CASTLIGHT HEALTH, INC., 10-Q filed on 10/27/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Oct. 25, 2017
Class A
Oct. 25, 2017
Class B
Class of Stock [Line Items]
 
 
 
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Sep. 30, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
Q3 
 
 
Trading Symbol
CSLT 
 
 
Entity Registrant Name
CASTLIGHT HEALTH, INC. 
 
 
Entity Central Index Key
0001433714 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
53,005,558 
80,731,913 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 44,986 
$ 48,722 
Marketable securities
42,074 
65,882 
Accounts receivable, net
26,017 
14,806 
Deferred commissions
7,805 
8,218 
Prepaid expenses and other current assets
5,712 
3,382 
Total current assets
126,594 
141,010 
Property and equipment, net
5,670 
5,285 
Restricted cash, non-current
1,325 
1,144 
Goodwill
91,785 
Intangible assets, net
21,469 
Deferred commissions, non-current
4,021 
5,050 
Other assets
7,338 
4,677 
Total assets
258,202 
157,166 
Current liabilities:
 
 
Accounts payable
3,393 
2,288 
Accrued expenses and other current liabilities
14,615 
6,369 
Accrued compensation
12,151 
9,443 
Deferred revenue
34,974 
30,623 
Total current liabilities
65,133 
48,723 
Deferred revenue, non-current
8,412 
5,245 
Debt, non-current
5,423 
Other liabilities, non-current
1,955 
1,236 
Total liabilities
80,923 
55,204 
Commitments and contingencies
   
   
Stockholders’ equity (deficit):
 
 
Additional paid-in capital
580,282 
457,596 
Accumulated other comprehensive income
(5)
Accumulated deficit
(403,011)
(355,644)
Total stockholders’ equity (deficit)
177,279 
101,962 
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)
258,202 
157,166 
Class A
 
 
Stockholders’ equity (deficit):
 
 
Common stock value issued
$ 13 
$ 10 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Revenue:
 
 
 
 
Subscription
$ 31,363 
$ 23,867 
$ 86,963 
$ 66,859 
Professional services and other
3,209 
1,634 
7,453 
4,944 
Total revenue, net
34,572 
25,501 
94,416 
71,803 
Cost of revenue:
 
 
 
 
Cost of subscription
8,123 1
3,988 1
20,075 1
12,218 1
Cost of professional services
4,898 1
3,978 1
13,679 1
13,941 1
Total cost of revenue
13,021 
7,966 
33,754 
26,159 
Gross profit
21,551 
17,535 
60,662 
45,644 
Operating expenses:
 
 
 
 
Sales and marketing
16,006 1
13,143 1
47,024 1
44,877 1
Research and development
13,809 1
10,573 1
40,074 1
30,619 1
General and administrative
10,307 1
5,338 1
26,071 1
19,902 1
Total operating expenses
40,122 
29,054 
113,169 
95,398 
Operating loss
(18,571)
(11,519)
(52,507)
(49,754)
Other income, net
84 
116 
288 
304 
Loss before income tax benefit
(18,487)
(11,403)
(52,219)
(49,450)
Income tax benefit
5,206 
Net loss
$ (18,487)
$ (11,403)
$ (47,013)
$ (49,450)
Net loss per Class A and B share, basic and diluted
$ (0.14)
$ (0.11)
$ 0 
$ 0 
Weighted-average shares used to compute basic and diluted net loss per Class A and B share
132,251 
103,147 
122,675 
99,734 
Consolidated Statements of Operations Parenthetical (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Cost of subscription [Member]
 
 
 
 
Allocated Share-based Compensation Expense
$ 258 
$ 139 
$ 638 
$ 367 
Cost of professional services [Member]
 
 
 
 
Allocated Share-based Compensation Expense
342 
456 
1,400 
1,468 
Sales and marketing [Member]
 
 
 
 
Allocated Share-based Compensation Expense
3,110 
2,190 
7,705 
6,644 
Research and development [Member]
 
 
 
 
Allocated Share-based Compensation Expense
1,631 
1,631 
5,675 
4,300 
General and administrative [Member]
 
 
 
 
Allocated Share-based Compensation Expense
$ 1,121 
$ 1,236 
$ 3,586 
$ 3,476 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net loss
$ (18,487)
$ (11,403)
$ (47,013)
$ (49,450)
Other comprehensive income (loss):
 
 
 
 
Net change in unrealized gain (loss) on available-for-sale marketable securities
10 
(16)
(5)
117 
Other comprehensive income (loss)
10 
(16)
(5)
117 
Comprehensive loss
$ (18,477)
$ (11,419)
$ (47,018)
$ (49,333)
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Operating activities:
 
 
Net loss
$ (47,013)
$ (49,450)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
4,572 
2,407 
Stock-based compensation
19,004 
16,255 
Amortization of deferred commissions
8,120 
3,157 
Release of deferred tax valuation allowance due to business combination
(5,206)
Change in fair value of contingent consideration liability
3,288 
Accretion and amortization of marketable securities
22 
406 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(7,778)
(3,137)
Deferred commissions
(6,678)
(4,403)
Prepaid expenses and other assets
(393)
(68)
Accounts payable
401 
300 
Accrued expenses and other liabilities
2,623 
(4,046)
Deferred revenue
5,661 
3,318 
Net cash used in operating activities
(23,377)
(35,261)
Investing activities:
 
 
Restricted cash
181 
Purchase of property and equipment
(2,276)
(1,587)
Purchase of marketable securities
(56,852)
(73,163)
Maturities of marketable securities
80,633 
126,157 
Business combination, net of cash acquired
(2,264)
Net cash provided by investing activities
19,060 
51,407 
Financing activities:
 
