CASTLIGHT HEALTH, INC., S-4 filed on 2/2/2017
Securities Registration: Business Combination
Document and Entity Information
9 Months Ended
Sep. 30, 2016
Document and Entity Information [Abstract]
 
Entity Registrant Name
CASTLIGHT HEALTH, INC. 
Entity Central Index Key
0001433714 
Entity Filer Category
Accelerated Filer 
Document Type
S-4 
Document Period End Date
Sep. 30, 2016 
Amendment Flag
false 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Dec. 31, 2014
Current assets:
 
 
 
Cash and cash equivalents
$ 55,108 
$ 19,150 
$ 17,425 
Marketable securities
61,326 
101,274 
175,057 
Accounts receivable, net
15,888 
12,751 
11,097 
Deferred commissions
7,746 
5,438 
3,675 
Prepaid expenses and other current assets
3,884 
3,772 
3,476 
Total current assets
143,952 
142,385 
210,730 
Property and equipment, net
5,912 
6,896 
3,630 
Marketable securities, noncurrent
13,335 
6,220 
Restricted cash, noncurrent
1,000 
1,000 
Deferred commissions, noncurrent
3,861 
4,923 
2,563 
Other assets
4,691 
4,735 
131 
Total assets
159,416 
173,274 
223,274 
Current liabilities:
 
 
 
Accounts payable
3,603 
3,384 
3,217 
Accrued expenses and other current liabilities
4,894 
4,550 
5,791 
Accrued compensation
7,146 
11,477 
10,455 
Deferred revenue
30,730 
26,590 
20,708 
Total current liabilities
46,373 
46,001 
40,171 
Deferred revenue, noncurrent
6,700 
7,522 
6,652 
Other liabilities, noncurrent
1,255 
1,397 
261 
Total liabilities
54,328 
54,920 
47,084 
Commitments and contingencies
   
   
   
Stockholders’ equity (deficit):
 
 
 
Preferred stock, $0.0001 par value; 10,000,000 and no shares authorized as of December 31, 2014 and 2013; no shares issued and outstanding as of December 31, 2014 and 2013
 
Common stock value issued
10 
10 
 
Additional paid-in capital
451,586 
415,519 
393,397 
Accumulated other comprehensive income
38 
(79)
(40)
Accumulated deficit
(346,546)
(297,096)
(217,176)
Total stockholders’ equity (deficit)
105,088 
118,354 
176,190 
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)
159,416 
173,274 
223,274 
Convertible Preferred Stock [Member]
 
 
 
Current liabilities:
 
 
 
Convertible preferred stock, $0.0001 par value; no and 64,475,662 shares authorized as of December 31, 2014 and 2013; no and 64,475,633 shares issued and outstanding as of December 31, 2014 and 2013
 
Class A [Member]
 
 
 
Stockholders’ equity (deficit):
 
 
 
Common stock value issued
 
Class B [Member]
 
 
 
Stockholders’ equity (deficit):
 
 
 
Common stock value issued
 
$ 4 
$ 3 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2015
Convertible Preferred Stock [Member]
Dec. 31, 2014
Convertible Preferred Stock [Member]
Dec. 31, 2015
Class A [Member]
Dec. 31, 2014
Class A [Member]
Dec. 31, 2015
Class B [Member]
Dec. 31, 2014
Class B [Member]
Convertible Preferred Stock
 
 
 
 
 
 
 
 
Par Value
 
 
$ 0.0001 
$ 0.0001 
 
 
 
 
Shares Authorized
 
 
 
 
 
 
Shares Issued
 
 
 
 
 
 
Shares Outstanding
 
 
 
 
 
 
Preferred Stock
 
 
 
 
 
 
 
 
Par Value
$ 0.0001 
$ 0.0001 
 
 
 
 
 
 
Shares Authorized
10,000,000 
10,000,000 
 
 
 
 
 
 
Shares Issued
 
 
 
 
 
 
Shares Outstanding
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
Par Value
 
 
 
 
$ 0.0001 
$ 0.0001 
$ 0.0001 
$ 0.0001 
Shares Authorized
 
 
 
 
200,000,000 
200,000,000 
800,000,000 
800,000,000 
Shares Issued
 
 
 
 
54,517,785 
58,862,574 
41,100,307 
32,328,809 
Shares Outstanding
 
 
 
 
54,517,785 
58,862,574 
41,100,307 
32,328,809 
Shares Subject to Repurchase
 
 
 
 
 
 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended 12 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Revenue:
 
 
 
 
 
 
 
Subscription
$ 23,867 
$ 18,233 
$ 66,859 
$ 50,417 
$ 70,350 
$ 41,602 
$ 11,655 
Professional services
1,634 
1,306 
4,944 
3,583 
4,965 
4,003 
1,318 
Total revenue
25,501 
19,539 
71,803 
54,000 
75,315 
45,605 
12,973 
Cost of revenue:
 
 
 
 
 
 
 
Cost of subscription
3,988 
3,081 
12,218 
8,532 
12,417 
10,472 
6,246 
Cost of professional services
3,978 
5,606 
13,941 
15,581 
21,351 
17,300 
11,058 
Total cost of revenue
7,966 
8,687 
26,159 
24,113 
33,768 
27,772 
17,304 
Gross profit (loss)
17,535 
10,852 
45,644 
29,887 
41,547 
17,833 
(4,331)
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
13,143 
16,731 
44,877 
50,835 
67,414 
62,065 
33,742 
Research and development
10,573 
7,868 
30,619 
21,853 
30,077 
22,917 
15,219 
General and administrative
5,338 
6,311 
19,902 
18,291 
24,274 
19,009 
9,047 
Total operating expenses
29,054 
30,910 
95,398 
90,979 
121,765 
103,991 
58,008 
Operating loss
(11,519)
(20,058)
(49,754)
(61,092)
(80,218)
(86,158)
(62,339)
Other income, net
116 
51 
304 
230 
298 
218 
157 
Net loss
(11,403)
(20,007)
(49,450)
(60,862)
(79,920)
(85,940)
(62,182)
Net loss per share, basic and diluted
$ (0.11)
$ (0.21)
$ (0.50)
$ (0.65)
$ (0.85)
$ (1.16)
$ (6.28)
Weighted-average shares used to compute basic and diluted net loss per share
103,147 
94,409 
99,734 
93,343 
93,753 
74,381 
9,895 
Cost of Services, Licenses and Maintenance Agreements [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
139 
96 
367 
196 
283 
180 
Technology Services Costs [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
456 
647 
1,468 
1,522 
2,175 
1,220 
120 
Selling and Marketing Expense [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
2,190 
2,058 
6,644 
5,883 
7,705 
5,933 
919 
Research and Development Expense [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
1,631 
981 
4,300 
2,344 
3,498 
2,556 
603 
General and Administrative Expense [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
$ 1,236 
$ 1,177 
$ 3,476 
$ 3,100 
$ 4,169 
$ 4,312 
$ 780 
Consolidated Statements of Operations Parenthetical (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended 12 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Cost of subscription [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
$ 139 
$ 96 
$ 367 
$ 196 
$ 283 
$ 180 
$ 5 
Cost of professional services [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
456 
647 
1,468 
1,522 
2,175 
1,220 
120 
Sales and marketing [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
2,190 
2,058 
6,644 
5,883 
7,705 
5,933 
919 
Research and development [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
1,631 
981 
4,300 
2,344 
3,498 
2,556 
603 
General and administrative [Member]
 
