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 September 30, ~~2017~~2019

~~[ ]~~☐ 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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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 ~~[ ]~~

~~(Do not check if a smaller~~

~~reporting company)~~

☐

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[ ]~~Yes ☐ No ~~[x]~~☒

As of October 25, ~~2017,~~2019, there were ~~53,005,558~~35,032,053 shares of the ~~Company’s~~Registrant’s Class A common stock outstanding and ~~80,731,913~~111,141,225 shares of the ~~Company’s~~Registrant’s Class B common stock outstanding.

Table of Contents

TABLE OF CONTENTS



		Page
		PART I. Financial Information
Item 1.		1Financial Statements	3
~~Item 1. Financial Statements~~		1
Condensed Consolidated Balance Sheets as of ~~September~~Septembe r 30, ~~2017~~2019 and December 31, ~~2016~~2018	13
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	24
		Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	35
		Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018	6
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	47
		Notes to Condensed Consolidated Financial Statements	58
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.		Controls and Procedures	2728
		PART II. Other Information
Item 1.		27Legal Proceedings	29
Item ~~1. Legal Proceedings~~1A.		28Risk Factors	29
Item ~~1A. Risk Factors~~6.		28Exhibits	51
		~~Item 2. Unregistered Sale of Equity Securities and Use of Proceeds~~Signature	49
~~Item 3. Defaults Upon Senior Securities~~	49
~~Item 4. Mine Safety Disclosures~~	49
~~Item 5. Other Information~~	49
~~Item 6. Exhibits~~	51
~~Signature~~	52
~~Exhibit Index~~	53

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CASTLIGHT HEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In ~~thousands)~~

thousands, except share and per share amounts)

As of
September 30, 2017 December 31, 2016
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 44,986
$ 48,722
Marketable securities 42,074
65,882
Accounts receivable, net 26,017
14,806
Deferred commissions 7,805
8,218
Prepaid expenses and other current assets 5,712
3,382
Total current assets 126,594
141,010
Property and equipment, net 5,670
5,285
Restricted cash, non-current 1,325
1,144
Goodwill 91,785
—
Intangible assets, net 21,469
—
Deferred commissions, non-current 4,021
5,050
Other assets 7,338
4,677
Total assets $ 258,202
$ 157,166
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 3,393
$ 2,288
Accrued expenses and other current liabilities 14,615
6,369
Accrued compensation 12,151
9,443
Deferred revenue 34,974
30,623
Total current liabilities 65,133
48,723
Deferred revenue, non-current 8,412
5,245
Debt, non-current 5,423
—
Other liabilities, non-current 1,955
1,236
Total liabilities 80,923
55,204
Commitments and contingencies

Stockholders’ equity:
Class A and Class B common stock 13
10
Additional paid-in capital 580,282
457,596
Accumulated other comprehensive loss (5 ) —
Accumulated deficit (403,011 ) (355,644 )
Total stockholders’ equity 177,279
101,962
Total liabilities and stockholders’ equity $ 258,202
$ 157,166
(unaudited)


	As of
	September 30, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	36,040	$	66,005
Marketable securities	19,977		11,327
Accounts receivable and other, net	35,442		26,816
Prepaid expenses and other current assets	4,512		3,680
Total current assets	95,971		107,828
Property and equipment, net	3,318		3,963
Restricted cash, non-current	1,325		1,325
Deferred commissions	17,242		20,142
Deferred professional service costs	8,429		10,133
Intangible assets, net	13,253		16,209
Goodwill	91,785		91,785
Operating lease right-of-use assets, net	13,351		—
Other assets	2,119		2,129
Total assets	$	246,793	$	253,514
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	11,989	$	9,556
Accrued expenses and other current liabilities	11,169		15,454
Accrued compensation	5,547		5,975
Deferred revenue	17,509		20,193
Operating lease liabilities	5,897		—
Total current liabilities	52,111		51,178
Deferred revenue, non-current	824		1,030
Debt, non-current	1,860		3,254
Operating lease liabilities, non-current	10,574		—
Other liabilities, non-current	1,125		3,381
Total liabilities	66,494		58,843
Commitments and contingencies
Stockholders’ equity:
Class A common stock, $0.0001 par value; 200,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 35,032,053 shares and 37,576,324 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	4		4
Class B common stock, $0.0001 par value; 800,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 111,133,913 shares and 104,350,881 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	11		10
Additional paid-in capital	623,573		609,697
Accumulated other comprehensive income	7		—
Accumulated deficit	(443,296)		(415,040)
Total stockholders’ equity	180,299		194,671
Total liabilities and stockholders’ equity	$	246,793	$	253,514