 
Proceeds from the exercise of stock options
1,312 
2,576 
Proceeds from issuance of common stock and warrants
17,358 
Payments of issuance costs related to equity
(731)
(122)
Net cash provided by financing activities
581 
19,812 
Net increase (decrease) in cash and cash equivalents
(3,736)
35,958 
Cash and cash equivalents at beginning of period
48,722 
19,150 
Cash and cash equivalents at end of period
44,986 
55,108 
Non-cash investing and financing activity:
 
 
Non-cash purchase consideration related to acquisition of Jiff
$ 101,692 
$ 0 
Organization and Description of Business
Organization and Description of Business
Organization and Description of Business
Castlight Health Inc. (“Castlight” or “the Company”) has historically offered 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. On April 3, 2017, the Company completed its acquisition of Jiff, Inc. (“Jiff”). The acquisition enables the Company to provide the full spectrum of wellbeing, healthcare decision support and a benefits hub all in one complete package. Jiff still operates as a wholly-owned subsidiary of the Company. Jiff's results of operations have been included in the Company’s Condensed Consolidated Statements of Operations beginning April 3, 2017. See Note 5 for more information on the Jiff acquisition. The Company's comprehensive technology offering aggregates complex, large-scale data and applies sophisticated analytics to make health care data actionable 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.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include Castlight and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. 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 results for the interim periods presented are not necessarily indicative of the results expected for any future period. 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, 2016
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
certain assumption used in the determination of the Company’s contingent consideration liability
the fair value of assets acquired and liabilities assumed for business combinations.
Actual results could differ from those estimates, and such differences could be material to the Company’s consolidated financial position and results of operations.

Critical Accounting Policies

Except for the accounting policies below, there have been no changes to our critical accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2016.




 
Business Combinations, Goodwill, and Intangible Assets

The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users and acquired technology, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
The Company reviews goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. The Company has elected to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the Company’s single reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step will be performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. As of September 30, 2017, no impairment of goodwill has been identified.
Acquired finite-lived intangible assets are amortized over their estimated useful lives. The Company evaluates the recoverability of its intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. The Company has not recorded any such impairment charges.

Recently Adopted Accounting Pronouncements
Stock-based Compensation
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment.” The guidance will change how companies account for certain aspects of share-based payments to employees. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The Company adopted this guidance on January 1, 2017 and accordingly recorded a cumulative-effect adjustment charge of approximately $0.4 million to the beginning accumulated deficit for the impact of electing to account for forfeitures as they occur. The adoption of this standard did not have any impact to the Statement of Operations or the Statement of Cash Flows. The Company is subject to full valuation allowance and thus has not utilized any excess tax benefits or realized any cash tax benefit related to stock compensation expense. The adoption of this standard did not have any material impact to the Company’s results of operations for three and nine months ended September 30, 2017.

Consolidation

In October 2016, the FASB issued ASU 2016-17, “Consolidation.” The standard addresses how companies evaluate whether a reporting entity is the primary beneficiary of a VIE by changing how the reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The standard became effective for the Company beginning January 1, 2017. Based on the Company’s evaluation, the standard did not have a material impact on its consolidated financial statements.

Recently Issued Accounting Pronouncements

Goodwill

In January 2017, the FASB issued ASU 2017-4, “Intangibles—Goodwill and Other.” The standard eliminates Step 2 from the goodwill impairment test, under which an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, instead requiring an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The standard will become effective for the Company beginning January 1, 2020, and early adoption is permitted. At this point in time, the Company does not intend to adopt the standard early. 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. At this point in time, the Company does not intend to adopt the standard early. The Company is evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the impact of adoption on its consolidated financial statement.     

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 of 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 impact of adoption on its consolidated financial statements.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” and has since updated the ASU. This ASU replaces existing revenue recognition standards with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The new standard will be effective for the Company beginning January 1, 2018 with early adoption permitted beginning January 1, 2017. The Company has elected not to early adopt the new standard.

The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company currently plans to adopt under the full retrospective method. However, a final decision regarding the adoption method has not been finalized at this time.

The Company is currently assessing the impact of the new standard on its accounting policies, processes, and controls, including system requirements and has assigned internal resources and has also engaged a third party service provider to assist in its assessment.

Based on its assessment to date, the Company currently believes a significant impact from the adoption of the new standard will be related to the Company’s costs to fulfill as well as its costs to obtain contracts with customers. For fulfillment costs, the new standard states that an entity shall recognize an asset from the costs incurred to fulfill a contract if certain criteria are met. The Company believes these criteria will be met and these costs will be recognized as an asset under the new standard.  The costs to fulfill a contract that are recognized as an asset are then amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The Company currently expenses costs to fulfill a contract when they are incurred. Similar to fulfillment costs, for costs to obtain a contract (which are primarily sales commissions and broker fees), the standard states that costs to obtain a contract shall be amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The Company currently capitalizes certain sales commissions and amortizes those costs over the non-cancelable portion of its subscription contracts. Under the new standard, the amortization period for the Company’s costs to obtain a contract could be longer. Lastly, based on its assessment, the Company currently believes areas of impact related to the Company’s revenue recognition will be in the accounting for termination provisions, the estimation of variable consideration, the accounting for contract modifications, and the allocation of the transaction price to the Company’s multiple performance obligations.

