CASTLIGHT HEALTH, INC., 10-Q filed on 11/12/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Nov. 10, 2014
Class A [Member]
Nov. 10, 2014
Class B [Member]
Class of Stock [Line Items]
 
 
 
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Sep. 30, 2014 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
Q3 
 
 
Trading Symbol
CSLT 
 
 
Entity Registrant Name
CASTLIGHT HEALTH, INC. 
 
 
Entity Central Index Key
0001433714 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
59,586,244 
30,705,200 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 25,231 
$ 25,154 
Marketable securities
156,931 
42,017 
Accounts receivable, net
11,278 
5,065 
Deferred commissions
3,399 
3,648 
Prepaid expenses and other current assets
3,344 
1,583 
Total current assets
200,183 
77,467 
Property and equipment, net
3,228 
2,631 
Marketable securities, noncurrent
27,700 
Restricted cash, noncurrent
101 
Deferred commissions, noncurrent
2,577 
1,821 
Other assets
292 
1,497 
Total assets
233,980 
83,517 
Current liabilities:
 
 
Accounts payable
2,708 
2,536 
Accrued expenses and other current liabilities
4,826 
4,998 
Accrued compensation
10,078 
8,064 
Deferred revenue
18,111 
6,925 
Total current liabilities
35,723 
22,523 
Deferred revenue, noncurrent
7,995 
4,548 
Other liabilities, noncurrent
290 
373 
Total liabilities
44,008 
27,444 
Commitments and contingencies
   
   
Stockholders’ equity (deficit):
 
 
Additional paid-in capital
387,443 
6,885 
Accumulated other comprehensive income
12 
Accumulated deficit
(197,492)
(131,236)
Total stockholders’ equity (deficit)
189,972 
(124,350)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)
233,980 
83,517 
Convertible Preferred Stock [Member]
 
 
Liabilities, convertible preferred stock and stockholders’ equity (deficit)
 
 
Convertible preferred stock
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 Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Revenue:
 
 
 
 
Subscription
$ 11,254 
$ 3,213 
$ 28,293 
$ 7,040 
Professional services
955 
396 
2,825 
801 
Total revenue
12,209 
3,609 
31,118 
7,841 
Cost of revenue:
 
 
 
 
Cost of subscription
2,596 1
1,510 1
8,223 1
4,174 1
Cost of professional services
4,559 1
3,325 1
12,932 1
7,751 1
Total cost of revenue
7,155 
4,835 
21,155 
11,925 
Gross profit (loss)
5,054 
(1,226)
9,963 
(4,084)
Operating expenses:
 
 
 
 
Sales and marketing
14,760 1
8,706 1
46,267 1
21,579 1
Research and development
5,630 1
4,138 1
16,633 1
10,662 1
General and administrative
4,944 1
2,571 1
13,473 1
6,012 1
Total operating expenses
25,334 
15,415 
76,373 
38,253 
Operating loss
(20,280)
(16,641)
(66,410)
(42,337)
Other income, net
81 
38 
154 
128 
Net loss
$ (20,199)
$ (16,603)
$ (66,256)
$ (42,209)
Net loss per share, basic and diluted
$ (0.23)
$ (1.63)
$ 0 
$ 0 
Weighted-average shares used to compute basic and diluted net loss per share
89,698 
10,168 
68,960 
9,684 
Consolidated Statements of Operations Parenthetical (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Cost of subscription [Member]
 
 
 
 
Allocated Share-based Compensation Expense
$ 60 
$ 1 
$ 99 
$ 2 
Cost of professional services [Member]
 
 
 
 
Allocated Share-based Compensation Expense
306 
33 
726 
85 
Sales and marketing [Member]
 
 
 
 
Allocated Share-based Compensation Expense
2,013 
175 
4,339 
583 
Research and development [Member]
 
 
 
 
Allocated Share-based Compensation Expense
561 
98 
1,475 
208 
General and administrative [Member]
 
 
 
 
Allocated Share-based Compensation Expense
$ 1,169 
$ 223 
$ 2,963 
$ 495 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Consolidated Statement of Comprehensive Loss:
 
 
 
 
Net loss
$ (20,199)
$ (16,603)
$ (66,256)
$ (42,209)
Other comprehensive income (loss):
 
 
 
