false2020Q10001433714--12-3100014337142020-01-012020-03-31xbrli:shares0001433714us-gaap:CommonClassAMember2020-05-050001433714us-gaap:CommonClassBMember2020-05-05iso4217:USD00014337142020-03-3100014337142019-12-31iso4217:USDxbrli:shares0001433714us-gaap:CommonClassAMember2020-03-310001433714us-gaap:CommonClassAMember2019-12-310001433714us-gaap:CommonClassBMember2020-03-310001433714us-gaap:CommonClassBMember2019-12-310001433714us-gaap:SubscriptionAndCirculationMember2020-01-012020-03-310001433714us-gaap:SubscriptionAndCirculationMember2019-01-012019-03-310001433714cslt:ProfessionalServicesAndOtherMember2020-01-012020-03-310001433714cslt:ProfessionalServicesAndOtherMember2019-01-012019-03-3100014337142019-01-012019-03-310001433714us-gaap:SubscriptionAndCirculationMember2020-01-012020-03-310001433714us-gaap:SubscriptionAndCirculationMember2019-01-012019-03-310001433714cslt:ProfessionalServicesAndOtherMember2020-01-012020-03-310001433714cslt:ProfessionalServicesAndOtherMember2019-01-012019-03-310001433714us-gaap:SellingAndMarketingExpenseMember2020-01-012020-03-310001433714us-gaap:SellingAndMarketingExpenseMember2019-01-012019-03-310001433714us-gaap:ResearchAndDevelopmentExpenseMember2020-01-012020-03-310001433714us-gaap:ResearchAndDevelopmentExpenseMember2019-01-012019-03-310001433714us-gaap:GeneralAndAdministrativeExpenseMember2020-01-012020-03-310001433714us-gaap:GeneralAndAdministrativeExpenseMember2019-01-012019-03-310001433714us-gaap:CommonStockMember2019-12-310001433714us-gaap:AdditionalPaidInCapitalMember2019-12-310001433714us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001433714us-gaap:RetainedEarningsMember2019-12-310001433714us-gaap:CommonStockMember2020-01-012020-03-310001433714us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001433714us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001433714us-gaap:RetainedEarningsMember2020-01-012020-03-310001433714us-gaap:CommonStockMember2020-03-310001433714us-gaap:AdditionalPaidInCapitalMember2020-03-310001433714us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310001433714us-gaap:RetainedEarningsMember2020-03-310001433714us-gaap:CommonStockMember2018-12-310001433714us-gaap:AdditionalPaidInCapitalMember2018-12-310001433714us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310001433714us-gaap:RetainedEarningsMember2018-12-3100014337142018-12-310001433714us-gaap:CommonStockMember2019-01-012019-03-310001433714us-gaap:AdditionalPaidInCapitalMember2019-01-012019-03-310001433714us-gaap:RetainedEarningsMember2019-01-012019-03-310001433714us-gaap:CommonStockMember2019-03-310001433714us-gaap:AdditionalPaidInCapitalMember2019-03-310001433714us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-310001433714us-gaap:RetainedEarningsMember2019-03-3100014337142019-03-31xbrli:pure0001433714us-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMembercslt:AnthemIncMember2020-01-012020-03-310001433714us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMembercslt:AnthemIncMember2020-01-012020-03-310001433714us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMembercslt:TwoCustomersMember2020-01-012020-03-3100014337142020-04-012020-03-310001433714us-gaap:CustomerRelationshipsMember2020-01-012020-03-310001433714us-gaap:CustomerRelationshipsMember2020-03-310001433714us-gaap:DevelopedTechnologyRightsMember2020-01-012020-03-310001433714us-gaap:DevelopedTechnologyRightsMember2020-03-310001433714us-gaap:CustomerRelationshipsMember2019-01-012019-12-310001433714us-gaap:CustomerRelationshipsMember2019-12-310001433714us-gaap:DevelopedTechnologyRightsMember2019-01-012019-12-310001433714us-gaap:DevelopedTechnologyRightsMember2019-12-310001433714us-gaap:OrderOrProductionBacklogMember2019-10-012019-12-310001433714us-gaap:OrderOrProductionBacklogMember2019-12-310001433714us-gaap:OtherIntangibleAssetsMembersrt:MinimumMember2019-01-012019-12-310001433714us-gaap:OtherIntangibleAssetsMembersrt:MaximumMember2019-01-012019-12-310001433714us-gaap:OtherIntangibleAssetsMember2019-12-310001433714us-gaap:USTreasurySecuritiesMember2020-03-310001433714us-gaap:USGovernmentAgenciesDebtSecuritiesMember2020-03-310001433714us-gaap:MoneyMarketFundsMember2020-03-310001433714us-gaap:CashAndCashEquivalentsMember2020-03-310001433714cslt:MarketableSecuritiesMember2020-03-310001433714us-gaap:USTreasurySecuritiesMember2019-12-310001433714us-gaap:USGovernmentAgenciesDebtSecuritiesMember2019-12-310001433714us-gaap:MoneyMarketFundsMember2019-12-310001433714us-gaap:CashAndCashEquivalentsMember2019-12-310001433714cslt:MarketableSecuritiesMember2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Memberus-gaap:USGovernmentAgenciesDebtSecuritiesMember2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Memberus-gaap:USGovernmentAgenciesDebtSecuritiesMember2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:USGovernmentAgenciesDebtSecuritiesMember2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel2Member2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMember2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:USTreasurySecuritiesMemberus-gaap:FairValueInputsLevel1Member2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Memberus-gaap:USTreasurySecuritiesMember2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:USTreasurySecuritiesMember2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Member2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMember2020-03-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel2Member2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:MoneyMarketFundsMember2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:USTreasurySecuritiesMemberus-gaap:FairValueInputsLevel1Member2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Memberus-gaap:USTreasurySecuritiesMember2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:USTreasurySecuritiesMember2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Memberus-gaap:USGovernmentAgenciesDebtSecuritiesMember2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Memberus-gaap:USGovernmentAgenciesDebtSecuritiesMember2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:USGovernmentAgenciesDebtSecuritiesMember2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel1Member2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Member2019-12-310001433714us-gaap:FairValueMeasurementsRecurringMember2019-12-310001433714us-gaap:LeaseholdImprovementsMember2020-03-310001433714us-gaap:LeaseholdImprovementsMember2019-12-310001433714us-gaap:ComputerEquipmentMember2020-03-310001433714us-gaap:ComputerEquipmentMember2019-12-310001433714us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2020-03-310001433714us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2019-12-310001433714us-gaap:SoftwareDevelopmentMember2020-03-310001433714us-gaap:SoftwareDevelopmentMember2019-12-310001433714us-gaap:FurnitureAndFixturesMember2020-03-310001433714us-gaap:FurnitureAndFixturesMember2019-12-310001433714us-gaap:ConstructionInProgressMember2020-03-310001433714us-gaap:ConstructionInProgressMember2019-12-310001433714cslt:InterestRateOption1Member2020-01-012020-03-310001433714cslt:InterestRateOption2Member2020-03-310001433714us-gaap:RevolvingCreditFacilityMemberus-gaap:SubsequentEventMemberus-gaap:LineOfCreditMember2020-05-050001433714us-gaap:PrimeRateMemberus-gaap:RevolvingCreditFacilityMemberus-gaap:SubsequentEventMemberus-gaap:LineOfCreditMember2020-05-052020-05-050001433714us-gaap:SubsequentEventMembercslt:PaycheckProtectionProgramMember2020-04-220001433714us-gaap:RestrictedStockUnitsRSUMember2019-12-310001433714us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-03-310001433714us-gaap:RestrictedStockUnitsRSUMember2020-03-310001433714us-gaap:PerformanceSharesMember2019-07-012019-09-300001433714us-gaap:PerformanceSharesMember2020-01-012020-03-310001433714us-gaap:EmployeeStockOptionMember2020-01-012020-03-310001433714us-gaap:EmployeeStockOptionMember2019-01-012019-03-310001433714srt:MinimumMemberus-gaap:EmployeeStockOptionMember2020-01-012020-03-310001433714srt:MaximumMemberus-gaap:EmployeeStockOptionMember2020-01-012020-03-310001433714us-gaap:EmployeeStockOptionMember2020-03-310001433714us-gaap:EmployeeStockMember2020-01-012020-03-310001433714us-gaap:CommonClassAMember2020-01-012020-03-310001433714us-gaap:CommonClassBMember2020-01-012020-03-310001433714us-gaap:CommonClassAMember2019-01-012019-03-310001433714us-gaap:CommonClassBMember2019-01-012019-03-310001433714us-gaap:StockCompensationPlanMember2020-01-012020-03-310001433714us-gaap:StockCompensationPlanMember2019-01-012019-03-310001433714us-gaap:EmployeeStockMember2020-01-012020-03-310001433714us-gaap:EmployeeStockMember2019-01-012019-03-310001433714us-gaap:WarrantMember2020-01-012020-03-310001433714us-gaap:WarrantMember2019-01-012019-03-31cslt:employee0001433714us-gaap:SubsequentEventMembercslt:TheProgramMember2020-05-042020-05-040001433714srt:MinimumMemberus-gaap:SubsequentEventMembercslt:TheProgramMember2020-05-040001433714us-gaap:SubsequentEventMembersrt:MaximumMembercslt:TheProgramMember2020-05-040001433714srt:ChiefExecutiveOfficerMemberus-gaap:SubsequentEventMember2020-05-162020-05-160001433714us-gaap:SubsequentEventMembersrt:ChiefFinancialOfficerMember2020-05-162020-05-160001433714us-gaap:SubsequentEventMembersrt:ExecutiveOfficerMember2020-05-162020-05-160001433714srt:MinimumMemberus-gaap:SubsequentEventMembercslt:OtherEmployeesWithSalariesGreaterThan100000Member2020-05-162020-05-160001433714us-gaap:SubsequentEventMembersrt:MaximumMembercslt:OtherEmployeesWithSalariesGreaterThan100000Member2020-05-162020-05-160001433714srt:DirectorMemberus-gaap:SubsequentEventMember2020-05-162020-05-16
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020

or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______ to ______
Commission File Number: 001-36330
CASTLIGHT HEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
26-1989091
(I.R.S. Employer
Identification Number)
 

150 Spear Street, Suite 400
San Francisco, CA 94105
(Address of principal executive offices)
(415) 829-1400
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Class B Common Stock, par value $0.0001 per share CSLT New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
Not applicable

Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of May 5, 2020, there were 35,032,053 shares of the Registrant’s Class A common stock outstanding and 114,484,826 shares of the Registrant’s Class B common stock outstanding.
1

TABLE OF CONTENTS
 
Page
3
3
4
5
6
7
8
17
26
27
28
28
50
52



2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

CASTLIGHT HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(unaudited)
As of
  March 31, 2020 December 31, 2019
Assets
Current assets:
Cash and cash equivalents
$ 37,681    $ 43,017   
Marketable securities
6,009    16,411   
Accounts receivable and other, net 38,073    31,397   
Prepaid expenses and other current assets
5,256    4,645   
Total current assets
87,019    95,470   
Property and equipment, net
6,823    4,856   
Restricted cash, non-current 1,144    1,144   
Deferred commissions 12,653    14,718   
Deferred professional service costs 6,220    6,711   
Intangible assets, net 11,104    12,178   
Goodwill 41,485    91,785   
Operating lease right-of-use assets, net 12,334    13,906   
Other assets
1,900    2,016   
Total assets
$ 180,682    $ 242,784   
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
$ 13,299    $ 19,596   
Accrued expenses and other current liabilities
10,445    10,454   
Accrued compensation
4,305    8,770   
Deferred revenue
13,730    10,173   
Operating lease liabilities 5,430    5,914   
Total current liabilities
47,209    54,907   
Deferred revenue, non-current 588    572   
Debt, non-current 930    1,395   
Operating lease liabilities, non-current 10,618    11,823   
Other liabilities, non-current 1,241    1,213   
Total liabilities
60,586    69,910   
Commitments and contingencies
Stockholders’ equity:
Class A common stock, $0.0001 par value; 200,000,000 shares authorized as of March 31, 2020 and December 31, 2019; 35,032,053 shares and 35,032,053 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
   