While the Company continues to assess the potential impacts of the new standard, including the areas described above, and anticipates the standard could have a material impact on its consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the Company’s consolidated financial statements at this time.
Marketable Securities
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, 2017 and December 31, 2016, respectively, marketable securities consisted of the following (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
September 30, 2017
 
 
 
 
 
 
 
U.S. agency obligations
$
15,294

 
$

 
$
(2
)
 
$
15,292

U.S. treasury securities
43,382

 
1

 
(4
)
 
43,379

Money market mutual funds
3,647

 

 

 
3,647

 
62,323

 
1

 
(6
)
 
62,318

Included in cash and cash equivalents
20,244

 

 

 
20,244

Included in marketable securities
$
42,079

 
$
1

 
$
(6
)
 
$
42,074


 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2016
 
 
 
 
 
 
 
U.S. agency obligations
$
33,019

 
$
5

 
$
(3
)
 
$
33,021

U.S. treasury securities
37,864

 

 
(2
)
 
37,862

Money market mutual funds
7,965

 

 

 
7,965

 
78,848

 
5

 
(5
)
 
78,848

Included in cash and cash equivalents
12,966

 

 

 
12,966

Included in marketable securities
$
65,882

 
$
5

 
$
(5
)
 
$
65,882

Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
The Company measures its financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires that the Company 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.
The Company classifies its contingent consideration liability in connection with the acquisition of Jiff within the Level 3 category, as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. The Company estimates the fair value of the contingent consideration liability based on the Monte Carlo simulation model. The fair value of the contingent consideration is calculated with numerous projected outcomes, the results of which are averaged and then discounted to estimate the present value. Some of the more significant assumptions inherent in the development of the Monte Carlo simulation model include bookings and revenue forecasts, asset-level volatility, stock price volatility, correlation between stock price and revenue, risk-free rate, weighted average cost of capital (“WACC”), and stock price. Any change in these assumptions could result in a significantly higher (lower) fair value measurement.
Except for new valuation for contingent consideration liability, there have been no changes in valuation techniques in the periods presented. There were no significant transfers between fair value measurement levels as of September 30, 2017 and December 31, 2016.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2017
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
$
3,647

 
$

 
$

 
$
3,647

U.S. agency obligations

 
5,848

 

 
5,848

U.S. treasury securities

 
10,749

 

 
10,749

Marketable securities:
 
 
 
 
 
 
 
U.S. agency obligations

 
9,444

 

 
9,444

U.S. treasury securities

 
32,630

 

 
32,630

 
$
3,647

 
$
58,671

 
$

 
$
62,318

 
 
 
 
 
 
 
 
Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Contingent consideration liability(1)
$

 
$

 
$
3,959

 
$
3,959

 
 
 
 
 
 
 
 
 (1) Change in fair value is recorded in general and administrative expenses in the Company’s condensed consolidated statement of operations. 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2016
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
$
7,965

 
$

 
$

 
$
7,965

U.S. treasury securities

 
5,000

 

 
5,000

Marketable securities:
 
 
 
 
 
 
 
U.S. agency obligations

 
33,021

 

 
33,021

U.S. treasury securities

 
32,862

 

 
32,862

 
$
7,965

 
$
70,883

 
$

 
$
78,848


Gross unrealized gains and losses for cash equivalents and marketable securities as of September 30, 2017 and December 31, 2016 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, 2017 and December 31, 2016.
There were no realized gains or losses during the nine months ended September 30, 2017. All of the Company’s marketable securities at September 30, 2017 and December 31, 2016 mature within one year. 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.
The following is a reconciliation of the Level 3 contingent consideration liability (in thousands):
 
 
Contingent Consideration Liability
Balance as of December 31, 2016
 
$

Initial fair value as of acquisition date
 
671

Re-measurement of fair value on June 30, 2017 (1)
 
(643
)
Balance as of June 30, 2017
 
28

Re-measurement of fair value on September 30, 2017 (1)
 
3,931

Balance as of September 30, 2017
 
$
3,959

(1) Changes in fair value are recorded in general and administrative expenses in our condensed consolidated statements of operations. 
    The fair value estimate of this liability was $0.7 million at the date of acquisition. The changes in the fair value of the contingent consideration liability subsequent to the acquisition date are recognized in earnings in the period when the change in the estimated fair value occurs. The Company recognized a $3.9 million and $3.3 million loss related to change in the fair value of the contingent consideration liability in its condensed consolidated statements of operations for the three months and nine months ended September 30, 2017, respectively.
Business Combinations
Business Combinations
Business Combinations
    
On April 3, 2017, the Company completed its acquisition of Jiff. Jiff provides an enterprise health benefits platform that serves as a central hub for employee wellbeing and employee benefit programs. The acquisition enables the Company to provide the full spectrum of wellbeing, healthcare decision support and a benefits hub all in one complete package. The Company acquired Jiff for approximately 27,000,000 in shares and options.

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

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

As part of the merger, certain stockholders and option holders will receive an aggregate of 1,000,000 shares of the Company’s Class B common stock or options if the Jiff business achieves at least $25 million in revenue in 2017 and an aggregate of 3,000,000 shares of Class B common stock or options if the Jiff business achieves at least $25 million in net new bookings during 2017 (“the milestones”). Additionally, all options for Jiff common stock held by Jiff employees who became employees of the combined company were converted into options to purchase the Company’s Class B common stock.









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

Fair value of contingent consideration
 
671

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

Transaction costs paid on behalf of Jiff
 
4,498

Estimated purchase price consideration
 
$
106,190


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

The Company determined that the contingent consideration shares associated with the milestones are one unit of account and the Company classified the contingent consideration as a liability as the arrangement can be settled in a variable number of shares and is not considered fixed-for-fixed. Based on the probability of completing the milestones and changes in the fair value of the Company’s common stock, the Company used a Monte Carlo simulation model to determine the fair value of the contingent consideration liability which was $0.7 million at the date of acquisition and $4.0 million at September 30, 2017. The Company classified the contingent consideration liability as a current liability on the condensed consolidated balance sheet and the contingent consideration liability will be subsequently remeasured to fair value at each reporting date. See Note 4 for the fair value measurement disclosure on the contingent consideration liability.

