CASTLIGHT HEALTH, INC., 10-K filed on 3/12/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2014
Jun. 30, 2014
Mar. 6, 2015
Class A [Member]
Mar. 6, 2015
Class B [Member]
Class of Stock [Line Items]
 
 
 
 
Document Type
10-K 
 
 
 
Amendment Flag
false 
 
 
 
Document Period End Date
Dec. 31, 2014 
 
 
 
Document Fiscal Year Focus
2014 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Trading Symbol
CSLT 
 
 
 
Entity Registrant Name
CASTLIGHT HEALTH, INC. 
 
 
 
Entity Central Index Key
0001433714 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
 
Entity Public Float
 
$ 840,200,000 
 
 
Entity Common Stock, Shares Outstanding
 
 
58,474,383 
33,407,450 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 17,425 
$ 25,154 
Marketable securities
175,057 
42,017 
Accounts receivable, net
11,097 
5,065 
Deferred commissions
3,675 
3,648 
Prepaid expenses and other current assets
3,476 
1,583 
Total current assets
210,730 
77,467 
Property and equipment, net
3,630 
2,631 
Marketable securities, noncurrent
6,220 
Restricted cash, noncurrent
101 
Deferred commissions, noncurrent
2,563 
1,821 
Other assets
131 
1,497 
Total assets
223,274 
83,517 
Current liabilities:
 
 
Accounts payable
3,217 
2,536 
Accrued expenses and other current liabilities
5,791 
4,998 
Accrued compensation
10,455 
8,064 
Deferred revenue
20,708 
6,925 
Total current liabilities
40,171 
22,523 
Deferred revenue, noncurrent
6,652 
4,548 
Other liabilities, noncurrent
261 
373 
Total liabilities
47,084 
27,444 
Commitments and contingencies
   
   
Stockholders’ equity (deficit):
 
 
Preferred stock, $0.0001 par value; 10,000,000 and no shares authorized as of December 31, 2014 and 2013; no shares issued and outstanding as of December 31, 2014 and 2013
Additional paid-in capital
393,397 
6,885 
Accumulated other comprehensive income
(40)
Accumulated deficit
(217,176)
(131,236)
Total stockholders’ equity (deficit)
176,190 
(124,350)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)
223,274 
83,517 
Convertible Preferred Stock [Member]
 
 
Current liabilities:
 
 
Convertible preferred stock, $0.0001 par value; no and 64,475,662 shares authorized as of December 31, 2014 and 2013; no and 64,475,633 shares issued and outstanding as of December 31, 2014 and 2013
180,423 
Class A [Member]
 
 
Stockholders’ equity (deficit):
 
 
Common stock value issued
Class B [Member]
 
 
Stockholders’ equity (deficit):
 
 
Common stock value issued
$ 3 
$ 0 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2014
Dec. 31, 2013
Preferred Stock
 
 
Par Value
$ 0.0001 
$ 0.0001 
Shares Authorized
10,000,000 
Shares Issued
Shares Outstanding
Convertible Preferred Stock [Member]
 
 
Convertible Preferred Stock
 
 
Par Value
$ 0.0001 
$ 0.0001 
Shares Authorized
64,475,662 
Shares Issued
64,475,633 
Shares Outstanding
64,475,633 
Class A [Member]
 
 
Common Stock
 
 
Par Value
$ 0.0001 
$ 0.0001 
Shares Authorized
200,000,000 
95,000,000 
Shares Issued
58,862,574 
10,994,074 
Shares Outstanding
58,862,574 
10,994,074 
Shares Subject to Repurchase
185,000 
Class B [Member]
 
 
Common Stock
 
 
Par Value
$ 0.0001 
$ 0.0001 
Shares Authorized
800,000,000 
95,000,000 
Shares Issued
32,328,809 
Shares Outstanding
32,328,809 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Revenue:
 
 
 
Subscription
$ 41,602 
$ 11,655 
$ 3,395 
Professional services
4,003 
1,318 
759 
Total revenue
45,605 
12,973 
4,154 
Cost of revenue:
 
 
 
Cost of subscription
10,472 1
6,246 1
3,242 1
Cost of professional services
17,300 1
11,058 1
5,286 1
Total cost of revenue
27,772 
17,304 
8,528 
Gross profit (loss)
17,833 
(4,331)
(4,374)
Operating expenses:
 
 
 
Sales and marketing
62,065 1
33,742 1
15,829 1
Research and development
22,917 1
15,219 1
9,718 1
General and administrative
19,009 1
9,047 1
5,212 1
Total operating expenses
103,991 
58,008 
30,759 
Operating loss
(86,158)
(62,339)
(35,133)
Other income, net
218 
157 
129 
Net loss
$ (85,940)
$ (62,182)
$ (35,004)
Net loss per share, basic and diluted
$ (1.16)
$ (6.28)
$ (4.44)
Weighted-average shares used to compute basic and diluted net loss per share
74,381 
9,895 
7,885 
Consolidated Statements of Operations Parenthetical (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cost of subscription [Member]
 
 
 
Allocated Share-based Compensation Expense
$ 180 
$ 5 
$ 2 
Cost of professional services [Member]
 
 
 
Allocated Share-based Compensation Expense
1,220 
120 
105 
Sales and marketing [Member]
 
 
 
Allocated Share-based Compensation Expense
5,933 
919 
551 
Research and development [Member]
 
 
 
Allocated Share-based Compensation Expense
2,556 
603 
242 
General and administrative [Member]
 
 
 
Allocated Share-based Compensation Expense
$ 4,312 
$ 780 
$ 411 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Consolidated Statement of Comprehensive Loss:
 
 
 
Net loss
$ (85,940)
$ (62,182)
$ (35,004)
Other comprehensive income (loss):
 
 
 
Net change in unrealized gain (loss) on available-for-sale marketable securities
(40)
(34)
27 
Reclassification adjustments for net realized gains (loss) on available-for-sale marketable securities
Other comprehensive income (loss)
(40)
(34)
27 
Comprehensive loss
$ (85,980)
$ (62,216)
$ (34,977)
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Operating activities:
 
 
 
Net loss
$ (85,940)
$ (62,182)
$ (35,004)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,354 
633 
231 
Stock-based compensation
14,201 
2,427 
1,311 
Amortization of deferred commissions
4,092 
2,541 
10 
Accretion and amortization of marketable securities
1,489 
714 
558 
Expense related to warrant
2,639 
135 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(6,032)
(2,703)
(2,228)
Deferred commissions
(4,861)
(4,959)
(3,048)
Prepaid expenses and other current assets
(1,893)
(252)
(696)
Other assets
(2)
(109)
Accounts payable
147 
868 
1,075 
Accrued expenses and other current liabilities
1,982 
2,892 
397 
Deferred revenue
15,887 
7,268 
3,340 
Accrued compensation
2,412 
2,544 
4,619 
Other liabilities, noncurrent
(112)
119 
105 
Net cash used in operating activities
(54,637)
(50,064)
(29,325)
Investing activities:
 
 
 