 
 
 
 
 
 
Allocated Share-based Compensation Expense
$ 1,236 
$ 1,177 
$ 3,476 
$ 3,100 
$ 4,169 
$ 4,312 
$ 780 
Consolidated Statements of Comprehensive Loss (USD $)
3 Months Ended 9 Months Ended 12 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Consolidated Statement of Comprehensive Loss:
 
 
 
 
 
 
 
Net loss
$ (11,403,000)
$ (20,007,000)
$ (49,450,000)
$ (60,862,000)
$ (79,920,000)
$ (85,940,000)
$ (62,182,000)
Other comprehensive loss:
 
 
 
 
 
 
 
Net change in unrealized loss on available-for-sale marketable securities
(16,000)
19,000 
117,000 
69,000 
(39,000)
(40,000)
(34,000)
Reclassification adjustments for net realized gain (loss) on available-for-sale marketable securities
Other comprehensive loss
(16,000)
19,000 
117,000 
69,000 
(39,000)
(40,000)
(34,000)
Comprehensive loss
$ (11,419,000)
$ (19,988,000)
$ (49,333,000)
$ (60,793,000)
$ (79,959,000)
$ (85,980,000)
$ (62,216,000)
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended 12 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Operating activities:
 
 
 
 
 
Net loss
$ (49,450)
$ (60,862)
$ (79,920)
$ (85,940)
$ (62,182)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
Depreciation and amortization
2,407 
1,378 
2,024 
1,354 
633 
Stock-based compensation
16,255 
13,045 
17,830 
14,201 
2,427 
Amortization of deferred commissions
3,157 
2,576 
3,510 
4,092 
2,541 
Accretion and amortization of marketable securities
406 
1,126 
1,385 
1,489 
714 
Expense related to warrant
 
 
2,639 
135 
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(3,137)
(2,548)
(1,654)
(6,032)
(2,703)
Deferred commissions
(4,403)
(3,346)
(7,633)
(4,861)
(4,959)
Prepaid expenses and other current assets
(68)
(1,026)
807 
(1,893)
(252)
Other assets
 
 
(479)
(2)
(109)
Accounts payable
300 
716 
646 
147 
868 
Accrued expenses and other current liabilities
(4,046)
(1,740)
(1,475)
1,982 
2,892 
Deferred revenue
3,318 
5,770 
6,752 
15,887 
7,268 
Accrued compensation
 
 
1,022 
2,412 
2,544 
Other liabilities, noncurrent
 
 
317 
(112)
119 
Net cash used in operating activities
(35,261)
(44,911)
(56,868)
(54,637)
(50,064)
Increase in Restricted Cash
1,000 
 
 
 
Increase (Decrease) in Restricted Cash
 
 
(1,000)
101 
 
Investing activities:
 
 
 
 
 
Restricted cash
 
 
 
 
Payments to Acquire Interest in Subsidiaries and Affiliates
(4,125)
(4,125)
Purchase of property and equipment, net
(1,587)
(3,499)
(5,376)
(1,860)
(2,587)
Purchase of marketable securities
(73,163)
(86,324)
(119,867)
(230,316)
(42,288)
Sales of marketable securities
5,000 
5,000 
13,000 
5,000 
Maturities of marketable securities
126,157 
140,019 
180,111 
76,527 
72,135 
Net cash provided by (used in) investing activities
51,407 
50,071 
54,743 
(142,548)
32,260 
Financing activities:
 
 
 
 
 
Proceeds from the exercise of stock options and warrants
2,576 
3,180 
3,944 
3,294 
864 
Proceeds from Issuance or Sale of Equity
17,358 
 
 
 
Proceeds from initial public offering
 
 
189,943 
Payments of deferred financing costs
(122)
(94)
(94)
(3,781)
(440)
Net cash provided by financing activities
19,812 
3,086 
3,850 
189,456 
424 
Net increase (decrease) in cash and cash equivalents
35,958 
8,246 
1,725 
(7,729)
(17,380)
Cash and cash equivalents at beginning of period
19,150 
17,425 
17,425 
25,154 
42,534 
Cash and cash equivalents at end of period
55,108 
25,671 
19,150 
17,425 
25,154 
Noncash investing and financing activity:
 
 
 
 
 
Vesting of early exercised stock options, restricted common stock, and warrants
 
 
(321)
(128)
Purchase of property and equipment, accrued but not paid
 
 
(165)
(600)
(122)
Deferred offering costs, accrued but not paid
 
 
$ 0 
$ (94)
$ (927)
Consolidated Statements of Convertible Preferred Stock and Stockholders' (Deficit)/Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Convertible Preferred Stock [Member]
Beginning balance at Dec. 31, 2012
$ (65,388)
$ 1 
$ 3,631 
$ (69,054)
$ 34 
 
Beginning balance at Dec. 31, 2012
 
 
 
 
 
180,423 
Beginning balance (in shares) at Dec. 31, 2012
 
 
 
 
 
64,475,633 
Beginning balance (in shares) at Dec. 31, 2012
 
9,897,997,000 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Exercise of stock options (in shares)
 
1,036,077,000 
 
 
 
 
Exercise of stock options, net
564 
 
564 
 
 
 
Vesting of early exercised stock options, restricted common stock, and warrants
128 
 
128 
 
 
 
Early exercise of warrant issued (in shares)
 
60,000,000 
 
 
 
 
Stock-based compensation
2,427 
 
2,427 
 
 
 
Expense related to warrant
135 
 
135 
 
 
 
Comprehensive loss
(62,216)
 
 
(62,182)
(34)
 
Ending balance at Dec. 31, 2013
(124,350)
6,885 
(131,236)
 
Ending balance (in shares) at Dec. 31, 2013
 
10,994,074,000 
 
 
 
 
Beginning balance at Dec. 31, 2013
 
 
 
 
 
180,423 
Beginning balance (in shares) at Dec. 31, 2013
 
 
 
 
 
64,475,633 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
 
 
Conversion of preferred stock to common stock (in shares)
 
64,475,633,000 
 
 
 
64,475,633 
Conversion of preferred stock to common stock
180,423 
180,416 
 
 
(180,423)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Vesting of restricted common stock
21 
 
21 
 
 
 
Exercise of stock options (in shares)
 
2,956,676,000 
 
 
 
 
Exercise of stock options, net
3,294 
 
3,294 
 
 
 
Vesting of early exercised stock options, restricted common stock, and warrants
321 
 
 
 
 
 
Vesting of early exercised warrant issued
300 
 
300 
 
 
 
Stock-based compensation
14,215 
 
14,215 
 
 
 
Expense related to warrant
2,639 
 
2,639 
 
 
 
Issuance of common stock upon initial public offering, net of issuance costs (in shares)
 
12,765,000,000 
 
 
 
 
Issuance of common stock upon initial public offering, net of issuance costs
185,628 
185,627 
 
 
 
Comprehensive loss
(85,980)
 
 
(85,940)
(40)
 
Ending balance at Dec. 31, 2014
176,190 
393,397 
(217,176)
(40)
 
Ending balance at Dec. 31, 2014
 
 
 
 
 
Ending balance (in shares) at Dec. 31, 2014
 
 
 
 
 
Ending balance (in shares) at Dec. 31, 2014
 
91,191,383,000 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Vesting of restricted stock units (in shares)
 
295,468,000 
 
 
 
 
Exercise of stock options (in shares)
 
4,131,241,000 
 
 
 