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

The allocation of purchase consideration to assets and liabilities is not yet finalized. The Company continues to evaluate the fair value of certain assets and liabilities related to the acquisition of Jiff. Additional information, which existed as of the acquisition date but was at that time unknown to us, may become known to us during the remainder of the measurement period. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill. The preliminary estimated fair values of assets acquired and liabilities assumed may be subject to change as additional information is received. The fair values of the assets acquired and liabilities assumed by major class in the acquisition of Jiff as of September 30, 2017 were recognized as follows (in thousands):
Cash
$
2,234

Current assets
5,159

Other assets
1,971

Acquired intangible assets
23,900

Goodwill
91,785

    Total assets acquired
125,049

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



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

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

 
10
Developed technology
 
10,600

 
5
Backlog
 
1,500

 
3
Other acquired intangible assets
 
900

 
1-3
Total identifiable intangible assets
 
$
23,900

 
 

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

The Company has included the financial results of Jiff in the condensed consolidated statements of operations from the date of acquisition. For the three and nine months ended September 30, 2017 approximately $3.2 million and $6.4 million revenue attributable to Jiff was included in the consolidated results of operations respectively, the associated operating loss was immaterial. The Company incurred $3.1 million of total acquisition-related costs for the nine months ended September 30, 2017 that were recognized in general and administrative expenses.

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

The unaudited pro forma financial information is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Total revenue
$
34,538

 
$
27,059

 
$
97,991

 
$
75,513

Net loss
$
(17,632
)
 
$
(20,190
)
 
$
(53,362
)
 
$
(71,757
)


The pro forma revenue and net loss reflects material, nonrecurring adjustments, such as the tax benefit of $5.2 million that resulted from the acquisition, non-recurring acquisition-related compensation expense and non-recurring deferred revenue fair value adjustments.
Property and equipment, net
Property and equipment
Property and Equipment
Property and equipment consisted of the following (in thousands):
 
As of
 
September 30, 2017
 
December 31, 2016
Leasehold improvements
$
2,627

 
$
2,061

Computer equipment
6,035

 
5,487

Software
1,149

 
1,099

Capitalization of internal-use software
2,925

 
2,925

Furniture and equipment
1,293

 
931

Total
14,029

 
12,503

Accumulated depreciation
(8,359
)
 
(7,218
)
Property and equipment, net
$
5,670

 
$
5,285


Depreciation and amortization expense for the three months ended September 30, 2017 and 2016, was $0.7 million and $0.8 million, respectively. Depreciation and amortization expense for the nine months ended September 30, 2017 and 2016, was $2.1 million and $2.4 million, respectively. Depreciation and amortization are recorded on a straight-line basis.
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Goodwill and Intangible Assets

Goodwill

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

The changes in the carrying amount of goodwill as of September 30, 2017 were as follows (in thousands):
Balance as of December 31, 2016 (1)
$

Acquisition of Jiff
91,398

Goodwill adjustments
387

Balance as of September 30, 2017
$
91,785


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

Intangible assets, net
    
The following table sets forth the fair value components of identifiable acquired intangible assets (in thousands) and their estimated useful lives (in years) as of September 30, 2017 were as follows (in thousands):
 
 
Intangible Assets, Gross
 
Accumulated Amortization
 
Acquired Intangibles, Net
 
Useful Life
 
 
December 31, 2016 (1)
 
Additions
 
September 30, 2017
 
December 31, 2016
 
Expense
 
September 30, 2017
 
September 30, 2017
 
Customer relationships
 
$

 
$
10,900

 
$
10,900

 
$

 
$
(546
)
 
$
(546
)
 
10,354

 
10
Developed technology
 

 
10,600

 
10,600

 

 
(1,060
)
 
(1,060
)
 
9,540

 
5
Backlog
 

 
1,500

 
1,500

 

 
(442
)
 
(442
)
 
1,058

 
3
Other acquired intangible assets
 

 
900

 
900

 

 
(383
)
 
(383
)
 
517

 
1-3
Total identifiable intangible assets
 
$

 
$
23,900

 
$
23,900

 
$

 
$
(2,431
)
 
$
(2,431
)
 
$
21,469

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

Amortization expense from acquired intangible assets for the three and nine months ended September 30, 2017 was $1.2 million and $2.4 million, respectively and is included in cost of subscription, general and administrative, and sales and marketing expenses.

Estimated amortization expense for acquired intangible assets for the following five years and thereafter is as follows (in thousands):
2017
1,216

2018
4,044

2019
3,505

2020
3,242

2021
3,210

Thereafter
6,252

Total estimated amortization expense
21,469

Related Party Transactions (Notes)
Related Party Transactions and Variable Interest Entity
Note 9. Related Party Transactions and Variable Interest Entity

Lyra Health    

In 2015, the Company made a preferred stock investment in Lyra Health (”Lyra”) of $4.1 million, associated with a strategic alliance with Lyra. 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. The Company has evaluated all its transactions with Lyra and has determined that Lyra is a variable interest entity (“VIE”) for the Company but that 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 assesses its investment for impairment on a quarterly basis or more frequently if facts and circumstances necessitates reassessment of fair value of its investment. As of September 30, 2017, the Company concluded that its investment was appropriately valued and not impaired.