Class B common stock, $0.0001 par value; 800,000,000 shares authorized as of March 31, 2020 and December 31, 2019; 114,485,591 shares and 113,177,162 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
11    11   
Additional paid-in capital
631,445    627,899   
Accumulated other comprehensive income 13     
Accumulated deficit
(511,377)   (455,042)  
Total stockholders’ equity 120,096    172,874   
Total liabilities and stockholders’ equity $ 180,682    $ 242,784   
See Notes to Condensed Consolidated Financial Statements.
3

CASTLIGHT HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
 
  Three Months Ended March 31,
  2020 2019
Revenue:
Subscription
$ 38,383    $ 33,806   
Professional services and other 662    1,684   
Total revenue, net 39,045    35,490   
Cost of revenue:
Cost of subscription (1)
10,232    8,166   
Cost of professional services and other (1)
4,241    5,944   
Total cost of revenue
14,473    14,110   
Gross profit
24,572    21,380   
Operating expenses:
Sales and marketing (1)
10,472    9,215   
Research and development (1)
13,822    15,725   
General and administrative (1)
6,576    7,293   
Goodwill impairment
50,300    —   
Total operating expenses
81,170    32,233   
Operating loss
(56,598)   (10,853)  
Other income, net
263    314   
Net loss
$ (56,335)   $ (10,539)  
Net loss per share, basic and diluted $ (0.38)   $ (0.07)  
Weighted-average shares used to compute basic and diluted net loss per share
148,872    143,000   

(1) Includes stock-based compensation expense as follows:
  Three Months Ended March 31,
  2020 2019
Cost of revenue:
Cost of subscription $ 169    $ 219   
Cost of professional services and other 116    265   
Sales and marketing 672    627   
Research and development 1,163    1,704   
General and administrative 1,066    1,162   

See Notes to Condensed Consolidated Financial Statements.
4

CASTLIGHT HEALTH, INC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
  Three Months Ended March 31,
  2020 2019
Net loss $ (56,335)   (10,539)  
Other comprehensive income:
Net change in unrealized gain on available-for-sale marketable securities
11    —   
Other comprehensive income 11    —   
Comprehensive loss $ (56,324)   $ (10,539)  

See Notes to Condensed Consolidated Financial Statements.

5

CASTLIGHT HEALTH, INC
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(unaudited)

  Class A and B Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated
Deficit
Total
Stockholders’
Equity
  Shares Amount
Balances as of December 31, 2019 148,209,215    $ 15    $ 627,899    $   $ (455,042)   $ 172,874   
Vesting of restricted stock units 923,693    —    —    —    —    —   
Issuance of common stock upon exercise of stock options 142,729    —    155    —    —    155   
Issuance of common stock under the ESPP 242,007    —    186    —    —    186   
Stock-based compensation —    —    3,205    —    —    3,205   
Comprehensive loss —    —    —    11    (56,335)   (56,324)  
Balances as of March 31, 2020 149,517,644    $ 15    $ 631,445    $ 13    $ (511,377)   $ 120,096   
Balance as of December 31, 2018 141,927,205    $ 14    $ 609,697    $ —    $ (415,040)   $ 194,671   
Vesting of restricted stock units 967,712    —    —    —    —    —   
Issuance of common stock upon exercise of stock options 1,060,870    —    1,680    —    —    1,680   
Stock-based compensation —    —    4,017    —    —    4,017   
Comprehensive loss —    —    —    —    (10,539)   (10,539)  
Balances as of March 31, 2019 143,955,787    $ 14    $ 615,394    $ —    $ (425,579)   $ 189,829   

See Notes to Condensed Consolidated Financial Statements.

6

CASTLIGHT HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
  Three Months Ended March 31,
  2020 2019
Operating activities:
Net loss $ (56,335)   $ (10,539)  
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,535    1,344   
Goodwill impairment 50,300    —   
Stock-based compensation 3,186    3,977   
Amortization and impairment of deferred commissions 2,383    2,491   
Amortization and impairment of deferred professional service costs 925    969   
Non-cash operating lease expense 1,400    1,282   
Accretion and amortization of marketable securities   (126)  
Changes in operating assets and liabilities:
Accounts receivable and other, net (6,676)   (7,883)  
Deferred commissions (318)   (1,416)  
Deferred professional service costs (416)   (469)  
Prepaid expenses and other assets (494)   (751)  
Accounts payable (7,462)   (849)  
Operating lease liabilities (1,516)   (1,382)  
Accrued expenses and other liabilities 19    (1,304)  
Deferred revenue 3,573    3,495   
Accrued compensation (4,465)   (970)  
Net cash used in operating activities (14,359)   (12,131)  
Investing activities:
Purchase of property and equipment (1,264)   (204)  
Purchase of marketable securities (1,989)   —   
Maturities of marketable securities 12,400    11,453   
Net cash provided by investing activities 9,147    11,249   
Financing activities:
Proceeds from exercise of stock options 155    1,680   
Proceeds from ESPP offering 186    —   
Principal payments on long-term debt (465)   (465)  
Net cash (used in) provided by financing activities (124)   1,215   
Net (decrease) increase in cash, cash equivalents and restricted cash (5,336)   333   
Cash, cash equivalents and restricted cash at beginning of period 44,342    67,330   
Cash, cash equivalents and restricted cash at end of period $ 39,006    $ 67,663   
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents $ 37,681    $ 66,338   
Restricted cash included in Prepaid expenses and other current assets 181    —   
Restricted cash, non-current 1,144    1,325   
Total cash, cash equivalents and restricted cash $ 39,006    $ 67,663   
See Notes to Condensed Consolidated Financial Statements.
7

CASTLIGHT HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Note 1. Organization and Description of Business
Castlight Health, Inc. (“Castlight” or “the Company”) provides health navigation solutions for large U.S. employers and health plans (“customers”) and their respective employees and members (“users”). Castlight’s offerings deliver a personalized and simplified user experience that helps connect individuals with the right provider or available benefit at the right time. Castlight’s navigation offerings have demonstrated measurable results, driving increased levels of user satisfaction and program utilization and lower healthcare costs for its customers and millions of users. The Company was incorporated in the State of Delaware in January 2008. The Company's principal executive offices are located in San Francisco, California.

Note 2. Accounting Standards and Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include Castlight and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. In the opinion of management, the information herein reflects all adjustments, consisting only of normal recurring adjustments except as otherwise noted, considered necessary for a fair statement of results of operations, financial position, stockholders’ equity and cash flows. The results for the interim periods presented are not necessarily indicative of the results expected for any future period. The following information should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 

Other than as described below, there have been no changes to the Company's significant accounting policies described in the Company's Annual Report that have had a material impact on the Company's consolidated financial statements and related notes.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. These estimates include, but are not limited to the determination of:

Variable consideration included in the transaction price of the Company’s contracts with customers;
The standalone selling price of the performance obligations in the Company’s contracts with customers;
Assumptions used in the valuation of certain equity awards; and
Assumptions used in the calculation of goodwill impairment, including the forecast of future cash flows and discount rate.

Actual results could differ from those estimates, and such differences could be material to the Company’s consolidated financial position and results of operations.

Marketable Securities

The Company's marketable securities consist of U.S. agency obligations and U.S. treasury securities, with maturities at the time of purchase of greater than three months. Marketable securities with remaining maturities in excess of one year are classified as non-current. The Company classifies its marketable securities as available-for-sale at the time of purchase based on its intent and are recorded at their estimated fair value. Unrealized gains for available-for-sale securities are recorded in other comprehensive income/loss. Unrealized losses for available-for-sale securities are recorded in other comprehensive income/loss, unless the losses relate to deterioration in credit risk or if it is likely securities will be sold before the recovery of their cost basis. In these cases, the unrealized losses are reported in other income, net in the consolidated statement of operations.
8

CASTLIGHT HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Realized gains and losses are determined based on the specific identification method and are reported in other income, net in the consolidated statements of operations.

Concentrations of Risk and Significant Customers

The Company had one customer, Anthem Inc. ("Anthem"), that accounted for 44% of total revenue during the three months ended March 31, 2020 and 28% of accounts receivable as of March 31, 2020. Additionally, the Company had two customers that each accounted for approximately 11% of accounts receivable as of March 31, 2020.

Recently Adopted Accounting Pronouncements

Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses, and subsequent amendments (“ASC 326”). The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The adoption of this standard did not have a material impact on the Company’s financial statements. The Company will continue to actively monitor the impact of the current coronavirus (“COVID-19”) pandemic on expected credit losses.

Effective January 1, 2020, the Company adopted ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements

The Company considers the applicability and impact of all ASUs issued by the FASB. The Company determined that the ASUs issued by the FASB during the three months ended March 31, 2020 are either not applicable or are expected to have minimal impact on the Company's condensed consolidated financial results.
Note 3. Revenue, Deferred Revenue, Contract Balances and Performance Obligations

The Company sells to customers based in the United States. Starting January 1, 2020, the effective date of the Anthem enterprise license agreement, the Company began treating Anthem as a direct health plan customer rather than a channel partner. As a result, substantially all of the Company's revenues are generated through direct sales.

Deferred revenue as of March 31, 2020 and December 31, 2019 was $14.3 million and $10.7 million, respectively. Contract assets as of March 31, 2020 and December 31, 2019 were $2.7 million and $0.4 million, respectively. The increase in contract assets is primarily due to the Anthem enterprise license agreement.

Revenue of $6.5 million and $11.2 million was recognized during the three months ended March 31, 2020 and 2019, respectively, that was included in the Company’s deferred revenue balances at the beginning of the respective periods.

The Company recorded favorable cumulative catch-up adjustments to revenue of $1.7 million and $1.4 million during the three months ended March 31, 2020 and 2019, respectively, arising from changes in estimates of transaction price.

The aggregate balance of remaining performance obligations from non-cancelable contracts with customers as of March 31, 2020 was $229.2 million. The Company expects to recognize approximately 50% of this balance over the next 12 months, with the remaining balance recognized thereafter. Remaining performance obligations are defined as deferred revenue and amounts yet to be billed for the non-cancelable portion of contracts.


9

CASTLIGHT HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Note 4. Deferred Costs

Changes in the balance of total deferred commissions and total deferred professional service costs during the three months ended March 31, 2020 are as follows (in thousands):

As of December 31, 2019 Expense recognized As of March 31, 2020
Additions
Deferred commissions $ 14,718    $ 318    $ (2,383)   $ 12,653   
Deferred professional service costs    6,711    434    (925)   6,220   
Total deferred commissions and professional service costs
$ 21,429    $ 752    $ (3,308)   $ 18,873   

 These costs are reviewed for impairment quarterly. Impairment charges were $1.1 million for the three months ended March 31, 2020. Impairment charges for the three months ended March 31, 2019 were immaterial.
Note 5. Goodwill and Intangible Assets

Impairment

The Company determined that the significant decline in the U.S. economy as a result of the COVID-19 pandemic, together with the decline in the Company’s stock price, constituted a triggering event, which required the Company to perform interim impairment analyses related to its long-lived assets and goodwill during the first quarter of 2020. The impairment analysis for long-lived assets indicated that the assets were recoverable; therefore, no impairment was recorded. After assessing long-lived assets, the Company performed a goodwill impairment analysis and determined that the fair value of its only reporting unit exceeded its carrying value by approximately $50.3 million. The fair value was determined using the income approach. The Company believes that the income approach is the most reliable indication of fair value since it incorporates future estimated revenues and expenses for the reporting unit that the market approach may not directly incorporate. In addition to future estimated revenue and expenses, the determination of fair value included assumptions related to a discount rate.