 
Net change in unrealized gain (loss) on available-for-sale marketable securities
52 
15 
12 
(20)
Reclassification adjustments for net realized gains (loss) on available-for-sale marketable securities
Other comprehensive income (loss)
52 
15 
12 
(20)
Comprehensive loss
$ (20,147)
$ (16,588)
$ (66,244)
$ (42,229)
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Operating activities:
 
 
Net loss
$ (66,256)
$ (42,209)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation
944 
401 
Stock-based compensation
9,602 
1,373 
Amortization of deferred commissions
3,119 
741 
Accretion and amortization of marketable securities
1,021 
585 
Expense related to warrant
2,659 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(6,213)
(1,348)
Deferred commissions
(3,626)
(3,301)
Prepaid expenses and other assets
(1,922)
(270)
Accounts payable
193 
228 
Accrued expenses and other liabilities
2,753 
2,947 
Deferred revenue
14,633 
5,332 
Net cash used in operating activities
(43,093)
(35,521)
Investing activities:
 
 
Decrease Restricted cash
101 
Purchase of property and equipment
(1,398)
(2,279)
Purchase of marketable securities
(210,388)
(42,288)
Sale of marketable securities
13,000 
5,000 
Maturities of marketable securities
53,765 
58,835 
Net cash (used in) provided by investing activities
(144,920)
19,268 
Financing activities:
 
 
Proceeds from the exercise of stock options
1,928 
314 
Net proceeds from initial public offering
186,162 
Net cash provided by financing activities
188,090 
314 
Net increase (decrease) in cash and cash equivalents
77 
(15,939)
Cash and cash equivalents at beginning of period
25,154 
42,534 
Cash and cash equivalents at end of period
$ 25,231 
$ 26,595 
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 gain control over their rapidly escalating healthcare costs. 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 cost and quality data transparent and useful. We were incorporated in the State of Delaware in January 2008 as Maria Health, Inc. In November 2008, we changed our name to Ventana Health Services, and in April 2010, we changed our name to Castlight, Inc., and then subsequently changed our name to Castlight Health, Inc. 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
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP), for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (SEC), Regulation S-X. In the opinion of management, the information herein reflects all adjustments, consisting only of normal recurring adjustments except as otherwise noted, considered necessary for a fair statement of results of operations, financial position and cash flows. The condensed consolidated financial statements include the results of Castlight and its wholly owned U.S. subsidiary. The results for the interim periods presented are not necessarily indicative of the results expected for any future period.
The condensed consolidated balance sheet as of December 31, 2013 included herein was derived from the audited financial statements as of that date. The following information should be read in conjunction with the audited consolidated financial statements and notes included in Castlight’s prospectus dated March 13, 2014 and filed with the SEC on March 14, 2014 pursuant to Rule 424(b) under the Securities Act of 1933. There have been no changes to our significant accounting policies described in the prospectus that have had a material impact on our condensed consolidated financial statements and related notes.
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 condensed 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 reporting 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, with the exception of our 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 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 standalone 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 and depreciation of owned computer equipment and software.
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. government-issued 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 condensed consolidated statements of operations.
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.
During the three and nine months ended September 30, 2014, we capitalized software costs totaling $0.2 million. All software development costs incurred in prior periods have been expensed.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with the noncancelable 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 noncancelable terms of the related contracts. The deferred commission amounts are recoverable through the future revenue streams under the noncancelable customer contracts. Amortization of deferred commissions is included in sales and marketing expense in the condensed consolidated statements of operations.
Deferred Revenue
Deferred revenue primarily consists of professional services and cloud-based subscription services that have been billed in advance of revenue being recognized or the services have not been delivered. 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 condensed 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. 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. 
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.
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 September 30, 2014 and December 31, 2013, respectively, marketable securities consisted of the following (in thousands):
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
September 30, 2014
 
 
 
 
 
 
 
U.S. agency obligations
$
182,406

 
$
20

 
$
(12
)
 
$
182,414

U.S. treasury securities
5,635

 
4

 

 
5,639

Money market mutual funds
11,692

 

 

 
11,692

 
199,733

 
24

 
(12
)
 
199,745

Included in cash and cash equivalents
15,114

 

 

 
15,114

Included in marketable securities
$
156,920

 
$
20

 
$
(9
)
 
$
156,931

Included in marketable securities, noncurrent
$
27,699

 
$
4

 
$
(3
)
 