Restricted cash
101 
129 
Purchase of property and equipment, net
(1,860)
(2,587)
(458)
Purchase of marketable securities
(230,316)
(42,288)
(103,552)
Sales of marketable securities
13,000 
5,000 
19,181 
Maturities of marketable securities
76,527 
72,135 
33,196 
Net cash (used in) provided by investing activities
(142,548)
32,260 
(51,504)
Financing activities:
 
 
 
Proceeds from the exercise of stock options and warrants
3,294 
864 
232 
Proceeds from initial public offering
189,943 
Payments of deferred financing costs
(3,781)
(440)
Proceeds from issuance of convertible preferred stock
99,851 
Net cash provided by financing activities
189,456 
424 
100,083 
Net (decrease) increase in cash and cash equivalents
(7,729)
(17,380)
19,254 
Cash and cash equivalents at beginning of period
25,154 
42,534 
23,280 
Cash and cash equivalents at end of period
17,425 
25,154 
42,534 
Noncash investing and financing activity:
 
 
 
Vesting of early exercised stock options, restricted common stock, and warrants
(321)
(128)
(112)
Purchase of property and equipment, accrued but not paid
(600)
(122)
(581)
Deferred offering costs, accrued but not paid
$ (94)
$ (927)
$ 0 
Consolidated Statements of Convertible Preferred Stock and Stockholders' (Deficit)/Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Convertible Preferred Stock [Member]
Beginning balance at Dec. 31, 2011
$ (32,066)
$ 1 
$ 1,976 
$ (34,050)
$ 7 
 
Beginning balance at Dec. 31, 2011
 
 
 
 
 
80,572 
Beginning balance (in shares) at Dec. 31, 2011
 
 
 
 
 
47,909,912 
Beginning balance (in shares) at Dec. 31, 2011
 
8,819,008,000 
 
 
 
 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
 
 
Issuance of Series D preferred stock for cash, net of issuance costs (in shares)
 
 
 
 
 
16,565,721 
Issuance of Series D preferred stock for cash, net of issuance costs
 
 
 
 
 
99,851 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Vesting of early exercised stock options and restricted common stock, net
112 
 
112 
 
 
 
Issuance of restricted stock (in shares)
 
22,727,000 
 
 
 
 
Exercise of stock options (in shares)
 
1,056,262,000 
 
 
 
 
Exercise of stock options, net
232 
 
232 
 
 
 
Stock-based compensation
1,311 
 
1,311 
 
 
 
Comprehensive loss
(34,977)
 
 
(35,004)
27 
 
Ending balance at Dec. 31, 2012
(65,388)
3,631 
(69,054)
34 
 
Ending balance at Dec. 31, 2012
 
 
 
 
 
180,423 
Ending balance (in shares) at Dec. 31, 2012
 
 
 
 
 
64,475,633 
Ending balance (in shares) at Dec. 31, 2012
 
9,897,997,000 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Vesting of early exercised stock options and restricted common stock, net
128 
 
128 
 
 
 
Exercise of stock options (in shares)
 
1,036,077,000 
 
 
 
 
Exercise of stock options, net
564 
 
564 
 
 
 
Stock-based compensation
2,427 
 
2,427 
 
 
 
Comprehensive loss
(62,216)
 
 
(62,182)
(34)
 
Early exercise of warrant issued (in shares)
 
60,000,000 
 
 
 
 
Expense related to warrant
135 
 
135 
 
 
 
Ending balance at Dec. 31, 2013
(124,350)
6,885 
(131,236)
 
Ending balance (in shares) at Dec. 31, 2013
 
10,994,074,000 
 
 
 
 
Beginning balance at Dec. 31, 2013
 
 
 
 
 
180,423 
Beginning balance (in shares) at Dec. 31, 2013
 
 
 
 
 
64,475,633 
Increase (Decrease) in Temporary Equity [Roll Forward]
 
 
 
 
 
 
Conversion of preferred stock to common stock
180,423 
180,416 
 
 
 
Conversion of preferred stock to Class A common stock (in shares)
 
64,475,633,000 
 
 
 
(64,475,633)
Stock Issued During Period, Value, Conversion of Convertible Securities, Net of Adjustments
 
 
 
 
 
(180,423)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Vesting of early exercised stock options and restricted common stock, net
321 
 
 
 
 
 
Exercise of stock options (in shares)
 
2,956,676,000 
 
 
 
 
Exercise of stock options, net
3,294 
 
3,294 
 
 
 
Stock-based compensation
14,215 
 
14,215 
 
 
 
Comprehensive loss
(85,980)
 
 
(85,940)
(40)
 
Expense related to warrant
2,639 
 
2,639 
 
 
 
Vesting of restricted common stock
21 
 
21 
 
 
 
Vesting of early exercised warrant issued
300 
 
300 
 
 
 
Issuance of Class B common stock upon Initial public offering (in shares)
 
12,765,000,000 
 
 
 
 
Issuance of common stock upon initial public offering, net of issuance costs
185,628 
185,627 
 
 
 
Ending balance at Dec. 31, 2014
176,190 
393,397 
(217,176)
(40)
 
Ending balance at Dec. 31, 2014
 
 
 
 
 
$ 0 
Ending balance (in shares) at Dec. 31, 2014
 
 
 
 
 
Ending balance (in shares) at Dec. 31, 2014
 
91,191,383,000 
 
 
 
 
Organization and Description of Business
Organization and Description of Business
Organization and Description of Business

Description of Business
Castlight Health, Inc. (Castlight) is a pioneer in a new category of cloud-based software that enables enterprises to understand and manage health care spending as a strategic business investment, and help employees and their families make more informed medical decisions based on factors such as cost, quality and patient experience. Our Enterprise Healthcare Cloud allows our customers to conquer the complexity of the existing healthcare system by providing personalized, actionable information to their employees, implementing technology-enabled benefit designs and integrating disparate systems and applications. Our comprehensive technology offering aggregates complex, large-scale data and applies sophisticated analytics to make health care data transparent and useful. We were incorporated in the State of Delaware in January 2008. Our principal executive offices are located in San Francisco, California.
Initial Public Offering
On March 19, 2014, we completed our initial public offering (IPO), in which we sold 12.8 million shares of Class B common stock at a price to the public of $16.00 per share. The aggregate offering price for shares sold in the offering was approximately $204.2 million. We raised approximately $185.6 million in net proceeds from the offering, after deducting underwriter discounts and commissions of approximately $14.3 million and other offering expenses of approximately $4.3 million.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements include the results of Castlight and its wholly owned U.S. subsidiary.
On December 30, 2013, our board of directors and stockholders authorized a one-for-one exchange of all outstanding Class B common stock to Class A common stock. All share, per share and related information presented in these financial statements and accompanying footnotes have been retroactively adjusted to reflect the impact of this exchange.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. These estimates include, but are not limited to, the determination of the relative selling prices for our services and certain assumptions used in the valuation of our common stock prior to the IPO and in equity awards. Actual results could differ from those estimates, and such differences could be material to our consolidated financial position and results of operations.
 