 
Exercise of stock options, net
3,944 
3,943 
 
 
 
Vesting of early exercised stock options, restricted common stock, and warrants
 
 
 
 
 
Stock-based compensation
18,179 
 
18,179 
 
 
 
Comprehensive loss
(79,959)
 
 
(79,920)
(39)
 
Ending balance at Dec. 31, 2015
118,354 
10 
415,519 
(297,096)
(79)
 
Ending balance at Dec. 31, 2015
 
 
 
 
 
$ 0 
Ending balance (in shares) at Dec. 31, 2015
 
 
 
 
 
Ending balance (in shares) at Dec. 31, 2015
 
95,618,092,000 
 
 
 
 
Marketable Securities
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Marketable Securities
Marketable Securities
All of the Company’s cash equivalents and marketable securities are classified as “available-for-sale” securities. These securities are reported at fair value, with the related unrealized gains and losses included in accumulated other comprehensive income, a component of shareholders’ equity.
At September 30, 2016 and December 31, 2015, respectively, marketable securities consisted of the following (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
September 30, 2016
 
 
 
 
 
 
 
U.S. agency obligations
$
34,481

 
$
24

 
$

 
$
34,505

U.S. treasury securities
26,807

 
15

 
(1
)
 
26,821

Money market mutual funds
32,468

 

 

 
32,468

 
93,756

 
39

 
(1
)
 
93,794

Included in cash and cash equivalents
32,468

 

 

 
32,468

Included in marketable securities
$
61,288

 
$
39

 
$
(1
)
 
$
61,326

 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2015
 
 
 
 
 
 
 
U.S. agency obligations
$
83,763

 
$

 
$
(48
)
 
$
83,715

U.S. treasury securities
33,924

 

 
(31
)
 
33,893

Money market mutual funds
1,038

 

 

 
1,038

 
118,725

 

 
(79
)
 
118,646

Included in cash and cash equivalents
4,038

 

 
(1
)
 
4,037

Included in marketable securities
$
101,334

 
$

 
$
(60
)
 
$
101,274

Included in marketable securities, noncurrent
$
13,353

 
$

 
$
(18
)
 
$
13,335

Marketable Securities
Marketable Securities
At December 31, 2015 and December 31, 2014, respectively, marketable securities consisted of the following (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2015
 
 
 
 
 
 
 
U.S. agency obligations
$
83,763

 
$

 
$
(48
)
 
$
83,715

U.S. treasury securities
33,924

 

 
(31
)
 
33,893

Money market mutual funds
1,038

 

 

 
1,038

 
118,725

 

 
(79
)
 
118,646

Included in cash and cash equivalents
4,038

 

 
(1
)
 
4,037

Included in marketable securities
$
101,334

 
$

 
$
(60
)
 
$
101,274

Included in marketable securities, noncurrent
$
13,353

 
$

 
$
(18
)
 
$
13,335

 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2014
 
 
 
 
 
 
 
U.S. agency obligations
$
177,297

 
$
4

 
$
(44
)
 
$
177,257

U.S. treasury securities
5,580

 
1

 

 
5,581

Money market mutual funds
1,919

 

 

 
1,919

 
184,796

 
5

 
(44
)
 
184,757

Included in cash and cash equivalents
3,480

 

 

 
3,480

Included in marketable securities
$
175,093

 
$
5

 
$
(41
)
 
$
175,057

Included in marketable securities, noncurrent
$
6,223

 
$

 
$
(3
)
 
