CASTLIGHT HEALTH, INC., 10-K filed on 3/1/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Feb. 26, 2018
Class A
Feb. 26, 2018
Class B
Class of Stock [Line Items]
 
 
 
 
Document Type
10-K 
 
 
 
Amendment Flag
false 
 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
 
Document Fiscal Year Focus
2017 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Trading Symbol
CSLT 
 
 
 
Entity Registrant Name
CASTLIGHT HEALTH, INC. 
 
 
 
Entity Central Index Key
0001433714 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Filer Category
Accelerated Filer 
 
 
 
Entity Public Float
 
$ 386,200,000 
 
 
Entity Common Stock, Shares Outstanding
 
 
52,832,553 
82,441,771 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 61,319 
$ 48,722 
Marketable securities
32,025 
65,882 
Accounts receivable, net
20,761 
14,806 
Deferred commissions
6,403 
8,218 
Prepaid expenses and other current assets
3,991 
3,382 
Total current assets
124,499 
141,010 
Property and equipment, net
5,263 
5,285 
Restricted cash, non-current
1,325 
1,144 
Goodwill
91,785 
Intangible assets, net
20,253 
Deferred commissions, non-current
4,180 
5,050 
Other assets
1,997 
4,677 
Total assets
249,302 
157,166 
Current liabilities:
 
 
Accounts payable
3,907 
2,288 
Accrued expenses and other current liabilities
13,178 
6,369 
Accrued compensation
13,941 
9,443 
Deferred revenue
29,410 
30,623 
Total current liabilities
60,436 
48,723 
Deferred revenue, non-current
6,686 
5,245 
Debt, non-current
4,958 
Other liabilities, non-current
1,900 
1,236 
Total liabilities
73,980 
55,204 
Commitments and contingencies
   
   
Stockholders’ equity (deficit):
 
 
Preferred stock, $0.0001 par value; 10,000,000 shares authorized as of December 31, 2017 and 2016; no shares issued and outstanding as of December 31, 2017 and 2016
Additional paid-in capital
586,900 
457,596 
Accumulated other comprehensive income
(22)
Accumulated deficit
(411,569)
(355,644)
Total stockholders’ equity (deficit)
175,322 
101,962 
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)
249,302 
157,166 
Class A
 
 
Stockholders’ equity (deficit):
 
 
Common stock value issued
Class B
 
 
Stockholders’ equity (deficit):
 
 
Common stock value issued
$ 8 
$ 5 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Preferred Stock
 
 
Par Value
$ 0.0001 
$ 0.0001 
Shares Authorized
10,000,000 
10,000,000 
Shares Issued
Shares Outstanding
Class A
 
 
Common Stock
 
 
Par Value
$ 0.0001 
$ 0.0001 
Shares Authorized
200,000,000 
200,000,000 
Shares Issued
52,853,400 
54,295,405 
Shares Outstanding
52,853,400 
54,295,405 
Class B
 
 
Common Stock
 
 
Par Value
$ 0.0001 
$ 0.0001 
Shares Authorized
800,000,000 
800,000,000 
Shares Issued
81,685,875 
50,015,518 
Shares Outstanding
81,685,875 
50,015,518 
Consolidated Statements of Operations (USD $)
Share data in Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenue:
 
 
 
Subscription
$ 120,496,000 
$ 95,016,000 
$ 70,350,000 
Professional services and other
10,933,000 
6,684,000 
4,965,000 
Total revenue, net
131,429,000 
101,700,000 
75,315,000 
Cost of revenue:
 
 
 
Cost of subscription
28,410,000 1
16,463,000 1
12,417,000 1
Cost of professional services
 
 
21,351,000 1
Total cost of revenue
47,184,000 
34,561,000 
33,768,000 
Gross profit
84,245,000 
67,139,000 
41,547,000 
Operating expenses:
 
 
 
Sales and marketing
 
 
67,414,000 1
Research and development
54,502,000 1
40,460,000 1
30,077,000 1
General and administrative
28,825,000 1
26,859,000 1
24,274,000 1
Total operating expenses
145,640,000 
126,119,000 
121,765,000 
Operating loss
(61,395,000)
(58,980,000)
(80,218,000)
Other income, net
618,000 
432,000 
298,000 
Income (Loss) from Continuing Operations before Income Taxes, Noncontrolling Interest
(60,777,000)
(58,548,000)
(79,920,000)
Income Tax Expense (Benefit)
5,200,000 
Net loss
$ (55,571,000)
$ (58,548,000)2
$ (79,920,000)2
Net loss per share, basic and diluted
$ (0.44)
$ (580.00)
$ (850.00)
Weighted-average shares used to compute basic and diluted net loss per share
125,534 
100,798 
93,753 
Consolidated Statements of Operations Parenthetical (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cost of subscription [Member]
 
 
 
Allocated Share-based Compensation Expense
$ 888 
$ 506 
$ 283 
Cost of professional services [Member]
 
 
 
Allocated Share-based Compensation Expense
1,656 
1,961 
2,175 
Sales and marketing [Member]
 
 
 
Allocated Share-based Compensation Expense
9,665 
8,843 
7,705 
Research and development [Member]
 
 
 
Allocated Share-based Compensation Expense
7,415 
5,959 
3,498 
General and administrative [Member]
 
 
 
Allocated Share-based Compensation Expense
$ 4,954 
$ 4,743 
$ 4,169 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Consolidated Statement of Comprehensive Loss:
 
 
 
Net loss
$ (55,571)
$ (58,548)1
$ (79,920)1
Other comprehensive (loss) gain:
 
 
 
Net change in unrealized (loss) gain on available-for-sale marketable securities
(22)
79 
(39)
Other comprehensive (loss) gain
(22)
79 
(39)
Comprehensive loss
$ (55,593)
$ (58,469)
$ (79,959)
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Operating activities:
 
 
 
Net loss
$ (55,571,000)
$ (58,548,000)1
$ (79,920,000)1
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
6,613,000 
3,168,000 1
2,024,000 1
Stock-based compensation
24,578,000 
22,012,000 1
17,830,000 1
Amortization of deferred commissions
12,453,000 
5,070,000 1
3,510,000 1
Release of deferred tax valuation allowance due to business combination
5,206,000 
1
1
Release of deferred tax valuation allowance due to business combination
(4,900,000)
(14,600,000)
 
Change in fair value of contingent consideration liability
(671,000)
1
1
Accretion and amortization of marketable securities
(83,000)
481,000 1
1,385,000 1
Expense related to expiration of SAP warrant
1,132,000 
1
1
Gain on sale of investment in related party
(1,375,000)
1
1
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,522,000)
(2,055,000)1
(1,654,000)1
Deferred commissions
(9,768,000)
(7,977,000)1
(7,633,000)1
Prepaid expenses and other assets
1,645,000 
448,000 1
328,000 1
Accounts payable
764,000 
(1,035,000)1
646,000 1
Accrued expenses and other liabilities
3,493,000 
1,743,000 1
(1,158,000)1
Deferred revenue
(1,629,000)
1,756,000 1
6,752,000 1
Accrued compensation
2,690,000 
(2,034,000)1
1,022,000 1
Net cash used in operating activities
(23,457,000)
(36,971,000)1
(56,868,000)1
Investing activities:
 
 
 
Proceeds from sale of investment in related party
5,500,000 
1
1
Investment in related party
1
(4,125,000)1
Purchase of property and equipment, net
(2,544,000)
(1,702,000)1
(5,376,000)1
Purchase of marketable securities
(62,658,000)
(98,184,000)1
(119,867,000)1
Sales of marketable securities
1
5,000,000 1
Maturities of marketable securities
96,576,000 
146,508,000 1
180,111,000 1
Business combination, net of cash acquired
(2,264,000)
1
1
Net cash provided by investing activities
34,610,000 
46,622,000 1
55,743,000 1
Financing activities:
 
 
 
Proceeds from the exercise of stock options and warrants
2,356,000 
2,829,000 1
3,944,000 1
Proceeds from the issuance of common stock and warrants to SAP
17,358,000 1
1
Payments of deferred financing costs
(731,000)
(122,000)1
(94,000)1
Net cash provided by financing activities
1,625,000 
20,065,000 1
3,850,000 1
Net increase in cash, cash equivalents and restricted cash
12,778,000 
29,716,000 1
2,725,000 1
Cash, cash equivalents and restricted cash at beginning of period
49,866,000 1
20,150,000 1
 
Total cash, cash equivalents and restricted cash
62,644,000 
49,866,000 1
20,150,000 1
Cash and cash equivalents
61,319,000 
48,722,000 
19,150,000 
Restricted cash, non-current
1,325,000 
1,144,000 
1,000,000 
Total cash, cash equivalents and restricted cash
62,644,000 
49,866,000 1
20,150,000 1
Cash paid during the year for interest
117,000 
Non-cash purchase consideration related to acquisition of Jiff
101,692,000 
Purchase of property and equipment, accrued but not paid
$ (188,000)
$ (20,000)
$ (165,000)
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Accumulated Deficit [Member]
Beginning balance at Dec. 31, 2014
$ 176,190 
$ 9 
$ 393,397 
$ (40)
$ (217,176)
Beginning balance (in shares) at Dec. 31, 2014
 
91,191,383 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Vesting of restricted stock units
 
 
 
Vesting of restricted stock units (in shares)
 
295,468 
 
 
 
Exercise of stock options (in shares)
 
4,131,241 
 
 
 
Exercise of stock options, net
3,944 
3,943 
 
 
Stock-based compensation
18,179 
 
18,179 
 
 
Comprehensive loss
(79,959)
 
(39)
(79,920)
Ending balance at Dec. 31, 2015
118,354 
10 
415,519 
(79)
(297,096)
Ending balance (in shares) at Dec. 31, 2015
 
