Company Quick10K Filing
Quick10K
Castlight Health
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
8-K 2019-07-26 Earnings, Officers, Exhibits
8-K 2019-06-05 Shareholder Vote
8-K 2019-05-02 Earnings, Exhibits
8-K 2019-02-28 Earnings, Exhibits
8-K 2018-11-06 Earnings, Exhibits
8-K 2018-07-30 Earnings, Exit Costs, Exhibits
8-K 2018-06-20 Shareholder Vote
8-K 2018-06-08 Officers, Exhibits
8-K 2018-02-21 Earnings, Exhibits
WIT Wipro 22,507
CARG Cargurus 3,610
CSGS CSG Systems 1,739
DMRC Digimarc 478
ISSC Innovative Solutions & Support 89
CTG Computer Task Group 63
PERI Perion Network 29
MRIN Marin Software 16
AABA Altaba 0
CCIH Chinacache International Holdings 0
CSLT 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Note 1. Organization and Description of Business
Note 2. Accounting Standards and Significant Accounting Policies
Note 3. Revenue, Deferred Revenue, Contract Balances and Performance Obligations
Note 4. Deferred Costs
Note 5. Goodwill and Intangible Assets
Note 6. Marketable Securities
Note 7. Fair Value Measurements
Note 8. Property and Equipment
Note 9. Debt
Note 10. Leases
Note 11. Contingencies
Note 12. Stock Compensation
Note 13. Stockholders' Equity
Note 14. Income Taxes
Note 15. Net Loss per Share
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.1 ex101momearaofferletter.htm
EX-10.2 ex102snmofferletter.htm
EX-31.1 ex311q21910-qxceo302certif.htm
EX-31.2 ex312q21910-qxcfo302certif.htm
EX-32.1 ex321q21910-qxceo906certif.htm
EX-32.2 ex322q21910-qxcfo906certif.htm

Castlight Health Earnings 2019-06-30

CSLT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 q21910-q.htm 10-Q Q2'19 Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019

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)

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

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 [X] 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 [X] 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 [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Emerging growth company [X]

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. [X]

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

As of July 25, 2019, there were 35,043,253 shares of the Registrant’s Class A common stock outstanding and 110,207,745 shares of the Registrant’s Class B common stock outstanding.



TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 




i


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CASTLIGHT HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
 
As of
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
50,052

 
$
66,005

Marketable securities
13,874

 
11,327

Accounts receivable and other, net
32,611

 
26,816

Prepaid expenses and other current assets
5,450

 
3,680

Total current assets
101,987

 
107,828

Property and equipment, net
3,556

 
3,963

Restricted cash, non-current
1,325

 
1,325

Deferred commissions
17,956

 
20,142

Deferred professional service costs
9,093

 
10,133

Intangible assets, net
14,457

 
16,209

Goodwill
91,785

 
91,785

Operating lease right-of-use assets, net
14,691

 

Other assets
2,223

 
2,129

Total assets
$
257,073

 
$
253,514

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,355

 
$
9,556

Accrued expenses and other current liabilities
11,170

 
15,454

Accrued compensation
5,169

 
5,975

Deferred revenue
20,698

 
20,193

Operating lease liabilities
5,911

 

Total current liabilities
54,303

 
51,178

Deferred revenue, non-current
837

 
1,030

Debt, non-current
2,324

 
3,254

Operating lease liabilities, non-current
12,032

 

Other liabilities, non-current
1,067

 
3,381

Total liabilities
70,563

 
58,843

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Class A and Class B common stock
14

 
14

Additional paid-in capital
620,449

 
609,697

Accumulated other comprehensive income
7

 

Accumulated deficit
(433,960
)
 
(415,040
)
Total stockholders’ equity
186,510

 
194,671

Total liabilities and stockholders’ equity
$
257,073

 
$
253,514

See Notes to Condensed Consolidated Financial Statements.

1


CASTLIGHT HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Subscription
$
33,964

 
$
34,802

 
$
67,770

 
$
67,791

Professional services and other
1,946

 
2,982

 
3,630

 
6,472

Total revenue, net
35,910

 
37,784

 
71,400

 
74,263

Cost of revenue:
 
 
 
 
 
 
 
Cost of subscription (1)
8,234

 
9,140

 
16,400

 
18,314

Cost of professional services and other (1)
5,929

 
6,590

 
11,873

 
12,359

Total cost of revenue
14,163

 
15,730

 
28,273

 
30,673

Gross profit
21,747

 
22,054

 
43,127

 
43,590

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing (1)
8,889

 
13,306

 
18,104

 
27,218

Research and development (1)
14,487

 
16,425

 
30,212

 
31,796

General and administrative (1)
7,010

 
6,382

 
14,303

 
13,207

Total operating expenses
30,386

 
36,113

 
62,619

 
72,221

Operating loss
(8,639
)
 