$
6,220

Organization and Description of Business
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Organization and Description of Business
Organization and Description of Business
Description of Business
Castlight Health Inc. (the “Company”) offers a health benefits platform that engages employees to make better health care decisions and enables employers to communicate and measure their benefit programs. The Company provides a simple, personalized, and powerful way for employees to shop for and manage their health care. At the same time, the Company enables employers to understand their employees’ needs and guide them to the right care, right providers and right programs at the right time. The Company’s comprehensive technology offering aggregates complex, large-scale data and applies sophisticated analytics to make health care data transparent and useful. The Company was incorporated in the State of Delaware in January 2008. The Company’s principal executive offices are located in San Francisco, California.
Organization and Description of Business
Organization and Description of Business
Description of Business
Castlight offers a health benefits platform that engages employees to make better health care decisions and enables employers to communicate and measure their benefit programs. We provide a simple, personalized, and powerful way for employees to shop for and manage their health care. At the same time, we enable employers to understand their employees’ needs and guide them to the right care, right providers and right programs at the right time. Our comprehensive technology offering aggregates complex, large-scale data and applies sophisticated analytics to make health care data transparent and useful. We were incorporated in the State of Delaware in January 2008. Our principal executive offices are located in San Francisco, California.
Initial Public Offering
On March 19, 2014, we completed our initial public offering (IPO), in which we sold 12.8 million shares of Class B common stock at a price to the public of $16.00 per share. The aggregate offering price for shares sold in the offering was approximately $204.2 million. We raised approximately $185.6 million in net proceeds from the offering, after deducting underwriter discounts and commissions of approximately $14.3 million and other offering expenses of approximately $4.3 million.
Summary of Significant Accounting Policies
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”), Regulation S-X. 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 condensed consolidated financial statements include the results of Castlight and its wholly owned U.S. subsidiary. The results for the interim periods presented are not necessarily indicative of the results expected for any future period.
The condensed consolidated balance sheet as of December 31, 2015 included herein was derived from the audited financial statements as of that date. The following information should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes to the Company’s significant accounting policies described in the Company’s Annual Report on Form 10-K that have had a material impact on its condensed consolidated financial statements and related notes.
Use of Estimates
The preparation of condensed 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 products and services, certain assumptions used in the valuation of the Company’s equity awards, annual bonus attainment and the capitalization and estimated useful life of internal-use software development costs. Actual results could differ from those estimates, and such differences could be material to the Company’s consolidated financial position and results of operations.
Recently Issued and Adopted Accounting Pronouncements
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-1, “Classification of Certain Cash Receipts and Cash Payments.” The guidance clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows and how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. This guidance will be effective for the Company beginning January 1, 2018 and earlier adoption is permitted in any interim period. 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.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The guidance changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking expected loss model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. This guidance will be effective for the Company beginning January 1, 2020 and earlier adoption is permitted beginning 2019. 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.
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 standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted in any interim or annual period. Accordingly, the standard is effective for the Company beginning January 1, 2017, and the Company has elected not to early adopt. Based on the Company’s evaluation, the standard will not have a material impact on its consolidated financial statements.
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.
Financial Instruments
In January 2016, the FASB issued ASU 2016-1, “Financial Instruments.” The guidance provides a new measurement alternative for equity investments that don’t have readily determinable fair values and don’t qualify for the net asset value practical expedient. Under this alternative, these investments can be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment if the same issuer. This guidance will be effective for the Company beginning January 1, 2018 and earlier adoption is not 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.
Cloud Computing Arrangements
In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The guidance is intended to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement, primarily to determine whether the arrangement includes a sale or license of software. The Company adopted this guidance on January 1, 2016 and it does not impact the Company’s financial statements.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The guidance provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB deferred the effective date of the standard for all entities by one year. The standard will become effective for the annual reporting period (including interim reporting periods) beginning after December 15, 2017, and early adoption is permitted as of annual reporting periods (including interim periods) beginning after December 15, 2016. 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.
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.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us 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 our services, certain assumptions used in the valuation of our equity awards, and the capitalization and estimated useful life of internal-use software development costs. Actual results could differ from those estimates, and such differences could be material to our consolidated financial position and results of operations.
Segment Information
Our chief operating decision maker, our CEO, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating our financial performance. Accordingly, we have determined that we operate in a single reportable segment, cloud-based products.
Revenue Recognition
We derive our revenue from sales of cloud-based subscription service and professional services contracts. We sell subscriptions to our cloud-based subscription service through contracts that are generally three years in length.
Our 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.
We commence revenue recognition for our 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.
Our subscription and professional service arrangements do not contain refund provisions for fees earned related to services performed. We do, however, have commitments under service-level agreements, as discussed under “Warranties and Indemnification” below.
Subscription Revenue. Subscription revenue recognition commences on the date that our 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 recognized based on the terms in our customer contracts, which can provide for (a) a variable periodic fee based upon the actual or contractual number of users that is recognized to revenue based on the actual or contractual number of users or (b) a fixed fee that is recognized to revenue on a straight-line basis over the contractual term of the arrangement.
Some of our 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 Revenue. Professional services revenue is comprised of implementation services and communication services related to our cloud-based subscription service, as well as follow-on professional services to assist our customers in further adopting our cloud-based subscription service. Nearly all of our professional services are sold on a fixed-fee basis. We do not have standalone value for our implementation services. Accordingly, we recognize 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. For follow-on professional services that are sold separately from the cloud-based subscription service, we recognize revenue as the services are delivered. 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.
Multiple Deliverable Arrangements. To date, we have generated substantially all our 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, we evaluate 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, we account 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 our cloud-based subscription service, and revenue for the combined unit is recognized over the remaining term of the cloud-based subscription service.
Our deliverables have standalone value if we or any other vendor sells a similar service separately. We have concluded that we have standalone value for our cloud-based subscription service as we sell these services separately through renewals and for our communication services as other vendors sell similar services separately. Conversely, we have concluded that our implementation services do not have standalone value, as we and others do not yet sell these services separately. Accordingly, we consider the separate units of accounting in our 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, we estimate the best estimated selling price, or BESP. VSOE does not currently exist for any of our deliverables. Additionally, we do not believe TPE is a practical alternative due to differences in our cloud-based subscription service compared to other parties and the availability of relevant third-party pricing information for our cloud-based subscription service and our other services. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, we allocate the arrangement fee to the separate units of accounting based on our BESP. The amount of arrangement fee allocated is limited by contingent revenue, if any.
We determine BESP for our deliverables by considering our overall pricing objectives and market conditions. This includes evaluating our pricing practices, our target prices, the size of our transactions, historical sales and our go-to-market strategy. The determination of BESP is made through consultation with and approval by management. For financial statement presentation purposes, we allocate the fees from our 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 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 our 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 owned computer equipment and software. Amortization of internal-use software was $0.2 million for the year ended December 31, 2015.
Cost of professional services revenue consists primarily of employee-related expenses associated with these services, the cost of subcontractors and travel costs. The time and costs of our customer implementations vary based on the source and condition of the data we receive from third parties, the configurations that we agree 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. Our cash and cash equivalents generally consist of investments in money market funds and U.S. agency obligations. Cash and cash equivalents are stated at fair value.
Marketable Securities
Our 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. We classify our marketable securities as available-for-sale at the time of purchase based on our intent and are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive loss. We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we 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 our assessment of the collectability of accounts. We regularly review 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 noncancellable portion of cloud-based subscription service contracts with customers and consist of sales commissions paid to our direct sales force. The commissions are deferred and amortized over the noncancellable terms of the related contracts. The deferred commission amounts are recoverable through the future revenue streams under the noncancellable 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.
Restricted Cash
Restricted cash consists of a letter of credit related to our leased office space.
Internal-use Software
For our development costs related to our cloud-based service, we capitalize 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, plant 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.
We capitalized software development costs totaling $2.6 million and $0.3 million for the years ended December 31, 2015 and 2014, respectively.
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 single unit of accounting. We invoice our customers for our cloud-based subscription services based on the terms of the contract, which can be annual, quarterly or monthly installments. We invoice our customers for our 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 our 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). We estimate 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 our 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.
Compensation expense for non-employee stock options and warrants is calculated using the Black-Scholes option-pricing model and is recorded as the options vest. Options subject to vesting are required to be periodically revalued over their service period, which is generally the same as the vesting period. 
Income Taxes
We account 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.
We assess 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.
We recognize and measure 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. We evaluate our uncertain tax positions on a regular basis. Our 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
Our 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.
Our arrangements generally include certain provisions for indemnifying customers against liabilities if there is a breach of a customer’s data or if our service infringes a third party’s intellectual property rights. To date, we have 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. We have entered into service-level agreements with certain customers warranting defined levels of performance and response and permitting those customers to receive credits for prepaid amounts related to subscription services in the event that we fail to meet those levels. To date, we have not experienced any significant failures to meet defined levels of performance and response as a result of those agreements.
We have also agreed to indemnify our 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 us, arising out of that person’s services as our director or officer or that person’s services provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that would generally enable us to recover a portion of any future amounts paid. We may also be subject to indemnification obligation by law with respect to the actions of our employees under certain circumstances and in certain jurisdictions.
Advertising Expenses
Advertising is expensed as incurred. Advertising expense was $0.4 million, $0.7 million and $0.4 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Concentrations of Risk and Significant Customers
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed federally insured limits.
We serve our customers and users from outsourced data center facilities located in Colorado and Arizona. We have internal procedures to restore all of our production customer facing services in the event of disasters at the Colorado facility. Procedures utilizing currently deployed hardware, software and services at our disaster recovery location in Arizona allow our cloud-based service to be restored within 48 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,
 
2015
 
2014
 
2013
Revenue:
 
 
 
 
 
Customer A
*
 
14
%
 
16
%
  * Less than 10%
During the years ended December 31, 2015, 2014 and 2013, all of our 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,
 
2015
 
2014
Accounts Receivable:
 
 
 
Customer B
*

 
12
%
Customer C
19
%
 
19
%
 * Less than 10%
Recently Issued and Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (FASB) issued a new accounting standard that would require companies and other organizations to include lease obligations on their balance sheets. The guidance will be effective for us beginning January 1, 2019. We are 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, we do not intend to adopt the standard early.
In April 2015, FASB issued new accounting guidance on Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This guidance is intended to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement, primarily to determine whether the arrangement includes a sale or license of software. The guidance will be effective for us beginning January 1, 2016. Early adoption is permitted. We have elected not to early adopt. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In May 2014, FASB issued ASU 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, FASB deferred the effective date of the standard for all entities by one year. The standard will become effective for the annual reporting period (including interim reporting periods) beginning after December 15, 2017, and early adoption is permitted as of annual reporting periods (including interim periods) beginning after December 15, 2016. We are 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, we do not intend to adopt the standard early.
Fair Value Measurements
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
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 maximize 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. There have been no changes in valuation techniques in the periods presented. The Company has no financial assets or liabilities measured using Level 3 inputs. There were no significant transfers between Levels 1 and 2 assets as of September 30, 2016 and December 31, 2015. 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):
 
Level 1
 
Level 2
 
Total
September 30, 2016
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
32,468

 
$

 
$
32,468

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
34,505

 
34,505

U.S. treasury securities

 
26,821

 
26,821

 
$
32,468

 
$
61,326

 
$
93,794

 
Level 1
 
Level 2
 
Total
December 31, 2015
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
1,038