The Company will continue to monitor its goodwill on a quarterly basis for indicators of impairment, including but not limited to, further declines in the stock price. Accordingly, there may be future impairments.

Goodwill

The Company’s goodwill relates entirely to the acquisition of Jiff in 2017. As of March 31, 2020, the gross amount of goodwill was $91.8 million and accumulated goodwill impairment was $50.3 million, all of which was recorded in the first quarter of 2020. The goodwill impairment did not involve any cash expenditures.

Intangible assets, net

Identified intangible assets are recorded at their estimated fair values at the date of acquisition and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. Backlog and Other acquired intangible assets were fully amortized and written off during the three months ended March 31, 2020.

The following tables set forth the fair value components of identifiable acquired intangible assets (dollars in thousands):
As of March 31, 2020
Useful Life Gross Accumulated Amortization Net
Customer relationships 6 $ 10,900    $ (4,036)   $ 6,864   
Developed technology 5 10,600    (6,360)   4,240   
Total identifiable intangible assets $ 21,500    $ (10,396)   $ 11,104   

10

CASTLIGHT HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


As of December 31, 2019
Useful Life Gross Accumulated Amortization Net
Customer relationships 6 $ 10,900    $ (3,509)   $ 7,391   
Developed technology 5 10,600    (5,830)   4,770   
Backlog 2.5 1,500    (1,500)   —   
Other acquired intangible assets 1 - 3 900    (883)   17   
Total identifiable intangible assets $ 23,900    $ (11,722)   $ 12,178   

Amortization expense from acquired intangible assets for the three months ended March 31, 2020 and 2019 was $1.1 million and $0.9 million and is included in cost of subscription, sales and marketing, and general and administrative expenses.

Future estimated amortization expense for acquired intangible assets is as follows (in thousands):
Remainder of 2020 $ 3,174   
2021 4,232   
2022 2,642   
2023 1,056   
Total amortization expense $ 11,104   

Note 6. Marketable Securities

Marketable securities consisted of the following (in thousands):

As of March 31, 2020
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. treasury securities $ 2,002    $   $ —    $ 2,005   
U.S. agency obligations 11,644    10    —    11,654   
Money market mutual funds 12,337    —    —    12,337   
25,983    13    —    25,996   
Included in cash and cash equivalents 19,983      —    19,987   
Included in marketable securities $ 6,000    $   $ —    $ 6,009   

As of December 31, 2019
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
U.S. treasury securities $ 13,602    $   $ —    $ 13,603   
U.S. agency obligations 6,400      —    6,401   
Money market mutual funds 8,736    —    —    8,736   
28,738      —    28,740   
Included in cash and cash equivalents 12,329    —    —    12,329   
Included in marketable securities $ 16,409    $   $ —    $ 16,411   

11

CASTLIGHT HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Note 7. Fair Value Measurements
The Company measures its financial assets and liabilities at fair value at each reporting period using a fair value hierarchy that requires that the Company maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Include other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
The fair value of marketable securities included in the Level 2 category is based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. These values were obtained from a third-party pricing service and were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established third party pricing vendors and broker-dealers.
There have been no changes in valuation techniques in the periods presented. There were no significant transfers between fair value measurement levels as of March 31, 2020 and December 31, 2019. As of March 31, 2020 and December 31, 2019, there were no securities within Level 3 of the fair value hierarchy.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above input categories (in thousands):
As of March 31, 2020
Level 1 Level 2 Total
Cash equivalents:
U.S. agency obligations $ —    $ 7,650    $ 7,650   
Money market mutual funds 12,337    —    12,337   
Marketable securities:
U.S. treasury securities —    2,005    2,005   
U.S. agency obligations —    4,004    4,004   
$ 12,337    $ 13,659    $ 25,996   

As of December 31, 2019
Level 1 Level 2 Total
Cash equivalents:
Money market mutual funds $ 8,736    $ —    $ 8,736   
U.S. treasury securities —    3,593    3,593   
Marketable securities:
U.S. agency obligations —    6,401    6,401   
U.S. treasury securities —    10,010    10,010   
$ 8,736    $ 20,004    $ 28,740   
Gross unrealized gains for cash equivalents and marketable securities as of March 31, 2020 and December 31, 2019 were not material.
There were no realized gains or losses during the three months ended March 31, 2020. All of the Company’s securities as of March 31, 2020 and December 31, 2019 mature within one year.  
12

CASTLIGHT HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Note 8. Property and Equipment
Property and equipment consisted of the following (in thousands):
As of
  March 31, 2020 December 31, 2019
Leasehold improvements $ 4,734    $ 2,834   
Computer equipment 8,114    8,126   
Software 1,110    1,110   
Internal-use software 3,878    2,925   
Furniture and equipment 1,668    1,048   
Construction in progress 128    1,164   
Total 19,632    17,207   
Less: accumulated depreciation (12,809)   (12,351)  
Property and equipment, net $ 6,823    $ 4,856   
Depreciation and amortization expense for the three months ended March 31, 2020 and 2019 was $0.5 million and $0.5 million, respectively. Depreciation and amortization are recorded on a straight-line basis.
Note 9. Debt

Term Loan

The Company has a term loan facility (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) that provided for a term loan of approximately $5.6 million (the “Term Loan”). Obligations under the Term Loan accrue interest at a floating per annum rate equal to the greater of (A) the prime rate as published in the money rates section of The Wall Street Journal (“Prime Rate”) minus 1% or (B) 0%. Interest on the Term Loan is payable monthly. The maturity date of the Term Loan is September 1, 2021.

In addition to principal and interest payments, the Company is also required to pay $0.5 million as final payment on the earlier of maturity, termination or prepayment of the Term Loan. The Company accrues for the final payment over the life of the Term Loan using the effective interest method.

The future maturities of the Term Loan by year as of March 31, 2020 are as follows (in thousands):

Remainder of 2020 $ 1,394   
2021(1)
1,395   
Total future maturities of debt 2,789   
Less current maturities(2)
(1,859)  
Debt, non-current $ 930   
(1) Excludes the $0.5 million required to be paid as final payment on the earlier of maturity, termination or prepayment of the Term Loan.
(2) Classified within accrued expenses and other current liabilities on the condensed consolidated balance sheet as of March 31, 2020.

Per the Loan Agreement the Company is subject to certain reporting covenants and the debt obligations are secured by a security interest in the assets of the Company, excluding intellectual property and certain other exceptions. The Company was in compliance with all reporting covenants in the Loan Agreement related to the outstanding principal balance as of March 31, 2020.

On May 5, 2020, the Company entered into the Third Amended and Restated Loan and Security Agreement (the "Amended Loan Agreement") with the Bank. The Amended Loan Agreement amended and restated its existing Loan Agreement. Under the Amended Loan Agreement, the Bank agreed to extend a $25.0 million revolving credit facility to the Company (the “Revolving Line”). Borrowings under the Revolving Line accrue interest at a floating per annum rate equal to the Prime Rate plus 1%, and such interest is payable monthly. The Company may request borrowings under the Revolving Line
13

CASTLIGHT HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


prior to May 4, 2023, on which date the Revolving Line terminates. In relation to the Revolving Line, the Company is subject to certain financial and reporting covenants.

On April 22, 2020, the Company entered into a Paycheck Protection Program Loan (the “PPP Note”) sponsored by the Small Business Administration (the “SBA”) through the Bank, providing for $10.0 million in proceeds. The PPP Note was issued pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Note was scheduled to mature on April 22, 2022, carried an interest rate of 1% per annum, and was subject to the terms and conditions applicable to all loans made pursuant to the Paycheck Protection Program as administered by the SBA under the CARES Act, including the debt forgiveness provisions contained therein. Following additional guidance issued by the SBA on April 23, 2020 that cast doubt on the ability of public companies to qualify for loans under the Paycheck Protection Program, the Company repaid the PPP Note on April 29, 2020.
Note 10. Contingencies
Legal Matters

From time to time, the Company may become subject to other legal proceedings, claims or litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patents or other intellectual property rights. If an unfavorable outcome were to occur in litigation, the impact could be material to the Company’s business, financial condition, cash flow or results of operations, depending on the specific circumstances of the outcome. The Company accrues for loss contingencies when it is both probable that it will incur the loss and when it can reasonably estimate the amount of the loss or range of loss. 
Note 11. Stock Compensation
Restricted Stock Units (“RSUs”) Activity

A summary of unvested restricted stock unit activity for the three months ended March 31, 2020 is as follows:

Number of
Shares
Weighted-
Average
Grant Date Fair Value
Balance as of December 31, 2019 11,615,884    $ 2.44   
Granted 3,534,142    $ 1.21   
Vested (923,693)   $ 2.94   
Forfeited and canceled
(1,679,626)   $ 2.94   
Balance as of March 31, 2020 12,546,707    $ 1.99   

As of March 31, 2020, there was a total of $22.2 million in unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted-average period of approximately 2.8 years.

The Company granted approximately 0.9 million performance stock units ("PSUs") during the third quarter of 2019. The number of shares that will eventually vest depends on achievement of certain performance targets, as determined by the compensation committee of the Company's board of directors. Once the performance is determined, the PSUs, if any, will vest, subject to recipients' continued service, on the later of (i) the attainment of the performance targets and (ii) a year after the grant date. The compensation expense associated with the PSUs is recognized using the accelerated method. For the three months ended March 31, 2020, the Company recognized compensation expense of approximately $0.2 million related to these performance awards.

Stock Option Activity

A summary of stock option activity for the three months ended March 31, 2020 is as follows: 
14

CASTLIGHT HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Options
Outstanding
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value (in thousands)
Balance as of December 31, 2019 7,207,733    $ 1.94    $ 412   
Granted 749,111    $ 1.17   
Exercised (142,729)   $ 1.08   
Forfeited and canceled (344,855)   $ 2.02   
Balance as of March 31, 2020 7,469,260    $ 1.87    $ —   

The total grant-date fair value of stock options granted during the three months ended March 31, 2020 and 2019 was $0.6 million and $0.4 million, respectively.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-valuation model with the following assumptions:

  Three Months Ended March 31,
  2020 2019
Volatility 73% 57%
Expected life (in years)
6.11 - 6.12
6.06
Risk-free interest rate
0.84% - 1.47%
2.57%
Dividend yield —% —%

As of March 31, 2020, the Company had $3.9 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 3.5 years. 
Employee Stock Purchase Plan
The Company used the following Black-Scholes assumptions in estimating the fair value of the shares under the 2014 Employee Stock Purchase Plan (the “ESPP”):

Three Months Ended March 31, 2020
Volatility 71%
Expected life equals length of offering period (in years) 0.5
Risk-free interest rate 0.95%
Dividend yield —%

Stock-based compensation expense related to the ESPP was immaterial for the three months ended March 31, 2020. As of March 31, 2020, the unrecognized stock-based compensation expense related to the ESPP was also immaterial, and is expected to be recognized over the remaining term of the offering period.
Note 12. Income Taxes

The effective tax rate for the three months ended March 31, 2020 and 2019 was zero percent, primarily as a result of the estimated tax loss for the year and the change in valuation allowance. At March 31, 2020, all unrecognized tax benefits are subject to a full valuation allowance and, if recognized, will not affect the effective tax rate.
15

CASTLIGHT HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Note 13. Net Loss per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including outstanding stock options and warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.

Net loss is allocated based on the contractual participation rights of the Class A and Class B common stock as if the earnings for the year have been distributed. As the liquidation and dividend rights are identical, the net loss is allocated on a proportionate basis.