(14,059
)
 
(19,492
)
 
(28,631
)
Other income, net
258

 
101

 
572

 
229

Net loss
$
(8,381
)
 
$
(13,958
)
 
$
(18,920
)
 
$
(28,402
)
Net loss per share, basic and diluted
$
(0.06
)
 
$
(0.10
)
 
$
(0.13
)
 
$
(0.21
)
Weighted-average shares used to compute basic and diluted net loss per share
144,572

 
136,682

 
143,790

 
135,843


(1) Includes stock-based compensation expense as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenue:
 
 
 
 
 
 
 
Cost of subscription
$
196

 
$
231

 
$
415

 
$
473

Cost of professional services and other
236

 
315

 
501

 
616

Sales and marketing
662

 
1,318

 
1,289

 
2,456

Research and development
1,733

 
1,908

 
3,437

 
3,562

General and administrative
2,030

 
1,375

 
3,192

 
2,632


See Notes to Condensed Consolidated Financial Statements.

2


CASTLIGHT HEALTH, INC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
(8,381
)
 
$
(13,958
)
 
(18,920
)
 
$
(28,402
)
Other comprehensive income:
 
 
 
 
 
 
 
Net change in unrealized gain on available-for-sale marketable securities
7

 
11

 
7

 
13

Other comprehensive income
7

 
11

 
7

 
13

Comprehensive loss
$
(8,374
)
 
$
(13,947
)
 
$
(18,913
)
 
$
(28,389
)

See Notes to Condensed Consolidated Financial Statements.


3


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 March 31, 2019
143,955,787

 
$
14

 
$
615,394

 
$

 
$
(425,579
)
 
$
189,829

Vesting of restricted stock units
1,123,186

 

 

 

 

 

Exercise of stock options, net
119,914

 

 
165

 

 

 
165

Stock-based compensation

 

 
4,890

 

 

 
4,890

Comprehensive loss

 

 

 
7

 
(8,381
)
 
(8,374
)
Balances as of June 30, 2019
145,198,887

 
$
14

 
$
620,449

 
$
7

 
$
(433,960
)
 
$
186,510

 
 
 
 
 
 
 
 
 
 
 
 
Balances as of March 31, 2018
135,595,828

 
$
13

 
$
592,023

 
$
(20
)
 
$
(389,778
)
 
$
202,238

Vesting of restricted stock units
915,115

 

 

 

 

 

Exercise of stock options, net
1,218,067

 
1

 
1,752

 

 

 
1,753

Stock-based compensation

 

 
5,188

 

 

 
5,188

Comprehensive loss

 

 

 
11

 
(13,958
)
 
(13,947
)
Balances as of June 30, 2018
137,729,010

 
$
14

 
$
598,963

 
$
(9
)
 
$
(403,736
)
 
$
195,232

 
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2018
141,927,205

 
$
14

 
$
609,697

 
$

 
$
(415,040
)
 
$
194,671

Vesting of restricted stock units
2,090,898

 

 

 

 

 

Exercise of stock options, net
1,180,784

 

 
1,845

 

 

 
1,845

Stock-based compensation

 

 
8,907

 

 

 
8,907

Comprehensive loss

 

 

 
7

 
(18,920
)
 
(18,913
)
Balances as of June 30, 2019
145,198,887

 
$
14

 
$
620,449

 
$
7

 
$
(433,960
)
 
$
186,510

 
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2017
134,539,275

 
$
13

 
$
586,900

 
$
(22
)
 
$
(375,334
)
 
$
211,557

Vesting of restricted stock units
1,662,426

 

 

 

 

 

Exercise of stock options, net
1,527,309

 
1

 
2,242

 

 

 
2,243

Stock-based compensation

 

 
9,821

 

 

 
9,821

Comprehensive loss

 

 

 
13

 
(28,402
)
 
(28,389
)
Balances as of June 30, 2018
137,729,010

 
$
14

 
$
598,963

 
$
(9
)
 
$
(403,736
)
 
$
195,232


See Notes to Condensed Consolidated Financial Statements.


4


CASTLIGHT HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(18,920
)
 
$
(28,402
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,687

 
3,573

Stock-based compensation
8,834

 
9,739

Amortization and impairment of deferred commissions
4,856

 
5,800

Amortization and impairment of deferred professional service costs
2,014

 
2,097

Non-cash operating lease expense
2,580

 

Lease exit and related charges

 
1,817

Accretion and amortization of marketable securities
(213
)
 
(266
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable and other, net
(5,795
)
 
(6,252
)
Deferred commissions
(2,670
)
 
(2,979
)
Deferred professional service costs
(901
)
 
(1,389
)
Prepaid expenses and other assets
(1,864
)
 
(1,896
)
Accounts payable
1,864

 
511

Operating lease liabilities
(2,795
)
 