Jiff Acquisition

On April 3, 2017, the Company acquired Jiff, Inc. Venrock, a holder of more than 5% of the Company’s capital stock was also a stockholder of Jiff. At the closing of the acquisition, Venrock acquired a total of 3,965,979 shares of the Company’s Class B common stock in exchange for its shares of Jiff capital stock. Venrock will also receive additional shares of the Company’s Class B common stock upon the achievement by the Jiff business of certain milestones in 2017. Bryan Roberts, the Chairman of the Company’s Board of Directors is a Partner at Venrock. The Company’s Board appointed a Special Committee (comprised solely of disinterested directors) to which it delegated the full and exclusive power, authority and discretion of the Castlight Board to evaluate, assess, and approve the Jiff transaction on its behalf, including retaining a financial advisor for an opinion on the fairness of the financial conditions of the transaction. The transaction was approved solely by the Special Committee which concluded that the transaction terms were fair to Castlight and the transaction was in the best interests of Castlight and its stockholders.
Stock Compensation
Stock Compensation
Stock Options
A summary of stock option activity for the nine months ended September 30, 2017 is as follows (in thousands, except share and per share amounts): 
 
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
Balance at December 31, 2016
7,642,953

 
$
3.71

 
$
18,537

Stock option grants
400,000

 
$
3.60

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

 
$
1.42

 
 
Stock options exercised
(726,060
)
 
$
1.81

 
 
Stock options canceled
(1,742,228
)
 
$
3.11

 
 
Balance at September 30, 2017
10,957,278

 
$
2.80

 
$
25,685


The total grant-date fair value of stock options granted during the nine months ended September 30, 2017 and 2016 was $0.8 million and $3.6 million, respectively.
Assumed and Awarded Jiff Options
In connection with the acquisition of Jiff, the Company assumed 5.4 million options with a grant date fair value of $14.1 million. These options are categorized as performance stock options, as the final exercise price will be determined upon the achievement of certain milestones. These options were valued using the Monte Carlo simulation model. The total acquisition date fair value of $14.1 million allocation to the pre-combination services and post-combination services was $9.6 and $4.5 million, respectively. Any subsequent changes in the fair value of the assumed Jiff options resulting from achievement of the earn-out milestones will be accounted as post-combination stock compensation expense.
The relevant assumptions used in the Monte Carlo simulation model are presented in the table below. The Monte Carlo simulation model considers vesting schedules, stated expiration dates and potential early exercises based on market performance in determining the effective holding period for the options.
 
Nine Months Ended September 30,
 
2017
 
2016
Volatility
75%
 
*
Risk-free interest rate
2.35%
 
*
Dividend yield
—%
 
*
* The Company has not used the Monte Carlo simulation model prior to the acquisition of Jiff. 
Except for the stock options assumed and granted related to acquisition, 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,
 
2017
 
2016
Volatility
61%
 
47%
Expected life (in years)
6.02
 
6.12
Risk-free interest rate
2.03%
 
1.37%
Dividend yield
—%
 
—%

As of September 30, 2017, the Company had $7.2 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.    
Restricted Stock Units

A summary of restricted stock unit activity for the nine months ended September 30, 2017 is as follows:
 
Number of
Shares
Outstanding
 
Weighted-
Average
Grant Date Fair Value
Balance at December 31, 2016
10,541,666

 
$
4.82

Restricted Stock Units granted (1)
6,209,788

 
$
3.62

Restricted Stock Units vested
(3,130,004
)
 
$
5.08

Restricted Stock Units forfeited/canceled (2)
(3,395,161
)
 
$
4.61

Balance at September 30, 2017
10,226,289

 
$
4.10

(1) Includes 1.4 million performance stock units (“PSUs”) that were granted during the nine months ended September 30, 2017. 
(2) Includes PSUs that were granted in the prior year, which were canceled because performance targets were not achieved.  
As of September 30, 2017, there was a total of $35.1 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 2.81 years.

During 2017, the Company awarded 1.4 million PSUs to certain employees. The number of shares that will eventually vest depends on achievement of performance targets for 2017, as determined by the compensation committee of the Company's board of directors, and may range from 0 to 150% of the targeted award amount. Once the performance is determined and a targeted award amount is fixed, the target number of PSUs, if any, will vest in eight quarterly installments, subject to recipients' continued service, beginning on February 15, 2018. The compensation expense associated with the PSUs is recognized using the accelerated method. No expense has been recorded through September 30, 2017 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, 2017 is as follows:
 
Number of
Shares
Outstanding
 
Weighted-
Average
Grant Date Fair Value
Balance at December 31, 2016
10,541,666

 
$
4.82

Restricted Stock Units granted (1)
6,209,788

 
$
3.62

Restricted Stock Units vested
(3,130,004
)
 
$
5.08

Restricted Stock Units forfeited/canceled (2)
(3,395,161
)
 
$
4.61

Balance at September 30, 2017
10,226,289

 
$
4.10

(1) Includes 1.4 million performance stock units (“PSUs”) that were granted during the nine months ended September 30, 2017. 
(2) Includes PSUs that were granted in the prior year, which were canceled because performance targets were not achieved.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Legal Matters

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

In connection with the acquisition of Jiff on April 3, 2017, the Company assumed Jiff’s operating leases located in Mountain View, California, Oakland, California, Palo Alto, California, and Charlotte, North Carolina with various expiration dates through 2022, some of which are subleased. The total rent obligation of the Company under all operating leases is $21.9 million.
    
