest method over the term of the Amended Credit Agreement.
The Company has the option to repay its borrowings under the Amended Credit Agreement without premium or penalty prior to maturity. The Amended Credit Agreement contains customary affirmative covenants, such as financial statement reporting requirements and delivery of borrowing base certificates, as well as customary covenants that restrict its ability to, among other things, incur additional indebtedness, sell certain assets, guarantee obligations of third parties, declare cash dividends in the entirety or make certain other distributions, and undergo a merger or consolidation or certain other transactions. The Amended Credit Agreement also contains certain financial condition covenants, including maintaining a total level of liquidity of not less than $125.0 million and maintaining certain minimum total revenue ranging from $725.0 million to $1,985.0 million depending on the applicable date of determination. As of September 30, 2019, the Company was in compliance with the covenants under the Amended Credit Agreement. At September 30, 2019, the Company was contingently liable for approximately $43.0 million in standby letters of credit as security for its operating lease and inventory purchasing obligations.

9. Commitments and Contingencies
Content Costs for Past Use Reserve
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To secure the rights to stream music on the Peloton platform, the Company must obtain licenses from, and pay royalties to, copyright owners of both sound recordings and musical compositions. The Company has entered into negotiations with various music rights holders, to pay for any and all uses of musical compositions and sound recordings to-date and, at the same time, enter into go-forward license agreements for the use of music in the future.

Prior to the execution of go-forward music license agreements, the Company estimates and records expenses inclusive of estimated content costs for past use as well as normal and recurring music royalty expenses. The Company recorded content costs for past use of $0.9 million and $2.9 million during the three months ended September 30, 2019 and 2018, respectively. In addition, the Company recorded estimates for normal and recurring royalty expense of $1.6 million and $0.8 million, respectively. The Company includes both of these components in its reserve. As of September 30, 2019, the Company recorded reserves of $20.8 million, included in accrued expenses in the accompanying condensed consolidated balance sheets.

Legal Proceedings
On March 19, 2019, Downtown Music Publishing LLC, ole Media Management, L.P., Big Deal Music, LLC, CYPMP, LLC, Peer International Corporation, PSO Limited, Peermusic Ltd., Peermusic III, Ltd., Peertunes, Ltd., Songs of Peer Ltd., Reservoir Media Management, Inc., The Richmond Organization, Inc., Round Hill Music LLC, The Royalty Network, Inc., and Ultra International Music Publishing, LLC filed a lawsuit against the Company in the U.S. District Court for the Southern District of New York, captioned Downtown Music Publ’g LLC, et. al v. Peloton Interactive, Inc., alleging that the Company engaged in copyright infringement by using certain accused songs in streaming and recorded fitness classes without necessary licenses. The plaintiffs allege that they are music publishers that own or control the copyrights in numerous musical works that were synchronized by the Company without the plaintiffs’ authorization. The complaint asserts a single claim for copyright infringement.

On April 30, 2019, the Company answered the complaint and filed counterclaims against the original named plaintiffs and National Music Publishers’ Association, Inc., a trade association, alleging that they coordinated to collectively negotiate licenses in violation of the antitrust laws. The counterclaims also assert that the trade association tortuously interfered with the Company's attempts to engage in direct negotiations with music publishers in violation of state law. The counterclaims seek injunctive relief, monetary damages (to be trebled under applicable statute), and attorneys’ fees and costs. An initial pretrial conference was held on May 9, 2019 and discovery has commenced. An amended complaint filed on May 31, 2019 named additional plaintiffs Greensleeves Publishing Ltd., Me Gusta Music, LLC, Raleigh Music Publishing LLC, STB Music, Inc., and TuneCore, Inc. and identified additional musical works. The Company answered the amended complaint on June 14, 2019. On June 24, 2019, counter-defendants filed a motion to dismiss the counterclaims, to which the Company filed an opposition on August 8, 2019. Discovery on the claims and counterclaims is ongoing in this case.