Accrued expenses and other liabilities
(3,131
)
 
3,182

Deferred revenue
312

 
(1,210
)
Accrued compensation
(806
)
 
(4,411
)
Net cash used in operating activities
(13,948
)
 
(20,086
)
Investing activities:
 
 
 
Purchase of property and equipment
(593
)
 
(1,304
)
Purchase of marketable securities
(13,780
)
 
(23,979
)
Maturities of marketable securities
11,453

 
26,450

Net cash (used in) provided by investing activities
(2,920
)
 
1,167

Financing activities:
 
 
 
Proceeds from exercise of stock options
1,845

 
2,242

Principal payments on long-term debt
(930
)
 

Net cash provided by financing activities
915

 
2,242

 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
(15,953
)
 
(16,677
)
Cash, cash equivalents and restricted cash at beginning of period
67,330

 
62,644

Cash, cash equivalents and restricted cash at end of period
$
51,377

 
$
45,967

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
50,052

 
$
44,642

Restricted cash
1,325

 
1,325

Total cash, cash equivalents and restricted cash
$
51,377

 
$
45,967


See Notes to Condensed Consolidated Financial Statements.

5

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



Note 1. Organization and Description of Business
Castlight Health, Inc. (“Castlight” or “the Company”) offers a comprehensive software-as-a-service platform that simplifies health benefits navigation for millions of employees. The Castlight platform matches employees to the best resources their employers make available to them, whether they are healthy, actively seeking medical care, or managing a condition, and motivates them to take the best steps for their health. Castlight helps employers generate more value from their benefits investments by helping to improve outcomes, lower health care costs, and increase benefits satisfaction. In July 2019, the Company announced plans to market its technology beyond its current employer market to health plans and other potential buyers who interact with healthcare users at the point of their care. 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, 2018

Other than described below, there have been no changes to our significant accounting policies described in our Annual Report that have had a material impact on our 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;
The amortization period for deferred commissions and deferred professional services costs; and
Assumptions used in the calculation of right-of-use (“ROU”) assets and lease liabilities for operating leases, including lease terms and the Company’s incremental borrowing rate.

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

Summary of Significant Accounting Policies

Leases

The Company determines if an arrangement is a lease and its classification at lease inception. Operating lease liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the lease commencement date to compute the present value of lease payments when the implicit rate is not readily determinable. ROU assets are measured at

6

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



lease inception based on the initial measurement of the lease liability, plus any prepaid lease amounts, less any lease incentives. The Company does not recognize ROU assets or lease liabilities for leases with a term of 12 months or less. Lease terms do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Generally, lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company's lease agreements have both lease and non-lease components. The Company has elected to account for the non-lease components of its leases as part of their related lease components.

Concentrations of Risk and Significant Customers

No single direct customer accounted for more than 10% of total revenue during the three and six months ended June 30, 2019 or more than 10% of accounts receivable as of June 30, 2019. Castlight had one channel partner that represented approximately 26% and 25% of total revenue during the three and six months ended June 30, 2019, respectively, and approximately 37% of accounts receivable as of June 30, 2019.

Recently Adopted Accounting Pronouncements

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases, and subsequent amendments ("ASC 842") using the modified retrospective method, and chose to apply the provisions at the beginning of the period of adoption. The guidance requires lessees to put all leases that have a term of more than one year on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements. The guidance states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-of-use ("ROU") asset for the right to use the underlying asset for the lease term. 

As a result of the adoption of ASC 842 as of January 1, 2019, reporting periods beginning on and after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with prior accounting guidance under ASC 840. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. As a result of the adoption of the new lease accounting guidance, the Company recognized on January 1, 2019 an operating lease ROU asset of approximately $17.3 million and an operating lease liability of approximately $20.7 million. The difference between the operating lease ROU asset and lease liability resulted from the reclass of the deferred rent liability to the operating lease ROU asset. The standard did not materially impact the Company’s condensed consolidated statement of operations and had no impact on the cash flows. See Note 10 - Leases for more information on leases.

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 six months ended June 30, 2019 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 through direct sales and indirect channels. Indirect channel revenue represented approximately 27% and 10% of the Company’s total revenue for the three months ended June 30, 2019 and 2018, respectively. Indirect channel revenue represented approximately 27% and 10% of the Company’s total revenue for the six months ended June 30, 2019 and 2018, respectively.

Deferred revenue as of June 30, 2019 and December 31, 2018 was $21.5 million and $21.2 million, respectively. Contract assets as of June 30, 2019 and December 31, 2018 were $1.2 million and $1.0 million, respectively.

$11.3 million and $16.5 million of revenue was recognized during the three months ended June 30, 2019 and 2018, respectively, that was included in the Company’s deferred revenue balances at the beginning of the respective periods. $16.0 million and $22.6 million of revenue was recognized during the six months ended June 30, 2019 and 2018, respectively, that was included in the Company’s deferred revenue balances at the beginning of the respective periods.