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, 2016. 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.
Stockholders' Equity
Stockholders’ Equity
Note 12. Stockholders’ Equity
Common Stock
As of September 30, 2017, the Company had 53,005,558 shares of Class A common stock and 80,215,478 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 approximately 4.7 million shares (“Shares”) of its Class B Common Stock and a warrant (“Warrant”) to purchase up to approximately 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 remains at $4.91 per share and will expire four years from the date the Company enters into an agreement with SAP related to the distribution and the reselling of the Company’s solutions (the “Alliance Agreement”) within a prescribed period. If the Company does not enter into the Alliance Agreement with SAP by the end of the prescribed period, then the Warrant will become void and will not be exercisable. In the second quarter of 2017, the Company and SAP modified the Warrant to extend the time period allowed to execute the Alliance Agreement from May 17, 2017 to November 17, 2017.
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 obligations under the Alliance Agreement.
The Company updated its preliminary allocation of the net proceeds as a result of the modification of the Warrant in the second quarter of 2017, which resulted in a change in classification of customer prepayment liability into other assets. The Company expects to derive future economic benefit from a strategic partnership with SAP once the Alliance Agreement is executed.
Income Taxes
Income Taxes
Income Taxes
The effective tax rate for the nine months ended September 30, 2017 and 2016 was zero percent, primarily as a result of the estimated tax loss for the year and the change in valuation allowance. However, as a result of the acquisition of Jiff in April 2017, the Company recorded a tax benefit of $5.2 million as a discrete item in the second quarter. This tax benefit is a result of the partial release of its existing valuation allowance since the acquired deferred tax liabilities from Jiff will provide a source of income for the Company to realize a portion of its deferred tax assets, for which a valuation allowance is no longer needed.
At September 30, 2017, all unrecognized tax benefits are subject to a full valuation allowance and, if recognized, will not affect the effective tax rate.
Net Loss per Share
Net Loss per Share
Net Loss per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. 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,
 
2017
 
2016
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Net loss
$
(7,425
)
 
$
(11,062
)
 
$
(6,011
)
 
$
(5,392
)
 
$
(20,620
)
 
$
(26,393
)
 
$
(27,002
)
 
$
(22,448
)
Weighted-average shares used to compute basic and diluted net loss per share
53,119

 
79,132

 
54,376

 
48,771

 
53,805

 
68,870

 
54,460

 
45,274

Basic and diluted net loss per share
$
(0.14
)
 
$
(0.14
)
 
$
(0.11
)
 
$
(0.11
)
 
$
(0.38
)
 
$
(0.38
)
 
$
(0.50
)
 
$
(0.50
)

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,
 
2017
 
2016
 
2017
 
2016
Stock options and restricted stock units
21,184

 
21,538

 
21,184

 
21,538

Warrants*
2,020

 
2,020

 
2,020

 
2,020

Contingent issuable shares related to Jiff
3,284

 

 
3,284

 

Total
26,488

 
23,558

 
26,488

 
23,558


*includes 1.9 million warrants issued to SAP that become exercisable upon execution of the Alliance Agreements as described in Note 12.
Summary of Significant Accounting Policies (Policies)
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include Castlight and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. 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 results for the interim periods presented are not necessarily indicative of the results expected for any future period. 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, 2016
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
certain assumption used in the determination of the Company’s contingent consideration liability
the fair value of assets acquired and liabilities assumed for business combinations.
Actual results could differ from those estimates, and such differences could be material to the Company’s consolidated financial position and results of operations.
Stock-based Compensation
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment.” The guidance will change how companies account for certain aspects of share-based payments to employees. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The Company adopted this guidance on January 1, 2017 and accordingly recorded a cumulative-effect adjustment charge of approximately $0.4 million to the beginning accumulated deficit for the impact of electing to account for forfeitures as they occur. The adoption of this standard did not have any impact to the Statement of Operations or the Statement of Cash Flows. The Company is subject to full valuation allowance and thus has not utilized any excess tax benefits or realized any cash tax benefit related to stock compensation expense. The adoption of this standard did not have any material impact to the Company’s results of operations for three and nine months ended September 30, 2017.

Consolidation

In October 2016, the FASB issued ASU 2016-17, “Consolidation.” The standard addresses how companies evaluate whether a reporting entity is the primary beneficiary of a VIE by changing how the reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The standard became effective for the Company beginning January 1, 2017. Based on the Company’s evaluation, the standard did not have a material impact on its consolidated financial statements.

Recently Issued Accounting Pronouncements

Goodwill

In January 2017, the FASB issued ASU 2017-4, “Intangibles—Goodwill and Other.” The standard eliminates Step 2 from the goodwill impairment test, under which an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, instead requiring an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The standard will become effective for the Company beginning January 1, 2020, and early adoption is permitted. At this point in time, the Company does not intend to adopt the standard early. 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. At this point in time, the Company does not intend to adopt the standard early. The Company is evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the impact of adoption on its consolidated financial statement.     

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 of 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 impact of adoption on its consolidated financial statements.

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” and has since updated the ASU. This ASU replaces existing revenue recognition standards with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The new standard will be effective for the Company beginning January 1, 2018 with early adoption permitted beginning January 1, 2017. The Company has elected not to early adopt the new standard.

The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company currently plans to adopt under the full retrospective method. However, a final decision regarding the adoption method has not been finalized at this time.

The Company is currently assessing the impact of the new standard on its accounting policies, processes, and controls, including system requirements and has assigned internal resources and has also engaged a third party service provider to assist in its assessment.

Based on its assessment to date, the Company currently believes a significant impact from the adoption of the new standard will be related to the Company’s costs to fulfill as well as its costs to obtain contracts with customers. For fulfillment costs, the new standard states that an entity shall recognize an asset from the costs incurred to fulfill a contract if certain criteria are met. The Company believes these criteria will be met and these costs will be recognized as an asset under the new standard.  The costs to fulfill a contract that are recognized as an asset are then amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The Company currently expenses costs to fulfill a contract when they are incurred. Similar to fulfillment costs, for costs to obtain a contract (which are primarily sales commissions and broker fees), the standard states that costs to obtain a contract shall be amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The Company currently capitalizes certain sales commissions and amortizes those costs over the non-cancelable portion of its subscription contracts. Under the new standard, the amortization period for the Company’s costs to obtain a contract could be longer. Lastly, based on its assessment, the Company currently believes areas of impact related to the Company’s revenue recognition will be in the accounting for termination provisions, the estimation of variable consideration, the accounting for contract modifications, and the allocation of the transaction price to the Company’s multiple performance obligations.