$
27,700

 
 
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 September 30, 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
September 30, 2014
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
11,692

 
$

 
$
11,692

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
182,414

 
182,414

U.S. treasury securities

 
5,639

 
5,639

 
$
11,692


$
188,053


$
199,745

 
 
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 September 30, 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 September 30, 2014.
There were no realized gains or losses during the three and nine months ended September 30, 2014 and 2013. As of September 30, 2014 those securities with maturities at the time of purchase of greater than one year are reflected in the noncurrent portion of our condensed 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.
Property and equipment, net
Property and equipment
Property and Equipment

Property and equipment consisted of the following (in thousands):
 
 
As of
 
September 30, 2014
 
December 31, 2013
Leasehold improvements
$
1,043

 
$
924

Computer equipment
2,635

 
2,024

Software
824

 
263

Capitalization of internal-use software
162

 

Furniture and equipment
301

 
257

Total
4,965

 
3,468

Accumulated depreciation
(1,737
)
 
(837
)
Property and equipment, net
$
3,228

 
$
2,631


Depreciation expense for the three months ended September 30, 2014 and 2013, was $0.3 million, and $0.2 million, respectively, and for the nine months ended September 30, 2014 and 2013, $0.9 million and $0.4 million, respectively. Depreciation is recorded on a straight-line basis.
Deferred Revenue
Deferred Revenue
Deferred Revenue
Deferred revenue consisted of the following (in thousands):
 
 
As of
 
September 30, 2014
 
December 31, 2013
Subscription
$
12,387

 
$
3,810

Professional services—implementation
2,891

 
1,835

Professional services—communications
2,833

 
1,280

Total current
18,111

 
6,925

Subscription
3,379

 
1,489

Professional services—implementation
4,209

 
2,443

Professional services—communications
407

 
616

Total noncurrent
7,995

 
4,548

Total
$
26,106

 
$
11,473

Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Leases and Contractual Obligations
We lease office space under noncancelable 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.

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 September 30, 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

 
62,622,110

 
95,000,000

 
10,994,074

 

 
Class B common stock
800,000,000

 
27,307,588

 
95,000,000

 

 

 
Total
1,010,000,000

 
89,929,698

 
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.

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.


Stock Options Activity

A summary of stock option activity for the nine months ended September 30, 2014 is as follows (in thousands, except share and per share amounts): 
 
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
Balance at December 31, 2013
16,455,404

 
$
1.22

 
$
91,192

Stock option grants
4,132,429

 
$
12.51

 
 
Stock options exercised
(1,693,338
)
 
$
1.14

 
 
Stock options canceled
(1,664,236
)
 
$
3.38

 
 
Balance at September 30, 2014
17,230,259

 
$
3.73

 
$
158,743


The total grant-date fair value of stock options granted during the nine months ended September 30, 2014 and 2013 was $32.1 million and $4.1 million, respectively.
Stock-Based Compensation to Employees
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-valuation model with the following assumptions and fair value per share:
 
 
Nine Months Ended September 30,
 
2014
 
2013
Volatility
60%
 
57.8%-60%
Expected life (in years)
5.0-6.2
 
5.0-6.5
Risk-free interest rate
1.53%-2.05%
 
0.7%-1.8%
Dividend yield
—%
 
—%
Weighted-average fair value of underlying common stock
$13.60
 
$1.44

As of September 30, 2014, we had $26.5 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 3.1 years.
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 September 30, 2014 seventy percent of the warrants were vested and the remaining thirty percent will vest on December 31, 2014. Expense for the warrants is calculated using the Black-Scholes-Merton option-pricing model and is recorded over the service performance period, which is the same as the vesting period. For the nine months ended September 30, 2014, we recorded $2.7 million in expense associated with this warrant. The expense for the three months ended September 30, 2014 was immaterial.
Income Taxes
Income Taxes
Income Taxes

The effective tax rate for the three and nine months ended September 30, 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 three and nine months ended September 30, 2014, and we do not anticipate that the unrecognized tax benefits will significantly increase or decrease in the next 12 months. At September 30, 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 September 30, 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):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
Class A
 
Class B
 
Class A
 
Class A
 
Class B
 
Class A
Net loss
$
(16,356
)
 
$
(3,843
)
 
$
(16,603
)
 
$
(55,833
)
 