The following table presents the calculation of basic and diluted net loss per share for the Company’s common stock (in thousands, except per share data):


  Three Months Ended March 31,
  2020 2019
Class A Class B Class A Class B
Net loss $ (13,257)   $ (43,078)   $ (2,741)   $ (7,798)  
Weighted-average shares used to compute basic and diluted net loss per share
35,032    113,840    37,189    105,811   
Basic and diluted net loss per share
$ (0.38)   $ (0.38)   $ (0.07)   $ (0.07)  

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 March 31,
  2020 2019
Stock options and restricted stock units
20,016    14,477   
Shares issuable under the ESPP 297    —   
Warrants 115    115   
Total 20,428    14,592   

Note 14. Subsequent Event

On May 4, 2020, the Company announced its intent to undertake a program to reduce its workforce as part of the Company’s efforts to respond to the COVID-19 pandemic and ensure longer-term financial stability for the Company in light of the ongoing economic challenges resulting from COVID-19 and its impact on the Company’s business (the “Program”). The Program involves the termination of approximately 60 employees, representing 13% of the Company’s headcount. Under the Program, the Company estimates that it will incur charges of approximately $1.8 million to $2.2 million, which will be related to employee severance and benefits costs, all of which are cash expenditures, the majority of which the Company expects to incur in the second quarter of 2020.

In addition, as part of its cost reductions in light of the COVID-19 pandemic, the Company has implemented reductions in base salary for its employees, effective May 16, 2020, consisting of a 30% reduction for the Company’s Chief Executive Officer, 25% reduction for the Company’s Chief Financial Officer, 20% reduction for members of the Company’s executive leadership team, and tiered reductions of 10-15% for other employees with salaries above $100,000, which the Company anticipates will last at least six months, and will be re-evaluated at that time. Members of the Company’s board of directors have also voluntarily agreed to forego 50% of their cash compensation for the duration of the employee salary reductions.
16

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding the impact our future results of operations, financial position and cash flows, our business strategy, expansion opportunities, results and outcomes for customers and users, plans and our objectives for future operations, and the impact of the coronavirus ("COVID-19") pandemic on our business and the U.S. and global economies are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “would,” “could,” “should,” “intend” and “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations.
Overview

Castlight Health, Inc. (“Castlight”, “the Company” or “we”) provides health navigation solutions for large U.S. employers and health plans (“customers”) and their respective employees and members (“users”). Castlight’s offerings deliver a personalized and simplified user experience that helps connect users with the right provider or available benefit at the right time. Castlight’s navigation offerings have demonstrated measurable results, driving increased levels of user satisfaction and program utilization and lower healthcare costs for its customers and millions of users.

The foundation of Castlight’s solutions is its proprietary single stack software-as-a-service platform. We believe our platform is unique in its:

Breadth and depth of data and partner integrations across the healthcare ecosystem;
Personalization engine that leverages data from these integrations to customize each user experience and help steer users to the right benefits and providers;
Comprehensive coverage across a user’s available wellness, physical health and behavioral health benefits; and
Ability to engage a user through digital (web, mobile app) and high-touch (telephonic) communication modes.

Our platform’s services-oriented architecture enables us to extend our technology for use beyond our own applications. This enables us to serve health plans and other entities seeking to leverage our Company’s technology within their own member-facing applications or user touch points.

We sell our platform as a suite of branded and white-labeled digital health navigation mobile applications and web services primarily to large, self-insured U.S. employers. We also sell branded product offerings through our direct sales force and partnerships with large benefits consultants, with a focus on serving large U.S. employers.

In July 2019, we expanded our strategy to focus on health plans as a customer and to package our products to support user experiences beyond those of Castlight-powered websites and applications. Specifically, we seek to leverage our white-
17

labeled health navigation offering and our platform’s services-oriented architecture to power health navigation delivered through third-party digital interface, such as a health plan’s existing member app or call centers.

Since this strategic expansion, we have begun demonstrating proof points for our expanded strategy, including:

In October 2019, we announced an enterprise license agreement with Anthem, Inc. (“Anthem”) that provides Anthem with access to key components of our platform. We are seeking opportunities to replicate this model with other health plans, such as U.S. regional health plans.
In late 2019, we introduced a pilot of our high-touch navigation offering – Castlight Care Guides – as a supplemental service for our large employer customers. Care Guides will support Castlight users by providing high touch channels for health navigation that leverages the same core technology powering our digital navigation platform. We believe Castlight Care Guides will generate incremental user engagement and healthcare cost savings for our customers and users over time.

In December 2019, a strain of coronavirus was reported in Wuhan, China, and began to spread globally, including to the United States and Europe, in the following months. The World Health Organization has declared COVID-19 to be a pandemic and a public health emergency of international concern. The full impact of the COVID-19 outbreak is inherently uncertain at the time of this report. The COVID-19 outbreak has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. As COVID-19 has spread, it has significantly impacted the health and economic environment around the world and many governments have closed most public establishments, including restaurants, workplaces and schools. Our health plan and corporate customers may be affected by the closure of offices, manufacturing sites, or country borders, among other measures being put in place around the world. Consequent increases in layoffs during the shutdown are having, and will continue to have, a negative impact on the demand for goods through global supply chains and production capacity, which affects the supply of goods for sale, and the ability to transport such goods. A negative impact on our customers may cause them to request extended payment terms, delayed invoicing, higher discounts, lower renewal amounts, delayed buying decisions or cancellations. Likewise, because we typically charge on a per-employee-per-month basis, if our current customers reduce their own workforces in response to the pandemic or otherwise, we could experience a corresponding reduction in revenue based on renewal or audit date in the customer's contract. The inability to travel and conduct face-to-face meetings can also make it more difficult to sell to our current and prospective customers for new business generation. Any of these circumstances will potentially have a negative impact on our financial results and liquidity in fiscal 2020.

As for our own business, the COVID-19 pandemic has caused us to modify our business practices (including but not limited to curtailing or modifying employee travel, moving to full remote work including our call center function, and cancelling physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

The extent of the impact of the COVID-19 on our future liquidity and operational performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers' operations and the impact to our sales and renewal cycles.

Castlight was incorporated in the State of Delaware in January 2008. Our principal executive offices are located in San Francisco, California.
Key Factors Affecting Our Performance

Sales of Products. Our revenue growth rate and long-term profitability are affected by our ability to sell products to new and existing customers, directly and through our channel partners. Additionally, we believe that there is a significant opportunity to sell subscriptions to add-on products as our customers become more familiar with our offering and seek to address additional needs.

Renewals of Customer Contracts. We believe that our ability to retain our customers and expand their subscription revenue growth over time will be an indicator of the stability of our revenue base and the long-term value of our customer relationships.

18

Channel Partnerships. We have relationships with channel partners which complement our direct sales capabilities. These relationships allow deeper penetration into our market and enable us to promote our health benefits platform and products to create customer cross-sell opportunities.

Ecosystem Partnerships: We have relationships with digital health partners that integrate with our platform to provide a more streamlined experience for our customers and users. We also have many third-party benefit solutions integrated with our products to enable simplified procurement and effortless access to these programs to our users. We believe these partnerships enable a single user experience that is essential to drive engagement and increase user satisfaction.

Implementation Timelines. Our ability to convert backlog into revenue and improve our gross margin depends on how quickly we complete customer implementations. Our implementation timelines vary from customer to customer 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. Our implementation timelines for our products are typically three to 12 months after entering into an agreement with a customer.

Professional Services Model. We believe our professional services capabilities support the adoption of our subscription offerings. As a result, our sales efforts have been focused primarily on our subscription offering, rather than the profitability of our professional services business. Our professional services are generally priced on a fixed-fee basis and the costs incurred to complete these services, which consist mainly of personnel-related costs, have been greater than the amount charged to the customer. We also concluded that our implementation services are not distinct for accounting purposes. Accordingly, we recognize implementation services revenue in the same manner as the associated subscription revenue, which is recognized on a straight-line basis, ratably over the contract term.

Seasonality. We have historically observed seasonality related to employee benefits cycles as a significantly higher proportion of our customers enter into new subscription agreements with us in the second half of the year, compared to the first half of the year. As we continue to leverage our channel relationships and expand our business, there is no assurance this seasonality will continue. The impact from any seasonality in our new customer agreements is not immediately apparent in our revenue because we do not begin recognizing revenue from new customer agreements until we have implemented our offering, based on the implementation timelines discussed above.

Revenue recognized in any quarter is primarily from customer agreements entered into in prior quarters. In addition, the mix of customers paying monthly, quarterly, or annually varies from quarter to quarter and impacts our deferred revenue balance. As a result of variability in our billing and implementation timelines, the deferred revenue balance does not represent the total value of our customer contracts, nor do changes in deferred revenue serve as a reliable indicator of our future subscription revenue.
Key Business Metrics
We review a number of operating metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, and make strategic decisions.

Signed Annual Recurring Revenue ("ARR")
As of
March 31, 2020 December 31, 2019
 (in millions)
Signed Annual Recurring Revenue $ 142.4    $ 147.0   

Revenue recognized in any quarter is largely derived from customer agreements signed in prior quarters. Accordingly, management measures sales performance and forecasts future subscription revenue based on signed Annual Recurring Revenue. ARR is a forward-looking metric based on contractual terms in existence as of the applicable ARR measurement date and is subject to change resulting from a number of factors including, but not limited to, addition of new customers, changes in user counts, terminations or non-renewals, renewal terms as well as upsells and cross-sells. As discussed above, we begin recognizing revenue from new customer agreements when we have implemented our offering, which can take from approximately three to 12 months after entering into an agreement with a customer.

19

ARR represents the annualized value of subscription revenue under contract with customers at the end of a quarter, which we refer to for this purpose as a measurement date. To calculate ARR, we first calculate the annualized subscription value for each signed customer (whether implemented or not), as of the applicable measurement date, by multiplying the monthly contract value of the subscription services under contract by 12. We exclude from this calculation any customers that have provided us with formal notice of termination or non-renewal as of the measurement date. ARR does not take into account the (i) potential for customers to terminate, or decline to renew, their agreements with us, (ii) achievement of non-recurring or yet-to-be-earned performance guarantees, (iii) one-time engagement bonuses included within our customer contracts or (iv) revenues related to professional services, such as implementation and communications services. ARR is not determined in reference to GAAP.

As of March 31, 2020, ARR totaled $142.4 million compared to $147.0 million as of December 31, 2019. The decrease of approximately 3% is primarily attributable to churn, partially offset by new customers and renewals.

Annual Net Dollar Retention Rate
Year Ended December 31,
2019 2018
Annual Net Dollar Retention Rate 94  % 82  %

We assess our performance on customer retention by measuring our Annual Net Dollar Retention rate (“NDR”). We believe that our ability to retain our customers and expand their subscription revenue growth over time will be an indicator of the stability of our revenue base and the long-term value of our customer relationships. Our NDR provides a measurement of our ability to increase revenue across our existing customer base through expansion of our additional products to existing customers, increases in user counts for existing customers and customer renewals, as offset by terminations or pricing changes. The addition or loss of a significant customer or customers during the calendar year can have a significant impact on NDR. We calculate NDR for a given period as the aggregate annualized subscription contract value as of the last day of that year from those customers that were also customers as of the last day of the prior year, divided by the aggregate annualized subscription contract value from all customers as of the last day of the prior year. In calculating NDR, we exclude one-time fees. NDR does not include subscriptions by new customers contracted since the end of the most recently completed year. We observed an annual net dollar retention rate of 94% and 82% for our signed customer base, for the years ended December 31, 2019 and 2018, respectively. The NDR of 94% at the end of 2019 was primarily due to churn, partially offset by our expanded agreement with Anthem, upsells and cross-sells.