7

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



The Company recorded favorable cumulative catch-up adjustments to revenue of $0.5 million during the three months ended June 30, 2019 and unfavorable cumulative catch-up adjustments to revenue of $0.8 million during the three months ended June 30, 2018, arising from changes in estimates of transaction price. The Company recorded favorable cumulative catch-up adjustments to revenue of $1.9 million during the six months ended June 30, 2019 and unfavorable cumulative catch-up adjustments to revenue of $0.6 million during the six months ended June 30, 2018, arising from changes in estimates of transaction price.

The aggregate balance of remaining performance obligations from non-cancelable contracts with customers as of June 30, 2019 was $127.3 million. The Company expects to recognize approximately 70% 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.
Note 4. Deferred Costs

Changes in the balance of total deferred commissions and total deferred professional service costs during the six months ended June 30, 2019 are as follows (in thousands):
 
As of December 31, 2018
 
 
 
Expense recognized
 
As of June 30, 2019
 
 
Additions
 
Deferred commissions
$
20,142

 
$
2,670

 
$
(4,856
)
 
$
17,956

Deferred professional service costs
10,133

 
974

 
(2,014
)
 
9,093

Total deferred commissions and professional service costs
$
30,275

 
$
3,644

 
$
(6,870
)
 
$
27,049


    These costs are reviewed for impairment periodically, and impairment charges recorded for the three and six months ended June 30, 2019 and 2018 were not material.
    
Note 5. Goodwill and Intangible Assets

Goodwill

Currently, all of the Company’s goodwill relates to the acquisition of Jiff. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. There were no changes to goodwill for the three and six months ended June 30, 2019.

Intangible assets, net
    
The following tables set forth the fair value components of identifiable acquired intangible assets (dollars in thousands):
 
June 30, 2019
 
Useful Life
 
Gross
 
Accumulated Amortization
 
Net
Customer relationships
10
 
$
10,900

 
$
(2,452
)
 
$
8,448

Developed technology
5
 
10,600

 
(4,770
)
 
5,830

Backlog
3
 
1,500

 
(1,371
)
 
129

Other acquired intangible assets
1
-
3
 
900

 
(850
)
 
50

Total identifiable intangible assets
 
 
 
 
$
23,900

 
$
(9,443
)
 
$
14,457



8

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



 
December 31, 2018

Useful Life
 
Gross

Accumulated Amortization

Net
Customer relationships
10
 
$
10,900


$
(1,908
)

$
8,992

Developed technology
5
 
10,600


(3,710
)

6,890

Backlog
3
 
1,500


(1,256
)

244

Other acquired intangible assets
1
-
3
 
900


(817
)

83

Total identifiable intangible assets



 
$
23,900


$
(7,691
)

$
16,209


Amortization expense from acquired intangible assets for the three months ended June 30, 2019 and 2018 was $0.9 million and $1.0 million, respectively. Amortization expense from acquired intangible assets for the six months ended June 30, 2019 and 2018 was $1.8 million and $2.1 million, respectively. Amortization expense is included in cost of subscription, sales and marketing, and general and administrative expenses.

Amortization expense for acquired intangible assets for the following five years and thereafter is as follows (in thousands):
Remainder of 2019
$
1,753

2020
3,242

2021
3,210

2022
1,620

2023
1,090

Thereafter
3,542

Total amortization expense
$
14,457


Note 6. Marketable Securities

All of the Company’s cash equivalents and marketable securities are classified as “available-for-sale” securities. These securities are reported at fair value, with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, except for money market mutual funds, where gains and losses are included in the results of operation.

As of June 30, 2019 and December 31, 2018, respectively, marketable securities consisted of the following (in thousands):
 
As of June 30, 2019
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
U.S. treasury securities
$
3,999

 
$
4

 
$

 
$
4,003

U.S. agency obligations
14,808

 
3

 

 
14,811

Money market mutual funds
2,778

 

 

 
2,778

 
21,585

 
7

 

 
21,592

Included in cash and cash equivalents
7,718

 

 

 
7,718

Included in marketable securities
$
13,867

 
$
7

 
$

 
$
13,874



9

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



 
As of December 31, 2018
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
U.S. treasury securities
$
7,980

 
$

 
$

 
$
7,980

U.S. agency obligations
18,158

 

 

 
18,158

Money market mutual funds
7,115

 

 

 
7,115

 
33,253

 

 

 
33,253

Included in cash and cash equivalents
21,926

 

 

 
21,926

Included in marketable securities
$
11,327

 
$

 
$

 
$
11,327


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 June 30, 2019 and December 31, 2018. As of June 30, 2019 and December 31, 2018, there were no securities within Level 3 of the fair value hierarchy.