95,618,092 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Cumulative adjustment upon adoption of ASU 2016-09
 
354 
 
(354)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest, Adjusted Balance
101,962 
10 
457,950 
(355,998)
Vesting of restricted stock units
 
 
 
Vesting of restricted stock units (in shares)
 
1,984,407 
 
 
 
Exercise of stock options (in shares)
 
1,945,766 
 
 
 
Exercise of stock options, net
2,829 
2,829 
 
 
Stock-based compensation
22,012 
 
22,012 
 
 
Issuance Of Common Stock And Warrants To SAP Net, Shares
4,762,658 
 
 
 
 
Issuance Of Common Stock And Warrants To SAP, Net
17,236 
 
17,236 
Comprehensive loss
(58,469)
 
 
79 
(58,548)
Ending balance at Dec. 31, 2016
101,962 
10 
457,596 
(355,644)
Ending balance (in shares) at Dec. 31, 2016
 
104,310,923 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Vesting of restricted stock units (in shares)
 
3,956,495 
 
 
 
Exercise of stock options (in shares)
 
1,217,808 
 
 
 
Exercise of stock options, net
2,356 
2,355 
 
 
Issuance of common stock and warrants to SAP, net, shares
 
 
 
 
SAP warrant modification
1,729 
 
1,729 
 
 
Stock-based compensation
24,578 
 
24,578 
 
 
Comprehensive loss
(55,593)
 
 
(22)
(55,571)
Issuance Of Common Stock Related To Acquisition, Shares
25,054,049 
 
 
 
 
Issuance Of Common Stock Related To Acquisition, Amount
100,290 
100,288 
 
 
Ending balance at Dec. 31, 2017
$ 175,322 
$ 13 
$ 586,900 
$ (22)
$ (411,569)
Ending balance (in shares) at Dec. 31, 2017
 
134,539,275 
 
 
 
Organization and Description of Business
Organization and Description of Business
Organization and Description of Business

Description of Business

Castlight Health, Inc. (“Castlight” or “the Company”) offers a comprehensive software-as-a-service platform that simplifies health benefits navigation for millions of employees. The Castlight platform matches employees to the best resources their employers make available to them - whether they are healthy, actively seeking medical care, or managing a condition - and motivates them to take the best steps for their health. Castlight helps employers generate more value from their benefits investments by helping to improve outcomes, lower health care costs, and increase benefits satisfaction. On April 3, 2017, the Company expanded into wellbeing through its acquisition of Jiff, Inc. (“Jiff”). Jiff's results of operations have been included in the Company’s Consolidated Statements of Operations beginning April 3, 2017. See Note 3Business Combinations for more information on the Jiff acquisition. The Company was incorporated in the State of Delaware in January 2008. The Company's principal executive offices are located in San Francisco, California.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation
The consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). In the opinion of management, the information herein reflects all adjustments, consisting only of normal recurring adjustments, except as otherwise noted, considered necessary for a fair statement of results of operations, financial position and cash flows. The consolidated financial statements include the results of Castlight and its wholly owned U.S. subsidiary.
During the fourth quarter of 2017, we adopted the requirements of Accounting Standards Update ("ASU") No. 2016-18, “Statement of Cash Flows” as discussed later in this note. All amounts and disclosures set forth in this Form 10-K have updated to comply with the new standard, as indicated by the “as adjusted” footnote.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. These estimates include, but are not limited to, the determination of the relative selling prices for the Company's services, certain assumptions used in the valuation of its equity awards and the fair value of assets acquired and liabilities assumed for business combinations. Actual results could differ from those estimates, and such differences could be material to the Company's consolidated financial position and results of operations.

Segment Information
The Company's chief operating decision maker, its CEO, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company's financial performance. Accordingly, the Company has determined that it operates in a single reportable segment, cloud-based products.

Revenue Recognition
The Company derives its revenue from sales of cloud-based subscription service and professional services contracts. The Company's cloud-based subscription service contracts are generally three years in length.
The Company's cloud-based subscription service contracts do not provide customers with the right to take possession of the software supporting the cloud-based service and, as a result, are accounted for as service contracts.
The Company commences revenue recognition for its cloud-based subscription service and professional services when all of the following criteria are met:
there is persuasive evidence of an arrangement;
the service has been provided to the customer;
collection of the fees is reasonably assured; and
the amount of fees to be paid by the customer is fixed or determinable.
The Company's subscription and professional service arrangements do not contain refund provisions for fees earned related to services performed. The Company does, however, have commitments under service-level agreements, as discussed under "Warranties and Indemnification" below.
Subscription Revenue. Subscription revenue recognition commences on the date that the Company's cloud-based service is made available to the customer, which is considered the launch date, provided all of the other criteria described above are met. Revenue is typically recognized on a straight-line basis.
Some of the Company's cloud-based subscription arrangements include performance incentives that are generally based upon employee engagement. Fees for performance incentives are considered contingent revenue, and are recognized over the remaining term of the related subscription arrangement commencing at the time they are earned.
Professional Services and Other Revenue. Professional services and other revenue is primarily comprised of implementation services and communication services related to the Company's cloud-based subscription service. Nearly all of the Company's professional services are sold on a fixed-fee basis. The Company does not have standalone value for its implementation services. Accordingly, the Company recognizes implementation services revenue in the same manner as the associated cloud-based subscription service, beginning on the launch date, provided all other criteria described above have been met. Communication services have standalone value and the associated revenue is recognized over the contractual term, generally one year, commencing when the revenue recognition criteria have been met. Revenue from products sold through our online market place and add-on subscription products made available from other ecosystem partners are recognized on a net basis principally because we are not the primary obligor to the end-customers.
Multiple Deliverable Arrangements. To date, the Company has generated substantially all its revenue from multiple deliverable arrangements consisting of multi-year cloud-based subscription services and professional services, including implementation services and communication services. For arrangements with multiple deliverables, the Company evaluates whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, the Company accounts for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables do not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with the Company's cloud-based subscription service, and revenue for the combined unit is recognized over the remaining term of the cloud-based subscription service.
The Company's deliverables have standalone value if we or any other vendor sells a similar service separately. The Company has concluded that it has standalone value for its cloud-based subscription service as it sells these services separately through renewals and for its communication services as other vendors sell similar services separately. Conversely, the Company has concluded that its implementation services do not have standalone value, as the Company and others do not yet sell these services separately. Accordingly, the Company considers the separate units of accounting in its multiple deliverable arrangements to be the communication services and a combined deliverable comprised of cloud-based subscription services and implementation services.
When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence, or VSOE, of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence, or TPE, of selling price is used to establish the selling price if it exists. If TPE does not exist, the Company estimates the best estimated selling price, or BESP. VSOE does not currently exist for any of its deliverables. Additionally, the Company does not believe TPE is a practical alternative due to differences in its cloud-based subscription service compared to other parties and the availability of relevant third-party pricing information for its cloud-based subscription service and its other services. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, the Company allocates the arrangement fee to the separate units of accounting based on its BESP. The amount of arrangement fee allocated is limited by contingent revenue, if any.
The Company determines BESP for its deliverables by considering its overall pricing objectives and market conditions. This includes evaluating the Company's pricing practices, its target prices, the size of its transactions, historical sales and its go-to-market strategy. The determination of BESP is made through consultation with and approval by management. For financial statement presentation purposes, the Company allocates the fees from its combined units of accounting to subscription and professional services based upon their relative selling price.

Costs of Revenue

Cost of revenue consists of the cost of subscription revenue and cost of professional services and other revenue.

Cost of subscription revenue primarily consists of data fees, employee-related expenses (including salaries, benefits and stock-based compensation) related to hosting costs of its cloud-based service, cost of subcontractors, expenses for service delivery (which includes call center support), allocated overhead, the costs of data center capacity, amortization of internal-use software and depreciation of certain owned computer equipment and software.

Cost of professional services and other revenue consists primarily of employee-related expenses associated with these services, the cost of subcontractors and travel costs. The time and costs of the Company's customer implementations vary based on the source and condition of the data the Company receive from third parties, the configurations that the Company agrees to provide and the size of the customer.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. The Company's cash and cash equivalents generally consist of investments in money market funds, U.S treasury securities and U.S. agency obligations. Cash and cash equivalents are stated at fair value.

Marketable Securities

The Company's marketable securities consist of U.S. agency obligations and U.S. treasury securities, with maturities at the time of purchase of greater than three months. Marketable securities with remaining maturities in excess of one year are classified as noncurrent. The Company classifies its marketable securities as available-for-sale at the time of purchase based on its intent and are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive loss. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. The Company consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely it will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income, net in the consolidated statements of operations.

Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company's assessment of the collectability of accounts. The Company regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice and the collection history of each customer to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. For all periods presented, the allowance for doubtful accounts was not significant.

Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with the non-cancellable portion of cloud-based subscription service contracts with customers and consist of sales commissions paid to the Company's direct sales force and channel partners. The commissions are deferred and amortized over the non-cancellable terms of the related contracts. The deferred commission amounts are recoverable through the future revenue streams under the non-cancellable customer contracts. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.

Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective asset as follows:
Software
  
3–5 years
Computer equipment
  
3 years
Furniture and equipment
  
5–7 years
Leasehold improvements
  
Shorter of the lease term or the estimated useful lives of the improvements

Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the consolidated statement of operations for the period realized.

Internal-Use Software

For the Company's development costs related to its cloud-based service, the Company capitalizes costs incurred during the application development stage. Costs related to preliminary project and post-implementation stages are expensed as incurred. Capitalized software development costs are included as part of property and equipment and are amortized on a straight-line basis over the technology's estimated useful life, which is generally three years. The amortization expense is recorded as a component of cost of subscription revenue and was $1.0 million and $0.9 million for the years ended December 31, 2017 and 2016, respectively.