$
(10,423
)
 
$
(42,209
)
Weighted-average shares used to compute basic and diluted net loss per share
72,633

 
17,065

 
10,168

 
58,112

 
10,848

 
9,684

Basic and diluted net loss per share
$
(0.23
)
 
$
(0.23
)
 
$
(1.63
)
 
$
(0.96
)
 
$
(0.96
)
 
$
(4.36
)

The following securities were excluded from the calculation of diluted net loss per share for common stock because their effect would have been anti-dilutive for the periods presented (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Convertible preferred stock

 
64,476

 

 
64,476

Stock options and restricted common stock
17,230

 
13,615

 
17,230

 
13,615

Warrants
115

 

 
115

 

 
17,345

 
78,091

 
17,345

 
78,091

Summary of Significant Accounting Policies (Policies)
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP), for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (SEC), Regulation S-X. In the opinion of management, the information herein reflects all adjustments, consisting only of normal recurring adjustments except as otherwise noted, considered necessary for a fair statement of results of operations, financial position and cash flows. The condensed consolidated financial statements include the results of Castlight and its wholly owned U.S. subsidiary. The results for the interim periods presented are not necessarily indicative of the results expected for any future period.
The condensed consolidated balance sheet as of December 31, 2013 included herein was derived from the audited financial statements as of that date. The following information should be read in conjunction with the audited consolidated financial statements and notes included in Castlight’s prospectus dated March 13, 2014 and filed with the SEC on March 14, 2014 pursuant to Rule 424(b) under the Securities Act of 1933. There have been no changes to our significant accounting policies described in the prospectus that have had a material impact on our condensed consolidated financial statements and related notes.
Use of Estimates
The preparation of condensed 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 reporting 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, with the exception of our 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 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 standalone 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 and depreciation of owned computer equipment and software.
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. government-issued 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 condensed consolidated statements of operations.
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.
During the three and nine months ended September 30, 2014, we capitalized software costs totaling $0.2 million. All software development costs incurred in prior periods have been expensed.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with the noncancelable 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 noncancelable terms of the related contracts. The deferred commission amounts are recoverable through the future revenue streams under the noncancelable customer contracts. Amortization of deferred commissions is included in sales and marketing expense in the condensed consolidated statements of operations.
Deferred Revenue
Deferred revenue primarily consists of professional services and cloud-based subscription services that have been billed in advance of revenue being recognized or the services have not been delivered. 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 condensed 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. 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.
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 jurisdiction
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 (Tables)
Available-for-sale Securities
At September 30, 2014 and December 31, 2013, respectively, marketable securities consisted of the following (in thousands):
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
September 30, 2014
 
 
 
 
 
 
 
U.S. agency obligations
$
182,406

 
$
20

 
$
(12
)
 
$
182,414

U.S. treasury securities
5,635

 
4

 

 
5,639

Money market mutual funds
11,692

 

 

 
11,692

 
199,733

 
24

 
(12
)
 
199,745

Included in cash and cash equivalents
15,114

 

 

 
15,114

Included in marketable securities
$
156,920

 
$
20

 
$
(9
)
 
$
156,931

Included in marketable securities, noncurrent
$
27,699

 
$
4

 
$
(3
)
 
$
27,700

 
 
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 (Tables)
Fair Value, Assets Measured on Recurring Basis
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
September 30, 2014
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market mutual funds
$
11,692

 
$

 
$
11,692

Marketable securities:
 
 
 
 
 
U.S. agency obligations

 
182,414

 
182,414

U.S. treasury securities

 
5,639

 
5,639

 
$
11,692


$
188,053


$
199,745

 
 
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

Property and equipment, net (Tables)
Property, Plant and Equipment
Property and equipment consisted of the following (in thousands):
 
 
As of
 
September 30, 2014
 
December 31, 2013
Leasehold improvements
$
1,043

 
$
924

Computer equipment
2,635

 
2,024

Software
824

 
263

Capitalization of internal-use software
162

 

Furniture and equipment
301

 
257

Total
4,965

 
3,468

Accumulated depreciation
(1,737
)
 
(837
)
Property and equipment, net
$
3,228

 
$
2,631

Deferred Revenue (Tables)
Deferred Revenue, by Arrangement, Disclosure
Deferred revenue consisted of the following (in thousands):
 