 
$

 
$
1,038

U.S. agency obligations

 
3,000

 
3,000

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
80,715

 
80,715

U.S. treasury securities

 
33,893

 
33,893

 
$
1,038


$
117,608


$
118,646


Gross unrealized gains and losses for cash equivalents and marketable securities as of September 30, 2016 and December 31, 2015 were not material. The Company does not believe the unrealized losses represent other-than-temporary impairments based on the Company’s evaluation of available evidence as of September 30, 2016 and December 31, 2015.
There were no realized gains or losses during the nine months ended September 30, 2016. All of the Company’s marketable securities at September 30, 2016 mature within one year. As of December 31, 2015, those securities with maturities greater than one year are reflected in the noncurrent portion of the Company’s condensed consolidated balance sheets. Marketable securities on the balance sheets consist of securities with original or remaining maturities at the time of purchase of greater than three months, and the remainder of the securities is reflected in cash and cash equivalents.
Fair Value Measurements
Fair Value Measurements
We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires that we maximize 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. There have been no changes in valuation techniques in the periods presented. We have no financial assets or liabilities measured using Level 3 inputs. There were no significant transfers between Levels 1 and 2 assets as of December 31, 2015 and December 31, 2014. The following tables present information about our assets that are measured at fair value on a recurring basis using the above input categories (in thousands):
 
Level 1
 
Level 2
 
Total
December 31, 2015
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
1,038

 
$

 
$
1,038

U.S. agency obligations

 
3,000

 
3,000

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
80,715

 
80,715

U.S. treasury securities

 
33,893

 
33,893

 
$
1,038

 
$
117,608

 
$
118,646

 
Level 1
 
Level 2
 
Total
December 31, 2014
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
1,919

 
$

 
$
1,919

U.S. agency obligations

 
1,561

 
1,561

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
175,696

 
175,696

U.S. treasury securities

 
5,581

 
5,581

 
$
1,919

 
$
182,838

 
$
184,757


Gross unrealized gains and losses for cash equivalents and marketable securities as of December 31, 2015 and December 31, 2014 were not material. We do not believe the unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of December 31, 2015.
There were no realized gains or losses for the years ended December 31, 2015 and 2014. As of December 31, 2015 and 2014 those securities with maturities at the time of purchase of greater than one year are reflected in the noncurrent portion of our consolidated balance sheets. Marketable securities on the balance sheets consist of securities with original or remaining maturities at the time of purchase of greater than three months, and the remainder of the securities is reflected in cash and cash equivalents. As of December 31, 2015, all of our marketable securities mature within one to five years.
Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 
As of December 31,
 
2015
 
2014
Prepaid expenses and advances
$
3,033

 
$
2,285

Security deposit
228

 
211

Interest receivable on marketable securities
361

 
537

Other current assets
150

 
443

Total
$
3,772

 
$
3,476

Property and equipment, net
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Property and equipment
Property and Equipment
Property and equipment consisted of the following (in thousands):
 
As of
 
September 30, 2016
 
December 31, 2015
Leasehold improvements
$
2,061

 
$
2,046

Computer equipment
5,369

 
4,345

Software
1,136

 
885

Capitalization of internal-use software
2,925

 
2,925

Furniture and equipment
931

 
853

Total
12,422

 
11,054

Accumulated depreciation
(6,510
)
 
(4,158
)
Property and equipment, net
$
5,912

 
$
6,896


Depreciation and amortization expense for the three months ended September 30, 2016 and 2015, was $0.8 million and $0.5 million, respectively. Depreciation and amortization expense for the nine months ended September 30, 2016 and 2015, was $2.4 million and $1.4 million, respectively. Depreciation and amortization are recorded on a straight-line basis.
Property and equipment
Property and Equipment
Property and equipment consisted of the following (in thousands):
 
As of December 31,
 
2015
 
2014
Leasehold improvements
$
2,046

 
$
1,058

Computer equipment
4,345

 
3,247

Software
885

 
874

Capitalization of internal-use software
2,925

 
291

Furniture and equipment
853

 
301

Total
11,054

 
5,771

Accumulated depreciation
(4,158
)
 
(2,141
)
Property and equipment, net
$
6,896

 
$
3,630


Depreciation and amortization expense for the years ended December 31, 2015, 2014 and 2013 was $2.0 million, $1.4 million and $0.6 million, respectively. Depreciation is recorded on a straight-line basis.
Related Party Transactions (Notes)
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Related Party Transactions Disclosure [Text Block]
Related Party Transactions and Variable Interest Entity
In the second quarter of 2015, the Company announced a strategic alliance with Lyra Health (”Lyra”), to develop and bring to market an integrated behavioral health solution. In connection with this strategic alliance, the Company made an initial preferred stock investment in Lyra of $3.1 million and its chief executive officer, Dr. Colella, joined the Lyra board. Additionally, the Company made a subsequent preferred stock investment in Lyra of $1.0 million in August 2015. In March 2016, the Company amended the strategic alliance to modify the manner in which the Company collaborates with Lyra on the solution. In connection with this amendment, Dr. Colella ceased service on the Lyra board of directors. Lyra is considered a related party to the Company because two of the Company’s directors, Dr. Roberts and Mr. Ebersman, serve on the Lyra board of directors and Mr. Ebersman is the Lyra chief executive officer. An independent committee of the Company’s board of directors, comprised of directors without any involvement in any external behavioral health business initiatives, approved the strategic alliance with and investment in Lyra.
The Company has evaluated all its transactions with Lyra and has determined that Lyra is a variable interest entity (“VIE”) for the Company. In determining that the Company is not the VIE’s primary beneficiary, the Company considered qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the characteristics of the Company’s involvement; and the obligation or likelihood for the Company to provide incremental financial support. Based on the Company’s evaluation, the Company determined it is not required to consolidate the operations of the VIE. The Company’s maximum exposure to loss as a result of its involvement with this unconsolidated VIE is limited to its investment of $4.1 million and it is not obligated to provide incremental financial support to Lyra.
The investment in Lyra is accounted for under the cost method and is included under other assets in the Company’s consolidated financial statements. The Company has not estimated the fair value of its investment because there have been no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. The Company assesses its investment for impairment on a quarterly basis or based on facts or circumstances that may require it to reassess the fair value of its investment. Based on the facts and circumstances as of September 30, 2016, the Company concluded that its investment was appropriately valued.
Related Party Transactions Disclosure [Text Block]
Related Party Transactions and Variable Interest Entity
In the second quarter of 2015, we announced a strategic alliance with Lyra Health (“Lyra”), to develop and bring to market an integrated behavioral health solution. In connection with this strategic alliance, Castlight made an initial preferred stock investment in Lyra of $3.1 million. Additionally, we made a subsequent preferred stock investment in Lyra of $1.0 million in August 2015. Lyra is considered a related party to us because two of Lyra’s co-founders serve on our board of directors, and Castlight’s chief executive officer serves on Lyra’s board. An independent committee of Castlight’s board of directors, comprised of directors without any involvement in any external behavioral health business initiatives, approved the strategic alliance with and investment in Lyra.
Lyra Health was founded in 2015 to work with employers, health plans, and providers to improve behavioral health outcomes and plans to offer a complementary behavioral health service that combines technology with active care management to improve patient outcomes. As part of the strategic alliance Lyra’s product will be integrated with Castlight Elevate for those customers who purchase both solutions. Castlight Elevate is an extension of our health benefits platform which enables employees to research behavioral health services, make educated treatment choices, and commence care.
We have evaluated both the initial and additional investment transactions and have determined that Lyra is a variable interest entity (“VIE”) for Castlight. In determining that we are not the VIE’s primary beneficiary, we considered qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the characteristics of our involvement; and the obligation or likelihood for us to provide incremental financial support. Based on our evaluation, we determined that Castlight and our related parties collectively have power and benefits of the operations of VIE; however, Castlight is not the party most closely associated to the VIE. Accordingly, we are not required to consolidate the operations of the VIE. Our maximum exposure to loss as a result of our involvement with this unconsolidated VIE is limited to our investment of $4.1 million and we are not obligated to provide incremental financial support to Lyra.
The investment in Lyra is accounted for under the cost method and is included under other assets in our consolidated financial statements. We have not estimated the fair value of our investment because there have been no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. We assess our investment for impairment on a quarterly basis or based on facts or circumstances that may require us to reassess the fair value of our investment. Based on the facts and circumstances as of December 31, 2015, we concluded that our investment was appropriately valued.
Accrued Compensation
Accrued Compensation
Accrued Compensation
Accrued compensation consisted of the following (in thousands):
 