The Company did not have any capitalized software development costs for the years ended December 31, 2017 and December 31, 2016.
Restricted Cash
Restricted cash consists of a letter of credit related to the Company's leased office space.
Business Acquisitions
The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users and acquired technology, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Goodwill
The Company reviews goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The Company adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, during the fourth quarter of fiscal 2017, which eliminated step 2 from the testing of goodwill impairment. The Company has elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the Company’s single reporting unit is less than its carrying amount. Based on the qualitative assessment, if it is determined that it is more likely than not that its fair value is less than its carrying amount, the fair value of the Company's single reporting unit is compared to its carrying value. Any excess of the goodwill carrying amount over the fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. As of December 31, 2017, no impairment of goodwill has been identified.
Intangible Assets
Acquired finite-lived intangible assets are amortized over their estimated useful lives. The Company evaluates the recoverability of its intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. The Company has not recorded any such impairment charges.
Deferred Revenue
Deferred revenue consists of professional services and cloud-based subscription services that have been billed in advance of revenue being recognized. Additionally, deferred revenue consists of professional services that have been billed and delivered but the revenue is being deferred and recognized together with a cloud-based subscription contract as a combined unit of accounting. The Company invoices its customers for its cloud-based subscription services based on the terms of the contract, which can be annual, quarterly or monthly installments. The Company invoices its customers for its professional services and the first year of communication services generally at contract execution. Deferred revenue that is anticipated to be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as noncurrent.

Stock-based Compensation
All stock-based compensation to employees is measured based on the grant-date fair value of the awards and recognized in the Company's consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). The options assumed and awarded in connection with the acquisition of Jiff were valued using the Monte Carlo simulation model. The Company estimates the fair value of all other stock options granted using the Black-Scholes option valuation model. For restricted stock units, fair value is based on the closing price of the Company's Class B common stock on the grant date. Compensation expense is recognized over the vesting period of the applicable award using the straight-line method. For awards with performance based and service vesting conditions, compensation cost is recognized over the requisite service period if it is probable that the performance condition will be satisfied based on the accelerated attribution method.

Income Taxes
The Company accounts for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax bases and tax credit and net operating loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse.
The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
The Company recognizes and measures uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions on a regular basis. The Company's evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of audit and effective settlement of audit issues.

Warranties and Indemnification
The Company's cloud-based service is generally warranted to be performed in a professional manner and in a manner that will comply with the terms of the customer agreements.

The Company's arrangements generally include certain provisions for indemnifying customers against liabilities if there is a breach of a customer’s data or if the Company's service infringes a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in the financial statements. The Company has entered into service-level agreements with certain customers warranting, among other things, defined levels of performance and response times and permitting those customers to receive credits for prepaid amounts related to subscription services in the event that the Company fails to meet those levels. To date, the Company has not experienced any significant failures to meet defined levels of performance and response times as a result of those agreements.

The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as its director or officer or that person’s services provided to any other company or enterprise at the Company's request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.

Advertising Expenses
Advertising is expensed as incurred. Advertising expense was $0.3 million, $0.6 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Concentrations of Risk and Significant Customers
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits.
The Company serves its customers and users from outsourced data center facilities located in the United States. The Company has internal procedures to restore all of its production customer facing services in the event of disasters at the certain facilities. Procedures utilizing currently deployed hardware, software and services at certain of the Company's disaster recovery locations allow its cloud-based service to be restored within 24 hours during the implementation of the procedures to restore services.
Revenue from customers representing 10% or more of total revenue for the respective years, is summarized as follows:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Revenue:
 
 
 
 
 
Customer A
*
 
10
%
 
*
  * Less than 10%
During the years ended December 31, 2017, 2016 and 2015, all of the Company's revenue was generated by customers located in the United States.
Accounts receivable from customers representing 10% or more of total accounts receivable as of the respective dates is summarized as follows:
 
As of December 31,
 
2017
 
2016
Accounts Receivable:
 
 
 
Customer B
*
 
18
%
 * Less than 10%
Recently Adopted Accounting Pronouncements
    
Statement of Cash Flows

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows.” The standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The standard will become effective for the Company beginning January 1, 2018, and early adoption is permitted. The Company early adopted the standard in the fourth quarter of 2017. As a result of adopting ASU 2016-18, we adjusted our consolidated statements of cash flows from previously reported amounts. Select consolidated statements of cash flow line items, which reflect the adoption of ASU 2016-18 are shown below (in thousands):


Year Ended December 31, 2016

As Reported

Adjustment

As Adjusted
Investing activities:





Restricted cash
$
(144
)

$
144


$

Net cash provided by investing activities
46,478


144


46,622







Net increase in cash, cash equivalents and restricted cash
29,572


144


29,716

Cash, cash equivalents and restricted cash at beginning of period
19,150


1,000


20,150

Cash, cash equivalents and restricted cash at end of period
$
48,722


$
1,144


$
49,866


 
Year Ended December 31, 2015
 
As Reported
 
Adjustment
 
As Adjusted
Investing activities:
 
 
 
 
 
Restricted cash
$
(1,000
)
 
$
1,000

 
$

Net cash provided by investing activities
54,743

 
1,000

 
55,743

 

 
 
 
 
Net increase in cash, cash equivalents and restricted cash
1,725

 
1,000

 
2,725

Cash, cash equivalents and restricted cash at beginning of period
17,425

 

 
17,425

Cash, cash equivalents and restricted cash at end of period
$
19,150

 
$
1,000

 
$
20,150



Stock-based Compensation
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment.” The guidance will change how companies account for certain aspects of share-based payments to employees. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The Company adopted this guidance on January 1, 2017, using a modified retrospective approach, and accordingly recorded a cumulative-effect adjustment charge of approximately $0.4 million to the beginning accumulated deficit for the impact of electing to account for forfeitures as they occur. The adoption of this standard did not have any impact to the Statement of Operations or the Statement of Cash Flows. The Company is subject to full valuation allowance and thus has not utilized any excess tax benefits or realized any cash tax benefit related to stock compensation expense. The adoption of this standard did not have any material impact to the Company’s results of operations for the year ended December 31, 2017.

Goodwill

ASU 2017-4 eliminates Step 2 from the goodwill impairment test, under which an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, instead requiring an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The standard will become effective for the Company beginning January 1, 2020, and early adoption is permitted. The Company early adopted the standard in the fourth quarter of 2017. The adoption of the standard did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” and has since updated the ASU. This ASU replaces existing revenue recognition standards with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The new standard will be effective for the Company beginning January 1, 2018.

The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company plans to adopt under the full retrospective method.

The Company is in its final stages of assessing the impact of the new standard on its accounting policies, processes, and controls, including finalizing system requirements.
Based on its assessment to date, the Company determined a significant area impacted by the adoption of the new standard will be related to the Company’s costs to fulfill contracts with customers. The Company currently expenses costs to fulfill contracts when they are incurred. The new standard states that an entity shall recognize as assets certain costs incurred to fulfill contracts. The new standard also states that costs to fulfill contracts that are recognized as assets are amortized on a systematic basis over a period that is consistent with the transfer to the customer of the goods or services to which those assets relate. The Company believes certain of its costs to fulfill contracts will be recognized as assets under the new standard and we have determined the amortization period of those costs to be five years.

Additionally, based on its assessment to date, the Company determined another area impacted by the adoption of the new standard will be related to the Company’s costs to obtain contracts with customers. The Company currently capitalizes certain sales commissions and amortizes those costs over the non-cancelable portion of its subscription contracts. The new standard states that certain costs to obtain a contract shall capitalized and then amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which those assets relate. The Company believes there will be additional costs capitalized under the new standard, and we have determined the amortization of all costs capitalized will generally be five years.

Lastly, based on its assessment to date, the Company believes the final area impacted by the adoption of the new standard will be related to revenue recognition. Specifically, the impact will be driven by the accounting for termination provisions, the estimation of variable consideration, the accounting for contract modifications, and the allocation of the transaction price to the Company’s multiple performance obligations.

Expected impact of adoption

From a deferred cost perspective, the Company preliminarily expects the impact of the adoption of the new standard on 2017 and 2016 will be as follows (in thousands):

 
Year Ended December 31,
 
2017
 
2016
 
As reported
 
Adjustment increase/(decrease)
 
As adjusted
 
As reported
 
Adjustment increase/(decrease)
 
As adjusted
Income statement:
 
 
 
 
 
 
 
 
 
 
 
  Cost of professional services and other
$
18,774

 
$
(532
)
 
$
18,242

 
$
18,098

 
$
(2,695
)
 
$
15,403

  Sales and marketing
62,313

 
(2,526
)
 
59,787

 
58,800

 
(183
)
 
58,617


 
As of
 
December 31, 2017
 
December 31, 2016
 
As reported
 
Adjustment increase/(decrease)
 
As adjusted
 
As reported
 
Adjustment increase/(decrease)
 
As adjusted
Balance sheet:
 
 
 
 
 
 
 
 
 
 
 
  Deferred commissions
$
10,583

 
$
16,821

 
$
27,404

 
$
13,268

 
$
14,295

 
$
27,563

  Deferred professional services costs

 
12,480

 
12,480

 

 
11,948

 
11,948


From a revenue recognition perspective, the Company continues to assess the impact of the adoption of the new standard on 2017 and 2016.