 
As of
 
September 30, 2014
 
December 31, 2013
Subscription
$
12,387

 
$
3,810

Professional services—implementation
2,891

 
1,835

Professional services—communications
2,833

 
1,280

Total current
18,111

 
6,925

Subscription
3,379

 
1,489

Professional services—implementation
4,209

 
2,443

Professional services—communications
407

 
616

Total noncurrent
7,995

 
4,548

Total
$
26,106

 
$
11,473

Stockholders' Equity (Deficit) (Tables)
 
 
As of September 30, 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

 
62,622,110

 
95,000,000

 
10,994,074

 

 
Class B common stock
800,000,000

 
27,307,588

 
95,000,000

 

 

 
Total
1,010,000,000

 
89,929,698

 
254,475,662

 
75,469,707

 
$
181,000,000

A summary of stock option activity for the nine months ended September 30, 2014 is as follows (in thousands, except share and per share amounts): 
 
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
Balance at December 31, 2013
16,455,404

 
$
1.22

 
$
91,192

Stock option grants
4,132,429

 
$
12.51

 
 
Stock options exercised
(1,693,338
)
 
$
1.14

 
 
Stock options canceled
(1,664,236
)
 
$
3.38

 
 
Balance at September 30, 2014
17,230,259

 
$
3.73

 
$
158,743

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-valuation model with the following assumptions and fair value per share:
 
 
Nine Months Ended September 30,
 
2014
 
2013
Volatility
60%
 
57.8%-60%
Expected life (in years)
5.0-6.2
 
5.0-6.5
Risk-free interest rate
1.53%-2.05%
 
0.7%-1.8%
Dividend yield
—%
 
—%
Weighted-average fair value of underlying common stock
$13.60
 
$1.44
Net Loss per Share (Tables)
The following table presents the calculation of basic and diluted net loss per share for our common stock (in thousands, except per share data):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
Class A
 
Class B
 
Class A
 
Class A
 
Class B
 
Class A
Net loss
$
(16,356
)
 
$
(3,843
)
 
$
(16,603
)
 
$
(55,833
)
 
$
(10,423
)
 
$
(42,209
)
Weighted-average shares used to compute basic and diluted net loss per share
72,633

 
17,065

 
10,168

 
58,112

 
10,848

 
9,684

Basic and diluted net loss per share
$
(0.23
)
 
$
(0.23
)
 
$
(1.63
)
 
$
(0.96
)
 
$
(0.96
)
 
$
(4.36
)
The following securities were excluded from the calculation of diluted net loss per share for common stock because their effect would have been anti-dilutive for the periods presented (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Convertible preferred stock

 
64,476

 

 
64,476

Stock options and restricted common stock
17,230

 
13,615

 
17,230

 
13,615

Warrants
115

 

 
115

 

 
17,345

 
78,091

 
17,345

 
78,091

Organization and Description of Business (Details) (USD $)
Share data in Millions, except Per Share data, unless otherwise specified
9 Months Ended 0 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Mar. 19, 2014
IPO [Member]
Mar. 19, 2014
IPO [Member]
Class B [Member]
Class of Stock [Line Items]
 
 
 
 
Stock Issued During Period, Shares, New Issues
 
 
 
12.8 
Shares Issued, Price Per Share
 
 
 
$ 16.00 
Stock Issued During Period, Value, New Issues
 
 
$ 204,200,000 
 
Proceeds from Issuance Initial Public Offering
186,162,000 
185,600,000 
 
Payments of Stock Issuance Costs, Underwriter Fees and Commissions
 
 
14,300,000 
 
Deferred Offering Costs
 
 
$ 4,300,000 
 
Summary of Significant Accounting Policies (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2014
Dec. 30, 2013
Revenue Recognition, Multiple-deliverable Arrangements [Line Items]
 
 
 
Common Stock, Conversion Basis, Ratio
 
 
Capitalized software costs
$ 0.2 
$ 0.2 
 
Cloud-Based Subscription Service [Member]
 
 
 
Revenue Recognition, Multiple-deliverable Arrangements [Line Items]
 
 
 
Revenue Recognition, Contractual Term of Services
 
3 years 
 
Communication Services [Member]
 
 
 
Revenue Recognition, Multiple-deliverable Arrangements [Line Items]
 
 
 