Segment Information
Our chief operating decision maker, our CEO, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating our financial performance. Accordingly, we have determined that we operate in a single reportable segment, cloud applications.
Revenue Recognition
We derive our revenue from sales of cloud-based subscription service contracts, including support, and professional services contracts. We sell subscriptions to our cloud-based subscription service through contracts that are generally three years in length.
Our cloud-based subscription service contracts do not provide customers with the right to take possession of the software supporting the cloud-based service and, as a result, are accounted for as service contracts.
We commence revenue recognition for our cloud-based subscription service and professional services when all of the following criteria are met:
there is persuasive evidence of an arrangement;
the service has been provided to the customer;
collection of the fees is reasonably assured; and
the amount of fees to be paid by the customer is fixed or determinable.
Our subscription and professional service arrangements do not contain refund provisions for fees earned related to services performed. We do, however, have commitments under service-level agreements, as discussed under "Warranties and Indemnification" below.
Subscription Revenue. Subscription revenue recognition commences on the date that our cloud-based service is made available to the customer, which is considered the launch date, provided all of the other criteria described above are met. Revenue is recognized based on the terms in our customer contracts, which can provide for (a) a variable periodic fee based upon the actual or contractual number of users that is recognized to revenue based on the actual or contractual number of users or (b) a fixed fee that is recognized to revenue on a straight-line basis over the contractual term of the arrangement.
Certain of our cloud-based subscription arrangements include performance incentives that are generally based upon employee engagement. Fees for performance incentives are considered contingent revenue, and are recognized over the remaining term of the related subscription arrangement commencing at the time they are earned.
Professional Services Revenue. Professional services revenue is comprised of implementation services related to our cloud-based subscription service, as well as follow-on professional services to assist our customers in further adopting our cloud-based subscription service, and communications services. Nearly all of our professional services contracts are sold on a fixed-fee basis. We do not have standalone value for our implementation services. Accordingly, we recognize implementation services revenue in the same manner as the associated cloud-based subscription service, beginning on the launch date, provided all other criteria described above have been met. For follow-on professional services that are sold separately from the cloud-based subscription service, we recognize revenue as the services are delivered. Communication services revenue is recognized over the contractual term, generally one year, commencing when the revenue recognition criteria have been met.
Multiple Deliverable Arrangements. To date, we have generated substantially all our revenue from multiple deliverable arrangements consisting of multi-year cloud-based subscription services and professional services, including implementation services and communication services. For arrangements with multiple deliverables, we evaluate whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables do not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with our cloud-based subscription service, and revenue for the combined unit is recognized over the remaining term of the cloud-based subscription service.
Our deliverables have standalone value if we or any other vendor sells a similar service separately. We have concluded that we have standalone value for our cloud-based subscription service as we sell these services separately through renewals and for our communication services as other vendors sell similar services separately. Conversely, we have concluded that our implementation services do not have standalone value, as we and others do not yet sell these services separately. Accordingly, we consider the separate units of accounting in our multiple deliverable arrangements to be the communication services and a combined deliverable comprised of cloud-based subscription services and implementation services.
When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence, or VSOE, of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence, or TPE, of selling price is used to establish the selling price if it exists. If TPE does not exist, we estimate the best estimated selling price, or BESP. VSOE does not currently exist for any of our deliverables. Additionally, we do not believe TPE is a practical alternative due to differences in our cloud-based subscription service compared to other parties and the availability of relevant third-party pricing information for our cloud-based subscription service and our other services. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, we allocate the arrangement fee to the separate units of accounting based on our BESP. The amount of arrangement fee allocated is limited by contingent revenue, if any.
We determine BESP for our deliverables by considering our overall pricing objectives and market conditions. This includes evaluating our pricing practices, our list prices, the size of our transactions, historical sales and our go-to-market strategy. The determination of BESP is made through consultation with and approval by management. For financial statement presentation purposes, we allocate the fees from our combined units of accounting to subscription and professional services based upon their relative selling price.
Costs of Revenue
Cost of revenue consists of the cost of subscription revenue and cost of professional services revenue.
Cost of subscription revenue primarily consists of data fees, employee-related expenses (including salaries, benefits and stock-based compensation) related to hosting costs of our cloud-based service, cost of subcontractors, expenses for service delivery (which includes call center support), allocated overhead, the costs of data center capacity, amortization of internal-use software and depreciation of owned computer equipment and software. Amortization of internal-use software was immaterial for the year ended December 31, 2014.
Cost of professional services revenue consists primarily of employee-related expenses associated with these services, the cost of subcontractors and travel costs. The time and costs of our customer implementations vary based on the source and condition of the data we receive from third parties, the configurations that we agree to provide and the size of the customer.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. Our cash and cash equivalents generally consist of investments in money market funds, U.S. treasury securities and U.S. agency obligations. Cash and cash equivalents are stated at fair value.
Marketable Securities
Our marketable securities consist of U.S. agency obligations, U.S. treasury securities and money market funds, with maturities at the time of purchase of greater than three months. Marketable securities with remaining maturities in excess of one year are classified as noncurrent. We classify our marketable securities as available-for-sale at the time of purchase based on our intent and are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income (loss). We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income, net in the consolidated statements of operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on our assessment of the collectability of accounts. We regularly review the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice and the collection history of each customer to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. For all periods presented, the allowance for doubtful accounts was not significant.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with the non-cancellable portion of cloud-based subscription service contracts with customers and consist of sales commissions paid to our direct sales force. The commissions are deferred and amortized over the non-cancellable terms of the related contracts. The deferred commission amounts are recoverable through the future revenue streams under the non-cancellable customer contracts. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.

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

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

For our development costs related to our cloud-based service, we capitalize costs incurred during the application development stage. Costs related to preliminary project and post-implementation stages are expensed as incurred. Capitalized software development costs are included as part of property, plant and equipment and are amortized on a straight-line basis over the technology's estimated useful life, which is generally three years. The amortization expense is recorded as a component of cost of subscription revenue.
For the year ended December 31, 2014, we capitalized software development costs totaling $0.3 million. All software development costs incurred in prior periods were expensed.
Deferred Revenue
Deferred revenue consists of professional services and cloud-based subscription services that have been billed in advance of revenue being recognized. Additionally, deferred revenue consists of professional services that have been billed and delivered but the revenue is being deferred and recognized together with a cloud-based subscription contract as a single unit of accounting. We invoice our customers for our cloud-based subscription services based on the terms of the contract, which can be annual, quarterly or monthly installments. We invoice our customers for our professional services and the first year of communication services generally at contract execution. Deferred revenue that is anticipated to be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as noncurrent.
Stock-based Compensation
All stock-based compensation to employees is measured based on the grant-date fair value of the awards and recognized in our consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). We estimate the fair value of stock options granted using the Black-Scholes option valuation model. For restricted stock units, fair value is based on the closing price of our Class B common stock on the grant date. Compensation expense is recognized over the vesting period of the applicable award using the straight-line method.
Compensation expense for non-employee stock options and warrants is calculated using the Black-Scholes option-pricing model and is recorded as the options vest. Options subject to vesting are required to be periodically revalued over their service period, which is generally the same as the vesting period. 