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases.” The guidance will require lessees to put all leases on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements in a manner similar to current practice. The guidance states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The guidance will be effective for the Company beginning January 1, 2019 and early adoption is permitted. The Company is evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption. At this point in time, the Company does not intend to adopt the standard early.
Business Combinations
Business Combinations
Business Combinations
    
On April 3, 2017, the Company completed its acquisition of Jiff. Jiff provides an enterprise health benefits platform that serves as a central hub for employee wellbeing and employee benefit programs. The acquisition enables the Company to provide the full spectrum of wellbeing, healthcare decision support and a benefits hub all in one complete package. The Company acquired Jiff for approximately 27,000,000 shares and options.

At the closing on April 3, 2017, Venrock, a holder of more than 5% of the Company’s capital stock, acquired a total of 3,965,979 shares of the Company’s Class B common stock in exchange for its shares of Jiff capital stock. Venrock will also receive its pro rata share of any additional contingent consideration further described below. Bryan Roberts, the Chairman of the Company’s Board of Directors, is a Partner at Venrock. Accordingly, this was a related party transaction.

The Company’s Board appointed a Special Committee (comprised solely of disinterested directors) to which it delegated the full and exclusive power, authority and discretion of the Castlight Board to evaluate, assess, and approve the Jiff transaction on its behalf, including retaining a financial advisor for an opinion on the fairness of the financial conditions of the transaction. The transaction was approved solely by the Special Committee which concluded that the transaction terms were fair to Castlight, and the transaction was in the best interests of Castlight and its stockholders.

As part of the merger, certain stockholders and option holders were to receive an aggregate of 1,000,000 shares of the Company’s Class B common stock or options if the Jiff business achieved at least $25 million in revenue in 2017 and an aggregate of 3,000,000 shares of Class B common stock or options if the Jiff business achieved at least $25 million in net new bookings during 2017 (“the milestones”). As of December 31, 2017, the Company evaluated and determined that both the milestones were not met. Additionally, all options for Jiff common stock held by Jiff employees who became employees of the combined company were converted into options to purchase the Company’s Class B common stock.

The following table summarizes the components of the purchase consideration transferred based on the closing price of the Company’s stock as of the acquisition date (in thousands):
 
 
Fair value
Fair value of Company Class B common stock (25,054,049 shares @ $3.65 per share)
 
$
91,447

Fair value of contingent consideration
 
671

Fair value of assumed Jiff options attributable to pre-combination services
 
9,574

Transaction costs paid on behalf of Jiff
 
4,498

Estimated purchase price consideration
 
$
106,190


    
For the Jiff options assumed as part of the acquisition, the Company applied the ratio of pre-combination service provided, on a grant-by-grant basis, to the total service period and applied this ratio to the acquisition date fair value of the Jiff awards.

The Company determined that the contingent consideration shares associated with the milestones are one unit of account, and the Company classified the contingent consideration as a liability as the arrangement can be settled in a variable number of shares and is not considered fixed-for-fixed. Based on the probability of completing the milestones and changes in the fair value of the Company’s common stock, the Company used a Monte Carlo simulation model to determine the fair value of the contingent consideration liability which was $0.7 million at the date of acquisition. As of December 31, 2017, the Company reversed the contingent consideration liability as the milestones were not met. As a result, $0.7 million of income was recorded in general and administrative expenses for the year ended December 31, 2017. See Note 6Fair Value Measurements for the fair value measurement disclosure on the contingent consideration liability.

The Company has accounted for this acquisition as a business combination. The method requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date.     

The allocation of purchase consideration to assets and liabilities is not yet finalized. The Company continues to evaluate the fair value of certain assets and liabilities related to the acquisition of Jiff. Additional information, which existed as of the acquisition date but was at that time unknown to us, may become known to us during the remainder of the measurement period. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill. The preliminary estimated fair values of assets acquired and liabilities assumed may be subject to change as additional information is received. The fair values of the assets acquired and liabilities assumed by major class in the acquisition of Jiff as of December 31, 2017 were recognized as follows (in thousands):
Cash
$
2,234

Current assets
5,159

Other assets
1,971

Acquired intangible assets
23,900

Goodwill
91,785

    Total assets acquired
125,049

Deferred revenue
(1,857
)
Other current liabilities
(6,192
)
Debt
(5,578
)
Non-current liabilities
(5,232
)
Total net assets acquired
$
106,190



The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management’s estimates and assumptions. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill balance is primarily attributed to the cross-selling opportunities, cost synergies, and a knowledgeable and experienced workforce which play an important role in the integration of the acquired customers and technology. The goodwill balance is not deductible for U.S. income tax purposes.

The following table sets forth the fair value components of identifiable acquired intangible assets (in thousands) and their estimated useful lives (in years):
 
 
Fair Value
 
Useful Life
Customer relationships
 
$
10,900

 
10
Developed technology
 
10,600

 
5
Backlog
 
1,500

 
3
Other acquired intangible assets
 
900

 
1-3
Total identifiable intangible assets
 
$
23,900

 
 

   
Customer relationships represent the fair value of projected cash flows that will be derived from the sale of products to Jiff's existing customers based on existing, in-process, and future versions of the underlying technology. Developed technology represents Jiff’s benefits platform. The Company used the relief from royalty method to value the developed technology. To determine the net cash flow that a market participant would expect to realize from licensing the Company's technology, the Company estimated a net royalty rate, which excludes any expenses that would be incurred to maintain the current functionality of the technology.

The Company has included the financial results of Jiff in the consolidated statements of operations from the date of acquisition. For the year ended December 31, 2017, $10.9 million revenue attributable to Jiff was included in the consolidated results of operations, and the associated operating income was immaterial. The Company incurred $3.1 million of acquisition-related costs for the year ended December 31, 2017 that were recognized in general and administrative expenses.

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Jiff as if the companies were combined as of the beginning of 2016. The historical consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination and factually supportable. The unaudited pro forma financial information presented includes the business combination accounting effects resulting from the acquisition, including amortization charges from acquired intangible assets, stock-based compensation, and acquisition-related costs. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of 2016.

The unaudited pro forma financial information is as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
Total revenue
$
134,997

 
$
107,287

Net loss
$
(61,068
)
 
$
(89,448
)


The pro forma revenue and net loss reflects material, nonrecurring adjustments, such as the tax benefit of $5.2 million that resulted from the acquisition, non-recurring acquisition-related compensation expense and non-recurring deferred revenue fair value adjustments.
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Goodwill and Intangible Assets

Goodwill

Currently, all of the Company’s goodwill relates to the acquisition of Jiff. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill.

The changes in the carrying amount of goodwill as of December 31, 2017 were as follows (in thousands):
Balance as of December 31, 2016 (1)
$

Acquisition of Jiff
91,398

Measurement period adjustments for Jiff acquisition
387

Balance as of December 31, 2017
$
91,785

(1) The Company had no goodwill prior to the acquisition of Jiff. 

Intangible assets, net
    
The following table sets forth the fair value components of identifiable acquired intangible assets (in thousands) and their estimated useful lives (in years) as of December 31, 2017 were as follows (in thousands):
 
 
Intangible Assets, Gross
 
Accumulated Amortization
 
Acquired Intangibles, Net
 
Useful Life
 
 
December 31, 2016 (1)
 
Additions
 
December 31, 2017
 
December 31, 2016
 
Expense
 
December 31, 2017
 
December 31, 2017
 
Customer relationships
 
$

 
$
10,900

 
$
10,900

 
$

 
$
(818
)
 
$
(818
)
 
10,082

 
10
Developed technology
 

 
10,600

 
10,600

 

 
(1,590
)
 
(1,590
)
 
9,010

 
5
Backlog
 

 
1,500

 
1,500

 

 
(664
)
 
(664
)
 
836

 
3
Other acquired intangible assets
 

 
900

 
900

 

 
(575
)
 
(575
)
 
325

 
1-3
Total identifiable intangible assets
 
$

 
$
23,900

 
$
23,900

 
$

 
$
(3,647
)
 
$
(3,647
)
 
$
20,253

 
 
(1) The Company had no intangible assets prior to the acquisition of Jiff. 

Amortization expense from acquired intangible assets for the year ended December 31, 2017 was $3.6 million and is included in cost of subscription, general and administrative, and sales and marketing expenses.

Estimated amortization expense for acquired intangible assets for the following five years and thereafter is as follows (in thousands):
2018
$
4,044

2019
3,505

2020
3,242

2021
3,210

2022
1,620

Thereafter
4,632

Total estimated amortization expense
$
20,253

Marketable Securities
Marketable Securities
Marketable Securities
As of December 31, 2017 and December 31, 2016, respectively, marketable securities consisted of the following (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2017
 
 
 
 
 
 
 
U.S. treasury securities
$
31,047

 
$

 
$
(22
)
 
$
31,025

U.S. agency obligations
19,366

 

 

 
19,366

Money market mutual funds
6,115

 

 

 
6,115

 
56,528

 

 
(22
)
 
56,506

Included in cash and cash equivalents
24,481

 

 

 
24,481

Included in marketable securities
$
32,047

 
$

 
$
(22
)
 
$
32,025


 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2016
 
 
 
 
 
 
 
U.S. treasury securities
$
37,864

 
$

 
$
(2
)
 
$
37,862

U.S. agency obligations
33,019

 
5

 
(3
)
 
33,021

Money market mutual funds
7,965

 

 

 
7,965

 
78,848

 
5

 
(5
)
 
78,848

Included in cash and cash equivalents
12,966

 

 

 
12,966

Included in marketable securities
$
65,882

 
$
5

 
$
(5
)
 
$
65,882

Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
The Company measures its financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires that the Company maximizes the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
 
The fair value of marketable securities included in the Level 2 category is based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. These values were obtained from a third-party pricing service and were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established third party pricing vendors and broker-dealers.

