|Accounting Standards and 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, stockholders' equity and cash flows. The consolidated financial statements include the results of Castlight and its wholly-owned U.S. subsidiaries.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. These estimates include, but are not limited to the determination of:
•Variable consideration included in the transaction price of the Company’s contracts with customers;
•The standalone selling price of the performance obligations in the Company’s contracts with customers;
•Assumptions used in the valuation of certain equity awards;
•The amortization period for deferred commissions and deferred professional services costs; and
•Assumptions used in the calculation of right-of-use (“ROU”) assets and lease liabilities for operating leases, including lease terms and the Company’s incremental borrowing rate.
Actual results could differ from those estimates, and such differences could be material to the Company’s consolidated financial position and results of operations.
The Company's chief operating decision maker, its CEO, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company's financial performance. Accordingly, the Company has determined that it operates in a single reportable segment, cloud-based products.
Revenues are derived primarily from contracts with customers for subscription services and professional services. Revenues are recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues do not include sales taxes.
We determine revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer;
•Identification of the performance obligations in the contract;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when, or as, the Company satisfies a performance obligation.
Subscription Revenue. Subscription revenue recognition commences on the date that the Company’s subscription services are made available to the customer, which the Company considers to be the launch date, and subscription revenue is generally recognized over the contract term. Subscription contracts are generally three years in length and certain contracts include termination provisions.
Some of the Company’s subscription contracts include performance incentives that are generally based on engagement. Additionally, some of the Company’s subscription contracts include audit provisions. The Company considers fees related to performance incentives and audit provisions to be variable consideration. The Company estimates variable consideration at the most likely amount to which it expects to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance as well as other information available to the Company. The Company reassesses its estimates related to variable consideration each reporting period and records adjustments when appropriate.
Professional Services and Other Revenue. Professional services and other revenue is primarily comprised of implementation services and communication services related to the Company's subscription service. Nearly all of the Company's professional services are sold on a fixed-fee basis.
The Company determined its implementation services are not capable of being distinct. Accordingly, the Company recognizes implementation services revenue in the same manner as the subscription service, beginning on the launch date. The Company determined its communication services are distinct and the associated revenue is recognized over time from the commencement of the communication services through the end of the contractual term.
Professional services and other revenue also includes revenue from products sold through the Company’s online marketplace and add-on subscription services made available from other ecosystem partners. These revenues are recognized on a net basis primarily because the Company acts as an agent in these contracts.
Contracts with Multiple Performance Obligations. Most of the Company’s contracts have multiple performance obligations consisting of subscription services and professional services, including implementation services and communication services. For arrangements with multiple performance obligations, the Company evaluates whether the individual performance obligations are distinct. If the performance obligations are distinct, revenue is recognized for the respective performance obligation separately. If one or more of the performance obligations are not distinct, the performance obligations that are not distinct are combined with the Company's subscription service, and revenue for the combined performance obligation is recognized over the term of the subscription service commencing on the launch date.
The Company has concluded that its subscription services and its communication services are distinct. Conversely, the Company has concluded that its implementation services are not distinct, primarily because these services are not capable of being distinct as the customer cannot benefit from the implementation services on their own. Accordingly, the Company considers the separate performance obligations in its multiple performance obligation contracts to be communication services and a combined performance obligation comprised of subscription services and implementation services.
The transaction price for arrangements with multiple performance obligations is allocated to the separate performance obligations based on their standalone selling price. The Company determines standalone selling prices based on its overall pricing objectives taking into consideration market conditions and other factors, including the value of the contracts, the subscription services sold, and customer demographics.
The Company records a contract asset when revenue is recognized prior to invoicing. Contract assets are presented within accounts receivable and other in the accompanying consolidated balance sheet. A contract liability represents deferred revenue.
Deferred revenue consists of professional services and cloud-based subscription services that have been billed in advance of revenue being recognized. The Company invoices its customers for its cloud-based subscription services based on the terms of the contract, which can be annual, quarterly or monthly installments. 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 non-current.
Costs of Revenue
Cost of revenue consists of cost of subscription revenue and cost of professional services and other revenue.