20

Components of Results of Operations
Revenue

We generate revenue from subscription fees from customers for access to the products they select. We also earn revenue from professional services primarily related to the implementation of our offering, including extensive communications support to drive adoption by our customers’ employees and their dependents, products sold through our online marketplace and add-on subscription products made available from our other ecosystem partners.
Our subscription fees are based primarily on the number of users that employers identify as eligible to use our offering, which typically includes all of our customers’ employees and adult dependents that receive health benefits.
Typically, we recognize subscription fees on a straight-line basis ratably over the contract term beginning when our products are implemented and ready for launch. Our customer agreements generally have a term of three years. We generally invoice our customers in advance on a monthly, quarterly or annual basis. Amounts that have been invoiced are initially recorded as deferred revenue. Amounts that have not been invoiced and the related revenues have been recognized are reflected as contract assets, recorded as accounts receivable in our condensed consolidated financial statements.

As a result of variability in our billing terms, the deferred revenue balance does not represent the total value of our customer contracts, nor do changes in deferred revenue serve as a reliable indicator of our future subscription revenue in a given period.
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, bonuses, benefits and stock-based compensation), hosting costs of our cloud-based service, cost of subcontractors, expenses for service delivery (which includes call center support), amortization of internal-use software, depreciation of owned computer equipment and software, amortization of intangibles related to developed technology and backlog, and allocated overhead.

Cost of professional services and other revenue consists primarily of employee-related expenses (including salaries, bonuses, benefits and stock-based compensation) associated with these services, the cost of subcontractors, travel costs and allocated overhead. 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.

Our cost of subscription revenue is expensed as we incur the costs. The cost of professional services and other revenue, to the extent they are incurred and are directly attributable to fulfillment of performance obligations under a customer contract, are deferred and amortized over the benefit period of five years.

Operating Expenses

Operating expenses consist of sales and marketing, research and development and general and administrative expenses.
Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses (including salaries, sales commissions and bonuses, benefits and stock-based compensation), travel-related expenses, marketing programs, amortization of intangibles related to customer relationships and allocated overhead. All commissions earned by our sales force and third party referral fees are deferred and amortized generally over a period of five years.

Research and Development. Research and development expenses consist primarily of employee-related expenses (including salaries, bonuses, benefits and stock-based compensation), costs associated with subcontractors and allocated overhead.
General and Administrative. General and administrative expenses consist primarily of employee-related expenses (including salaries, bonuses, benefits and stock-based compensation) for finance and accounting, legal, human resources and management information systems personnel, legal costs, professional fees, other corporate expenses, acquisition-related costs, and allocated overhead.
21

Overhead Allocation. Expenses associated with our facilities and IT costs are allocated between cost of revenues and operating expenses based on employee headcount determined by the nature of work performed.
Results of Operations

Outlook

There are many uncertainties regarding the current COVID-19 pandemic, and we are closely monitoring the impact of the pandemic on all aspects of our business, including how it will impact our customers, employees, vendors, business partners and communities. During these uncertain times, we have used our core technology to help users, customers and the community to navigate through the COVID-19 pandemic. The Castlight platform has supported our customers with COVID-19 education and communication of healthcare coverage changes, analytics to identify and support vulnerable populations and provided faster access to free ecosystem resources. We have also provided our symptom checker and COVID-19 testing site finder to the community at no charge, which is being used to power some well-known public resources nationwide. We believe Castlight is positioned to help the country to return to work through our efforts on testing and our relationships with large employers.

While we currently cannot predict the precise impact of the pandemic on our financial position and operating results with any level of certainty, we do expect that the pandemic will create some level of headwind for our business, as discussed above in "—Overview." We expect to continue to assess the evolving impact of the COVID-19 pandemic and intend to make adjustments to our responses accordingly.

During the first quarter of 2020, we recorded a $50.3 million non-cash goodwill impairment charge as a result of our reduced market capitalization and the impact of COVID-19 on the U.S. economy at large. See Note 5 - Goodwill and Intangible Assets to the condensed consolidated financial statements for additional information.

On May 4, 2020, the Company announced its intent to undertake a program to reduce its workforce as part of the Company’s efforts to respond to the COVID-19 pandemic and ensure longer-term financial stability for the Company in light of the ongoing economic challenges resulting from COVID-19 and its impact on the Company’s business. In addition, as part of its cost reductions in light of the COVID-19 pandemic, the Company has implemented reductions in base salary for its employees, effective May 16, 2020. See Note 14 - Subsequent Event to the condensed consolidated financial statements for additional information.
The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenue for each of the periods indicated:
Three Months Ended March 31,
2020 2019
Revenue:
Subscription 98  % 95  %
Professional services and other % %
Total revenue, net 100  % 100  %
Cost of revenue:
Cost of subscription 26  % 23  %
Cost of professional services and other 11  % 17  %
Total cost of revenue 37  % 40  %
Gross margin percentage 63  % 60  %
Operating expenses:
Sales and marketing 27  % 26  %
Research and development 35  % 44  %
General and administrative 17  % 21  %
Goodwill impairment 129  % —  %
Total operating expenses 208  % 91  %
Operating loss (145) % (31) %
Other income, net % %
Net loss (144) % (30) %
22

Revenue 
Three Months Ended March 31,
2020 2019 % Change $ Change
(In thousands, except percentages)
Revenue:
Subscription $ 38,383    $ 33,806    14% $ 4,577   
Professional services and other 662    1,684    (61)% (1,022)  
Total revenue, net $ 39,045    $ 35,490    10% $ 3,555   

Subscription revenue for the three months ended March 31, 2020 increased by $4.6 million, or 14%, primarily due to the Anthem enterprise license agreement, customer launches, and a significant cancellation fee for one customer, partially offset by customer terminations. Professional services and other revenue decreased primarily due to lower implementation activities in the three months ended March 31, 2020.

Costs and Operating Expenses

Three Months Ended March 31,
2020 2019 % Change $ Change
(In thousands, except percentages)
Cost of revenue:
Subscription $10,232    $ 8,166    25  % $ 2,066   
Professional services and other 4,241    5,944    (29) % (1,703)  
Total cost of revenue $ 14,473    $ 14,110    % $ 363   
Gross margin (loss) percentage:
Subscription 73  % 76  %
Professional services and other (541) % (253) %
Total gross margin 63  % 60  %
Gross profit $ 24,572    $ 21,380    15  % $ 3,192   
Cost of subscription revenue for the three months ended March 31, 2020 increased by $2.1 million, or 25%, primarily due to increases of $1.0 million of employee-related expenses and $0.9 million of third-party contractor and professional service fees.
Cost of professional services revenue for the three months ended March 31, 2020 decreased by $1.7 million or 29%, primarily due to a decrease of $2.2 million of employee-related expenses, partially offset by an increase of $0.3 million of third-party contractor and professional service fees.

Gross margin for the three months ended March 31, 2020 increased primarily due to revenue increase of 10% compared to a 3% increase in the associated costs.

Sales and Marketing
 
Three Months Ended March 31,
2020 2019 % Change $ Change
(In thousands, except percentages)
Sales and marketing $ 10,472    $ 9,215    14  % $ 1,257   

Sales and marketing expense for the three months ended March 31, 2020 increased by $1.3 million, or 14%, primarily due to an increase of $1.2 million of employee-related expenses.

23

Research and Development
Three Months Ended March 31,
2020 2019 % Change $ Change
(In thousands, except percentages)
Research and development $ 13,822    $ 15,725    (12) % $ (1,903)  

Research and development expense for the three months ended March 31, 2020 decreased by $1.9 million, or 12%, primarily due to a decrease of $1.4 million of employee-related expenses.


General and Administrative
Three Months Ended March 31,
2020 2019 % Change $ Change
(In thousands, except percentages)
General and administrative $ 6,576    $ 7,293    (10) % $ (717)  

General and administrative expense for the three months ended March 31, 2020 decreased by $0.7 million, or 10%, primarily due to a decrease in legal costs.

24

Liquidity and Capital Resources
 
Three Months Ended March 31,
2020 2019
(In thousands)
Net cash used in operating activities $ (14,359)   $ (12,131)  
Net cash provided by investing activities 9,147    11,249   
Net cash (used in) provided by financing activities (124)   1,215   
Net (decrease) increase in cash, cash equivalents and restricted cash $ (5,336)   $ 333   
As of March 31, 2020, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $43.7 million, which were primarily held for working capital purposes. Our securities are comprised of U.S. agency obligations, U.S. treasury securities and money market funds.

Since our inception, we have financed our operations primarily through sales of equity securities and receipts from our customers. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, new customer acquisitions, subscription renewal activity, the timing and extent of spending to support development efforts, the introduction of new and enhanced service offerings and the continuing market acceptance of our cloud-based subscription services. Although we currently are not a party to any agreement and do not have any understanding with any third parties with respect to potential investments in, or acquisitions of, businesses or technologies, we may in the future enter into these types of arrangements.

We process vendor payments using a financial institution's credit card program, which carries a $20.0 million limit. We pay the financial institution monthly based on the terms of the credit card program.

On May 5, 2020, we entered into the Third Amended and Restated Loan and Security Agreement (the "Amended Loan Agreement") with Silicon Valley Bank (the "Bank"). Under the Amended Loan Agreement, the Bank agreed to extend a $25.0 million revolving credit facility (the “Revolving Line”) to us. We may request borrowings under the Revolving Line prior to May 4, 2023, on which date the Revolving Line terminates. See Note 9 - Debt to the condensed consolidated financial statements for additional information.

We may be required to seek additional equity or debt financing in the future. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.
Operating Activities

Cash used in operating activities for the three months ended March 31, 2020 and 2019 was $14.4 million and $12.1 million, respectively. Cash used in operations reflected our net loss of $56.3 million for the three months ended March 31, 2020, adjusted by $59.7 million in non-cash expenses, including goodwill impairment of $50.3 million, stock-based compensation of $3.2 million, amortization of deferred costs of $3.3 million, depreciation and amortization of $1.5 million and non-cash operating lease expense of $1.4 million. Uses of cash included an increase in accounts receivable of $6.7 million, primarily as a result of the timing of billings and collections. Other uses of cash included an increase in deferred costs of $0.7 million, an increase in other assets of $0.5 million, payments of operating lease liabilities of $1.5 million, a decrease in accounts payable of $7.5 million, primarily due to timing of payments and vendor invoicing, and a decrease in accrued compensation of $4.5 million primarily due to payout of 2019 bonuses. These uses of cash were partially offset by an increase in deferred revenue of $3.6 million.
Investing Activities
25

Cash provided by investing activities for the three months ended March 31, 2020 and 2019 was $9.1 million and $11.2 million, respectively. Net cash provided by investing activities during the three months ended March 31, 2020 was attributable to $10.4 million of maturities net of purchases of marketable securities, partially offset by $1.3 million of purchases of property and equipment.
Financing Activities 

Cash used in financing activities was $0.1 million for the three months ended March 31, 2020 and cash provided by financing activities was $1.2 million for the three months ended March 31, 2019. Net cash used in financing activities during the three months ended March 31, 2020 was due to payments on long-term debt of $0.5 million, partially offset by proceeds from exercise of employee stock options of $0.2 million and proceeds from ESPP offering of $0.2 million.
Contractual Obligations and Commitments
Our principal commitments primarily consist of debt obligations and lease obligations for office space and data centers. Our existing lease agreements provide us with the option to renew and generally provide for rental payments on a graduated basis. Our future operating lease obligations would change if we entered into additional operating lease agreements as we expand our operations and if we exercised these options. Contractual agreements represent future cash commitments and liabilities under agreements with third parties and exclude purchase orders for goods and services. See Note 9 – Debt to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of our borrowings. There were no other material changes in our contractual obligations from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019.

Other than our borrowings described in Note 9 - Debt and lease obligations, we do not have any other debt arrangements. We do not have any material non-cancelable purchase commitments as of March 31, 2020.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.
Critical Accounting Policies and Estimates

There were no significant changes to our critical accounting policies during the three months ended March 31, 2020, as described in our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
We had cash, cash equivalents and marketable securities totaling $43.7 million as of March 31, 2020 and $59.4 million as of December 31, 2019. These are invested primarily in U.S. agency obligations, U.S. treasury securities and money market funds. The cash and cash equivalents are held for working capital and other general corporate purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. All our investments are denominated in U.S. dollars.
Our cash equivalents are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our securities as “available for sale,” no gains or losses are
26

recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. Our fixed-income portfolio is subject to interest rate risk.
An immediate increase or decrease of 100-basis points in interest rates would result in an immaterial change in the market value of our investments as of March 31, 2020. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.