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

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

We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as our director or officer or that person’s services provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that would generally enable us to recover a portion of any future amounts paid. We may also be subject to indemnification obligation by law with respect to the actions of our employees under certain circumstances and in certain jurisdictions.
Advertising Expenses
Advertising is expensed as incurred. Advertising expense was $0.7 million, $0.4 million and $0.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Concentrations of Risk and Significant Customers
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed federally insured limits.
We serve our customers and users from outsourced data center facilities located in Colorado and Arizona. We have internal procedures to restore all our services in the event of disasters at the Arizona facility. Procedures utilizing currently deployed hardware, software and services at our disaster recovery location allow our cloud-based service to be restored within 48 hours without significant interruptions during the implementation of the procedures to restore services.
Revenue from customers representing 10% or more of total revenue for the respective years, is summarized as follows:
 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Customer A
14
%
 
16
%
 
%
Customer B
*

 
*

 
30
%
Customer C
*

 
*

 
13
%
Customer D
*

 
*

 
10
%
  * Less than 10%
During the years ended December 31, 2014, 2013 and 2012, all of our revenue was generated by customers located in the United States.
Accounts receivable from customers representing 10% or more of total accounts receivable as of the respective dates is summarized as follows:
 
As of December 31,
 
2014
 
2013
Accounts Receivable:
 
 
 
Customer A
*

 
10
%
Customer E
12
%
 
%
Customer F
19
%
 
17
%
 * Less than 10%
Recently Issued and Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will be effective for us beginning January 1, 2017. Early adoption is not permitted. We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
Marketable Securities
Marketable Securities
Marketable Securities
At December 31, 2014 and December 31, 2013, respectively, marketable securities consisted of the following (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2014
 
 
 
 
 
 
 
U.S. agency obligations
$
177,297

 
$
4

 
$
(44
)
 
$
177,257

U.S. treasury securities
5,580

 
1

 

 
5,581

Money market mutual funds
1,919

 

 

 
1,919

 
184,796

 
5

 
(44
)
 
184,757

Included in cash and cash equivalents
3,480

 

 

 
3,480

Included in marketable securities
$
175,093

 
$
5

 
$
(41
)
 
$
175,057

Included in marketable securities, noncurrent
$
6,223

 
$

 
$
(3
)
 
$
6,220


 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2013
 
 
 
 
 
 
 
U.S. agency obligations
$
35,996

 
$
6

 
$
(7
)
 
$
35,995

U.S. treasury securities
6,020

 
2

 

 
6,022

Money market mutual funds
18,082

 

 

 
18,082

 
60,098

 
8

 
(7
)
 
60,099

Included in cash and cash equivalents
18,082

 

 

 
18,082

Included in marketable securities
$
42,016

 
$
8

 
$
(7
)
 
$
42,017

Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
We measure our financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
 
The fair value of marketable securities included in the Level 2 category is based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. These values were obtained from a third-party pricing service and were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established third party pricing vendors and broker-dealers. There have been no changes in valuation techniques in the periods presented. We have no financial assets or liabilities measured using Level 3 inputs. There were no significant transfers between Levels 1 and 2 assets as of December 31, 2014 and December 31, 2013. The following tables present information about our assets that are measured at fair value on a recurring basis using the above input categories (in thousands):
 
Level 1
 
Level 2
 
Total
December 31, 2014
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
1,919

 
$

 
$
1,919

U.S. agency obligations

 
1,561

 
1,561

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
175,696

 
175,696

U.S. treasury securities

 
5,581

 
5,581

 
$
1,919


$
182,838


$
184,757

 
 
Level 1
 
Level 2
 
Total
December 31, 2013
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
18,082

 
$

 
$
18,082

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
35,995

 
35,995

U.S. treasury securities

 
6,022

 
6,022

 
$
18,082


$
42,017


$
60,099


Gross unrealized gains and losses for cash equivalents and marketable securities as of December 31, 2014 and December 31, 2013 were not material. We do not believe the unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of December 31, 2014.
There were no realized gains or losses for the year ended December 31, 2014 and 2013. As of December 31, 2014 those securities with maturities at the time of purchase of greater than one year are reflected in the noncurrent portion of our consolidated balance sheets. All of our marketable securities at December 31, 2013 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.
Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands)
 
As of December 31,
 
2014
 
2013
Prepaid expenses and advances
$
2,285

 
$
1,242

Security deposit
211

 
165

Interest receivable on marketable securities
537

 
156

Other current assets
443

 
20

Total
$
3,476

 
$
1,583

Property and equipment, net
Property and equipment
Property and Equipment
Property and equipment consisted of the following (in thousands):
 
As of December 31,
 
2014
 
2013
Leasehold improvements
$
1,058

 
$
924

Computer equipment
3,247

 
2,024

Software
874

 
263

Capitalization of internal-use software
291

 

Furniture and equipment
301

 
257

Total
5,771

 
3,468

Accumulated depreciation
(2,141
)
 
(837
)
Property and equipment, net
$
3,630

 
$
2,631


Depreciation and amortization expense for the years ended December 31, 2014, 2013 and 2012 was $1.4 million, $0.6 million and $0.2 million, respectively. Depreciation is recorded on a straight-line basis.
Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 
As of December 31,
 
2014
 
2013
Accrued expenses
$
5,363

 
$
3,845

Other
428

 
1,153

Total
$
5,791

 
$
4,998

Accrued Compensation
Accrued Compensation
Accrued Compensation
Accrued compensation consisted of the following (in thousands):
 
As of December 31,
 
2014
 
2013
Accrued bonuses and commissions
$
7,763

 
$
6,800

Other benefits payable
2,692

 
1,243

Liability for stock options exercised prior to vesting and restricted Class A common stock subject to repurchase

 
21

Total
$
10,455

 
$
8,064

Deferred Revenue
Deferred Revenue
Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
As of December 31,
 
2014
 
2013
Subscription
$
14,826

 
$
3,810

Professional services—implementation
2,974

 
1,835

Professional services—communications
2,908

 
1,280

Total current
20,708

 
6,925

Subscription
1,950

 
1,489

Professional services—implementation
4,327

 
2,443

Professional services—communications
375

 
616

Total noncurrent
6,652

 
4,548

Total
$
27,360

 
$
11,473

Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Leases and Contractual Obligations
We lease office space under non-cancellable operating leases in San Francisco, California. Contractual obligations relate to our service agreements for our data centers in Colorado and Arizona and other third party service providers. As of December 31, 2014, the future minimum lease payments under non-cancellable operating leases are as follows (in thousands):
 
Operating
Leases
 
Contractual
Obligations
2015
$
1,325

 
$
369

2016
1,075

 
243

2017
600

 

2018

 

2019 and later

 

 
$
3,000

 
$
612


Our facility lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised. We recognize rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred but not paid. Rent expense for the years ended December 31, 2014, 2013 and 2012 was $1.2 million, $1.0 million and $0.9 million, respectively.
Legal Matters
We may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, we may receive letters alleging infringement of patents or other intellectual property rights. We are not a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Stockholders' Equity (Deficit)
Stockholders' Equity (Deficit)
Stockholders’ Equity (Deficit)