Cost of subscription revenue primarily consists of data fees, employee-related expenses (including salaries, bonuses, benefits and stock-based compensation), hosting costs of its cloud-based subscription service, cost of subcontractors, expenses for service delivery (which includes call center support), allocated overhead, costs of data center capacity, amortization of internal-use software, depreciation of certain owned computer equipment and software, and amortization of intangibles related to developed technology and backlog.
Cost of professional services and other revenue consists primarily of employee-related expenses (including salaries, bonuses, benefits and stock-based compensation) associated with these services, cost of subcontractors, deferred and amortized professional services costs, travel costs and allocated overhead. The time and costs of the Company's customer implementations vary based on the source and condition of the data the Company receives from third parties, the configurations that the Company agrees to provide and the size of the customer.
Cost of subscription revenue is expensed as the Company incurs the costs. Cost of professional services and other revenue, to the extent it is incurred and is directly attributable to fulfillment of performance obligations under a customer contract, is deferred and amortized over the benefit period of five years.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. The Company's cash and cash equivalents generally consist of investments in money market mutual funds and U.S. agency obligations. Cash and cash equivalents are stated at fair value.
The Company's marketable securities consist of U.S. agency obligations and U.S. treasury securities, with maturities at the time of purchase of greater than three months. Marketable securities with remaining maturities in excess of one year are classified as non-current. The Company classifies its marketable securities as available-for-sale at the time of purchase based on its intent and are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive loss. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. The Company consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely it will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income, net in the consolidated statements of operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded when invoiced and at the invoiced amount, net of allowances for doubtful accounts. When accounts receivable are recorded, the related revenue may not commence until a later date depending on the nature of the services invoiced. The allowance for doubtful accounts is based on the Company's assessment of the collectability of accounts. The Company regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each
outstanding invoice and the collection history of each customer to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. For all periods presented, the allowance for doubtful accounts was not significant.
Deferred commissions are the incremental costs that are incurred to obtain contracts with customers and consist primarily of sales commissions paid to the Company's sales force and channel partners. The commissions for initial contracts are deferred and amortized on a straight-line basis over a period of benefit that the Company has determined typically to be five years. The Company determined the period of benefit by taking into consideration the expected life of its subscription contracts, the expected life of the technology underlying its subscription services and other factors. Deferred commissions are recoverable through the Company’s future revenues. Amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations. All costs deferred are reviewed for impairment quarterly.
Deferred Professional Service Costs
Deferred professional service costs are the direct costs incurred to fulfill subscription contracts that occur prior to the launch of the Company’s subscription services. Professional service costs, which primarily consist of employee related expenses attributable to launch activities, are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined typically to be five years for the same reasons as described in the deferred commissions disclosure above. Deferred professional service costs are recoverable through future revenues. Amortization of deferred professional service costs is included in cost of professional services and other revenue in the accompanying consolidated statements of operations. All costs deferred are reviewed for impairment quarterly.
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 (in years):
|Furniture and equipment||5||-||7|
|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.
For the Company's development costs related to its cloud-based subscription service, the Company capitalizes costs incurred during the application development stage. Costs related to preliminary project and post-implementation stages are expensed as incurred. Capitalized software development costs are included as part of property and equipment and are amortized on a straight-line basis over the technology's estimated useful life, which is generally years. The amortization expense is recorded as a component of cost of subscription revenue and was $0.0 million, $0.8 million, and $1.0 million for the years ended December 31, 2019, 2018, and 2017, respectively. The Company capitalized software development costs of $0.3 million for the year ended December 31, 2019. The Company did not capitalize any software development costs for the year ended December 31, 2018. Previously capitalized internal-use software was fully amortized by December 31, 2018.
Restricted cash is included in Prepaid expenses and other current assets or Restricted cash, non-current depending on the remaining term of the restriction and consists of letters of credit related to the Company’s leased office spaces.
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. If it is determined that it is more likely than not that its fair value is less than its carrying amount, the Company performs a quantitative impairment test of goodwill, in which the fair value of the Company's single reporting unit is compared to its carrying value. Any excess of the goodwill carrying amount over the fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. As of December 31, 2019, 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.
The Company determines if an arrangement is a lease and its classification at lease inception. Operating lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the lease commencement date to compute the present value of lease payments when the implicit rate is not readily determinable. ROU assets are measured at lease inception based on the initial measurement of the lease liability, plus any prepaid lease amounts, less any lease incentives. The Company does not recognize ROU assets or lease liabilities for leases with a term of 12 months or less. Lease terms do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Generally, lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company's lease agreements have both lease and non-lease components. The Company has elected to account for lease and non-lease components on a combined basis.