Revenue Recognition, Contractual Term of Services
 
1 year 
 
Marketable Securities (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
$ 199,733 
$ 60,098 
Unrealized Gains
24 
Unrealized Losses
(12)
(7)
Fair Value
199,745 
60,099 
Included in cash and cash equivalents [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
15,114 
18,082 
Unrealized Gains
Unrealized Losses
Fair Value
15,114 
18,082 
Included in marketable securities [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
156,920 
42,016 
Unrealized Gains
20 
Unrealized Losses
(9)
(7)
Fair Value
156,931 
42,017 
U.S. agency obligations [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
182,406 
35,996 
Unrealized Gains
20 
Unrealized Losses
(12)
(7)
Fair Value
182,414 
35,995 
U.S. treasury securities [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
5,635 
6,020 
Unrealized Gains
Unrealized Losses
Fair Value
5,639 
6,022 
Money market mutual funds [Member]
 
 
Schedule of Available-for-sale Securities [Line Items]
 
 
Amortized Cost
11,692 
18,082 
Unrealized Gains
Unrealized Losses
Fair Value
$ 11,692 
$ 18,082 
Fair Value Measurements (Details) (USD $)
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2014
Fair Value Disclosures [Abstract]
 
 
Available-for-sale Securities, Gross Realized Gain (Loss)
$ 0 
$ 0 
Available-for-sale Securities, Maturity Period
 
1 year 
Fair Value Measurements - Summary of Assets Measured at Fair Value on a Recurring Basis (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Marketable securities:
 
 
Marketable securities
$ 199,745 
$ 60,099 
Money market mutual funds [Member]
 
 
Marketable securities:
 
 
Marketable securities
11,692 
18,082 
U.S. agency obligations [Member]
 
 
Marketable securities:
 
 
Marketable securities
182,414 
35,995 
U.S. treasury securities [Member]
 
 
Marketable securities:
 
 
Marketable securities
5,639 
6,022 
Fair Value, Measurements, Recurring
 
 
Marketable securities:
 
 
Assets, Fair Value Disclosure
199,745 
60,099 
Fair Value, Measurements, Recurring |
Money market mutual funds [Member]
 
 
Cash equivalents:
 
 
Cash equivalents
11,692 
18,082 
Fair Value, Measurements, Recurring |
U.S. agency obligations [Member]
 
 
Marketable securities:
 
 
Marketable securities
182,414 
35,995 
Fair Value, Measurements, Recurring |
U.S. treasury securities [Member]
 
 
Marketable securities:
 
 
Marketable securities
5,639 
6,022 
Fair Value, Measurements, Recurring |
Level 1 [Member]
 
 
Marketable securities:
 
 
Assets, Fair Value Disclosure
11,692 
18,082 
Fair Value, Measurements, Recurring |
Level 1 [Member] |
Money market mutual funds [Member]
 
 
Cash equivalents:
 
 
Cash equivalents
11,692 
18,082 
Fair Value, Measurements, Recurring |
Level 1 [Member] |
U.S. agency obligations [Member]
 
 
Marketable securities:
 
 
Marketable securities
Fair Value, Measurements, Recurring |
Level 1 [Member] |
U.S. treasury securities [Member]
 
 
Marketable securities:
 
 
Marketable securities
Fair Value, Measurements, Recurring |
Level 2 [Member]
 
 
Marketable securities:
 
 
Assets, Fair Value Disclosure
188,053 
42,017 
Fair Value, Measurements, Recurring |
Level 2 [Member] |
Money market mutual funds [Member]
 
 
Cash equivalents:
 
 
Cash equivalents
Fair Value, Measurements, Recurring |
Level 2 [Member] |
U.S. agency obligations [Member]
 
 
Marketable securities:
 
 
Marketable securities
182,414 
35,995 
Fair Value, Measurements, Recurring |
Level 2 [Member] |
U.S. treasury securities [Member]
 
 
Marketable securities:
 
 
Marketable securities
$ 5,639 
$ 6,022 
Property and equipment, net (Details) (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Property, Plant and Equipment [Abstract]
 
 
 
 
Depreciation Expense
$ 0.3 
$ 0.2 
$ 0.9 
$ 0.4 
Property and equipment, net - Schedule of Property, Plant and Equipment (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Property, Plant and Equipment [Line Items]
 