Except for the valuation for contingent consideration liability discussed below, there have been no changes in valuation techniques in the periods presented. There were no significant transfers between fair value measurement levels for the years ended December 31, 2017 and 2016. The following tables present information about the Company's assets that are measured at fair value on a recurring basis using the above input categories (in thousands):
 
December 31, 2017
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
6,115

 
$

 
$
6,115

U.S. agency obligations

 
18,366

 
18,366

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
1,000

 
1,000

U.S. treasury securities

 
31,025

 
31,025

 
$
6,115


$
50,391


$
56,506

 
 
December 31, 2016
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
7,965

 
$

 
$
7,965

U.S. treasury securities

 
5,001

 
5,001

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
33,021

 
33,021

U.S. treasury securities

 
32,861

 
32,861

 
$
7,965


$
70,883


$
78,848


Gross unrealized gains and losses for cash equivalents and marketable securities as of December 31, 2017 and December 31, 2016 were not material. The Company does not believe the unrealized losses represent other-than-temporary impairments based on its evaluation of available evidence as of December 31, 2017.
There were no realized gains or losses for the years ended December 31, 2017 and 2016. As of December 31, 2017 and December 31, 2016, all of the Company's marketable securities mature within one year.

The Company classified its contingent consideration liability in connection with the acquisition of Jiff within the Level 3 category, as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. At the time of acquisition, the Company estimated the fair value of the contingent consideration liability based on the Monte Carlo simulation model. The fair value of the contingent consideration was calculated with numerous projected outcomes, the results of which are averaged and then discounted to estimate the present value. Some of the more significant assumptions inherent in the development of the Monte Carlo simulation model included bookings and revenue forecasts, asset-level volatility, stock price volatility, correlation between stock price and revenue, risk-free rate, weighted average cost of capital (“WACC”), and stock price. Any change in these assumptions could result in a significantly higher (lower) fair value measurement. The fair value of the contingent consideration was remeasured each reporting period. During the fourth quarter of 2017, the Company reversed the contingent consideration liability since the milestones were not met.

The following is a reconciliation of the Level 3 contingent consideration liability (in thousands):

 
 
Contingent Consideration Liability
Balance as of December 31, 2016
 
$

Initial fair value as of acquisition date
 
671

Re-measurement of fair value on December 31, 2017 (1)
 
(671
)
Balance as of December 31, 2017
 
$

(1) Changes in fair value are recorded in general and administrative expenses in our consolidated statements of operations.
Property and equipment, net
Property and equipment
Property and Equipment
Property and equipment consisted of the following (in thousands):
 
As of December 31,
 
2017
 
2016
Leasehold improvements
$
2,915

 
$
2,061

Computer equipment
6,165

 
5,487

Software
1,149

 
1,099

Internal-use software
2,925

 
2,925

Furniture and equipment
1,293

 
931

Total
14,447

 
12,503

Accumulated depreciation
(9,184
)
 
(7,218
)
Property and equipment, net
$
5,263

 
$
5,285


Depreciation and amortization expense for the years ended December 31, 2017, 2016 and 2015 was $3.0 million, $3.2 million and $2.0 million, respectively. Depreciation is recorded on a straight-line basis.
Debt (Notes)
Debt
Debt

Term Loan

In connection with the Company’s acquisition of Jiff, on April 3, 2017, the Company, Jiff and Silicon Valley Bank (“Bank”) agreed to refinance the existing term loan facility owed by Jiff to the Bank (the “Loan Agreement”) for approximately $5.6 million (the “Term Loan”). The Term Loan requires interest-only payments for the period May 2017 through September 2018, followed by 36 monthly payments of principal and interest. Obligations under the Term Loan accrue interest at a floating per annum rate equal to the greater of (A) the prime rate as published in the money rates section of The Wall Street Journal (“Prime Rate”) minus 1% or (B) 0%. Interest on the Term Loan are payable monthly. The maturity date of the Term Loan is September 1, 2021.

In addition to principal and interest payments, the Company is also required to pay $0.5 million as final payment on the earlier of maturity, termination or prepayment of the Term Loan. The Company accrues for the final payment over the life of the Term Loan using the effective interest method.

The future maturities of the Term Loan by year as of December 31, 2017 are as follows (in thousands):
2018
$
620

2019
1,859

2020
1,859

2021 (1)
1,240

Total future maturities of debt(2)
$
5,578

(1) Excludes the $0.5 million, as previously discussed, required to be paid as final payment on the earlier of maturity, termination or prepayment of the Term Loan. 
(2) Includes $5.0 million classified as debt, non-current and $0.6 million classified as debt, current within accrued expenses and other current liabilities on the consolidated balance sheet as of December 31, 2017. 


Revolving Line of Credit    

The Loan Agreement also provides for an up to $25 million revolving credit facility (the “Revolving Line”). Borrowings under the Revolving Line accrue interest at a floating per annum rate equal to the Prime Rate plus one-half of one percent (0.50%) and are payable monthly. The Company may request borrowings under the Revolving Line prior to April 3, 2019, on which date the Revolving Line terminates. As of December 31, 2017, no borrowings have been made under the Revolving Line.

In relation to the Loan Agreement, the Company is subject to certain financial and reporting covenants and are secured by a security interest in the assets of the Company, excluding intellectual property and certain other exceptions. As of December 31, 2017, none of the financial covenants, which require the Company to maintain a certain minimum liquidity ratio, are applicable. The Company was in compliance with all reporting covenants in the Loan Agreement related to the outstanding principal balance as of December 31, 2017.
Related Party Transactions (Notes)
Related Party Transactions Disclosure
Related Party Transactions and Variable Interest Entity

In 2015, the Company made a preferred stock investment of $4.1 million and entered into a strategic alliance with Lyra Health ("Lyra"), a related party at the time of the investment. In the fourth quarter of 2017, the Company sold its investment in Lyra to a group of buyers that included related parties.

Lyra was considered a related party to the Company because two of the Company’s directors, Dr. Roberts and Mr. Ebersman, served on the Lyra board of directors and Mr. Ebersman is the Lyra chief executive officer. Prior to the sale of the investment in Lyra, the Company evaluated all its transactions with Lyra and determined that Lyra was a variable interest entity (“VIE”) for the Company but that it was not required to consolidate the operations of the VIE.

Because Lyra was a related party and potential buyers were also related parties, the Company formed an independent committee of the Company's board of directors (the "Independent Committee"), comprised solely of disinterested directors, to approve the sale. The Company engaged an independent third- party valuation expert to assist in determining the fair value of the Company's investment in Lyra. Based in part on the valuation performed, the Company negotiated a selling price of $5.5 million, which the Independent Committee approved after concluding that the transaction terms were fair to the Company. The sale resulted in a pre-tax gain of $1.4 million which is recorded in other income, net within the consolidated statements of operations.
Current Liabilities
Accrued Compensation
Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 
As of December 31,
 
2017
 
2016
Customer deposits related to online store
$
5,638

 
$

Other
7,540

 
6,369

Total
$
13,178

 
$
6,369


Accrued compensation consisted of the following (in thousands):
 
As of December 31,
 
2017
 
2016
Accrued commissions
$
2,481

 
$
3,637

Accrued bonuses
9,001

 
3,388

Other employee and benefits payable
2,459

 
2,418

Total
$
13,941

 
$
9,443

Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Leases and Contractual Obligations
We lease office space under non-cancellable operating leases in San Francisco, California, Mountain View, California and Charlotte, North Carolina, with expiration dates in 2022, 2022 and 2020, respectively.
Contractual obligations relate to our service agreements for our data centers and other third party service providers.

As of December 31, 2017, the future minimum lease payments under non-cancellable operating leases are as follows (in thousands):
 
Operating
Leases (1)
 
Contractual
Obligations
2018
$
5,556

 
$
718

2019
5,723

 
535

2020
5,334

 

2021
4,717

 

2022 and later
2,393

 

 
$
23,723

 
$
1,253



(1)
Minimum payments have not been reduced by sublease rentals of $3.0 million due in the future under a non-cancellable sublease. Additionally, in January 2018, the Company entered into a lease agreement, which is expected to commence August 1, 2018, for an additional 10,553 rentable square feet of office space in Sunnyvale, California.  The lease agreement provides for monthly payments over seven years with total minimum lease payments of $4.4 million and is excluded from the table above.
The Company's facility lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Rent expense for the years ended December 31, 2017, 2016 and 2015 was $4.1 million, $3.3 million and $2.1 million, respectively.
Legal Matters

During the second quarter of 2015, four purported securities class action lawsuits, which were later consolidated into a single action, were filed in the Superior Court of the State of California, County of San Mateo, against the Company, certain of its current and former directors, executive officers, significant stockholders and underwriters associated with its initial public offering (“IPO”). The lawsuits were brought by purported stockholders of the Company seeking to represent a class consisting of all those who purchased the Company’s stock pursuant or traceable to the Registration Statement and Prospectus issued in connection with its IPO, alleging claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. On March 28, 2016, the parties to the consolidated actions reached a mutually acceptable resolution by way of a mediated cash settlement for an aggregate amount of $9.5 million, and the Court entered final approval of the settlement on October 28, 2016. As a result of the settlement, Castlight recorded a net charge of $2.9 million to general and administrative expense in 2016. This amount represents the portion of settlement that was not covered by insurance and legal fees incurred in 2016 regarding this matter. 