While the Company continues to assess the potential impacts of the new standard, including the areas described above, and anticipates the standard could have a material impact on its consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the Company’s consolidated financial statements at this time.
Marketable Securities (Tables)
Available-for-sale Securities
At September 30, 2017 and December 31, 2016, respectively, marketable securities consisted of the following (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
September 30, 2017
 
 
 
 
 
 
 
U.S. agency obligations
$
15,294

 
$

 
$
(2
)
 
$
15,292

U.S. treasury securities
43,382

 
1

 
(4
)
 
43,379

Money market mutual funds
3,647

 

 

 
3,647

 
62,323

 
1

 
(6
)
 
62,318

Included in cash and cash equivalents
20,244

 

 

 
20,244

Included in marketable securities
$
42,079

 
$
1

 
$
(6
)
 
$
42,074


 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2016
 
 
 
 
 
 
 
U.S. agency obligations
$
33,019

 
$
5

 
$
(3
)
 
$
33,021

U.S. treasury securities
37,864

 

 
(2
)
 
37,862

Money market mutual funds
7,965

 

 

 
7,965

 
78,848

 
5

 
(5
)
 
78,848

Included in cash and cash equivalents
12,966

 

 

 
12,966

Included in marketable securities
$
65,882

 
$
5

 
$
(5
)
 
$
65,882

Fair Value Measurements (Tables)
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2017
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
$
3,647

 
$

 
$

 
$
3,647

U.S. agency obligations

 
5,848

 

 
5,848

U.S. treasury securities

 
10,749

 

 
10,749

Marketable securities:
 
 
 
 
 
 
 
U.S. agency obligations

 
9,444

 

 
9,444

U.S. treasury securities

 
32,630

 

 
32,630

 
$
3,647

 
$
58,671

 
$

 
$
62,318

 
 
 
 
 
 
 
 
Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
Contingent consideration liability(1)
$

 
$

 
$
3,959

 
$
3,959

 
 
 
 
 
 
 
 
 (1) Change in fair value is recorded in general and administrative expenses in the Company’s condensed consolidated statement of operations. 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2016
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
$
7,965

 
$

 
$

 
$
7,965

U.S. treasury securities

 
5,000

 

 
5,000

Marketable securities:
 
 
 
 
 
 
 
U.S. agency obligations

 
33,021

 

 
33,021

U.S. treasury securities

 
32,862

 

 
32,862

 
$
7,965

 
$
70,883

 
$

 
$
78,848

The following is a reconciliation of the Level 3 contingent consideration liability (in thousands):
 
 
Contingent Consideration Liability
Balance as of December 31, 2016
 
$

Initial fair value as of acquisition date
 
671

Re-measurement of fair value on June 30, 2017 (1)
 
(643
)
Balance as of June 30, 2017
 
28

Re-measurement of fair value on September 30, 2017 (1)
 
3,931

Balance as of September 30, 2017
 
$
3,959

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

Fair value of contingent consideration
 
671

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

Transaction costs paid on behalf of Jiff
 
4,498

Estimated purchase price consideration
 
$
106,190

The fair values of the assets acquired and liabilities assumed by major class in the acquisition of Jiff as of September 30, 2017 were recognized as follows (in thousands):
Cash
$
2,234

Current assets
5,159

Other assets
1,971

Acquired intangible assets
23,900

Goodwill
91,785

    Total assets acquired
125,049

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

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

 
10
Developed technology
 
10,600

 
5
Backlog
 
1,500

 
3
Other acquired intangible assets
 
900

 
1-3
Total identifiable intangible assets
 
$
23,900

 
 
The unaudited pro forma financial information is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Total revenue
$
34,538

 
$
27,059

 
$
97,991

 
$
75,513

Net loss
$
(17,632
)
 
$
(20,190
)
 
$
(53,362
)
 
$
(71,757
)
Property and equipment, net (Tables)
Property, Plant and Equipment
Property and equipment consisted of the following (in thousands):
 
As of
 
September 30, 2017
 
December 31, 2016
Leasehold improvements
$
2,627

 
$
2,061

Computer equipment
6,035

 
5,487

Software
1,149

 
1,099

Capitalization of internal-use software
2,925

 
2,925

Furniture and equipment
1,293

 
931

Total
14,029

 
12,503

Accumulated depreciation
(8,359
)
 
(7,218
)
Property and equipment, net
$
5,670

 
$
5,285

Goodwill and Intangible Assets (Tables)
The changes in the carrying amount of goodwill as of September 30, 2017 were as follows (in thousands):
Balance as of December 31, 2016 (1)
$

Acquisition of Jiff
91,398

Goodwill adjustments
387

Balance as of September 30, 2017
$
91,785

The following table sets forth the fair value components of identifiable acquired intangible assets (in thousands) and their estimated useful lives (in years) as of September 30, 2017 were as follows (in thousands):
 
 
Intangible Assets, Gross
 
Accumulated Amortization
 
Acquired Intangibles, Net
 
Useful Life
 
 
December 31, 2016 (1)
 
Additions
 
September 30, 2017
 
December 31, 2016
 
Expense
 
September 30, 2017
 
September 30, 2017
 
Customer relationships
 
$

 
$
10,900

 
$
10,900

 
$

 
$
(546
)
 
$
(546
)
 
10,354

 
10
Developed technology
 

 
10,600

 
10,600

 

 
(1,060
)
 
(1,060
)
 