 
Property and Equipment
$ 4,965 
$ 3,468 
Capitalization of internal-use software
162 
Accumulated depreciation
(1,737)
(837)
Property and equipment, net
3,228 
2,631 
Leasehold Improvements [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and Equipment
1,043 
924 
Computer Equipment [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and Equipment
2,635 
2,024 
Software [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and Equipment
824 
263 
Furniture and Equipment [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property and Equipment
$ 301 
$ 257 
Deferred Revenue - Components of Deferred Revenue (Details) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Deferred Revenue Arrangement [Line Items]
 
 
Total current
$ 18,111 
$ 6,925 
Total noncurrent
7,995 
4,548 
Total
26,106 
11,473 
Subscription [Member]
 
 
Deferred Revenue Arrangement [Line Items]
 
 
Total current
12,387 
3,810 
Total noncurrent
3,379 
1,489 
Professional Services - Implementation [Member]
 
 
Deferred Revenue Arrangement [Line Items]
 
 
Total current
2,891 
1,835 
Total noncurrent
4,209 
2,443 
Professional Services - Communications [Member]
 
 
Deferred Revenue Arrangement [Line Items]
 
 
Total current
2,833 
1,280 
Total noncurrent
$ 407 
$ 616 
Stockholders' Equity (Deficit) - Initial Public Offering (Details) (IPO [Member], Class B [Member], USD $)
In Millions, except Per Share data, unless otherwise specified
0 Months Ended
Mar. 19, 2014
IPO [Member] |
Class B [Member]
 
Class of Stock [Line Items]
 
Stock Issued During Period, Shares, New Issues
12.8 
Shares Issued, Price Per Share
$ 16.00 
Stockholders' Equity (Deficit) - Summary of Stock by Class (Details) (USD $)
Sep. 30, 2014
Dec. 31, 2013
Convertible Preferred Stock:
 
 
Shares Outstanding
64,475,633 
Stockholders' equity:
 
 
Preferred Stock, Shares Authorized
10,000,000 
Preferred Stock, Shares Issued
Preferred Stock, Shares Outstanding
Preferred Stock, Liquidation Preference
 
$ 0 
Shares Authorized, including Temporary Equity
1,010,000,000 
254,475,662 
Shares Issued, including Temporary Equity
89,929,698 
75,469,707 
Shares Outstanding, including Temporary Equity
89,929,698 
Preferred Stock, Liquidation Preference Including Temporary Equity, Value
 
181,000,000 
Convertible Preferred Stock [Member]
 
 
Convertible Preferred Stock:
 
 
Shares Authorized
64,475,662 
Shares Issued
64,475,633 
Liquidation Preference
 
181,000,000 
Series A Preferred Stock [Member]
 
 
Convertible Preferred Stock:
 
 
Shares Authorized
8,000,000 
Shares Issued
8,000,000 
Shares Outstanding
8,000,000 
Liquidation Preference
 
1,000,000 
Series A-1 Preferred Stock [Member]
 
 
Convertible Preferred Stock:
 
 
Shares Authorized
10,000,000 
Shares Issued
10,000,000 
Shares Outstanding
10,000,000 
Liquidation Preference
 
3,000,000 
Series B Preferred Stock [Member]
 
 
Convertible Preferred Stock:
 
 
Shares Authorized
15,315,314 
Shares Issued
15,315,314 
Shares Outstanding
15,315,314 
Liquidation Preference
 
17,000,000 
Series C Preferred Stock [Member]
 
 
Convertible Preferred Stock:
 
 
Shares Authorized
14,594,598 
Shares Issued
14,594,598 
Shares Outstanding
14,594,598 
Liquidation Preference
 
60,000,000 
Series D Preferred Stock [Member]
 
 
Convertible Preferred Stock:
 
 
Shares Authorized
16,565,750 
Shares Issued
16,565,721 
Shares Outstanding
16,565,721 
Liquidation Preference
 
$ 100,000,000 
Class A [Member]
 
 
Stockholders' equity:
 
 
Common Stock, Shares Authorized
200,000,000 
95,000,000 
Common Stock, Shares, Issued
62,622,110 
10,994,074 
Common Stock, Shares, Outstanding
62,622,110 
Class B [Member]
 
 
Stockholders' equity:
 