As of December 31,
 
2015
 
2014
Accrued bonuses
$
4,034

 
$
4,728

Accrued commissions
5,212

 
3,035

Other benefits payable
2,231

 
2,692

Total
$
11,477

 
$
10,455

Deferred Revenue
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Deferred Revenue
Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
As of
 
September 30, 2016
 
December 31, 2015
Subscription
$
22,152

 
$
18,029

Professional services—implementation
5,540

 
5,254

Professional services—communications
3,038

 
3,307

Total current
30,730

 
26,590

Subscription
370

 
1,163

Professional services—implementation
4,946

 
5,367

Professional services—communications
1,384

 
992

Total noncurrent
6,700

 
7,522

Total
$
37,430

 
$
34,112

Deferred Revenue
Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
As of December 31,
 
2015
 
2014
Subscription
$
18,029

 
$
14,826

Professional services—implementation
5,254

 
2,974

Professional services—communications
3,307

 
2,908

Total current
26,590

 
20,708

Subscription
1,163

 
1,950

Professional services—implementation
5,367

 
4,327

Professional services—communications
992

 
375

Total noncurrent
7,522

 
6,652

Total
$
34,112

 
$
27,360

Commitments and Contingencies
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Commitments and Contingencies
Commitments and Contingencies
Legal Matters
On April 2, April 16, April 29, and May 4, 2015, purported securities class action lawsuits 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, which were consolidated on July 22, 2015, 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. A consolidated complaint (“Complaint”) was filed on July 23, 2015, alleging claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. On September 22, 2015 the Company filed a demurrer to the Complaint. After briefing and argument, the Court overruled the demurrer as to Plaintiffs’ claims under Sections 11 and 15 and granted with leave to amend, the demurrer to Plaintiff’s claims under Section 12(a)(2). Plaintiffs filed an amended consolidated complaint (“Amended Complaint”) on November 10, 2015. On December 10, 2015, the Company filed a demurrer to the Section 12(a)(2) claim in the Amended Complaint. On January 28, 2016, the Court again sustained the demurrer to the Section 12(a)(2) claim in the amended Complaint. The Amended Complaint sought unspecified damages and other relief. On March 28, 2016, the parties to the consolidated actions reached a mutually acceptable resolution by way of a mediated cash settlement. The aggregate amount of the settlement under the agreement in principle is $9.5 million. The Court granted preliminary approval of the settlement on July 13, 2016, and the Court granted final approval of the settlement on October 28, 2016. As a result of the settlement the Company 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. Funds representing the Company’s portion of the settlement amount were moved to escrow in the third quarter of 2016 and the Company expects them to be paid in the fourth quarter of 2016. While the Company believes it has meritorious defenses to the litigation, the Company is satisfied with this resolution given the risks and expenses associated with further litigation. 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.
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.
Leases and Contractual Obligations
The Company’s principal commitments primarily consist of obligations under leases for office space and co-location facilities for data center capacity. The Company’s existing lease agreements provide it with the option to renew and generally provide for rental payments on a graduated basis. The Company’s future operating lease obligations would change if it entered into additional operating lease agreements as the Company expands its operations and if it exercised these options.
The Company leases two office spaces in San Francisco, California with expirations dates in 2017 and 2021, respectively. In anticipation of the expiration of the lease in 2017, the Company executed an amendment in September 2016 to extend the term of its other lease to 2022 and add incremental rentable square feet (“RSF”). As a result of the amendment, the Company’s office space increased by 8,247 RSF. As of September 30, 2016, the Company’s future minimum payments for all leases are $18.5 million.
Other than matters discussed above there were no other material changes in the Company’s contractual obligations from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2015. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in the Company’s Annual Report on Form 10-K for a description of its contractual obligations.
Commitments and Contingencies
Commitments and Contingencies
Leases and Contractual Obligations
We lease office space under noncancelable operating leases in San Francisco, California and Sunnyvale, California. Contractual obligations relate to our service agreements for our data centers in Colorado and Arizona and other third party service providers. As of December 31, 2015, the future minimum lease payments under noncancelable operating leases are as follows (in thousands):
 
Operating
Leases
 
Contractual
Obligations
2016
$
3,369

 
$
243

2017
3,073

 

2018
2,548

 

2019
2,624

 

2020 and later
3,830

 

 
$
15,444

 
$
243


Our 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. We recognize rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred but not paid. Rent expense for the years ended December 31, 2015, 2014 and 2013 was $2.1 million, $1.2 million and $1.0 million, respectively.
Legal Matters
On April 2, April 16, April 29, and May 4, 2015, purported securities class action lawsuits were filed in the Superior Court of the State of California, County of San Mateo, against us, certain of our current and former directors, executive officers, significant stockholders and underwriters associated with our initial public offering (IPO). The lawsuits, which were consolidated on July 22, 2015, were brought by purported stockholders of our company seeking to represent a class consisting of all those who purchased our stock pursuant or traceable to the Registration Statement and Prospectus issued in connection with our IPO. A consolidated complaint (“Complaint”) was filed on July 23, 2015, which purports to allege claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. On September 22, 2015 we filed a Demurrer to the Complaint. After briefing and argument, the Court overruled the demurrer as to Plaintiffs’ claims under Sections 11 and 15 and granted with leave amend the demurrer to Plaintiff’s claims under Section 12(a)(2). The Complaint seeks unspecified damages and other relief. Discovery in the action is ongoing. We believe that the claims are without merit and intend to defend the action vigorously.
From time to time, we may become subject to other legal proceedings, claims or litigation arising in the ordinary course of business. In addition, we may receive letters alleging infringement of patents or other intellectual property rights. We do not believe that any liability from any reasonably foreseeable disposition of these legal actions and claims, individually or in the aggregate, would have a material effect on our business, operating results, cash flows or financial condition. The lawsuits described above are still in their early stages and the final outcome, including our liability, if any, with respect to the claims in the lawsuits, is uncertain. If an unfavorable outcome were to occur in the litigation, the impact could be material to our business, financial condition, cash flow or results of operations, depending on the specific circumstances of the outcome. We cannot make a reasonable estimate of the potential loss or range of loss, if any, arising from these matters. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss. If we determine that a loss is reasonably possible and can reasonably estimate the range of the loss, then we will disclose the range of the possible loss.
Stock Compensation
Stock Compensation
Stock Options Activity
A summary of stock option activity for the nine months ended September 30, 2016 is as follows (in thousands, except share and per share amounts): 
 