We also have interest rate exposure as a result of our borrowings as described in Note 9 – Debt to the condensed consolidated financial statements. We currently do not hedge this risk. As of March 31, 2020, we had $2.8 million of borrowings outstanding under the term loan. Borrowings outstanding under the term loan are subject to variable interest rates based on the prime rate as published in the money rates section of The Wall Street Journal. Changes in the prime rate will affect the interest on borrowings under the loan agreement. However, a 50-basis point increase in the interest rate on the term loan would not materially increase interest expense during 2020.
Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Our management recognizes that there are inherent limitations in the effectiveness of any internal control and that effective internal control over financial reporting may not prevent or detect misstatements. In addition, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

Based on our management’s evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2020, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are continually monitoring the COVID-19 pandemic to minimize any impact of the situation on the design and operating effectiveness of our internal controls.
27

Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of legal proceedings, see Note 10 - Contingencies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

From time to time, we may become subject to other legal proceedings, claims or litigation arising in the ordinary course of business. We are not presently a party to any other legal proceedings that in the opinion of our management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.
Item 1A. Risk Factors

The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occur, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the market price of our Class B common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
We rely on Anthem for a substantial portion of our sales, and if our relationships with Anthem, or others, are unsuccessful our sales results would be adversely affected and the growth of our business would be harmed.
        Our sales strategy relies on relationships we have developed with Anthem as well as relationships we have built or are working to build with other health plans, benefits consultants, brokers and other industry participants. We are continuing to invest in, and expect to continue to increase our reliance on, these types of relationships to access customers and grow our overall sales. However, there can be no assurance that these relationships will be successful, or will result in access to additional users or growth in sales. These relationships do not always meet our expectations and could fail for a variety of reasons, including changes in our partners’ business priorities, insufficient or misaligned incentives for our partners to assist us with sales, competition, or other factors.

In October 2019, we entered into new agreements with Anthem, Inc. (“Anthem”), whereby various services previously provided to Anthem’s customers on a disaggregated basis under separate service order forms have been consolidated under a Software-as-a-Service Agreement (the “SaaS Agreement”). Under the SaaS Agreement, Anthem is committed to paying us significant annual license fees for calendar years 2020 and 2021, and the first six months of 2022, which could constitute a substantial amount of our revenue for such periods. If the SaaS Agreement were to be terminated by Anthem under its terms, or if Anthem breaches the terms of the SaaS Agreement, our business could be materially and adversely harmed.

Our current growth strategy includes investing resources in pursuing relationships with other health plans to leverage what we have experienced with Anthem. Developing these relationships will take time, require significant upfront investment, and divert our attention from other opportunities. There is no guarantee that our efforts in this regard will yield additional relationships, and even if it does, there is no guarantee that we will receive a return on our investments.  

In addition, our reliance on sales through, or facilitated by, third parties could put downward pressure on the total revenue we are able to generate, and could result in existing customers electing to use alternative or lower-functionality versions of our products that we may elect to provide through such relationships. The concentration of a material portion of business with any given partner could also create tensions with other companies with which we do business, including health plans on whom we rely to receive data and offer our services.

        Certain relationships we will enter, or have entered, will require substantial investments of our resources to support these initiatives. We plan to invest resources into developing products that are targeted to the needs of current partners or potential future partners. There can be no assurance that the investments we make to develop and support these relationships, or the effort required to do so or the products resulting from those efforts, will provide a positive return on our investment in the
28

near term, or at all.  If any of these events materialize, our business and results of operations could be materially adversely affected.

The COVID-19 pandemic has had a material impact on the U.S. and global economies and could have a material adverse impact on our employees, suppliers, customers and users, which could adversely and materially impact our business, financial condition and results of operations.

The World Health Organization has declared the outbreak of the novel coronavirus that causes COVID-19 disease a pandemic and public health emergency of international concern. In March 2020, the President of the United States declared a State of National Emergency due to the COVID-19 outbreak. In addition, many jurisdictions have limited, and are considering to further limit, social mobility and gathering. As the COVID-19 pandemic develops, governments (at national, state and local levels), corporations and other authorities may continue to implement restrictions or policies that could adversely impact consumer spending, global capital markets, the global economy and our stock price.

The COVID-19 pandemic has caused us to modify our business practices (including but not limited to curtailing or modifying employee travel, moving to full remote work including our call center function, and cancelling physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. In the first quarter of 2020, the shelter-in-place orders stemming from the COVID-19 pandemic have caused disruptions to our and many of our customers’ corporate operations. A prolonged disruption or any further unforeseen delay in our operations or within any of our business activities could continue to result in, increased costs and reduced revenue. We could also be adversely affected if government authorities impose additional restrictions on public gatherings, human interactions, mandatory closures, seek voluntary closures, restrict hours of operations or impose curfews, restrict the import or export of products or if suppliers issue mass recalls of products that affect us or our customers' businesses in a meaningful way. Moreover, there is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities. Neither we, nor our customer or users, can say with certainty how long these measures will remain in place, or what the total impact on our respective businesses may be.

The COVID-19 pandemic may adversely affect our customers’ operations, our employees and our employee productivity. It may also impact the ability of our health plan and corporate customers, and their suppliers, to operate and fulfill their respective contractual obligations, and result in an increase in costs, delays or disruptions in performance. These supply chain effects, and the direct effect of the virus and the disruption on our employees and operations, may negatively impact both our ability to meet customer demand and our revenue and profit margins. Our employees, in many cases, are working remotely and using various technologies to perform their functions. We might experience delays or changes in customer demand, particularly if customer funding priorities change or if our buyers' budgets are cut which may cause terminations, non-renewals or price degradation. We may be required to increase infrastructure spending or other spending necessary to support a fully-remote workforce. Additionally, the disruption and volatility in the global and domestic capital markets may increase the cost of capital and limit our ability to access capital. Both the health and economic aspects of the COVID-19 virus are highly fluid and the future course of each is uncertain. For these reasons and other reasons that may come to light if the COVID-19 pandemic and associated protective or preventative measures expand, we may experience a material adverse effect, either directly or indirectly through our customers, on our business operations, revenues and financial condition; however, its ultimate impact is highly uncertain and subject to change.

If our new products and services are not adopted by our customers, or if we fail to continue to innovate and develop new products and services that are adopted by customers, then our revenue and operating results will be adversely affected.
In prior years, we derived a substantial majority of our revenue from sales of our legacy care guidance platform, and our continued growth depends in part on our ability to successfully develop and sell new products and services to new and existing customers. We continue to introduce a number of products and cross-sells, such as our latest offerings of Castlight Complete, Care Guidance Navigator, Wellbeing Navigator, Castlight Elevate and Castlight Care Guides, as well as health plan solutions. We have also invested, and will continue to invest, significant resources in research and development to enhance our existing offering and introduce new high-quality products and services. If existing customers are not willing to make additional payments for such new products, or if new customers do not value such new products, our business and operating results will be harmed. If we are unable to predict employer preferences or our industry changes, or if we are unable to modify our offering and services on a timely basis, we might lose customers. Our operating results would also suffer if our innovations are not responsive to the needs of our customers, appropriately timed with market opportunity or effectively communicated and brought to market. 
29

If our existing customers, including health plan customers, do not continue or renew their agreements with us, renew at lower fee levels or decline to purchase additional products and services from us, our business and operating results will suffer.
        We expect to derive a significant portion of our revenue from renewal of existing customer agreements, including existing and future agreements with health plan customers or prospective customers, and sales of additional products and services to existing customers. Revenue recognized in any quarter is largely derived from customer agreements signed in prior quarters. As a result, achieving a high renewal rate of our customer agreements and selling additional products and services is critical to our future operating results.

        We may experience significantly more difficulty than we anticipate in renewing existing customer agreements or in renewing them upon favorable terms. Factors that may affect the renewal rate for our offering, terms of those renewals, and our ability to sell additional products and services include:

the price, performance and functionality of our offering;
our customers’ user counts and benefit design features;
the availability, price, performance and functionality of competing or alternative solutions;
the potential for customers that are able to access lower-functionality versions of our offering that we provide through health plans or other channel partners to opt to use the lower-functionality versions of our offering;
the potential for customers to use competing solutions developed by health plans themselves;
our ability to develop complementary products and services;
our continued ability to access the pricing and claims data necessary to enable us to deliver reliable data in our cost estimation and care guidance offering to customers;
the stability, performance and security of our hosting infrastructure and hosting services;
changes in health care laws, regulations or trends; and
the business environment of our customers, in particular, headcount reductions by our customers (which may be further implicated by the current COVID-19 pandemic), which affect subscription fees we are able to bill for.

        We enter into master services agreements with our customers. These agreements generally have stated terms of three years. Our customers have no obligation to renew their subscriptions for our offering after the term expires. In addition, our customers may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these customers. Factors that are not within our control may contribute to a reduction in our contract revenue. For instance, our customers may reduce their number of employees, which would result in a corresponding reduction in the number of employee users eligible for our offering and thus a lower aggregate monthly services fee. Our future operating results also depend, in part, on our ability to sell new products and services to our existing customers. If our direct or indirect customers fail to renew their agreements, renew their agreements upon less favorable terms or at lower fee levels, or decline to purchase new products and services from us, our revenue may decline or our future revenue may be constrained.
        
        In addition, a significant number of our customer agreements allow customers to terminate such agreements for convenience at certain times, typically with one to three months advance notice. We typically incur expenses associated with integrating a customer’s data into our health care database and related training and support prior to recognizing meaningful revenue from such customer. Customer subscription revenue is not recognized until our products are implemented for launch, which is generally from three to 12 months from contract signing. If a customer terminates its agreement early and revenue and cash flows expected from a customer are not realized in the time period expected or not realized at all, our business, operating results and financial condition could be adversely affected.

Our growth depends in part on the success of our strategic relationships with third parties.
        In order to grow our business, we anticipate that we will continue to depend on our relationships with third parties, including Anthem, Inc. In the future, this could include other health plans as well. We have continued to expand our ongoing relationship with Anthem, including Anthem’s offering of Engage, a Castlight-powered health navigation platform, and our development and support of the base technology underlying Anthem’s core care guidance offering. The culmination of these efforts was a license agreement entered into late 2019. This license agreement represents a substantial portion of our revenue and ARR, and if it is terminated early or not renewed, our business will suffer. In addition, adding new health plans as customers makes up a significant part of our go-forward strategy. If these health plans are slow to adopt our proposed solution, or adopt it in more limited ways than we expect, or not at all, our operating result may be harmed.
30


Apart from health plan customers or potential customers, channel partners and data partners, our offering also includes the integration of products supplied by strategic partners, who offer complementary products and services. We rely on these strategic partners in the timely and successful deployment of our offering to our customers. If the products provided by these partners have defects or do not operate as expected, if the services provided by these partners are not completed in a timely manner, if our partners have organizational or supply issues, or if we do not effectively integrate and support products supplied by these strategic partners, then we may have difficulty with the deployment of our offering that may result in loss of, or delay in, revenues, increased service and support costs and a diversion of development resources. We also may compete in some areas with these same partners. If these strategic partners fail to perform or choose not to cooperate with us on certain projects, in addition to the effects described above, we could experience loss of customers and market share; and failure to attract new customers or achieve and maintain market acceptance for our products. Identifying partners, negotiating and documenting relationships and building integrations with them, requires significant time and resources. If we are unsuccessful in establishing or maintaining our relationships with Anthem, or other third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer use of our platform or increased revenue.
We operate in a competitive industry, and if we are not able to compete effectively, our business and operating results will be harmed.
        