9,540

 
5
Backlog
 

 
1,500

 
1,500

 

 
(442
)
 
(442
)
 
1,058

 
3
Other acquired intangible assets
 

 
900

 
900

 

 
(383
)
 
(383
)
 
517

 
1-3
Total identifiable intangible assets
 
$

 
$
23,900

 
$
23,900

 
$

 
$
(2,431
)
 
$
(2,431
)
 
$
21,469

 
 
(1) The Company had no intangible assets prior to the acquisition of Jiff.
Estimated amortization expense for acquired intangible assets for the following five years and thereafter is as follows (in thousands):
2017
1,216

2018
4,044

2019
3,505

2020
3,242

2021
3,210

Thereafter
6,252

Total estimated amortization expense
21,469

Stock Compensation (Tables)
A summary of stock option activity for the nine months ended September 30, 2017 is as follows (in thousands, except share and per share amounts): 
 
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
Balance at December 31, 2016
7,642,953

 
$
3.71

 
$
18,537

Stock option grants
400,000

 
$
3.60

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

 
$
1.42

 
 
Stock options exercised
(726,060
)
 
$
1.81

 
 
Stock options canceled
(1,742,228
)
 
$
3.11

 
 
Balance at September 30, 2017
10,957,278

 
$
2.80

 
$
25,685

The relevant assumptions used in the Monte Carlo simulation model are presented in the table below. The Monte Carlo simulation model considers vesting schedules, stated expiration dates and potential early exercises based on market performance in determining the effective holding period for the options.
 
Nine Months Ended September 30,
 
2017
 
2016
Volatility
75%
 
*
Risk-free interest rate
2.35%
 
*
Dividend yield
—%
 
*
* The Company has not used the Monte Carlo simulation model prior to the acquisition of Jiff. 
Except for the stock options assumed and granted related to acquisition, 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,
 
2017
 
2016
Volatility
61%
 
47%
Expected life (in years)
6.02
 
6.12
Risk-free interest rate
2.03%
 
1.37%
Dividend yield
—%
 
—%
A summary of restricted stock unit activity for the nine months ended September 30, 2017 is as follows:
 
Number of
Shares
Outstanding
 
Weighted-
Average
Grant Date Fair Value
Balance at December 31, 2016
10,541,666

 
$
4.82

Restricted Stock Units granted (1)
6,209,788

 
$
3.62

Restricted Stock Units vested
(3,130,004
)
 
$
5.08

Restricted Stock Units forfeited/canceled (2)
(3,395,161
)
 
$
4.61

Balance at September 30, 2017
10,226,289

 
$
4.10

(1) Includes 1.4 million performance stock units (“PSUs”) that were granted during the nine months ended September 30, 2017. 
(2) Includes PSUs that were granted in the prior year, which were canceled because performance targets were not achieved.
Net Loss per Share (Tables)
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,
 
2017
 
2016
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Net loss
$
(7,425
)
 
$
(11,062
)
 
$
(6,011
)
 
$
(5,392
)
 
$
(20,620
)
 
$
(26,393
)
 
$
(27,002
)
 
$
(22,448
)
Weighted-average shares used to compute basic and diluted net loss per share
53,119

 
79,132

 
54,376

 
48,771

 
53,805

 
68,870

 
54,460

 
45,274

Basic and diluted net loss per share
$
(0.14
)
 
$
(0.14
)
 
$
(0.11
)
 
$
(0.11
)
 
$
(0.38
)
 
$
(0.38
)
 
$
(0.50
)
 
$
(0.50
)
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,
 
2017
 
2016
 
2017
 
2016
Stock options and restricted stock units
21,184

 
21,538

 
21,184

 
21,538

Warrants*
2,020

 
2,020

 
2,020

 
2,020

Contingent issuable shares related to Jiff
3,284

 

 
3,284

 

Total
26,488

 
23,558

 
26,488

 
23,558

Summary of Significant Accounting Policies (Details) (New Accounting Pronouncement, Early Adoption, Effect, ASU 2016-09, Forfeiture Rate Component, Accumulated deficit, USD $)
In Millions, unless otherwise specified
Jan. 1, 2017
New Accounting Pronouncement, Early Adoption, Effect |
ASU 2016-09, Forfeiture Rate Component |
Accumulated deficit
 
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
 
Cumulative-effect adjustment charge
$ 0.4 
Marketable Securities (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
$ 62,323 
$ 78,848 
Unrealized Gains
Unrealized Losses
(6)
(5)
Fair Value
62,318 
78,848 
Included in cash and cash equivalents [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
20,244 
12,966 
Unrealized Gains
Unrealized Losses
Fair Value
20,244 
12,966 
Included in marketable securities [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
42,079 
65,882 
Unrealized Gains
Unrealized Losses
(6)
(5)
Fair Value
42,074 
65,882 
U.S. agency obligations [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
15,294 
33,019 
Unrealized Gains
Unrealized Losses
(2)
(3)
Fair Value
15,292 
33,021 
U.S. treasury securities [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
43,382 
37,864 
Unrealized Gains
Unrealized Losses
(4)
(2)
Fair Value
43,379 
37,862 
Money market mutual funds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
3,647 
7,965 
Unrealized Gains
Unrealized Losses
Fair Value
$ 3,647 
$ 7,965 
Fair Value Measurements - Summary of Assets Measured at Fair Value on a Recurring Basis (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Marketable securities:
 
 
Marketable securities
$ 62,318 
$ 78,848 
Money market mutual funds
 
 
Marketable securities:
 
 
Marketable securities
3,647 
7,965 
U.S. agency obligations
 
 
Marketable securities:
 
 
Marketable securities
15,292 
33,021 
U.S. treasury securities