10

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



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 June 30, 2019
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
U.S. agency obligations
$

 
$
4,940

 
$
4,940

Money market mutual funds
2,778

 

 
2,778

Marketable securities:
 
 
 
 
 
U.S. treasury securities

 
4,003

 
4,003

U.S. agency obligations

 
9,871

 
9,871

 
$
2,778

 
$
18,814

 
$
21,592

  
 
As of December 31, 2018
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
U.S. agency obligations
$

 
$
14,811

 
$
14,811

Money market mutual funds
7,115

 

 
7,115

Marketable securities:
 
 
 
 
 
U.S. treasury securities

 
7,980

 
7,980

U.S. agency obligations

 
3,347

 
3,347

 
$
7,115

 
$
26,138

 
$
33,253

Gross unrealized gains and losses for cash equivalents and marketable securities as of June 30, 2019 and December 31, 2018 were not material. The Company does not believe the unrealized losses represent other-than-temporary impairments based on the Company’s evaluation of available evidence as of June 30, 2019 and December 31, 2018.
There were no realized gains or losses during the three and six months ended June 30, 2019. All of the Company’s securities as of June 30, 2019 and December 31, 2018 mature within one year.     
Note 8. Property and Equipment
Property and equipment consisted of the following (in thousands):
 
As of
 
June 30, 2019
 
December 31, 2018
Leasehold improvements
$
3,102

 
$
3,102

Computer equipment
7,185

 
6,860

Software
1,093

 
1,097

Internal-use software
2,925

 
2,925

Furniture and equipment
1,078

 
1,018

Total
15,383

 
15,002

Accumulated depreciation
(11,827
)
 
(11,039
)
Property and equipment, net
$
3,556

 
$
3,963

Depreciation and amortization expense for the three months ended June 30, 2019 and 2018 was $0.5 million and $0.8 million, respectively. Depreciation and amortization expense for the six months ended June 30, 2019 and 2018 was $0.9 million and $1.5 million, respectively. Depreciation and amortization are recorded on a straight-line basis.

11

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



Note 9. Debt

Term Loan

In connection with the Company’s acquisition of Jiff, on April 3, 2017, the Company, Jiff and Silicon Valley Bank (the “Bank”) agreed to refinance the existing term loan facility owed by Jiff to the Bank (the “Loan Agreement”) for approximately $5.6 million (the “Term Loan”). The Term Loan requires interest-only payments for the period May 2017 through September 2018, followed by 36 monthly payments of principal and interest. 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 June 30, 2019 are as follows (in thousands):
Remainder of 2019
$
929

2020
1,859

2021(1)
1,395

Total future maturities of debt
$
4,183

Less current maturities(2)
(1,859
)
Debt, non-current
$
2,324

(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 June 30, 2019.

Revolving Line of Credit    

The Loan Agreement also provided for an up to $25 million revolving credit facility, which expired on April 3, 2019, its termination date.

In relation to the Loan Agreement, the Company is subject to certain financial and reporting covenants. As of June 30, 2019, none of the financial covenants, which require the Company to maintain a certain minimum liquidity ratio, are applicable. The Company was in compliance with all reporting covenants in the Loan Agreement related to the outstanding principal balance as of June 30, 2019.


12

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



Note 10. Leases
    
The Company’s principal commitments primarily consist of obligations under leases for office space and co-location facilities for data center capacity. The leases expire at various dates through 2025 and, in some cases, include renewal options. The exercise of the option is at the sole discretion of the Company. The Company subleases certain office facilities to third parties. These leases are classified as operating leases. The Company does not have finance leases. Information about these operating leases is disclosed in the following table (dollars in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Lease cost:
 
 
 
Operating lease cost
$
1,639

 
$
3,288

Variable lease cost (1)
229

 
380

Short-term lease cost
7

 
7

Sublease income
(577
)
 
(1,193
)
Total lease cost
$
1,298

 
$
2,482

 
 
 
 
Other information:
 
 
 
Operating cash flows used in the measurement of operating lease liabilities
 
 
$
3,503

Weighted-average remaining lease term - operating leases (in years)
 
 
3.3

Weighted-average discount rate - operating leases
 
 
7.46
%
(1) Includes variable payments such as common area maintenance, property taxes and insurance.

Maturities of Lease Liabilities

As of June 30, 2019, the future minimum lease payments under non-cancellable operating leases are as follows (in thousands):
Remainder of 2019
$
3,582

2020
6,524

2021
5,355

2022
3,050

2023
677

2024 and later
1,111

Total lease payments
20,299

Less: Interest
(2,356
)
Present value of lease liabilities
$
17,943

Less: current portion
(5,911
)
Operating lease liabilities, non-current
$
12,032


Note 11. 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.    