        The market for our products and services is competitive, and we expect the market to attract increased competition, which could make it hard for us to succeed. We currently face competition for portions of our offering from a range of companies, including healthcare information technology companies and specialized software and solution providers that offer similar solutions, often at substantially lower prices, and that are continuing to develop additional products and becoming more sophisticated and effective. Our market is in an early stage of development, but is rapidly evolving and competitive. We currently face competition from both existing and emerging vendors across a variety of categories, from specialists in the care guidance and wellbeing areas of the market, to broader offerings that compete with our full health navigation platform. There are a number of independent companies we compete with across the various functions of our health navigation platform. Care Guidance competitors include Accolade, ClearCost Health, Sapphire Digital (formerly Vitals) Compass, HealthAdvocate, HealthSparq, Healthcare Bluebook, and Quantum Health. Wellbeing competitors include VirginPulse, Limeade and Vitality. Platform competitors include Evive, United Health Group (Rally Health), Sharecare, Grand Rounds and Welltok.

        In addition, large, well-financed health plans, with whom we cooperate and on whom we depend in order to obtain the pricing and claims data we need to deliver our offering to customers, have in some cases developed or acquired their own wellbeing and care guidance tools and provide these solutions to their customers at discounted prices or often for free. These health plans include, for example, Aetna Inc., Cigna Corporation, and UnitedHealth Group, Inc. (Rally). Competition from specialized software and solution providers, health plans and other parties may result in pricing pressure, which may lead to price decline in certain product segments, which could negatively impact our sales, profitability and market share. In addition, if health plans perceive continued cooperation with us as a threat to their business interests, they may take steps that impair our access to pricing and claims data, or that otherwise make it more difficult or costly for us to deliver our offering to customers.

        Some of our competitors, in particular health plans, have greater name recognition, longer operating histories and significantly greater resources than we do. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors might be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. In addition, current and potential competitors have established, and might in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their solutions in the marketplace. The field of healthcare and the services related to healthcare are subject to change, and there has been consolidation in the industry. Accordingly, new competitors or alliances might emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of our market, such as customers that desire a more narrow solution, which could create additional price pressure. In light of these factors, even if our offering is more effective than those of our competitors, current or potential customers might accept competitive offerings in lieu of purchasing our offerings.
Our proprietary software may not operate properly, which could damage our reputation, give rise to claims against us or divert application of our resources from other purposes, any of which could harm our business and operating results.
31


        Proprietary software development is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we will discover additional problems that prevent our proprietary products from operating properly. We are currently developing new features and services in our proprietary software for all of our offerings. If any of our offerings fail to function reliably or fail to achieve customer expectations in terms of performance, customers could assert liability claims against us or attempt to cancel their contracts with us. This could damage our reputation and impair our ability to attract or maintain clients which would adversely affect our operating results.

        Moreover, data services that are as complex as those we offer have in the past contained, and may in the future develop or contain, undetected defects or errors. This includes products we develop ourselves, as well as those we integrate into our platform ecosystem and resell. Material performance problems, defects or errors in our existing or new software and products and services may arise in the future and may result from interface of our offering with systems and data that we did not develop and the function of which is outside of our control or undetected in our testing. These defects and errors, and any failure by us to identify and address them, could result in loss of revenue or market share, diversion of development resources, injury to our reputation and increased service and maintenance costs. Defects or errors in our health benefits platform might discourage existing or potential customers from purchasing our offering from us. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating results.
Any failure to offer high-quality technical support services may adversely affect our relationships with our customers and harm our financial results.
        Our customers depend on our support organization to resolve any technical issues relating to our offering. In addition, our sales process is highly dependent on the quality of our offering, our business reputation and on strong recommendations from our existing customers. Any failure to maintain high-quality and highly-responsive technical support, or a market perception that we do not maintain high-quality and highly-responsive support, could harm our reputation, adversely affect our ability to sell our offering to existing and prospective customers, and harm our business, operating results and financial condition.
        We offer technical support services with our offering and may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services, particularly as we increase the size of our customer base. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. It is difficult to predict customer demand for technical support services and if customer demand increases significantly, we may be unable to provide satisfactory support services to our customers and their employees. Additionally, increased customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results.
If we cannot implement our offering for customers in a timely manner, we may lose customers and our reputation may be harmed.
        Our customers have a variety of different data formats, enterprise applications and infrastructure and our offering must support our customers’ data formats and integrate with complex enterprise applications and infrastructures. If our platform does not currently support a customer’s required data format or appropriately integrate with a customer’s applications and infrastructure, or if an existing customer switches to unsupported infrastructure, then we may have to configure our platform to do so, which increases our expenses. Additionally, we do not control our customers’ implementation schedules. As a result, if our customers do not allocate internal resources necessary to meet their implementation responsibilities or if we face unanticipated implementation difficulties, the implementation may be delayed. Further, our implementation capacity has at times constrained our ability to successfully implement our offering for our customers in a timely manner, particularly during periods of high demand. If the customer implementation process is not executed successfully or if execution is delayed, we could incur significant costs, customers could become dissatisfied and decide not to increase usage of our offering, or not to use our offering beyond an initial period prior to their term commitment or, in some cases, revenue recognition could be delayed. Our data dependencies and implementation procedures differ for each new product that we launch. Accordingly, our ability to convert sales of new products into billings and revenue depends on our ability to create a scalable launch infrastructure in each case. In addition, competitors with more efficient operating models with lower implementation costs could penetrate our customer relationships.

32

        Additionally, large and demanding customers, who currently comprise the majority of our customer base, may request or require specific features or functions unique to their particular business processes, which increase our upfront investment in sales and deployment efforts and the revenue resulting from the customers under our typical contract length may not cover the upfront investments. If prospective large customers require specific features or functions that we do not offer, then the market for our offering will be more limited and our business could suffer.

        In addition, supporting large customers could require us to devote significant development services and support personnel and strain our personnel resources and infrastructure. Furthermore, if we are unable to address the needs of these customers in a timely fashion or further develop and enhance our offering, or if a customer or its employees are not satisfied with our quality of work, our offering or professional services then we could incur additional costs to address the situation. In addition, we may be required to issue credits or refunds for prepaid amounts related to unused services, the timing of recognition of revenue for, and the profitability of, that work might be impaired and the customer’s dissatisfaction with our offering could damage our ability to expand the number of products and services purchased by that customer. These customers may not renew their agreements, seek to terminate their relationship with us or renew on less favorable terms. Moreover, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to retain or compete for new business with current and prospective customers. If any of these were to occur, our revenue may fail to grow at historical rates or at all, or may even decline, and our operating results could be adversely affected.
If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase and we may be unable to implement our business strategy.
        We have experienced significant growth since our inception, both organic and through acquisitions, which puts strain on our business, operations and employees. Future revenues may not grow at the same rates they have historically or may even stagnate or decline. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. Moreover, we may from time to time decide to undertake cost savings initiatives, such as the reduction in workforce we implemented in 2018, or disposing of, or otherwise discontinuing certain products, in an effort to focus our resources on key strategic initiatives and streamline our business. We must also attract, train and retain a significant number of qualified personnel in key areas such as research and development, sales and marketing, customer support, professional services, and management, and the availability of such personnel, in particular software engineers, may be constrained. These and similar challenges, and the related costs, may be exacerbated by the fact that our headquarters is located in the San Francisco Bay Area.
        A key aspect to managing our growth is our ability to scale our capabilities to implement our offering satisfactorily with respect to both large and demanding enterprise customers, who currently comprise the majority of our customer base, as well as smaller customers. Large customers often require specific features or functions unique to their particular business processes, which at a time of rapid growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully implement our offering to our customers in a timely manner. We may also need to make further investments in our technology and automate portions of our offering or services to decrease our costs, particularly as we grow sales of our health benefits platform to smaller customers. If we are unable to address the needs of our customers or their employees, or our customers or their employees are unsatisfied with the quality of our offering or services, they may not renew their agreements, seek to cancel or terminate their relationship with us or renew on less favorable terms. In addition, many of our customers adjust their benefit plan designs, benefits providers and eligibility criteria at the start of each new benefits plan year, requiring additional configurations for those customers. As our customer base grows, the complexity of these activities can increase. If we fail to automate these operations sufficiently and implement these changes on a timely basis or are unable to implement them effectively, our business may suffer.

        We have experienced additional challenges with managing our growth relating to our acquisition of Jiff and the resulting integration work it required. The operation and integration of the acquired technologies has required substantial financial costs and substantial management attention. If we fail to effectively manage the integrated solution in a proper manner, our business and financial results may suffer.

        Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. Our growth is expected to require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. In addition, data and content fees, which are one of our primary operational
33

costs, are not fixed as they vary based on the source and condition of the data we receive from third parties, and if they remain variable or increase over time, we would not be able to realize the economies of scale that we expect as we grow renewals and implementation of new customers, which may negatively impact our gross margin. If our management is unable to effectively manage our growth, our expenses might increase more than expected, our revenue may not increase or might grow more slowly than expected and we might be unable to implement our business strategy. The quality of our offering might also suffer, which could negatively affect our reputation and harm our ability to retain and attract customers.

We have experienced turnover in our senior management team, and the loss of one or more of our executive officers or key employees or an inability to attract and retain highly skilled employees or key subcontractor services could adversely affect our business.
Our success depends largely upon the continued services of our key executive officers. We have in the past and may in the future experience changes in our executive management team resulting from the departure of executives or subsequent hiring of new executives, which may be disruptive to our business. For example, effective July 26, 2019, Maeve O’Meara assumed the role of Chief Executive Officer, following the departure of John C. Doyle, and Will Bondurant assumed the role of Chief Financial Officer, effective November 15, 2019. Transitions such as these may have a disruptive impact on our ability to implement our business strategy and could have a material adverse effect on our business. Any changes in business strategies can create uncertainty, may negatively impact our ability to execute our business strategy quickly and effectively and may ultimately be unsuccessful. The impact of hiring new executives may not be immediately realized. Moreover, if key personnel become ill due to the current COVID-19 pandemic, or otherwise, we may not be able to manage our business effectively and, as a result, our business and operating results could be harmed.
        These executive officers are at-will employees and therefore may terminate employment with us at any time with no advance notice. We do not maintain “key person” insurance for any of these executive officers or any of our other key employees. We also rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and cost and may significantly delay or prevent the achievement of our business objectives.

        To continue to execute our growth strategy, we also must attract and retain highly skilled personnel, particularly in research and development and sales and marketing. Competition is intense for engineers with high levels of experience in designing and developing software and Internet-related services, particularly in the San Francisco Bay Area where we are located. We might not be successful in maintaining our unique culture and continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel with Software-as-a-Service, or SaaS, experience or experience working with the health care market is limited overall. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have. We supplement our hired skilled personnel through the use of subcontractors, particularly in the area of research and development, a significant portion of which perform services outside of the United States. If these subcontractors cease to perform services for us for any reason, our ability to meet our development goals may be impaired, and our business and future growth prospects could be severely harmed.
In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options or other equity instruments they are to receive in connection with their employment. Volatility or performance trends in the price of our stock might, therefore, adversely affect our ability to attract or retain highly skilled personnel. Furthermore, the requirement to expense stock options and other equity instruments might discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.
Our marketing efforts depend significantly on our ability to receive positive references from our existing customers.
Our marketing efforts depend significantly on our ability to call on our current customers to provide positive references to new, potential customers. Given our limited number of long-term customers, the loss or dissatisfaction of any customer could substantially harm our brand and reputation, inhibit the market adoption of our offering and impair our ability to
34

attract new customers and maintain existing customers. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.
If our security measures are breached and customer’s data are compromised, our offering may be perceived as insecure, we may incur significant liabilities, our reputation may be harmed and we could lose sales and customers.
        Our offering involves the storage and transmission of customers’ proprietary information, personally identifiable information, and protected health information of our customers’ employees and their dependents, which is regulated under HIPAA. Because of the extreme sensitivity of this information, the security features of our offering are very important. If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons may be able to obtain access to sensitive customer or employee data, including HIPAA-regulated protected health information. A security breach or failure could result from a variety of circumstances and events, including third-party action, employee negligence or error, malfeasance, computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication failures, user errors, and catastrophic events.