From time to time, the Company may become subject to other legal proceedings, claims or litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patents or other intellectual property rights. If an unfavorable outcome were to occur in litigation, the impact could be material to the Company’s business, financial condition, cash flow or results of operations, depending on the specific circumstances of the outcome. The Company accrues for loss contingencies when it is both probable that it will incur the loss and when it can reasonably estimate the amount of the loss or range of loss.
Stock Compensation
Stockholders' Equity (Deficit)
Stock Compensation
Employee Equity Plans

        The Company adopted a 2014 Equity Incentive Plan (EIP) that became effective on March 12, 2014 and serves as the successor to the Company's 2008 Stock Incentive Plan. Shares issued under the 2008 Stock Plan were Class A common stock and shares issued under the EIP are Class B common stock. The Company's 2014 Equity Incentive Plan authorizes the award of stock options, restricted stock awards (RSAs), stock appreciation rights (SARs), restricted stock units (RSUs), performance awards and stock bonuses. The Company began granting RSUs in the fourth quarter of 2014.

The Company adopted a 2014 Employee Stock Purchase Plan (ESPP) that became effective on March 13, 2014 that enables eligible employees to purchase shares of the Company's Class B common stock at a discount. The Company has not yet established a start date of the initial purchasing period under the ESPP.
Stock Option Activity
The following table summarizes activities for stock options:
 
Options Outstanding
 
Number of
Shares
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life (in
years)
 
Aggregate
Intrinsic
Value (in thousands)
Balance at December 31, 2016
7,642,953

 
$
3.71

 
7.19
 
$
18,537

Stock options granted
400,000

 
$
3.60

 
 
 
 
Stock options assumed and awarded related to acquisition
5,382,613

 
$
1.42

 
 
 
 
Stock options exercised
(1,217,808
)
 
$
1.93

 
 
 
 
Stock options forfeited and canceled
(1,872,580
)
 
$
3.09

 
 
 
 
Balance at December 31, 2017
10,335,178

 
$
2.83

 
6.16
 
$
19,253

Vested or expected to vest December 31, 2017
10,335,178

 
$
2.83

 
6.16
 
$
19,253

Exercisable as of December 31, 2017
7,657,299

 
$
2.96

 
5.37
 
$
15,626


The total grant-date fair value of stock options granted, excluding options assumed related to Jiff acquisition in 2017, during the years ended December 31, 2017, 2016 and 2015 was $0.8 million, $3.6 million and $2.5 million, respectively.
The total grant-date fair value of stock options vested, including options assumed related to Jiff acquisition in 2017, during the years ended December 31, 2017, 2016 and 2015 was $6.7 million, $4.9 million and $10.8 million, respectively.
The total intrinsic value of the options exercised, including options assumed related to Jiff acquisition in 2017, during the years ended December 31, 2017, 2016 and 2015, was $2.6 million, $4.7 million and $25.3 million, respectively. The intrinsic value is the difference of the current fair value of the stock and the exercise price of the stock option.
As of December 31, 2017, the Company had $3.8 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 2.3 years.
Assumed and Awarded Jiff Options
In connection with the acquisition of Jiff, the Company assumed 5.4 million options with a grant date fair value of $14.1 million. These options are categorized as performance stock options, as the final exercise price at the time of acquisition was to be determined upon the achievement of certain milestones. The total acquisition date fair value of $14.1 million allocation to the pre-combination services and post-combination services was $9.6 million and $4.5 million, respectively. Any subsequent changes in the fair value of the assumed Jiff options resulting from achievement of the earn-out milestones were to be accounted as post-combination stock compensation expense. For the year ended December 31, 2017, the Company did not make changes to the assumed Jiff options as earn-out milestones were not met.
Restricted Stock Units
The following table summarizes activities for RSUs:
 
Restricted Stock Units Outstanding
 
Number of shares
 
Weighted Average Grant-Date Fair Value
Balance at December 31, 2016
10,541,666

 
$
4.82

Restricted Stock Units granted (1)
6,608,813

 
$
3.63

Restricted Stock Units vested
(3,956,495
)
 
$
5.00

Restricted Stock Units forfeited and canceled (2)
(3,860,088
)
 
$
4.51

Balance at December 31, 2017
9,333,896

 
$
4.03

_______________________
(1) Includes performance stock units (“PSUs”) that were granted in 2017.
(2) Includes PSUs that were granted in the prior year, which were canceled because performance targets were not achieved.
The total grant-date fair value of RSUs granted during the years ended December 31, 2017 and 2016 was $24.0 million and $28.4 million, respectively.
The total grant-date fair value of RSUs vested during the year ended December 31, 2017 and 2016 was $19.8 million and $15.5 million.
As of December 31, 2017, the Company had $30.1 million in unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted-average period of approximately 2.69 years.
    
During 2017, the Company awarded 1.4 million PSUs to certain employees. The number of shares that would eventually vest depends on achievement of performance targets for 2017, as determined by the compensation committee of the Company's board of directors, and may range from 0% to 150% of the targeted award amount. Once the performance is determined and a targeted award amount is fixed, the target number of PSUs, if any, will vest in eight quarterly installments, subject to recipients' continued service, beginning on February 15, 2018. The compensation expense associated with the PSUs is recognized using the accelerated method. No expense was recorded in 2017 as the Company determined that the performance conditions were not met.
Stock-Based Compensation to Employees
All stock-based compensation to employees is measured based on the grant-date fair value of the awards and is generally recognized in the Company's statement of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). Except for the stock options assumed and granted related to Jiff acquisition, the Company estimates the fair value of stock options granted using the Black-Scholes option-valuation model. For restricted stock units, fair value is based on the closing price of the Company's Class B common stock on the grant date. Compensation cost is generally recognized over the vesting period of the applicable award using the straight-line method. For awards with performance based and service vesting conditions, compensation cost is recognized over the requisite service period if it is probable that the performance condition will be satisfied based on the accelerated attribution method.
The assumptions used in the Black-Scholes option-pricing model were determined as follows:
Volatility. Since the Company does not have enough trading history for its Class B common stock, the expected volatility was derived from the historical stock volatilities of peer group companies within the Company's industry. In evaluating peer companies, the Company considered factors such as nature of business, customer base, service offerings and markets served.
Risk-Free Interest Rate. The risk-free rate that the Company used is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Expected Life. The expected term represents the period that the Company's stock-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options.
Dividend Yield. The Company has never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and therefore, the Company uses an expected dividend yield of zero.
Fair Value of Common Stock. Prior to the Company's initial public offering in March 2014, the Company's board of directors considered numerous objective and subjective factors to determine the fair value of the Company's Class A common stock at each grant date. These factors included, but were not limited to, (i) contemporaneous valuations of Class A common stock performed by unrelated third-party specialists; (ii) the prices for the Company's Preferred Stock sold to outside investors; (iii) the rights, preferences and privileges of the Company's Preferred Stock relative to its Class A common stock; (iv) the lack of marketability of the Company's Class A common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of the Company, given prevailing market conditions.
Since the Company's initial public offering, the Company has used the market closing price for its Class B common stock as reported on the New York Stock Exchange to determine the fair value of the Company's common stock.
In addition to assumptions used in the Black-Scholes option-pricing model, prior to the adoption of ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment” in 2017, the Company estimated a forfeiture rate to calculate the stock-based compensation for its awards based on an analysis of its actual forfeitures. The Company used historical data to estimate pre-vesting option forfeitures and recorded stock-based compensation expense only for those awards that are expected to vest. With the adoption of ASU 2016-09, the Company no longer estimates forfeitures but accounts for forfeitures as they occur.
Except for the stock options assumed and granted related to Jiff acquisition, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions and fair value per share:
 
Year Ended December 31,
 
2017
 
2016
 
2015
Volatility
61%
 
45% - 47%
 
53%
Expected life (in years)
6.02
 
5.31 - 6.12
 
6.2
Risk-free interest rate
2.03%
 
0.95 - 1.37%
 
1.38%-1.91%
Dividend yield
—%
 
—%
 
—%
Weighted-average fair value of underlying common stock
$3.60
 
$3.16
 
$8.95

The options assumed and awarded in connection with the acquisition of Jiff were valued using the Monte Carlo simulation model. The relevant assumptions used in the Monte Carlo simulation model are presented in the table below. The Monte Carlo simulation model considers vesting schedules, stated expiration dates and potential early exercises based on market performance in determining the effective holding period for the options.
 
Year Ended December 31,
 
2017
 
2016
 
2015
Volatility
75%
 
*
 
*
Risk-free interest rate
2.35%
 
*
 
*
Dividend yield
—%
 
*
 
*

* The Company has not used the Monte Carlo simulation model prior to the acquisition of Jiff.
Stockholders' Equity
Stockholders' Equity
Stockholders' Equity
Common Stock
As of December 31, 2017, the Company had 52,853,400 shares of Class A common stock and 81,685,875 shares of Class B common stock outstanding. As of December 31, 2016, the Company had 54,295,405 shares of Class A common stock and 50,015,518 shares of Class B common stock outstanding.
Transactions with SAP Technologies, Inc.
In May 2016, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with SAP Technologies, Inc. (“SAP”) pursuant to which it sold and issued to SAP 4.7 million shares of its Class B Common Stock and a warrant (the “Warrant”), which gave SAP right to purchase up to 1.9 million shares of the Company's Class B Common Stock for an exercise price of $4.91, subject to certain conditions. The net proceeds from this transaction were $17.8 million, net of issuance costs, and are being used for working capital and other general corporate purposes.

The Warrant was set to expire four years from the date the Company enters into agreements with SAP related to the distribution and the reselling of the Company’s solutions (the “Alliance Agreement”) within a prescribed period. In the second quarter of 2017, the Company and SAP modified the Warrant to extend the time period allowed to execute the Alliance Agreement from May 17, 2017 to November 17, 2017. However, the Alliance Agreements were not executed prior to that date and as a result, the Warrant expired.