13

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



Note 12. Stock Compensation
Restricted Stock Units (“RSUs”)

A summary of unvested restricted stock unit activity for the six months ended June 30, 2019 is as follows:
 
Number of
Shares
 
Weighted-
Average
Grant Date Fair Value
Balance as of December 31, 2018
9,528,602

 
$
3.54

Granted
4,602,787

 
$
3.61

Vested
(2,090,898
)
 
$
3.82

Forfeited and canceled (1)
(1,113,569
)
 
$
3.48

Balance as of June 30, 2019
10,926,922

 
$
3.49

(1) Includes performance stock units that were granted in the prior year, which were canceled because performance targets were not achieved.
As of June 30, 2019, there was a total of $35.0 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 519,000 market-based RSUs during the three and six months ended June 30, 2019No market-based RSUs were granted in prior periods. The market-based RSUs vest based on the Company achieving certain stock price thresholds, subject to the employee’s continued employment with the Company through the date of achievement. The fair value is based on values calculated under the Monte Carlo simulation model on the grant date, which will be recognized over the derived service period. Compensation cost is not adjusted in future periods for subsequent changes in the expected outcome of market related conditions. For the three and six months ended June 30, 2019, the Company recognized $0.4 million of stock compensation expense in connection with this award.
Stock Options
A summary of stock option activity for the six months ended June 30, 2019 is as follows: 
 
Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value (in thousands)
Balance as of December 31, 2018
6,265,223

 
$
2.65

 
$
3,499

Granted
200,000

 
$
3.22

 
 
Exercised
(1,180,784
)
 
$
1.56

 
 
Forfeited and canceled
(54,406
)
 
$
2.55

 
 
Balance as of June 30, 2019
5,230,033

 
$
2.92

 
$
6,182

The total grant-date fair value of stock options granted during the six months ended June 30, 2019 and 2018 was $0.4 million and $0.3 million, respectively.

14

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



The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-valuation model with the following assumptions and fair value per share:
 
Six Months Ended June 30, 2019
 
2019
 
2018
Volatility
57%
 
57%
Expected life (in years)
6.06
 
6.06
Risk-free interest rate
2.57%
 
2.72
%
-
2.74%
Dividend yield
—%
 
—%
As of June 30, 2019, the Company had $1.0 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 2.3 years.    
Note 13. Stockholders’ Equity
Common Stock
As of June 30, 2019, the Company had 35,043,253 shares of Class A common stock and 110,155,634 shares of Class B common stock outstanding.
Note 14. Income Taxes
    
The effective tax rate for each of the three and six months ended June 30, 2019 and 2018 was zero percent, primarily as a result of the estimated tax loss for the year and the change in valuation allowance. At June 30, 2019, all unrecognized tax benefits are subject to a full valuation allowance and, if recognized, will not affect the effective tax rate.
Note 15. 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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
Net loss
$
(2,026
)
 
$
(6,355
)
 
$
(5,315
)
 
$
(8,643
)
 
$
(4,767
)
 
$
(14,153
)
 
$
(10,956
)
 
$
(17,446
)
Weighted-average shares used to compute basic and diluted net loss per share
35,276

 
109,296

 
52,043

 
84,639

 
36,227

 
107,563

 
52,401

 
83,442

Basic and diluted net loss per share
$
(0.06
)
 
$
(0.06
)
 
$
(0.10
)
 
$
(0.10
)
 
$
(0.13
)
 
$
(0.13
)
 
$
(0.21
)
 
$
(0.21
)

15

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



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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Stock options and restricted stock units
16,157

 
19,092

 
16,157

 
19,092

Warrants
115

 
115

 
115

 
115

Total
16,272

 
19,207

 
16,272

 
19,207




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 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “intend,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the section titled “Risk Factors” set forth in Part II, Item 1A in this Quarterly Report on Form 10-Q. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary 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.
 
All references to “Castlight,” “Castlight Health,” “we,” “us,” “our” or the “Company” mean Castlight Health, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company.

Overview
    
Castlight Health, Inc. (“Castlight”, “the Company” or "we") offers a comprehensive software-as-a-service (“SaaS”) platform that simplifies health benefits navigation for millions of employees. Our platform matches employees to the best resources their employers make available to them - whether they are healthy, actively seeking medical care, or managing a condition - and motivates them to take the best steps for their health. Castlight helps employers generate more value from their benefits investments by helping to improve outcomes, lower health care costs, and increase benefits satisfaction.

Castlight’s platform solution supports strong employee engagement and satisfaction through two foundational components: an ecosystem of deep integrations across an employer’s various health and wellbeing partners; and a predictive analytics “engine” that uses claims, demographic and user data and machine learning to personalize clinical options, benefit programs, wellbeing incentives, communications, and educational content, based on each employee’s specific health and wellbeing needs.