On September 27, 2019, the district court granted plaintiffs leave to file a second amended complaint identifying additional musical works and affiliated entities, and requesting injunctive relief, more than $300 million in damages, and attorneys’ fees and costs. The Company is opposing the motion and it is currently pending before the U.S. District Court for the Southern District of New York. The Company intends to vigorously defend the claim and answered the second amended complaint and also filed counterclaims on October 11, 2019. Discovery on the claims and counterclaims is ongoing in this case.

While the Company cannot predict the ultimate result of any judgment against, or settlement by, the Company, will be in this matter, based on application of ASC 450, "Contingencies", at September 30, 2019, the Company accrued its best estimate within a range of possible outcomes ranging from $4.0 million to $11.0 million, which is included in accrued expenses in the accompanying condensed consolidated balance sheets. Amounts accrued for this matter at September 30, 2019 are not considered material to the Company's financial position and the Company continues to vigorously defend its position in the aforementioned outstanding matter and assess its legal position.

In addition to the above, from time to time, the Company is subject to litigation matters and claims which arise in the ordinary course of its business. The Company believes that the outcome of any existing litigation, either individually or in the aggregate, will not have a material impact on the results of operations, financial condition or cash flows of the Company.

10. Stockholders' Equity (Deficit)
Convertible Preferred Stock
In September 2019, upon the closing of the Company's IPO, all outstanding shares of convertible preferred stock were automatically converted into an aggregate of 210,640,629 shares of Class B common stock.

Preferred Stock
Effective September 2019, the Company's Board of Directors ("Board of Directors") authorized the issuance of undesignated preferred stock, with a par value of $0.000025 per share. As of September 30, 2019, there were 50,000,000 shares of preferred stock authorized and zero shares of preferred stock outstanding.

Common Stock
In August 2019, the Company implemented a dual class common stock structure where all existing shares of common stock were reclassified into Class B common stock and the Company also authorized a new class of common stock, the Class A common stock. The Class A common stock is entitled to one vote per share and the Class B common stock is entitled to twenty votes per share. The Class A and Class B common stock have the same dividend and liquidation rights, and the Class B common stock converts to Class A at any time at the option of the holder, or automatically upon the date that is the earliest of (i) the date specified by a vote of the holders of 66 2/3% of the then outstanding shares of Class B common stock, (ii) 10 years from the closing date of the IPO, and (iii) the date that the total number of
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shares of Class B common stock outstanding cease to represent at least 1% of all outstanding shares of the Company's common stock. In addition, each share of Class B common stock will convert automatically into one share of Class A common stock upon any transfer, except for certain transfers described in the Company's restated certificate of incorporation. Upon the creation of the dual class common stock structure, all outstanding options and the warrant to purchase common stock became options and a warrant, respectively, to purchase an equivalent number of shares of Class B common stock.

The Board of Directors authorized the issuance of Class A common stock and Class B common stock, each with a par value of $0.000025 per share. As of September 30, 2019, there were 2,500,000,000 shares of Class A common stock and 2,500,000,000 shares of Class B common stock authorized and 43,448,475 shares of Class A common stock and 236,819,100 shares of Class B common stock outstanding.

11. Equity-Based Compensation

2015 Stock Plan
In April 2015, the Board of Directors approved the establishment of the 2015 Stock Plan (the “2015 Plan”) to provide stock award grants to employees, directors, and consultants of the Company. The Board of Directors, or at its sole discretion, a committee of the Board of Directors, is responsible for the administration of the 2015 Plan.