Initial Public Offering
On March 19, 2014, we completed our IPO, in which we sold 12.8 million shares of Class B common stock at a price to the public of $16.00 per share. Upon the consummation of the IPO, all outstanding shares of convertible preferred stock were converted into shares of Class A common stock as follows:
 
 
As of December 31, 2014
 
As of December 31, 2013
 
 
Shares
Authorized
 
Shares Issued and
Outstanding
 
Shares
Authorized
 
Shares Issued and
Outstanding
 
Liquidation
Preference
Convertible Preferred Stock:
 
 
 
 
 
 
 
 
 
 
Series A

 

 
8,000,000

 
8,000,000

 
$
1,000,000

 
Series A-1

 

 
10,000,000

 
10,000,000

 
3,000,000

 
Series B

 

 
15,315,314

 
15,315,314

 
17,000,000

 
Series C

 

 
14,594,598

 
14,594,598

 
60,000,000

 
Series D

 

 
16,565,750

 
16,565,721

 
100,000,000

 
Total

 

 
64,475,662

 
64,475,633

 
181,000,000

Stockholders' equity:
 
 
 
 
 
 
 
 
 
 
Preferred stock
10,000,000

 

 

 

 

 
Class A common stock
200,000,000

 
58,862,574

 
95,000,000

 
10,994,074

 

 
Class B common stock
800,000,000

 
32,328,809

 
95,000,000

 

 

 
Total
1,010,000,000

 
91,191,383

 
254,475,662

 
75,469,707

 
$
181,000,000


Employee Equity Plans

        We adopted a 2014 Equity Incentive Plan (EIP) that became effective on March 12, 2014 and serves as the successor to our 2008 Stock Incentive Plan. We reserved 15.0 million shares of our Class B common stock for future issuance under various terms provided for in the EIP. Shares issued under the 2008 Stock Plan were Class A common stock and shares issued under the EIP are Class B common stock. Our 2014 Equity Incentive Plan authorizes the award of stock options, restricted stock awards (RSAs), stock appreciation rights (SARs), restricted stock units (RSUs), performance awards and stock bonuses. We began granting RSUs in the fourth quarter of 2014.

We adopted a 2014 Employee Stock Purchase Plan (ESPP) that became effective on March 13, 2014 that enables eligible employees to purchase shares of our Class B common stock at a discount. We reserved 6.0 million shares of our Class B common stock for issuance under various terms provided for in the ESPP. We have not yet established a start date of the initial purchasing period under the ESPP.

The following table summarizes activities for stock options and unvested RSUs:
 
 
 
Options Outstanding
 
Restricted Stock Units Outstanding
 
Shares
Available
for
Grant
 
Number of
Shares
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life in
Years
 
Aggregate
Intrinsic
Value
 
Number of shares
 
Weighted Average Grant-Date Fair Value

Balance at December 31, 2011
238,581

 
9,032,499

 
$
0.55

 
8.6
 
$
2,981

 
 
 
 
Increase in Plan authorized shares
4,404,308

 
 
 
 
 
 
 
 
 
 
 
 
Restricted stock issued
(22,727
)
 
 
 
 
 
 
 
 
 
 
 
 
Granted
(4,422,412
)
 
4,422,412

 
$
1.03

 
 
 
 
 
 
 
 
Exercised

 
(1,056,262
)
 
$
0.28

 
 
 
 
 
 
 
 
Canceled and forfeited
991,039

 
(991,039
)
 
$
0.57

 
 
 
 
 
 
 
 
Balance at December 31, 2012
1,188,789

 
11,407,610

 
$
0.76

 
8.3
 
$
4,125

 
 
 
 
Increase in Plan authorized shares
7,000,000

 
 
 
 
 
 
 
 
 
 
 
 
Granted
(8,283,513
)
 
8,283,513

 
$
1.71

 
 
 
 
 
 
 
 
Exercised

 
(1,036,077
)
 
$
0.60

 
 
 
 
 
 
 
 
Canceled and forfeited
2,199,642

 
(2,199,642
)
 
$
0.96

 
 
 
 
 
 
 
 
Balance at December 31, 2013
2,104,918

 
16,455,404

 
$
1.22

 
8.4
 
$
91,192

 
 
 
 
Increase in Plan authorized shares
15,000,000

 
 
 
 
 
 
 
 
 
 
 
 
Granted
(6,749,822
)
 
5,325,929

 
$
12.25

 
 
 
 
 
1,423,893

 
$
11.06

Exercised

 
(2,956,676
)
 
$
1.11

 
 
 
 
 
 
 
 
Vested RSUs

 

 
 
 
 
 
 
 

 
 
Canceled and forfeited
2,457,118

 
(2,432,118
)
 
$
4.06

 
 
 
 
 
(25,000
)
 
$
11.06

Balance at December 31, 2014
12,812,214

 
16,392,539

 
$
4.40

 
 
 
$
128,541

 
1,398,893

 
$
11.06

Vested or expected to vest December 31, 2014
 
 
15,164,416

 
$
4.26

 
7.1
 
$
120,755

 
1,217,037

 
11.06

Exercisable as of December 31, 2014
 
 
6,945,436

 
$
2.11

 
5.1
 
$
68,645

 
 
 
 

The total grant-date fair value of awards granted during the year ended December 31, 2014, 2013 and 2012 was $55.6 million, $17.0 million and $2.7 million, respectively.
The total grant-date fair value of awards vested during the years ended December 31, 2014, 2013 and 2012 was $9.7 million, $1.7 million and $1.0 million, respectively. The total intrinsic value of the options exercised during the years ended December 31, 2014, 2013 and 2012, was $31.1 million, $1.8 million and $0.9 million, respectively. The intrinsic value is the difference of the current fair value of the stock and the exercise price of the stock option.
As of December 31, 2014, we had $37.9 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 3.1 years. As of December 31, 2014, we had $15.1 million in unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of approximately 4.2 years.
Stock-based compensation capitalized to internal-use software was immaterial for December 31, 2014.
Stock-Based Compensation to Employees
All stock-based compensation to employees is measured based on the grant-date fair value of the awards and is generally recognized in our statement of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). We estimate the fair value of stock options granted using the Black-Scholes option-valuation model. For restricted stock units, fair value is based on the closing price of our Class B common stock on the grant date. Compensation cost is generally recognized over the vesting period of the applicable award using the straight-line method.
The assumptions used in the Black-Scholes option-valuation model were determined as follows:
Volatility. Since we do not have a trading history for our Class B common stock, the expected volatility was derived from the historical stock volatilities of peer group companies within our industry. In evaluating peer companies, we considered factors such as nature of business, customer base, service offerings and markets served.
Risk-Free Interest Rate. The risk-free rate that we used is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options.
Expected Life. The expected term represents the period that our stock-based awards are expected to be outstanding. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options.
Dividend Yield. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and therefore, we use an expected dividend yield of zero.
Fair Value of Common Stock. Prior to our initial public offering in March 2014, our board of directors considered numerous objective and subjective factors to determine the fair value of our Class A common stock at each grant date. These factors included, but were not limited to, (i) contemporaneous valuations of Class A common stock performed by unrelated third-party specialists; (ii) the prices for our Preferred Stock sold to outside investors; (iii) the rights, preferences and privileges of our Preferred Stock relative to our Class A common stock; (iv) the lack of marketability of our Class A common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our Company, given prevailing market conditions.
Since our initial public offering, we have used the market closing price for our Class B common stock as reported on the New York Stock Exchange to determine the fair value of our common stock.
In addition to assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-valuation model with the following assumptions and fair value per share:
 