 
Common Stock, Shares Authorized
800,000,000 
95,000,000 
Common Stock, Shares, Issued
27,307,588 
Common Stock, Shares, Outstanding
27,307,588 
Stockholders' Equity (Deficit) - Employee Equity Plans (Details) (Class B [Member])
Mar. 12, 2014
2014 Equity Incentive Plan [Member]
Mar. 13, 2014
2014 Employee Stock Purchase Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
 
 
Common Stock, Capital Shares Reserved for Future Issuance
15,000,000.0 
6,000,000.0 
Stockholders' Equity (Deficit) - Summary of Stock Option Activity (Details) (USD $)
In Thousands, except Share data, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Options Outstanding
 
Beginning Balance
16,455,404,000 
Stock option grants
4,132,429,000 
Stock options exercised
(1,693,338,000)
Stock options canceled
(1,664,236,000)
Ending Balance
17,230,259,000 
Weighted- Average Exercise Price
 
Beginning Balance
$ 3.73 
Stock option grants
$ 12.51 
Stock options exercised
$ 1.14 
Stock options canceled
$ 3.38 
Ending Balance
$ 1.22 
Aggregate Intrinsic Value
 
Beginning Balance
$ 91,192 
Ending Balance
$ 158,743 
Stockholders' Equity (Deficit) - Stock Options Activity and Stock-based Compensation (Details) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Equity and Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
 
 
Stock Granted, Value, Share-based Compensation, Gross
$ 32.1 
$ 4.1 
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options
$ 26.5 
 
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition
3 years 1 month 13 days 
 
Stockholders' Equity (Deficit) - Warrants (Details) (USD $)
In Thousands, except Share data, unless otherwise specified
9 Months Ended 0 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Dec. 11, 2013
Class A [Member]
Sep. 30, 2014
Class A [Member]
Class of Warrant or Right [Line Items]
 
 
 
 
Document Period End Date
Sep. 30, 2014 
 
 
 
Class of Warrant or Right, Number of Securities Called by Warrants or Rights
 
 
175,000 
 
Class of Warrant or Right, Exercise Price of Warrants or Rights
 
 
5.00 
 
Class of Warrant or Right, Term
 
 
10 years 
 
Class of Warrant or Right, Percentage of Warrants Vested
 
 
 
70.00% 
Class of Warrant or Right, Percentage of Warrants Unvested
 
 
 
30.00% 
Expense related to warrant
$ 2,659 
$ 0 
 
 
Income Taxes (Details)
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Income Tax Disclosure [Abstract]
 
 
 
 
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent
0.00% 
0.00% 
0.00% 
0.00% 
Net Loss per Share - Calculation of Basic and Diluted EPS for Common Stock (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Schedule of Earnings Per Share, Basic and Diluted, by Common Class, Including Two Class Method [Table] [Line Items]
 
 
 
 
Net loss
$ (20,199)
$ (16,603)
$ (66,256)
$ (42,209)
Weighted-average shares used to compute basic and diluted net loss per share
89,698 
10,168 
68,960 
9,684 
Basic and diluted net loss per share (in usd per share)
$ (0.23)
$ (1.63)
$ 0 
$ 0 
Class A [Member]
 
 
 
 
Schedule of Earnings Per Share, Basic and Diluted, by Common Class, Including Two Class Method [Table] [Line Items]
 
 
 
 
Net loss
(16,356)
(16,603)
(55,833)
(42,209)
Weighted-average shares used to compute basic and diluted net loss per share
72,633 
10,168 
58,112 
9,684 
Basic and diluted net loss per share (in usd per share)
$ (0.23)
$ (1.63)
$ (0.96)
$ (4.36)
Class B [Member]
 
 
 
 
Schedule of Earnings Per Share, Basic and Diluted, by Common Class, Including Two Class Method [Table] [Line Items]
 
 
 
 
Net loss
$ (3,843)
 
$ (10,423)
 
Weighted-average shares used to compute basic and diluted net loss per share
17,065 
 
10,848 
 
Basic and diluted net loss per share (in usd per share)
$ (0.23)
 
$ (0.96)
 
Net Loss per Share - Summary of Antidilutive Securities (Details) (Class A [Member])
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount
17,345 
78,091 
17,345 
78,091 
Convertible Preferred Stock [Member]
 
 
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
 
 
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount
64,476 
64,476 
Stock Options and Restricted Common Stock [Member]
 
 
 
 
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]