The 2015 Plan requires that the per share exercise price of each stock option shall not be less than 100% of the fair market value of the common stock subject to the stock option on the grant date. Stock option grants shall not be exercisable after the expiration of ten years from the date of its grant or such shorter period as specified in a stock award agreement. For initial grants, vesting generally occurs over four years with the first 25% of the award vesting upon the 12-month anniversary of the vesting commencement date and the remaining 75% vesting monthly over the following 36 months. The 2015 Plan provides that the Board of Directors may, in its sole discretion, impose such limitations on transferability of stock options as the Board of Directors shall determine. In the absence of a determination by the Board of Directors to the contrary, stock options shall not be transferable except by will or by the laws of descent and distribution, and domestic relations orders unless specifically agreed to by the plan administrator.
The 2015 Plan was terminated in connection with the adoption of the Company's 2019 Equity Incentive Plan (the "2019 Plan") in September 2019, and the Company will not grant any additional awards under the 2015 Plan. However, the 2015 Plan will continue to govern the terms and conditions of the outstanding awards previously granted thereunder. Any reserved shares not issued or subject to outstanding grants under the 2015 Plan on the effective date of the 2019 Plan became available for grant under the 2019 Plan and will be issued as Class A common stock.

2019 Equity Incentive Plan
In August 2019, the Board of Directors adopted the 2019 Plan, which was subsequently approved by the Company’s stockholders in September 2019. The Company initially reserved 49,809,576 shares of the Company’s Class A common stock to be issued under the 2019 Plan, which figure includes all shares reserved under the 2015 Plan not issued or subject to outstanding grants under the 2015 Plan as of the effective date of the 2019 Plan. The number of shares reserved for issuance under the 2019 Plan will increase automatically on July 1 of each of 2020 through 2029 by the number of shares of the Company’s Class A common stock equal to 5% of the total outstanding shares of all of the Company’s classes of common stock as of each June 30 immediately preceding the date of increase, or a lesser amount as determined by the Board of Directors.

The following summary sets forth the stock option activity under the 2019 Plan:
Options Outstanding
Number of Stock Options
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Term (years)
Aggregate
Intrinsic
Value (in millions)
Outstanding — June 30, 201964,602,124  $6.71  8.6$972.0  
Granted1,114,900  $24.56  
Exercised(638,614) $3.41  
Cancelled(802,448) $9.45  
Outstanding — September 30, 201964,275,962  $7.02  8.4$1,164.2  
Vested and Exercisable— September 30, 201919,525,770  $3.00  7.4$431.5  

The aggregate intrinsic value of options outstanding, vested and exercisable, were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of September 30, 2019. Prior to the IPO, the fair value of the Company's common stock was determined by the Board of Directors. After the IPO, the fair value of the common stock is the closing stock price of the Company's Class A common stock as reported on the Nasdaq Global Select Market.

As part of the 2015 Plan, the Company issued options to certain key management that vest upon the achievement of certain performance milestones. During the three months ended September 30, 2019 and 2018, the Company recorded stock-based compensation expense related to the performance based options of $3.7 million and $0.1 million, respectively.

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For the three months ended September 30, 2019 and 2018, the weighted-average grant date fair value per option was $12.80 and $4.22, respectively. The fair value of each option was estimated at the grant date using the Black-Scholes method with the following assumptions:

Three Months Ended September 30,
20192018
Weighted average risk-free interest rate (1)
1.6 2.9 
Weighted average expected term (in years)
6.36.3
Weighted average expected volatility (2)
45.0 45.0 
Expected dividend yield
    
____________________________
(1)Based on U.S. Treasury seven-year constant maturity interest rate whose term is consistent with the expected term of the option.
(2)Expected volatility is based on an analysis of comparable public company volatilities and adjusted for the Company’s stage of development.

With respect to the grants made under the 2015 Plan, the Company recognized stock-based compensation expense of $19.0 million and $3.4 million for the three months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the Company had $213.1 million of unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average period of 3.7 years.

During the three months ended September 30, 2019, the holder of a warrant to purchase 240,000 shares of the Company's Class B common stock net exercised the warrant into 238,253 shares of Class B common stock at an exercise price of $0.19 per share. As of September 30, 2019, there were zero warrants issued and outstanding.