The shares and Warrant were considered freestanding instruments from each other and were classified within stockholders’ equity. Initially, upon execution of the Securities Purchase Agreement, the Company preliminarily allocated the net proceeds to the shares and Warrant and also to a customer prepayment liability classified within accrued expenses and other current liabilities that represented the future obligations under the Alliance Agreement. The Company updated its preliminary allocation of the net proceeds as a result of the modification of the Warrant in the second quarter of 2017, which resulted in a change in classification of customer prepayment liability into other assets. Subsequent to expiration, during the fourth quarter of 2017, the Company released the associated other asset in the consolidated balance sheet and recorded a $1.1 million non-cash charge in other income, net in the consolidated statement of operations. The expiration did not result in a change to the amounts recorded within stockholders' equity.
Income Taxes
Income Taxes
Income Taxes
The components of loss before income tax benefit were as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
United States
$
(60,777
)
 
$
(58,548
)
 
$
(79,920
)

As a result of the Company's history of net operating losses and full valuation allowance against its deferred tax assets, there was no current or deferred income tax provision for the years ended December 31, 2016 and 2015. For the year ended December 31, 2017, the Company recorded a tax benefit of $5.2 million as a result of the acquisition of Jiff in April 2017. This tax benefit is a result of the partial release of its existing valuation allowance since the acquired deferred tax liabilities from Jiff will provide a source of income for the Company to realize a portion of its deferred tax assets, for which a valuation allowance is no longer needed. 
Reconciliations of the statutory federal income tax rate and the Company's effective tax rate consist of the following (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Tax at federal statutory rate
$
(20,664
)
 
$
(19,812
)
 
$
(27,173
)
State statutory rate (net of federal benefit)
(2,479
)
 
(1,259
)
 
(1,560
)
Non-deductible stock compensation
106

 
1,594

 
2,334

Effect of U.S. tax law change
54,574

 

 

Change in valuation allowance
(33,098
)
 
14,365

 
24,332

Benefit associated with Jiff Acquisition
(5,206
)
 

 

Other
1,561

 
5,112

 
2,067

 
$
(5,206
)
 
$

 
$



Significant components of the Company's net deferred tax assets were as follows (in thousands):
 
As of December 31,
Deferred tax assets:
2017
 
2016
Net operating loss carryforwards
$
105,247

 
$
105,100

Deferred rent
474

 
580

Accrued compensation
2,792

 
1,291

Stock-based compensation
7,530

 
6,369

Other reserves and accruals
78

 
3

Property and equipment
283

 
649

Deferred revenue
1,729

 
3,879

 
118,133

 
117,871

Valuation allowance
(112,968
)
 
(117,871
)
Deferred tax assets, net of valuation allowance
5,165

 

Deferred tax liability:
 
 
 
Intangibles
(5,165
)
 

Deferred tax liability
(5,165
)
 

Total
$

 
$


The Company has provided a full valuation allowance for its deferred tax assets as of December 31, 2017 and 2016, due to the uncertainty surrounding the future realization of such assets. Therefore, no benefit has been recognized for the net operating loss carryforwards and other deferred tax assets.

The valuation allowance decreased by $4.9 million and increased by $14.6 million during the years ended December 31, 2017 and 2016, respectively. The decrease in the valuation allowance for the year ended December 31, 2017 was related to a decrease in the U.S. corporate federal income tax rate from 34% to 21%, as well as the acquired deferred tax liabilities from Jiff.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017 (the “Act”) into law. The new legislation decreases the U.S. corporate federal income tax rate from 35% to 21% effective January 1, 2018. The Act also includes a number of other provisions including the elimination of loss carrybacks and limitations on the use of future losses and repeal of the Alternative Minimum Tax regime. The Company has calculated its best estimate of the impact of the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was a net decrease related to deferred tax assets and deferred tax liabilities of $54.6 million, with a corresponding offsetting change in valuation allowance of $54.6 million for the year ended December 31, 2017.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has determined that the adjustment to deferred taxes was a provisional amount and a reasonable estimate at December 31, 2017. The determination of the benefit from income taxes requires complex estimations, significant judgments and significant knowledge and experience concerning the applicable tax laws. Given that the Company is still in the transition period for the accounting for income tax effects of the Act, the current assessment on deferred tax assets is based on the currently available information and guidance. If in the future any element of the tax reform changes the related accounting guidance for income tax, it could affect the Company’s income tax position, and the Company may need to adjust the benefit from (provision for) income taxes accordingly.
As of December 31, 2017, the Company had approximately $421.6 million of federal and $276.7 million of state net operating loss carryforwards available to offset future taxable income. If not utilized, the federal and state net operating loss carryforwards begin to expire in 2028 and 2028, respectively.
As of December 31, 2017, the Company also had approximately $9.0 million and $9.8 million of research and development tax credit carryforwards available to reduce future taxable income, if any, for federal and California purposes, respectively. The federal credit carryforwards expire beginning in 2028, and the California research credits do not expire and may be carried forward indefinitely.
The Company's ability to utilize the net operating loss and tax credit carryforwards in the future may be subject to substantial restrictions in the event of past or future ownership changes as defined in Section 382 of the Internal Revenue Code and similar state tax laws. In the event the Company should experience an ownership change, as defined, utilization of the Company's net operating loss carryforwards and tax credits could be limited.

     The Company evaluates tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefit is as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Gross unrecognized tax benefits at the beginning of the year
$
13,568

 
$
9,540

 
$
7,214

Increases for tax positions of prior years

 

 
133

Decreases for tax positions of prior years
(626
)
 
(125
)
 
(346
)
Increases for tax positions related to the current year
5,946

 
4,153

 
2,539

Gross unrecognized tax benefits at the end of the year
$
18,888

 
$
13,568

 
$
9,540


As of December 31, 2017, all unrecognized tax benefits are subject to a full valuation allowance and, if recognized, will not affect the Company's tax rate.

There were no material changes to the unrecognized tax benefits in the year ended December 31, 2017, and the Company does not anticipate that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months.
The Company's policy is to include interest and penalties related to unrecognized tax benefits within its provision for income taxes. Due to the Company's net operating loss position, the Company has not recorded an accrual for interest or penalties related to uncertain tax positions for the years ended December 31, 2017, 2016 or 2015.
Net Loss per Share
Net Loss per Share
Net Loss per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including Preferred Stock and outstanding stock options and warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.
When shares of both Class A and Class B common stock are outstanding, net loss is allocated based on the contractual participation rights of the Class A and Class B common stock as if the earnings for the year have been distributed. As the liquidation and dividend rights are identical, the net loss is allocated on a proportionate basis.
 
The following table presents the calculation of basic and diluted net loss per share for the Company's common stock (in thousands, except per share data):
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Net loss
$
(23,720
)
 
$
(31,851
)
 
$
(31,610
)
 
$
(26,938
)
 
$
(48,116
)
 
$
(31,804
)
Weighted-average shares used to compute basic and diluted net loss per share
53,582

 
71,952

 
54,421

 
46,377

 
56,444

 
37,309

Basic and diluted net loss per share
$
(0.44
)
 
$
(0.44
)
 
$
(0.58
)
 
$
(0.58
)
 
$
(0.85
)
 
$
(0.85
)

The following securities were excluded from the calculation of diluted net loss per share for common stock because their effect would have been anti-dilutive for the periods presented (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Stock options and restricted common stock
19,669

 
18,185

 
16,247

Warrants
115

 
2,020

 
115

 
19,784

 
20,205

 
16,362

401(k) Plan
401(k) Plan
401(k) Plan
The Company has a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code covering eligible employees. Under the plan, participating employees may defer up to 100% of their pre-tax earnings, subject to the Internal Revenue Service annual contribution limits. Effective January 1, 2015, the Company began matching a portion of the employee contributions. The Company's contribution expense totaled $1.1 million, $1.0 million and $0.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Reduction in Workforce
Reduction in Workforce
Reduction in Workforce
On May 10, 2016, the Company’s Board of Directors committed to a program to reduce the Company’s workforce in order to reduce expenses, align its operations with evolving business needs and improve efficiencies. Under this program, the Company undertook an initiative to reduce its workforce by approximately fourteen percent. For the year ended December 31, 2016, the Company incurred charges of $0.8 million, all of which were related to severance costs. As of December 31, 2016, all costs have been fully paid out.
Selected Quarterly Financial Data (unaudited)
Selected Quarterly Financial Data (unaudited)
Selected Quarterly Financial Data (unaudited)

The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in years 2017 and 2016 (in thousands, except per share data):
 
 
Quarter Ended (1)
 
 
Mar 31,
2017
 
Jun 30,
2017
 
Sept 30,
2017
 
Dec 31,
2017
Total revenue
 
$
27,745

 
$
32,099

 
$
34,572

 
$
37,013

Gross profit
 
19,511

 
19,600

 
21,551

 
23,583

Net loss
 
(14,809
)
 
(13,717
)
 
(18,487
)
 
(8,558
)
Net loss per share, basic and diluted
 
(0.14
)
 
(0.11
)
 
(0.14
)
 
(0.06
)

(1) 
On April 3, 2017, the Company acquired Jiff. Jiff has been included in our consolidated results of operations starting on the acquisition date. Please refer to Note 3Business Combinations for additional information on this acquisition.    
 