        If our security measures were to be breached or fail, our reputation could be severely damaged, adversely affecting customer or investor confidence, customers may curtail their use of or stop using our offering and our business may suffer. In addition, we could face litigation, damages for contract breach, penalties and regulatory actions for violation of HIPAA and other laws or regulations applicable to data protection and significant costs for remediation and for measures to prevent future occurrences. In addition, any potential security breach could result in increased costs associated with liability for stolen assets or information, repairing system damage that may have been caused by such breaches, incentives offered to customers or other business partners in an effort to maintain the business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. While we maintain insurance covering certain security and privacy damages and claim expenses we may not carry insurance or maintain coverage sufficient to compensate for all liability and such insurance may not be available for renewal on acceptable terms or at all, and in any event, insurance coverage would not address the reputational damage that could result from a security incident.
        
        We outsource important aspects of the storage and transmission of customer information, and thus rely on third parties to manage functions that have material cyber-security risks. These outsourced functions include services such as software design and product development, software engineering, database consulting, call center operations, co-location data centers, data-center security, IT, network security and Web application firewall services. We attempt to address these risks by requiring outsourcing subcontractors who handle customer information to sign business associate agreements contractually requiring those subcontractors to adequately safeguard personal health data and in some cases by requiring such outsourcing subcontractors to undergo third-party security examinations. However, we cannot assure you that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of customers proprietary and protected health information.
        We may experience cyber-security and other breach incidents that may remain undetected for an extended period. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against us, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition, in the event that our customers authorize or enable third parties to access their data or the data of their employees on our systems, we cannot ensure the complete integrity or security of such data in our systems as we would not control that access. Third parties may also attempt to fraudulently induce our employees or customers and their employees into disclosing sensitive information such as user names, passwords or other information or otherwise compromise our security measures in order to gain access to customer information, which could result in significant legal and financial exposure, a loss of confidence in the security of our offering, interruptions or malfunctions in our operations, and, ultimately, harm to our future business prospects and revenue. Because our offering offers single sign-on capabilities for our customers and their employees to point solutions offered by our partners, unauthorized access to our offering could also result in security breaches of customer information and data in offerings by our partners. We may be required to expend significant capital and financial resources to invest in security measures, protect against such threats or to alleviate problems caused by breaches in security. If an actual or perceived breach of our security occurs, or if we are unable to effectively resolve such breaches in a timely manner, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers or suffer other reputational harm.

35

We have a history of significant GAAP losses, which we expect to continue for the foreseeable future, and we may never achieve or sustain profitability in the future.
        We have incurred significant GAAP net losses in each year since our incorporation in 2008 and expect to continue to incur GAAP net losses for at least fiscal year 2020. We experienced GAAP net losses of $56.3 million (inclusive of a non-cash goodwill impairment charge of $50.3 million during the first quarter of 2020), $40.0 million, $39.7 million and $51.9 million for the three months ended March 31, 2020 and the years ended December 31, 2019, 2018 and 2017, respectively. As of March 31, 2020, we had an accumulated deficit of $511.4 million. The GAAP losses and accumulated deficit were primarily due to the substantial investments we made to grow our business, enhance our technology and offering through research and development and acquire and support customers. We anticipate that cost of revenue and operating expenses will increase in the foreseeable future as we seek to continue to grow our business, enhance our offerings and acquire additional customers. Many of our efforts to generate revenue from our business are new and unproven, and any failure to increase our revenue or generate revenue from new products and services could prevent us from achieving or maintaining profitability. Furthermore, to the extent we are successful in increasing our customer base, we could also incur increased GAAP losses because costs associated with entering into customer agreements are generally incurred up front, while customers are generally billed over the term of the agreement. Our prior GAAP losses, combined with our expected future GAAP losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect to continue to incur GAAP operating losses for the foreseeable future and may never become profitable on a quarterly or annual basis, or if we do, we may not be able to sustain profitability in subsequent periods. As a result of these factors, we may need to raise additional capital through debt or equity financings in order to fund our operations, which could be dilutive to stockholders, and such capital may not be available on reasonable terms, or at all.
Our limited operating history makes it difficult to evaluate our current business and future prospects.
        We were founded in 2008, began building the first version of our care guidance platform in 2009, did not complete our first customer sale and implementation until 2010 and did not make substantial investments in sales and marketing until 2012. Jiff was founded in 2010 and had its first customer implementation in 2013 before being acquired by Castlight in April of 2017. The limited operating histories of these two businesses, standalone and as combined, limit our ability to forecast our future operating results and such forecasts are subject to a number of uncertainties, including our ability to plan for and model future growth.
        
        We have encountered and will continue to encounter risks and uncertainties frequently experienced by new and growing companies in rapidly changing industries, such as determining appropriate investments of our limited resources, market adoption of our existing and future offerings, competition from other companies, acquiring and retaining customers, managing customer deployments, hiring, integrating, training and retaining skilled personnel, developing new products and services, determining prices for our products, handling unforeseen expenses and managing challenges in forecasting accuracy. If our assumptions regarding these and other similar risks and uncertainties, which we use to plan our business, are incorrect or change as we gain more experience operating our business or due to changes in our industry, or if we do not address these risks and uncertainties successfully, our operating and financial results could differ materially from our expectations and our business could suffer.

        In addition, we may need to change our current operations infrastructure in order for us to achieve profitability and scale our operations efficiently, which makes our future prospects even more difficult to evaluate. For example, in order to grow sales of our health benefits platform to smaller customers in a financially sustainable manner, we may need to further automate implementations, tailor our offering and modify our go-to-market approaches to reduce our service delivery and customer acquisition costs. If we fail to implement these changes on a timely basis or are unable to implement them effectively, our business may suffer.

The market for our offering is immature and volatile, and if it does not further develop, if it develops more slowly than we expect, or if our offering does not drive employee engagement, the growth of our business will be harmed.

        Our market is immature and volatile, and it is uncertain whether we will achieve and sustain high levels of demand and market adoption. Our success depends to a substantial extent on the willingness of employers to increase their use of our health navigation platform, the ability of our products to increase employee engagement, as well as on our ability to demonstrate the value of our offering to customers and their employees and to develop new products that provide value to customers and users. If employers do not perceive the benefits of our offering or our offering does not drive employee engagement, then our market might develop more slowly than we expect, or even shrink, which could significantly and adversely affect our operating results.
36

In addition, we have limited insight into trends that might develop and affect our business. If customer demand for a combined suite of offerings is lower than expected, our business will be harmed and our operating results will suffer. We might also make errors in predicting and reacting to relevant business, legal and regulatory trends, which could harm our business. If any of these events occur, it could materially and adversely affect our business, financial condition or results of operations.

Moreover, we are making significant investments in building a team and strategy to allow us to sell our solution to health plans, to power services they provide to their own customers. We have undertaken these efforts and made these investments based on our belief that health plan customers would prefer to use our solution, rather than build one of their own, or use a solution offered by one of our competitors. However, if health plan demand for our solution is lower than expected, then our business will be harmed and our operating results will suffer.
Our quarterly results may fluctuate significantly, which could adversely impact the value of our Class B common stock.
Our quarterly results of operations, including our revenue, gross margin, net loss and cash flows, may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, including, without limitation, those listed elsewhere in this “Risk Factors” section and those listed below:

the addition or loss of large customers, including through acquisitions or consolidations of such customers;
seasonal and other variations in the timing of the sales of our offering, as a significantly higher proportion of our customers either enter into new subscription agreements or renew previous agreements with us in the second half of the year.
the timing of recognition of revenue, including possible delays in the recognition of revenue due to lengthy and sometimes unpredictable implementation timelines;
failure to meet our contractual commitments under service-level agreements with our customers;
the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;
our access to pricing and claims data managed by health plans and other third parties, or changes to the fees we pay for that data;
the timing and success of introductions of new products, services and pricing by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners;
our ability to attract new customers;
customer renewal rates and the timing and terms of customer renewals;
network outages or security breaches;
the mix of products and services sold or renewed during a period;
general economic, industry and market conditions, including the domestic and global macroeconomic impact of the current COVID-19 pandemic;
the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies; and
impacts of new accounting pronouncements.

        We are particularly subject to fluctuations in our quarterly results of operations since the costs associated with entering into customer agreements and implementing our offerings are generally incurred prior to launch, while we generally recognize revenue over the term of the agreement beginning at launch. In addition, some of our contracts with customers provide for one-time bonus payments, or in some cases fee reductions, if our offering does, or does not, achieve certain metrics, such as a certain rate of employee engagement. These bonuses or reductions may lead to additional fluctuations in our quarterly operating results. In certain contracts, employee engagement may refer to the number of first time registrations by employees of our customers and in other cases it may refer to return usage of our products by employees. Any fluctuations in our quarterly results may not accurately reflect the underlying performance of our business and could cause a decline in the trading price of our Class B common stock.
We incur significant upfront costs in our customer relationships, and if we are unable to maintain and grow these customer relationships over time, we are likely to fail to recover these costs and our operating results will suffer.
37

        We devote significant resources and incur significant upfront costs to establish relationships with our customers and implement our offering and related services, particularly in the case of large enterprises that in the past have requested or required specific features or functions unique to their particular business processes. Accordingly, our operating results will depend in substantial part on our ability to deliver a successful customer experience and persuade our customers to maintain and grow their relationship with us over time. For example, if we are not successful in implementing our offering or delivering a successful customer experience, a customer could terminate or decline to renew their agreement with us, we would lose or be unable to recoup the significant upfront costs that we had expended on such customer and our operating results would suffer. As we grow, our customer acquisition costs could outpace our build-up of recurring revenue, and we may be unable to reduce our total operating costs through economies of scale such that we are unable to achieve profitability.
Similarly, we will devote significant upfront costs to developing health plan relationships, through which we expect to our services to the health plans to power their own offerings. We expect these efforts to have long lead times and require significant upfront investment by us. As part of our sales efforts, these health plans may require specific features or functions unique to their own particular businesses. Our operating results will depend in substantial part also on our ability to deliver a successful experience and persuade health plans to maintain and grow our relationships over time. If we are unable to make meaningful sales to health plans, our business will be harmed and our operating results will suffer.
Our ability to deliver our full offering to customers depends in substantial part on our ability to access data and other resources that are managed by a limited number of health plans and other third parties.
        In order to deliver the full functionality offered by our health benefits platform, we need continued access, on behalf of our customers, to sources of pricing and claims data, much of which is managed by a limited number of health plans and other third parties. We have developed various long-term and short-term processes to obtain data from certain health plans and other third parties. We are limited in our ability to offer the full functionality of our offering to customers of health plans with whom we do not have a data-sharing or joint customer support process or arrangement.

        The terms of the arrangements under which we have access to data managed by health plans and other third parties vary, which can impact the offering we are able to deliver. Many of our arrangements with health plans and third parties have terms that limit our access to and permitted uses of claims or pricing data to the data associated with our mutual customers. Also, some agreements, processes, or arrangements may be terminated if the underlying customer contracts do not continue, or may otherwise be subject to termination or non-renewal in whole or in part.
        In addition, in order to deliver current and potential future functionality of our full health navigation platform, including third-party integrated services, we need access to other resources and services that are largely or fully controlled by third-party integration partners. While we have developed, and expect to continue to develop, relationships with third parties in order to allow us and our customers to access these resources and services, we are exposed to the risk that third parties may limit or eliminate our access, which would hinder our ability to provide certain integrated health navigation functionality to our customers and harm our business.