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
Balance at December 31, 2015
9,561,713

 
$
5.62

 
$
16,694

Stock option grants
3,854,646

 
$
3.16

 
 
Stock options exercised
(1,804,676
)
 
$
1.43

 
 
Stock options canceled
(3,551,388
)
 
$
9.56

 
 
Balance at September 30, 2016
8,060,295

 
$
3.52

 
$
14,012


The total grant-date fair value of stock options granted during the nine months ended September 30, 2016 and 2015 was $3.6 million and $2.3 million, respectively.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-valuation model with the following assumptions and fair value per share:
 
Nine Months Ended September 30,
 
2016
 
2015
Volatility
47%
 
53%
Expected life (in years)
6.12
 
6.17
Risk-free interest rate
1.37%
 
1.38%-1.91%
Dividend yield
—%
 
—%

As of September 30, 2016, the Company had $13.5 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 2.2 years.
The options granted and canceled in the nine months ended September 30, 2016 in the table above include options that were exchanged under the Company’s stock option exchange program. Pursuant to the stock option exchange program, 108 out of 132 eligible employees tendered options covering an aggregate of 2,685,396 shares of the Company’s Class A and Class B common stock at a weighted average exercise price of $11.03, in exchange for options to purchase 2,685,396 shares of its Class B common stock at an exercise price of $2.99 per share, the closing sale price reported on the New York Stock Exchange on February 24, 2016. Each new grant began a new vesting period commencing on the date of grant over five years in equal monthly installments. As of February 15, 2016 the incremental expense related to this offer was $1.8 million, which will be recognized over five years.
For more information, refer to the Company’s Tender Offer Statement filed with the Securities and Exchange Commission on January 12, 2016, as amended on January 28, 2016 and February 26, 2016.
Restricted Stock Units
A summary of restricted stock unit activity for the nine months ended September 30, 2016 is as follows:
 
Number of
Shares
Outstanding
 
Weighted-
Average
Grant Date Fair Value
Balance at December 31, 2015
6,685,118

 
$
7.63

Restricted Stock Units granted (1)
7,538,265

 
$
3.62

Restricted Stock Units vested
(1,507,255
)
 
$
8.20

Restricted Stock Units forfeited/canceled (2)
(1,507,875
)
 
$
7.19

Balance at September 30, 2016
11,208,253

 
$
4.92

(1) Includes performance stock units (“PSUs”) that were granted in 2016.
(2) Includes PSUs that were granted in the prior year, which were canceled because performance targets were not achieved.
As of September 30, 2016, there was a total of $49.0 million in unrecognized compensation cost related to restricted stock units and performance stock units, which is expected to be recognized over a weighted-average period of approximately 3.1 years.
In February 2016, the Company awarded PSUs to certain employees. The number of shares that will eventually vest depends on achievement of performance targets for 2016, 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 16, 2017. The compensation expense associated with the PSUs is recognized using the accelerated method. No expense has been recorded through September 30, 2016 as the Company determined the achievement of the performance targets was not probable.
A summary of restricted stock unit activity for the nine months ended September 30, 2016 is as follows:
 
Number of
Shares
Outstanding
 
Weighted-
Average
Grant Date Fair Value
Balance at December 31, 2015
6,685,118

 
$
7.63

Restricted Stock Units granted (1)
7,538,265

 
$
3.62

Restricted Stock Units vested
(1,507,255
)
 
$
8.20

Restricted Stock Units forfeited/canceled (2)
(1,507,875
)
 
$
7.19

Balance at September 30, 2016
11,208,253

 
$
4.92

(1) Includes performance stock units (“PSUs”) that were granted in 2016.
(2) Includes PSUs that were granted in the prior year, which were canceled because performance targets were not achieved.
Stockholders' Equity (Deficit)
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Stockholders' Equity (Deficit)
Stockholders’ Equity
Common Stock
As of September 30, 2016, the Company had 54,323,980 shares of Class A common stock and 49,368,701 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 (“Shares”) of its Class B Common Stock and a warrant (“Warrant”) to purchase up to 1.9 million shares of its Class B Common Stock. The net proceeds from this transaction were $17.8 million and will be used for working capital and other general corporate purposes.
The exercise price of the Warrant is $4.91 per share and will expire four years from the date the Company enters into agreements with SAP related to both SAP’s Connected Health platform (the “Platform Agreement”) and SAP’s distribution of the Company’s solutions (the “Distribution Agreement”, and together, with the Platform Agreement, the “Alliance Agreements”). The Alliance Agreements will be focused on a strategic, multi-pronged business relationship aimed at delivering integrated healthcare technologies that can help lower healthcare costs, improve outcomes and increase benefits satisfaction for customers. If the Company does not enter into the Alliance Agreements with SAP by May 17, 2017, then the Warrant will become void.
The Shares and Warrant are considered freestanding instruments from each other and are classified within stockholders’ equity. 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 represents the future benefits of the Alliance Agreements. Additional accounting for the Warrants and the customer prepayment liability is dependent on, if and when, the Alliance Agreements are executed.
Stockholders' Equity (Deficit)
Stockholders’ Equity
Initial Public Offering
On March 19, 2014, we completed our IPO, in which we sold 12.8 million shares of Class B common stock at a price to the public of $16.00 per share. Upon the consummation of the IPO, all outstanding shares of convertible preferred stock were converted into shares of Class A common stock.
Employee Equity Plans
We adopted a 2014 Equity Incentive Plan (EIP) that became effective on March 12, 2014 and serves as the successor to our 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. Our 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. We began granting RSUs in the fourth quarter of 2014.
We adopted a 2014 Employee Stock Purchase Plan (ESPP) that became effective on March 13, 2014 that enables eligible employees to purchase shares of our Class B common stock at a discount. We have not yet established a start date of the initial purchasing period under the ESPP.
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
Balance at December 31, 2014
16,392,539

 
$
4.40

 
7.3
 
$
128,541

Stock options granted
491,900

 
$
8.95

 
 
 
 
Stock options exercised
(4,177,555
)
 
$
1.02

 
 
 
 
Stock options canceled and forfeited
(3,145,171
)
 
$
5.87

 
 
 
 
Balance at December 31, 2015
9,561,713

 
$
5.62

 
6.9
 
$
16,694

Vested or expected to vest December 31, 2015
9,022,878

 
$
5.50

 
6.8
 
$
16,149

Exercisable as of December 31, 2015
5,416,829

 
$
3.99

 
6.0
 
$
12,497


The total grant-date fair value of stock options granted during the years ended December 31, 2015, 2014 and 2013 was $2.5 million, $39.9 million and $17.0 million, respectively.
The total grant-date fair value of stock options vested during the years ended December 31, 2015, 2014 and 2013 was $10.8 million, $9.7 million and $1.7 million, respectively.
The total intrinsic value of the options exercised during the years ended December 31, 2015, 2014 and 2013, was $25.3 million, $31.1 million and $1.8 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, 2015, we had $19.0 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 2.4 years.
The following table summarizes activities for RSUs:
 
Restricted Stock Units Outstanding
 
Number of shares
 
Weighted Average Grant-Date Fair Value
Balance at December 31, 2014
1,398,893

 
$
11.06

Restricted stock units granted
6,507,250

 
$
7.24

Restricted stock units vested
(295,468
)
 