All stock-based compensation to employees is measured based on the grant-date fair value of the awards and recognized in the Company's consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). The Company accounts for forfeitures as they occur. The options assumed and awarded in connection with the acquisition of Jiff were valued using the Monte Carlo simulation model. The Company estimates the fair value of all other stock options and stock purchase rights under the employee stock purchase plan using the Black-Scholes option valuation model. For restricted stock units, fair value is based on the closing price of the Company's Class B common stock on the grant date. Compensation expense is recognized over the vesting period of the applicable award using the straight-line method. For awards with performance based and service vesting
conditions, compensation expense is recognized over the requisite service period if it is probable that the performance-based condition will be satisfied based on the accelerated attribution method. For awards with market based and service vesting conditions, compensation expense is recognized over the requisite service period using the accelerated attribution method.
The Company accounts for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax bases and tax credit and net operating loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse.
The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
The Company recognizes and measures uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. The Company evaluates its uncertain tax positions on a regular basis. The Company's evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of audit and effective settlement of audit issues.
Warranties and Indemnification
The Company's cloud-based subscription service is generally warranted to be performed in a professional manner and in a manner that will comply with the terms of the customer agreements.
The Company's arrangements generally include certain provisions for indemnifying customers against liabilities if there is a breach of a customer’s data or if the Company's service infringes a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in the financial statements. The Company has entered into service-level agreements with certain customers warranting, among other things, defined levels of performance and response times and permitting those customers to receive credits for prepaid amounts related to subscription services in the event that the Company fails to meet those levels. To date, the Company has not experienced any significant failures to meet defined levels of performance and response times as a result of those agreements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as its director or officer or that person’s services provided to any other company or enterprise at the Company's request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
Advertising is expensed as incurred. Advertising expense was $0.1 million, $0.3 million and $0.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Concentrations of Risk and Significant Customers
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits.
The Company serves its customers and users from outsourced data center facilities located in the United States. The Company has internal procedures to restore all of its production customer facing services in the event of disasters at its facilities. Procedures utilizing currently deployed hardware, software and services at certain of the Company's disaster recovery locations allow its cloud-based service to be restored within 24 hours during the implementation of the procedures to restore services.
Significant customers are direct customers or channel partners that represent more than 10% of the total revenue for the most recent period presented or more than 10% of accounts receivable balance as of the most recent balance sheet date. No single direct customer accounted for more than 10% of total revenue for the year ended December 31, 2019. However, two direct customers accounted for approximately 16% and 14%, respectively, of accounts receivable as of December 31, 2019. Castlight had one channel partner, Anthem, Inc. (“Anthem”) that represented approximately 27% of total revenue for the year ended December 31, 2019, and approximately 24% of accounts receivable as of December 31, 2019. See Note 3 - Revenue, Deferred Revenue, Contract Balances and Performance Obligations, under the caption “Anthem Agreement” for additional information.
Recently Adopted Accounting Pronouncements
Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases, and subsequent amendments (“ASC 842”) using the modified retrospective method, and elected to apply the provisions at the beginning of the period of adoption. The guidance requires lessees to put all leases that have a term of more than one year on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements. The guidance states that a lessee would recognize a lease liability for the obligation to make lease payments and a ROU asset for the right to use the underlying asset for the lease term.
As a result of the adoption of ASC 842 as of January 1, 2019, reporting periods beginning on and after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with prior accounting guidance under ASC 840. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019 an operating lease ROU asset of approximately $17.3 million and an operating lease liability of approximately $20.7 million. The difference between the operating lease ROU asset and lease liability resulted from the reclassification of the deferred rent liability to the operating lease ROU asset. The standard did not materially impact the Company’s consolidated statement of operations and had no impact on cash flows. See Note 13 - Leases for more information on leases.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”) and subsequent amendments have been issued since then. The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The Company will recognize an allowance for credit losses on available-for-sale securities rather than deductions in amortized cost. The standard is effective for fiscal years and interim periods beginning after December 15, 2019. The adoption of this standard is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software
(“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance will be effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of this standard is not expected to have a significant impact on the Company’s financial position or results of operations.