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May 8, 2020, 4:58 p.m. EDT

10-Q: CASTLIGHT HEALTH, INC.

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(EDGAR Online via COMTEX) -- 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.

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;

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-







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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 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.

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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

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.

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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.

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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.

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.

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.

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.







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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.

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                                                2  %       5  %
        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                                                              1  %       1  %
        Net loss                                                                    (144) %     (30) %
        


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        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             3  %    $   363
        Gross margin (loss) percentage:
        . . .
        


May 08, 2020

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