Employee Stock Purchase Plan
In August 2019, the Board of Directors adopted, and in September 2019, the Company's stockholders approved, the ESPP, through which eligible employees may purchase shares of the Company's Class A common stock at a discount through accumulated payroll deductions. The ESPP became effective on the date the registration statement, in connection with the Company’s IPO, was declared effective by the SEC (the "Effective Date"). A total of 5,600,000 shares of the Company's Class A common stock are available for issuance and sale to eligible employees under the ESPP. The number of shares of the Company's Class A common stock that will be available for issuance and sale to eligible employees under the ESPP will increase automatically on the first day of each fiscal year of the Company beginning on July 1, 2020 through 2029, equal to 1% of the total number of outstanding shares of all classes of the Company's common stock on the immediately preceding June 30, or such lesser number as may be determined by the Board of Directors or applicable committee in its sole discretion.

Unless otherwise determined by the Board of Directors, each offering period will consist of four six-month purchase periods, provided that the initial offering period commenced on the Effective Date and will end on August 31, 2021, and the initial purchase period will end February 28, 2020. Thereafter, each offering period and each purchase period will commence on September 1 and March 1 and end on August 31 and February 28 of each two-year period or each six-month period, respectively.

Unless otherwise determined by the Board of Directors, the purchase price for each share of Class A common stock purchased under the ESPP will be 85% of the lower of the fair market value per share on the first trading day of the applicable offering period or the fair market value per share on the last trading day of the applicable purchase period.

12. Income Taxes
The Company recorded a provision for income taxes of $0.1 million and zero for the three months ended September 30, 2019 and 2018, respectively. The tax income provision consists of the Texas state franchise tax and international income taxes.
The Company regularly evaluates the realizability of its deferred tax assets and establishes a valuation allowance if it is more likely than not that some or all the deferred tax assets will not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, loss carryback and tax-planning strategies. Generally, more weight is given to objectively verifiable evidence, such as the cumulative loss in recent years, as a significant piece of negative evidence to overcome.

13. Loss Per Share
The computation of loss per share is as follows:
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Three Months Ended September 30,
2019  2018  
(in millions, except share and per share amounts)
Basic loss per share:
Net loss attributable to common stockholders
$(49.8) $(54.5) 
Shares used in computation:
Weighted-average common shares outstanding
38,453,864  24,999,075  
Basic and diluted loss per share
$(1.29) $(2.18) 

Basic and diluted loss per share are the same for each class of common stock because they are entitled to the same liquidation and dividend rights.
The following potentially dilutive shares were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
Three Months Ended September 30,
2019  2018  
Employee stock options
38,113,154  9,389,725  
Warrants
  231,358  
Redeemable convertible preferred stock
  189,147,535  

14. Segment Information
The Company applies ASC 280, Segment Reporting, in determining reportable segments for its financial statement disclosure. The Company has three reportable segments: Connected Fitness Products, Subscription and Other. Segment information is presented in the same manner that the Company’s Chief Operating Decision Maker (the “CODM”) reviews the operating results in assessing performance and allocating resources. The CODM reviews revenue and gross profit for each of the reportable segments. Gross profit is defined as revenue less cost of revenue incurred by the segment. No operating segments have been aggregated to form the reportable segments. The Company does not allocate assets at the reportable segment level as these are managed on an entity wide group basis. As of September 30, 2019, the Company did not have material assets located outside of the United States.

The Connected Fitness Product segment derives revenue from sale of the Bike, Tread and related accessories, and associated fees for delivery and installation and extended warranty agreements. The Subscription segment derives revenue from monthly Subscription fees as well as credits from live studio classes. The Other segment primarily consists of boutique and apparel sales. There are no internal revenue transactions between the Company’s segments.

Key financial performance measures of the segments including revenue, cost of revenue, and gross profit are as follows:
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Three Months Ended September 30,
2019  2018  
(in millions)
Connected Fitness Products:
Revenue
$157.6  $