This unique combination of data integrations and personalization puts Castlight in a position to deliver value to employees and their employers. For employees, our platform improves their health benefits experience, with a highly-engaging, seamless mobile application and web experience, which are coupled with multi-channel communications. In addition, the platform’s rewards feature is designed to incentivize individuals to participate in health programs, optimize their care utilization, and improve their daily habits. For employers, Castlight provides a simplified, cost-effective, and flexible way to manage health benefits: allowing them to procure, deploy, manage, and measure a vast majority of their healthcare and wellbeing program vendors through a single platform.

In July 2019, the Company announced plans to market its technology beyond its current employer market to health plans and other potential buyers who interact with healthcare users at the point of their care.



17


Castlight was incorporated in the State of Delaware in January 2008. Its first generation care guidance solutions addressed the needs of employees actively seeking care or managing a chronic condition and serve as the foundation of our current care guidance offering. In 2015, we launched Castlight Action, our data-driven personalization benefits content and recommendations platform, which has been integrated into all of our products and rebranded as Castlight Genius. In April 2017, we acquired Jiff, Inc. Jiff provided an enterprise health benefits platform that served as a central hub for employee wellbeing and employee benefit programs, and is the foundation for our wellbeing offering. In 2018, Castlight launched two offerings that deliver health care and wellbeing benefits navigation in a single user experience: Engage (January) and Castlight Complete (September). The Company's principal executive offices are located in San Francisco, California.
Key Factors Affecting Our Performance

Sales of New and Additional Products. Our revenue growth rate and long-term profitability are affected by our ability to sell new and additional 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 and to market our technology to health plans and other potential buyers who interact with healthcare users at the point of their care.

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.

Channel Partnerships. We have relationships with channel partners including Anthem, 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 and to market our technology directly to these channel partners.

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 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 do not have standalone value for our implementation services for accounting purposes. Accordingly, we recognize implementation services revenue in the same manner as the associated subscription revenue.

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.

18


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
 
As of June 30,
 
2019
 
2018
 
 (in millions)
Signed Annual Recurring Revenue
$
141.7

 
$
166.4

    
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”). 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.

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.

Our ARR as of June 30, 2019 was $141.7 million, compared with $166.4 million as of June 30, 2018, representing a decrease of approximately 15%, primarily attributable to churn, partially offset by new customers and renewals.

Annual Net Dollar Retention Rate
 
Year Ended December 31,
 
2018
 
2017
Annual Net Dollar Retention Rate
82
%
 
104
%

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 82% and 104% for our signed customer base, for the years ended December 31, 2018 and 2017, respectively. The NDR of 82% at the end of 2018 was primarily due to churn, partially offset by upsells and cross-sells.


19


Components of Results of Operations
Revenue

We generate revenue from subscription fees from customers for access to the products they select, including basic customer service support. 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 employees and adult dependents 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, deferred and amortized professional services costs, 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

20


management information systems personnel, legal costs, professional fees, other corporate expenses, acquisition-related costs, and allocated overhead.
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
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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Subscription
95
 %
 
92
 %
 
95
 %
 
91
 %
Professional services and other
5
 %
 
8
 %
 
5
 %
 
9
 %
Total revenue, net
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of revenue:
 
 
 
 
 
 
 
Cost of subscription
23
 %
 
24
 %
 
23
 %
 
24
 %
Cost of professional services and other
16
 %
 
18
 %
 
17
 %
 
17
 %
Total cost of revenue
39
 %
 
42
 %
 
40
 %
 
41
 %
Gross margin percentage
61
 %
 
58
 %
 
60
 %
 
59
 %
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
25
 %
 
35
 %
 
25
 %
 
37
 %
Research and development
40
 %
 
43
 %
 
42
 %
 
43
 %
General and administrative
20
 %
 
17
 %
 
20
 %
 
18
 %
Total operating expenses
85
 %
 
95
 %
 
87
 %
 
98
 %
Operating loss
(24
)%
 
(37
)%
 
(27
)%
 
(39
)%
Other income, net
1
 %
 
 %
 
1
 %
 
1
 %
Net loss
(23
)%
 
(37
)%
 
(26
)%
 
(38
)%
Revenue    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
% Change
 
$ Change
 
2019
 
2018
 
% Change
 
$ Change
 
(In thousands, except percentages)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription
$
33,964

 
$
34,802

 
(2)%
 
$
(838
)
 
$
67,770

 
$
67,791

 
—%
 
$
(21
)
Professional services and other
1,946

 
2,982

 
(35)%
 
(1,036
)
 
3,630

 
6,472

 
(44)%
 
(2,842
)
Total revenue, net
$
35,910

 
$
37,784

 
(5)%
 
$
(1,874
)
 
$
71,400

 
$
74,263

 
(4)%
 
$
(2,863
)

Subscription revenue for the three months ended June 30, 2019 decreased by $0.8 million, or 2%, primarily due to customer terminations in 2018 and 2019, partially offset by customer launches in 2018 and 2019. Professional services and other revenue decreased primarily due to revenue from non-recurring professional services in the three months ended June 30, 2018.