Year Ended December 31,
 
2014
 
2013
 
2012
Volatility
60%
 
57.8%-60%
 
60%-63%
Expected life (in years)
5.0-6.3
 
5.0-7.2
 
5.0-6.5
Risk-free interest rate
1.53%-2.05%
 
0.7%-1.8%
 
0.6%-1.1%
Dividend yield
—%
 
—%
 
—%
Weighted-average fair value of underlying common stock
$14.74
 
$3.02
 
$1.05

Warrants
On December 11, 2013, we issued a warrant to purchase an aggregate of 175,000 shares of Class A common stock at an exercise price of $5.00 per share to a third-party service provider. The warrant provides for an early exercise right and has a 10 year term. As of December 31, 2014 the warrants were fully vested. Expense for the warrants is calculated using the Black-Scholes option-pricing model and is recorded over the service performance period, which is the same as the vesting period. For the year ended December 31, 2014, we recorded $2.6 million in expense associated with this warrant. The expense for the year ended December 31, 2013 was immaterial.
Income Taxes
Income Taxes
Income Taxes
The components of loss from continuing operations before income taxes were generated solely in the United States as follows (in thousands):
 
 
Year Ended December 31,
 
2014
 
2013
 
2012
United States
$
(85,940
)
 
$
(62,182
)
 
$
(35,004
)

As a result of our history of net operating losses and full valuation allowance against our deferred tax assets, there was no current or deferred income tax provision for the years ended December 31, 2014, 2013 and 2012.
Reconciliations of the statutory federal income tax rate and our effective tax rate consist of the following (in thousands):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Tax at federal statutory rate
$
(29,220
)
 
$
(21,142
)
 
$
(11,901
)
State statutory rate (net of federal benefit)
(1,728
)
 
(1,921
)
 
(2,193
)
Non-deductible stock compensation
(19
)
 
619

 
485

Change in valuation allowance
30,571

 
22,184

 
13,384

Other
396

 
260

 
225

 
$

 
$

 
$



Significant components of our deferred tax assets and liabilities were as follows (in thousands):
 
As of December 31,
Deferred tax assets:
2014
 
2013
Net operating loss carryforwards
$
72,984

 
$
45,744

Accrued expenses

 
239

Deferred rent
127

 
160

Accrued bonus
68

 
583

Accrued compensation
539

 
638

Stock-based compensation
3,266

 
533

Other reserves and accruals
2

 
2

Property and equipment
16

 
88

Deferred revenue
2,173

 
616

 
79,175

 
48,603

Valuation allowance
(79,175
)
 
(48,603
)
Net deferred tax assets
$

 
$


We have provided a full valuation allowance for our deferred tax assets at December 31, 2014 and 2013, due to the uncertainty surrounding the future realization of such assets. Therefore, no benefit has been recognized for the net operating loss carryforwards and other deferred tax assets.
The valuation allowance increased by $30.6 million and $22.3 million during the years ended December 31, 2014 and 2013, respectively. For the years ended December 31, 2014 and 2013, we recorded no tax benefits related to stock-based compensation.
As of December 31, 2014, we have approximately $194.3 million of federal and $119.8 million of state net operating loss carryforwards available to offset future taxable income. If not utilized, the federal and state net operating loss carryforwards begin to expire in 2028 and 2017, respectively.
The deferred tax asset related to our net operating losses does not include amounts relating to the tax benefit of stock option exercises, which, when realized, will be recorded as a credit to additional paid-in capital. As of December 31, 2014, we also had approximately $3.3 million and $3.7 million of research and development tax credit carryforwards available to reduce future taxable income if any, for federal and California purposes, respectively. The federal credit carryforwards expire beginning in 2028 and the California research credits do not expire and may be carried forward indefinitely.
Our ability to utilize the net operating loss and tax credit carryforwards in the future may be subject to substantial restrictions in the event of past or future ownership changes as defined in Section 382 of the Internal Revenue Code and similar state tax laws. In the event we should experience an ownership change, as defined, utilization of our net operating loss carryforwards and tax credits could be limited.
The American Taxpayer Relief Act of 2012, or the Act, was signed into law on January 2, 2013. The Act retroactively restored several expired business tax provisions, including the federal research tax credit. Because a change in tax law is accounted for in the period of enactment, the retroactive effect of the Act on our U.S. federal research tax credits for 2012 was recognized in the first quarter of 2013.

     We evaluate tax positions for recognition using a more-likely-than-not recognition threshold, and those tax positions eligible for recognition are measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon the effective settlement with a taxing authority that has full knowledge of all relevant information.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefit is as follows (in thousands):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Gross unrecognized tax benefits at the beginning of the fiscal year
$
4,513

 
$
2,445

 
$
1,823

Increases for tax positions of prior years
871

 

 
27

Decreases for tax positions of prior years
(831
)
 

 
(8
)
Increases for tax positions related to the current year
2,661

 
2,068

 
603

Gross unrecognized tax benefits at the end of the fiscal year
$
7,214

 
$
4,513

 
$
2,445


At December 31, 2014, all unrecognized tax benefits are subject to a full valuation allowance and, if recognized, will not affect our tax rate.
We do not anticipate that the total amounts of unrecognized tax benefits will significantly increase or decrease in the next 12 months.
Our policy is to include interest and penalties related to unrecognized tax benefits within our provision for income taxes. Due to our net operating loss position, we have not recorded an accrual for interest or penalties related to uncertain tax positions for the years ended December 31, 2014, 2013 or 2012.

The effective tax rate for the year ended December 31, 2014 and 2013 was zero percent, primarily as a result of the estimated tax loss for the year and the change in valuation allowance.

There were no material changes to the unrecognized tax benefits in the year ended December 31, 2014, and we do not anticipate that the unrecognized tax benefits will significantly increase or decrease in the next 12 months. At December 31, 2014, 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, less the weighted-average unvested common stock subject to repurchase. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including Preferred Stock and outstanding stock options and warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.
When shares of both Class A and Class B common stock are outstanding, net loss is allocated based on the contractual participation rights of the Class A and Class B common stock as if the earnings for the year have been distributed. As the liquidation and dividend rights are identical, the net loss is allocated on a proportionate basis. As of December 31, 2013, only shares of Class A common stock were outstanding and therefore no net loss was allocated.
 