$
10.70

Restricted stock units canceled and forfeited
(925,557
)
 
$
9.06

Balance at December 31, 2015
6,685,118

 
$
7.63


The total grant-date fair value of RSUs granted during the years ended December 31, 2015 and 2014 was $47.1 million and $15.7 million, respectively.
The total grant-date fair value of RSUs vested during the year ended December 31, 2015 was $3.2 million. No RSUs vested during the year ended December 31, 2014.
As of December 31, 2015, we had $43.6 million in unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted-average period of approximately 2.3 years.
Stock-based compensation capitalized to internal-use software for December 31, 2015 was $0.3 million.
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 our 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). We estimate 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 our 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.
The assumptions used in the Black-Scholes option-valuation model were determined as follows:
Volatility. Since we do not have a trading history for our Class B common stock, the expected volatility was derived from the historical stock volatilities of peer group companies within our industry. In evaluating peer companies, we considered factors such as nature of business, customer base, service offerings and markets served.
Risk-Free Interest Rate. The risk-free rate that we 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 our 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. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and therefore, we use an expected dividend yield of zero.
Fair Value of Common Stock. Prior to our initial public offering in March 2014, our board of directors considered numerous objective and subjective factors to determine the fair value of our 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 our Preferred Stock sold to outside investors; (iii) the rights, preferences and privileges of our Preferred Stock relative to our Class A common stock; (iv) the lack of marketability of our 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 our Company, given prevailing market conditions.
Since our initial public offering, we have used the market closing price for our Class B common stock as reported on the New York Stock Exchange to determine the fair value of our common stock.
In addition to assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-valuation model with the following assumptions and fair value per share:
 
Year Ended December 31,
 
2015
 
2014
 
2013
Volatility
53%
 
60%
 
57.8%-60%
Expected life (in years)
6.2
 
5.0-6.3
 
5.0-7.2
Risk-free interest rate
1.38%-1.91%
 
1.53%-2.05%
 
0.7%-1.8%
Dividend yield
—%
 
—%
 
—%
Weighted-average fair value of underlying common stock
$8.95
 
$14.74
 
$3.02

Warrants
On December 11, 2013, we issued a warrant to purchase an aggregate of 175,000 shares of Class A common stock at an exercise price of $5.00 per share to a third-party service provider. The warrant provides for an early exercise right and has a 10 year term. As of December 31, 2014, the warrants were fully vested. Expense for the warrants is calculated using the Black-Scholes option-pricing model and is recorded over the service performance period, which is the same as the vesting period. For the year ended December 31, 2014, we recorded $2.6 million in expense associated with this warrant. The expense for the year ended December 31, 2013 was immaterial.
Income Taxes
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
Income Taxes
Income Taxes
The effective tax rate for the three and nine months ended September 30, 2016 and 2015 was zero percent, primarily as a result of the estimated tax loss for the year and the change in valuation allowance. At September 30, 2016, all unrecognized tax benefits are subject to a full valuation allowance and, if recognized, will not affect the effective tax rate.
Income Taxes
Income Taxes
The components of loss from continuing operations before income taxes were generated solely in the United States as follows (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
United States
$
(79,920
)
 
$
(85,940
)
 
$
(62,182
)

As a result of our history of net operating losses and full valuation allowance against our deferred tax assets, there was no current or deferred income tax provision for the years ended December 31, 2015, 2014 and 2013.
Reconciliations of the statutory federal income tax rate and our effective tax rate consist of the following (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Tax at federal statutory rate
$
(27,173
)
 
$
(29,220
)
 
$
(21,142
)
State statutory rate (net of federal benefit)
(1,560
)
 
(1,728
)
 
(1,921
)
Non-deductible stock compensation
2,334

 
(19
)
 
619

Change in valuation allowance
24,332

 
30,571

 
22,184

Other
2,067

 
396

 
260

 
$

 
$

 
$


Significant components of our deferred tax assets and liabilities were as follows (in thousands):
 
As of December 31,
Deferred tax assets:
2015
 
2014
Net operating loss carryforwards
$
93,165

 
$
72,984

Deferred rent
235

 
127

Accrued bonus

 
68

Accrued compensation
326

 
539

Stock-based compensation
6,224

 
3,266

Other reserves and accruals
4

 
2

Property and equipment
322

 
16

Deferred revenue
3,017

 
2,173

 
103,293

 
79,175

Valuation allowance
(103,293
)
 
(79,175
)
Net deferred tax assets
$

 
$


We have provided a full valuation allowance for our deferred tax assets at December 31, 2015 and 2014, 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 increased by $24.1 million and $30.6 million during the years ended December 31, 2015 and 2014, respectively. For the years ended December 31, 2015 and 2014, we recorded no tax benefits related to stock-based compensation.
As of December 31, 2015, we have approximately $250.0 million of federal and $155.2 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 2017, respectively.
The deferred tax asset related to our net operating losses does not include amounts relating to the tax benefit of stock option exercises, which, when realized, will be recorded as a credit to additional paid-in capital. As of December 31, 2015, we also had approximately $4.5 million and $5.1 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.
Our 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 we should experience an ownership change, as defined, utilization of our net operating loss carryforwards and tax credits could be limited.
We evaluate 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,
 
2015
 
2014
 
2013
Gross unrecognized tax benefits at the beginning of the year
$
7,214

 
$
4,513

 
$
2,445

Increases for tax positions of prior years
133

 
871

 

Decreases for tax positions of prior years
(346
)
 
(831
)
 

Increases for tax positions related to the current year
2,539

 
2,661

 
2,068

Gross unrecognized tax benefits at the end of the year
$
9,540

 
$
7,214

 
$
4,513


At December 31, 2015, all unrecognized tax benefits are subject to a full valuation allowance and, if recognized, will not affect our tax rate.
There were no material changes to the unrecognized tax benefits in the year ended December 31, 2015, and we do not anticipate that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months.
Our policy is to include interest and penalties related to unrecognized tax benefits within our provision for income taxes. Due to our net operating loss position, we have not recorded an accrual for interest or penalties related to uncertain tax positions for the years ended December 31, 2015, 2014 or 2013.
Net Loss per Share
9 Months Ended 12 Months Ended
Sep. 30, 2016
Dec. 31, 2015
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. 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.
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):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Net loss
$
(6,011
)
 
$
(5,392
)
 
$
(11,584
)
 
$
(8,423
)
 
$
(27,002
)
 
$
(22,448
)
 
$
(37,207
)
 
$
(23,655
)
Weighted-average shares used to compute basic and diluted net loss per share
54,376

 
48,771

 
54,664

 
39,745

 
54,460

 
45,274

 
57,063

 
36,280

Basic and diluted net loss per share
$
(0.11
)
 
$
(0.11
)
 
$
(0.21
)
 
$
(0.21
)
 
$
(0.50
)
 
$
(0.50
)
 
$
(0.65
)
 
$
(0.65
)

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):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Stock options and restricted stock units
21,538

 
17,776

 
21,538

 
17,776

Warrants*
2,020

 
115

 
2,020

 
115

Total
23,558

 
17,891

 
23,558

 
17,891

*includes 1.9 million warrants issued to SAP that are exercisable upon execution of the Alliance Agreements.
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. As of December 31, 2013, only shares of Class A common stock were outstanding and therefore no net loss was allocated.
The following table presents the calculation of basic and diluted net loss per share for our common stock (in thousands, except per share data):