Subscription revenue for the six months ended June 30, 2019 remained flat, primarily due to customer terminations in 2018 and 2019, offset by customer launches in 2018 and 2019. Professional services and other revenue decreased primarily due to revenue from non-recurring professional services in the six months ended June 30, 2018.


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Costs and Operating Expenses

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
% Change
 
$ Change
 
2019
 
2018
 
% Change
 
$ Change
 
(In thousands, except percentages)
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription
$
8,234

 
$
9,140

 
(10
)%
 
$
(906
)
 
16,400

 
$
18,314

 
(10
)%
 
$
(1,914
)
Professional services and other
5,929

 
6,590

 
(10
)%
 
(661
)
 
11,873

 
12,359

 
(4
)%
 
(486
)
Total cost of revenue
$
14,163

 
$
15,730

 
(10
)%
 
$
(1,567
)
 
$
28,273

 
$
30,673

 
(8
)%
 
$
(2,400
)
Gross margin (loss) percentage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscription
76
 %
 
74
 %
 
 
 
 
 
76
 %
 
73
 %
 
 
 
 
Professional services and other
(205
)%
 
(121
)%
 
 
 
 
 
(227
)%
 
(91
)%
 
 
 
 
Total gross margin
61
 %
 
58
 %
 
 
 
 
 
60
 %
 
59
 %
 
 
 
 
Gross profit
$
21,747

 
$
22,054

 
(1
)%
 
$
(307
)
 
$
43,127

 
$
43,590

 
(1
)%
 
$
(463
)
Cost of subscription revenue for the three months ended June 30, 2019 decreased by $0.9 million, or 10%, primarily due to a decrease of $0.6 million in employee-related expenses and a decrease of $0.3 million in hosting costs.
Cost of subscription revenue for the six months ended June 30, 2019 decreased by $1.9 million, or 10%, primarily due to a decrease of $1.0 million in employee-related expenses, a decrease of $0.4 million in data fees and a decrease of $0.4 million in amortization of internal-use software.

Cost of professional services revenue for the three months ended June 30, 2019 decreased by $0.7 million or 10%. The decrease is primarily due to a $0.6 million decrease in employee-related expenses.

Cost of professional services revenue for the six months ended June 30, 2019 decreased by $0.5 million or 4%. The decrease is primarily due to a $0.5 million decrease in third-party contractor and professional service fees.

Gross margin for the three months ended June 30, 2019 increased primarily due to revenue decline of 5% compared to a 10% decline in the associated costs. Gross margin for the six months ended June 30, 2019 remained relatively flat.

Sales and Marketing
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
% Change
 
$ Change
 
2019
 
2018
 
% Change
 
$ Change
 
(In thousands, except percentages)
Sales and marketing
$
8,889

 
$
13,306

 
(33
)%
 
$
(4,417
)
 
$
18,104

 
$
27,218

 
(33
)%
 
$
(9,114
)

Sales and marketing expense for the three months ended June 30, 2019 decreased by $4.4 million, or 33%, due to decreases of $3.4 million in employee-related expenses primarily from the reduction in force in the third quarter of 2018, $0.3 million in travel-related expenses, $0.3 million in allocated overhead and $0.3 million in marketing programs.

Sales and marketing expense for the six months ended June 30, 2019 decreased by $9.1 million, or 33%, due to decreases of $6.3 million in employee-related expenses primarily from the reduction in force in the third quarter of 2018, $0.6 million in third-party referral fees, $0.6 million in marketing programs, $0.5 million in travel-related expenses, $0.4 million in allocated overhead and $0.3 million in third-party contractor and professional service fees.
 


22


Research and Development
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
% Change
 
$ Change
 
2019
 
2018
 
% Change
 
$ Change
 
(In thousands, except percentages)
Research and development
$
14,487

 
$
16,425

 
(12
)%
 
$
(1,938
)
 
$
30,212

 
$
31,796

 
(5
)%
 
$
(1,584
)

Research and development expense for the three months ended June 30, 2019 decreased by $1.9 million, or 12%. The overall decrease was primarily due to a decrease in employee-related expenses of $0.7 million, $0.6 million in third-party contractor and professional service fees and $0.8 million in lease exit and related charges recorded in the second quarter of 2018.

Research and development expense for the six months ended June 30, 2019 decreased by $1.6 million, or 5%. The overall decrease was primarily due to $1.8 million in lease exit and related charges recorded in the first and second quarter of 2018, a decrease in third-party contractor and professional service fees of $0.6 million, partially offset by an increase in allocated overhead of $0.4 million and an increase in facilities cost of $0.3 million.

General and Administrative
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
% Change
 
$ Change
 
2019
 
2018
 
% Change
 
$ Change