The following table presents the calculation of basic and diluted net loss per share for our common stock (in thousands, except per share data):
 
Year Ended December 31,
 
2014
 
2013
 
2012
 
Class A
 
Class B
 
Class A
 
Class A
Net loss
$
(67,655
)
 
$
(18,285
)
 
$
(62,182
)
 
$
(35,004
)
Weighted-average shares used to compute basic and diluted net loss per share
58,555

 
15,826

 
9,895

 
7,885

Basic and diluted net loss per share
$
(1.16
)
 
$
(1.16
)
 
$
(6.28
)
 
$
(4.44
)

The following securities were excluded from the calculation of diluted net loss per share for common stock because their effect would have been anti-dilutive for the periods presented (in thousands):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Convertible preferred stock

 
64,476

 
64,476

Stock options and restricted common stock
17,791

 
16,687

 
12,295

Warrants
115

 
175

 

 
17,906

 
81,338

 
76,771

401(k) Plan
401(k) Plan
401(k) Plan
We have a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code covering eligible employees. As of December 31, 2014, we had not made any matching contributions to this plan. Effective January 1, 2015, we will begin matching a portion of the employee contributions. We do not anticipate these costs to be material.
Selected Quarterly Financial Data (unaudited)
Selected Quarterly Financial Data (unaudited)
Selected Quarterly Financial Data (unaudited)

The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in fiscal 2014 and 2013 (in thousands, except per share data):
 
 
Quarter Ended
 
 
Mar 31,
2013
 
Jun 30,
2013
 
Sep 30,
2013
 
Dec 31,
2013
 
Mar 31,
2014
 
Jun 30,
2014
 
Sep 30,
2014
 
Dec 31,
2014
Total revenue
 
1,907

 
2,325

 
3,609

 
5,132

 
8,376

 
10,533

 
12,209

 
14,487

Gross (loss) profit
 
(1,350
)
 
(1,508
)
 
(1,226
)
 
(247
)
 
1,793

 
3,116

 
5,054

 
7,870

Net loss
 
$
(11,433
)
 
$
(14,173
)
 
$
(16,603
)
 
$
(19,973
)
 
$
(24,281
)
 
$
(21,776
)
 
$
(20,199
)
 
$
(19,684
)
Net loss per share, basic and diluted
 
$
(1.24
)
 
$
(1.47
)
 
$
(1.63
)
 
$
(1.90
)
 
$
(0.90
)
 
$
(0.24
)
 
$
(0.23
)
 
$
(0.22
)
Summary of Significant Accounting Policies (Policies)
Basis of Presentation and Principles of Consolidation
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements include the results of Castlight and its wholly owned U.S. subsidiary.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. These estimates include, but are not limited to, the determination of the relative selling prices for our services and certain assumptions used in the valuation of our common stock prior to the IPO and in equity awards. Actual results could differ from those estimates, and such differences could be material to our consolidated financial position and results of operations.
Segment Information
Our chief operating decision maker, our CEO, reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating our financial performance. Accordingly, we have determined that we operate in a single reportable segment, cloud applications.
Revenue Recognition
We derive our revenue from sales of cloud-based subscription service contracts, including support, and professional services contracts. We sell subscriptions to our cloud-based subscription service through contracts that are generally three years in length.
Our cloud-based subscription service contracts do not provide customers with the right to take possession of the software supporting the cloud-based service and, as a result, are accounted for as service contracts.
We commence revenue recognition for our cloud-based subscription service and professional services when all of the following criteria are met:
there is persuasive evidence of an arrangement;
the service has been provided to the customer;
collection of the fees is reasonably assured; and
the amount of fees to be paid by the customer is fixed or determinable.
Our subscription and professional service arrangements do not contain refund provisions for fees earned related to services performed. We do, however, have commitments under service-level agreements, as discussed under "Warranties and Indemnification" below.
Subscription Revenue. Subscription revenue recognition commences on the date that our cloud-based service is made available to the customer, which is considered the launch date, provided all of the other criteria described above are met. Revenue is recognized based on the terms in our customer contracts, which can provide for (a) a variable periodic fee based upon the actual or contractual number of users that is recognized to revenue based on the actual or contractual number of users or (b) a fixed fee that is recognized to revenue on a straight-line basis over the contractual term of the arrangement.
Certain of our cloud-based subscription arrangements include performance incentives that are generally based upon employee engagement. Fees for performance incentives are considered contingent revenue, and are recognized over the remaining term of the related subscription arrangement commencing at the time they are earned.
Professional Services Revenue. Professional services revenue is comprised of implementation services related to our cloud-based subscription service, as well as follow-on professional services to assist our customers in further adopting our cloud-based subscription service, and communications services. Nearly all of our professional services contracts are sold on a fixed-fee basis. We do not have standalone value for our implementation services. Accordingly, we recognize implementation services revenue in the same manner as the associated cloud-based subscription service, beginning on the launch date, provided all other criteria described above have been met. For follow-on professional services that are sold separately from the cloud-based subscription service, we recognize revenue as the services are delivered. Communication services revenue is recognized over the contractual term, generally one year, commencing when the revenue recognition criteria have been met.
Multiple Deliverable Arrangements. To date, we have generated substantially all our revenue from multiple deliverable arrangements consisting of multi-year cloud-based subscription services and professional services, including implementation services and communication services. For arrangements with multiple deliverables, we evaluate whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered. If one or more of the deliverables do not have standalone value upon delivery, the deliverables that do not have standalone value are generally combined with our cloud-based subscription service, and revenue for the combined unit is recognized over the remaining term of the cloud-based subscription service.
Our deliverables have standalone value if we or any other vendor sells a similar service separately. We have concluded that we have standalone value for our cloud-based subscription service as we sell these services separately through renewals and for our communication services as other vendors sell similar services separately. Conversely, we have concluded that our implementation services do not have standalone value, as we and others do not yet sell these services separately. Accordingly, we consider the separate units of accounting in our multiple deliverable arrangements to be the communication services and a combined deliverable comprised of cloud-based subscription services and implementation services.
When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence, or VSOE, of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence, or TPE, of selling price is used to establish the selling price if it exists. If TPE does not exist, we estimate the best estimated selling price, or BESP. VSOE does not currently exist for any of our deliverables. Additionally, we do not believe TPE is a practical alternative due to differences in our cloud-based subscription service compared to other parties and the availability of relevant third-party pricing information for our cloud-based subscription service and our other services. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, we allocate the arrangement fee to the separate units of accounting based on our BESP. The amount of arrangement fee allocated is limited by contingent revenue, if any.
We determine BESP for our deliverables by considering our overall pricing objectives and market conditions. This includes evaluating our pricing practices, our list prices, the size of our transactions, historical sales and our go-to-market strategy. The determination of BESP is made through consultation with and approval by management. For financial statement presentation purposes, we allocate the fees from our combined units of accounting to subscription and professional services based upon their relative selling price.
Costs of Revenue
Cost of revenue consists of the cost of subscription revenue and cost of professional services revenue.
Cost of subscription revenue primarily consists of data fees, employee-related expenses (including salaries, benefits and stock-based compensation) related to hosting costs of our cloud-based service, cost of subcontractors, expenses for service delivery (which includes call center support), allocated overhead, the costs of data center capacity, amortization of internal-use software and depreciation of owned computer equipment and software. Amortization of internal-use software was immaterial for the year ended December 31, 2014.
Cost of professional services revenue consists primarily of employee-related expenses associated with these services, the cost of subcontractors and travel costs. The time and costs of our customer implementations vary based on the source and condition of the data we receive from third parties, the configurations that we agree to provide and the size of the customer.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. Our cash and cash equivalents generally consist of investments in money market funds, U.S. treasury securities and U.S. agency obligations. Cash and cash equivalents are stated at fair value.
Marketable Securities
Our marketable securities consist of U.S. agency obligations, U.S. treasury securities and money market funds, with maturities at the time of purchase of greater than three months. Marketable securities with remaining maturities in excess of one year are classified as noncurrent. We classify our marketable securities as available-for-sale at the time of purchase based on our intent and are recorded at their estimated fair value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income (loss). We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income, net in the consolidated statements of operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on our assessment of the collectability of accounts. We regularly review the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice and the collection history of each customer to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. For all periods presented, the allowance for doubtful accounts was not significant.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with the non-cancellable portion of cloud-based subscription service contracts with customers and consist of sales commissions paid to our direct sales force. The commissions are deferred and amortized over the non-cancellable terms of the related contracts. The deferred commission amounts are recoverable through the future revenue streams under the non-cancellable customer contracts. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective asset as follows:
 