 
Quarter Ended
 
 
Mar 31,
2016
 
Jun 30,
2016
 
Sept 30,
2016
 
Dec 31,
2016
Total revenue
 
$
22,717

 
$
23,585

 
$
25,501

 
$
29,897

Gross profit
 
13,468

 
14,641

 
17,535

 
21,496

Net loss
 
(21,355
)
 
(16,692
)
 
(11,403
)
 
(9,098
)
Net loss per share, basic and diluted
 
(0.22
)
 
(0.17
)
 
(0.11
)
 
(0.09
)
Summary of Significant Accounting Policies (Policies)
Basis of Presentation and Principles of Consolidation
The consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). In the opinion of management, the information herein reflects all adjustments, consisting only of normal recurring adjustments, except as otherwise noted, considered necessary for a fair statement of results of operations, financial position and cash flows. The consolidated financial statements include the results of Castlight and its wholly owned U.S. subsidiary.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. These estimates include, but are not limited to, the determination of the relative selling prices for the Company's services, certain assumptions used in the valuation of its equity awards and the fair value of assets acquired and liabilities assumed for business combinations. Actual results could differ from those estimates, and such differences could be material to the Company's consolidated financial position and results of operations.
Segment Information
The Company's chief operating decision maker, its CEO, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company's financial performance. Accordingly, the Company has determined that it operates in a single reportable segment, cloud-based products.
Revenue Recognition
The Company derives its revenue from sales of cloud-based subscription service and professional services contracts. The Company's cloud-based subscription service contracts are generally three years in length.
The Company's cloud-based subscription service contracts do not provide customers with the right to take possession of the software supporting the cloud-based service and, as a result, are accounted for as service contracts.
The Company commences revenue recognition for its cloud-based subscription service and professional services when all of the following criteria are met:
there is persuasive evidence of an arrangement;
the service has been provided to the customer;
collection of the fees is reasonably assured; and
the amount of fees to be paid by the customer is fixed or determinable.
The Company's subscription and professional service arrangements do not contain refund provisions for fees earned related to services performed. The Company does, however, have commitments under service-level agreements, as discussed under "Warranties and Indemnification" below.
Subscription Revenue. Subscription revenue recognition commences on the date that the Company's cloud-based service is made available to the customer, which is considered the launch date, provided all of the other criteria described above are met. Revenue is typically recognized on a straight-line basis.
Some of the Company's cloud-based subscription arrangements include performance incentives that are generally based upon employee engagement. Fees for performance incentives are considered contingent revenue, and are recognized over the remaining term of the related subscription arrangement commencing at the time they are earned.
Professional Services and Other Revenue. Professional services and other revenue is primarily comprised of implementation services and communication services related to the Company's cloud-based subscription service. Nearly all of the Company's professional services are sold on a fixed-fee basis. The Company does not have standalone value for its implementation services. Accordingly, the Company recognizes implementation services revenue in the same manner as the associated cloud-based subscription service, beginning on the launch date, provided all other criteria described above have been met. Communication services have standalone value and the associated revenue is recognized over the contractual term, generally one year, commencing when the revenue recognition criteria have been met. Revenue from products sold through our online market place and add-on subscription products made available from other ecosystem partners are recognized on a net basis principally because we are not the primary obligor to the end-customers.
Multiple Deliverable Arrangements. To date, the Company has generated substantially all its revenue from multiple deliverable arrangements consisting of multi-year cloud-based subscription services and professional services, including implementation services and communication services. For arrangements with multiple deliverables, the Company evaluates whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, the Company accounts for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables do not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with the Company's cloud-based subscription service, and revenue for the combined unit is recognized over the remaining term of the cloud-based subscription service.
The Company's deliverables have standalone value if we or any other vendor sells a similar service separately. The Company has concluded that it has standalone value for its cloud-based subscription service as it sells these services separately through renewals and for its communication services as other vendors sell similar services separately. Conversely, the Company has concluded that its implementation services do not have standalone value, as the Company and others do not yet sell these services separately. Accordingly, the Company considers the separate units of accounting in its multiple deliverable arrangements to be the communication services and a combined deliverable comprised of cloud-based subscription services and implementation services.
When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence, or VSOE, of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence, or TPE, of selling price is used to establish the selling price if it exists. If TPE does not exist, the Company estimates the best estimated selling price, or BESP. VSOE does not currently exist for any of its deliverables. Additionally, the Company does not believe TPE is a practical alternative due to differences in its cloud-based subscription service compared to other parties and the availability of relevant third-party pricing information for its cloud-based subscription service and its other services. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, the Company allocates the arrangement fee to the separate units of accounting based on its BESP. The amount of arrangement fee allocated is limited by contingent revenue, if any.
The Company determines BESP for its deliverables by considering its overall pricing objectives and market conditions. This includes evaluating the Company's pricing practices, its target prices, the size of its transactions, historical sales and its go-to-market strategy. The determination of BESP is made through consultation with and approval by management. For financial statement presentation purposes, the Company allocates the fees from its combined units of accounting to subscription and professional services based upon their relative selling price.
Costs of Revenue

Cost of revenue consists of the cost of subscription revenue and cost of professional services and other revenue.

Cost of subscription revenue primarily consists of data fees, employee-related expenses (including salaries, benefits and stock-based compensation) related to hosting costs of its cloud-based service, cost of subcontractors, expenses for service delivery (which includes call center support), allocated overhead, the costs of data center capacity, amortization of internal-use software and depreciation of certain owned computer equipment and software.

Cost of professional services and other revenue consists primarily of employee-related expenses associated with these services, the cost of subcontractors and travel costs. The time and costs of the Company's customer implementations vary based on the source and condition of the data the Company receive from third parties, the configurations that the Company agrees to provide and the size of the customer.
Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. The Company's cash and cash equivalents generally consist of investments in money market funds, U.S treasury securities and U.S. agency obligations. Cash and cash equivalents are stated at fair value.
Marketable Securities

The Company's marketable securities consist of U.S. agency obligations and U.S. treasury securities, with maturities at the time of purchase of greater than three months. Marketable securities with remaining maturities in excess of one year are classified as noncurrent. The Company classifies its marketable securities as available-for-sale at the time of purchase based on its intent and are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive loss. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. The Company consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely it will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income, net in the consolidated statements of operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company's assessment of the collectability of accounts. The Company regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice and the collection history of each customer to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. For all periods presented, the allowance for doubtful accounts was not significant.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with the non-cancellable portion of cloud-based subscription service contracts with customers and consist of sales commissions paid to the Company's direct sales force and channel partners. The commissions are deferred and amortized over the non-cancellable terms of the related contracts. The deferred commission amounts are recoverable through the future revenue streams under the non-cancellable customer contracts. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective asset as follows:
Software
  
3–5 years
Computer equipment
  
3 years
Furniture and equipment
  
5–7 years
Leasehold improvements
  
Shorter of the lease term or the estimated useful lives of the improvements

Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the consolidated statement of operations for the period realized.
Deferred Revenue
Deferred revenue consists of professional services and cloud-based subscription services that have been billed in advance of revenue being recognized. Additionally, deferred revenue consists of professional services that have been billed and delivered but the revenue is being deferred and recognized together with a cloud-based subscription contract as a combined unit of accounting. The Company invoices its customers for its cloud-based subscription services based on the terms of the contract, which can be annual, quarterly or monthly installments. The Company invoices its customers for its professional services and the first year of communication services generally at contract execution. Deferred revenue that is anticipated to be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as noncurrent.
Internal-Use Software

For the Company's development costs related to its cloud-based service, the Company capitalizes costs incurred during the application development stage. Costs related to preliminary project and post-implementation stages are expensed as incurred. Capitalized software development costs are included as part of property and equipment and are amortized on a straight-line basis over the technology's estimated useful life, which is generally three years. The amortization expense is recorded as a component of cost of subscription revenue and was $1.0 million and $0.9 million for the years ended December 31, 2017 and 2016, respectively.

The Company did not have any capitalized software development costs for the years ended December 31, 2017 and December 31, 2016.
Restricted Cash
Restricted cash consists of a letter of credit related to the Company's leased office space.
Business Acquisitions
The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users and acquired technology, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Goodwill
The Company reviews goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The Company adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, during the fourth quarter of fiscal 2017, which eliminated step 2 from the testing of goodwill impairment. The Company has elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the Company’s single reporting unit is less than its carrying amount. Based on the qualitative assessment, if it is determined that it is more likely than not that its fair value is less than its carrying amount, the fair value of the Company's single reporting unit is compared to its carrying value. Any excess of the goodwill carrying amount over the fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. As of December 31, 2017, no impairment of goodwill has been identified.
Intangible Assets
Acquired finite-lived intangible assets are amortized over their estimated useful lives. The Company evaluates the recoverability of its intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. The Company has not recorded any such impairment charges.
Stock-based Compensation
All stock-based compensation to employees is measured based on the grant-date fair value of the awards and recognized in the Company's consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). The options assumed and awarded in connection with the acquisition of Jiff were valued using the Monte Carlo simulation model. The Company estimates the fair value of all other stock options granted using the Black-Scholes option valuation model. For restricted stock units, fair value is based on the closing price of the Company's Class B common stock on the grant date. Compensation expense is recognized over the vesting period of the applicable award using the straight-line method. For awards with performance based and service vesting conditions, compensation cost is recognized over the requisite service period if it is probable that the performance condition will be satisfied based on the accelerated attribution method.

Income Taxes
The Company accounts for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax bases and tax credit and net operating loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse.
The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
The Company recognizes and measures uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions on a regular basis. The Company's evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of audit and effective settlement of audit issues.
Warranties and Indemnification
The Company's cloud-based service is generally warranted to be performed in a professional manner and in a manner that will comply with the terms of the customer agreements.

The Company's arrangements generally include certain provisions for indemnifying customers against liabilities if there is a breach of a customer’s data or if the Company's service infringes a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in the financial statements. The Company has entered into service-level agreements with certain customers warranting, among other things, defined levels of performance and response times and permitting those customers to receive credits for prepaid amounts related to subscription services in the event that the Company fails to meet those levels. To date, the Company has not experienced any significant failures to meet defined levels of performance and response times as a result of those agreements.

The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as its director or officer or that person’s services provided to any other company or enterprise at the Company's request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
Advertising Expenses