Software
  
3–5 years
Computer equipment
  
3 years
Furniture and equipment
  
5–7 years
Leasehold improvements
  
Shorter of the lease term or the estimated useful lives of the improvements

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

For our development costs related to our cloud-based service, we capitalize costs incurred during the application development stage. Costs related to preliminary project and post-implementation stages are expensed as incurred. Capitalized software development costs are included as part of property, plant and equipment and are amortized on a straight-line basis over the technology's estimated useful life, which is generally three years. The amortization expense is recorded as a component of cost of subscription revenue.
For the year ended December 31, 2014, we capitalized software development costs totaling $0.3 million. All software development costs incurred in prior periods were expensed.
Stock-based Compensation
All stock-based compensation to employees is measured based on the grant-date fair value of the awards and recognized in our consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). We estimate the fair value of stock options granted using the Black-Scholes option valuation model. For restricted stock units, fair value is based on the closing price of our Class B common stock on the grant date. Compensation expense is recognized over the vesting period of the applicable award using the straight-line method.
Compensation expense for non-employee stock options and warrants is calculated using the Black-Scholes option-pricing model and is recorded as the options vest. Options subject to vesting are required to be periodically revalued over their service period, which is generally the same as the vesting period.
Income Taxes
We account for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax bases and tax credit and net operating loss carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse.
We assess the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized.
We recognize and measure uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Significant judgment is required to evaluate uncertain tax positions. We evaluate our uncertain tax positions on a regular basis. Our evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of audit and effective settlement of audit issues.
Warranties and Indemnification
Our cloud-based service is generally warranted to be performed in a professional manner and in a manner that will comply with the terms of the customer agreements.

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

We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as our director or officer or that person’s services provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that would generally enable us to recover a portion of any future amounts paid. We may also be subject to indemnification obligation by law with respect to the actions of our employees under certain circumstances and in certain jurisdictions.
Advertising Expenses
Advertising is expensed as incurred.
Concentrations of Risk and Significant Customers
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed federally insured limits.
We serve our customers and users from outsourced data center facilities located in Colorado and Arizona. We have internal procedures to restore all our services in the event of disasters at the Arizona facility. Procedures utilizing currently deployed hardware, software and services at our disaster recovery location allow our cloud-based service to be restored within 48 hours without significant interruptions during the implementation of the procedures to restore services.
Revenue from customers representing 10% or more of total revenue for the respective years, is summarized as follows:
 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Customer A
14
%
 
16
%
 
%
Customer B
*

 
*

 
30
%
Customer C
*

 
*

 
13
%
Customer D
*

 
*

 
10
%
  * Less than 10%
During the years ended December 31, 2014, 2013 and 2012, all of our revenue was generated by customers located in the United States.
Accounts receivable from customers representing 10% or more of total accounts receivable as of the respective dates is summarized as follows:
 
As of December 31,
 
2014
 
2013
Accounts Receivable:
 
 
 
Customer A
*

 
10
%
Customer E
12
%
 
%
Customer F
19
%
 
17
%
 * Less than 10%
Recently Issued and Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09 regarding ASC Topic 606, Revenue from Contracts with Customers. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will be effective for us beginning January 1, 2017. Early adoption is not permitted. We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
Summary of Significant Accounting Policies Summary of Significant Accounting Policies (Tables)
Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective asset as follows:
 
Software
  
3–5 years
Computer equipment
  
3 years
Furniture and equipment
  
5–7 years
Leasehold improvements
  
Shorter of the lease term or the estimated useful lives of the improvements
Property and equipment consisted of the following (in thousands):
 
As of December 31,
 
2014
 
2013
Leasehold improvements
$
1,058

 
$
924

Computer equipment
3,247

 
2,024

Software
874

 
263

Capitalization of internal-use software
291

 

Furniture and equipment
301

 
257

Total
5,771

 
3,468

Accumulated depreciation
(2,141
)
 
(837
)
Property and equipment, net
$
3,630

 
$
2,631

Revenue from customers representing 10% or more of total revenue for the respective years, is summarized as follows:
 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Customer A
14
%
 
16
%
 
%
Customer B
*

 
*

 
30
%
Customer C
*

 
*

 
13
%
Customer D
*

 
*

 
10
%
  * Less than 10%
Accounts receivable from customers representing 10% or more of total accounts receivable as of the respective dates is summarized as follows:
 
As of December 31,
 
2014
 
2013
Accounts Receivable:
 
 
 
Customer A
*

 
10
%
Customer E
12
%
 
%
Customer F
19
%
 
17
%
 * Less than 10%
Marketable Securities (Tables)
Available-for-sale Securities
At December 31, 2014 and December 31, 2013, respectively, marketable securities consisted of the following (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2014
 
 
 
 
 
 
 
U.S. agency obligations
$
177,297

 
$
4

 
$
(44
)
 
$
177,257

U.S. treasury securities
5,580

 
1

 

 
5,581

Money market mutual funds
1,919

 

 

 
1,919

 
184,796

 
5

 
(44
)
 
184,757

Included in cash and cash equivalents
3,480

 

 

 
3,480

Included in marketable securities
$
175,093

 
$
5

 
$
(41
)
 
$
175,057

Included in marketable securities, noncurrent
$
6,223

 
$

 
$
(3
)
 
$
6,220


 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
December 31, 2013
 
 
 
 
 
 
 
U.S. agency obligations
$
35,996

 
$
6

 
$
(7
)
 
$
35,995

U.S. treasury securities
6,020

 
2

 

 
6,022

Money market mutual funds
18,082