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CASTLIGHT HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue:
Subscription	$	34,900	$	36,702	$	102,670	$	104,493
Professional services and other	561		3,339		4,191		9,811
Total revenue, net	35,461		40,041		106,861		114,304
Cost of revenue:
Cost of subscription ⁽¹⁾	8,517		8,558		24,917		26,872
Cost of professional services and other ⁽¹⁾	5,984		6,237		17,857		18,596
Total cost of revenue	14,501		14,795		42,774		45,468
Gross profit	20,960		25,246		64,087		68,836
Operating expenses:
Sales and marketing⁽¹⁾	9,829		11,497		27,933		38,715
Research and development ⁽¹⁾	14,295		15,028		44,507		46,824
General and administrative ⁽¹⁾	6,440		6,193		20,743		19,400
Total operating expenses	30,564		32,718		93,183		104,939
Operating loss	(9,604)		(7,472)		(29,096)		(36,103)
Other income, net	268		207		840		436



Net loss	$	(9,336)	$	(7,265)	$	(28,256)	$	(35,667)
Net loss per share, basic and diluted	$	(0.06)	$	(0.05)	$	(0.20)	$	(0.26)
Weighted-average shares used to compute basic and diluted net loss per share	145,701		138,490		144,434		136,735

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Revenue:
Subscription $ 31,363
$ 23,867
$ 86,963
$ 66,859
Professional services and other 3,209
1,634
7,453
4,944
Total revenue, net 34,572
25,501
94,416
71,803
Cost of revenue:
Cost of subscription (1) 8,123
3,988
20,075
12,218
Cost of professional services and other (1) 4,898
3,978
13,679
13,941
Total cost of revenue 13,021
7,966
33,754
26,159
Gross profit 21,551
17,535
60,662
45,644
Operating expenses:
Sales and marketing (1) 16,006
13,143
47,024
44,877
Research and development (1) 13,809
10,573
40,074
30,619
General and administrative (1) 10,307
5,338
26,071
19,902
Total operating expenses 40,122
29,054
113,169
95,398
Operating loss (18,571 ) (11,519 ) (52,507 ) (49,754 )
Other income, net 84
116
288
304
Loss before income tax benefit $ (18,487 ) (11,403 ) $ (52,219 ) (49,450 )
Income tax benefit —
—
5,206
—
Net loss $ (18,487 ) $ (11,403 ) $ (47,013 ) $ (49,450 )
Net loss per Class A and B share, basic and diluted $ (0.14 ) $ (0.11 ) $ (0.38 ) $ (0.50 )
Weighted-average shares used to compute basic and diluted net loss per Class A and B share 132,251
103,147
122,675
99,734

~~_______________________~~


~~(1)~~	~~Includes stock-based compensation expense as follows:~~

⁽¹⁾Includes stock-based compensation expense as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,						Nine Months Ended September 30,
	2017		2016		2017		2016			2019		2018		2019		2018
Cost of revenue:									Cost of revenue:
Cost of subscription	$	258	$	139	$	638	$	367	Cost of subscription	$	180	$	322	$	595	$	795
Cost of professional services and other	342		456		1,400		1,468		Cost of professional services and other	236		322		737		938
Sales and marketing	3,110		2,190		7,705		6,644		Sales and marketing	678		699		1,967		3,155
Research and development	1,631		1,631		5,675		4,300		Research and development	1,294		1,798		4,731		5,360
General and administrative	1,121		1,236		3,586		3,476		General and administrative	625		1,129		3,817		3,761

See Notes to Condensed Consolidated Financial Statements.

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CASTLIGHT HEALTH, INC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Net loss	$	(9,336)	$	(7,265)	$	(28,256)	$	(35,667)
Other comprehensive income:
Net change in unrealized gain on available-for-sale marketable securities	—		3		7		16
Other comprehensive income	—		3		7		16
Comprehensive loss	$	(9,336)	$	(7,262)	$	(28,249)	$	(35,651)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net loss $ (18,487 ) $ (11,403 ) $ (47,013 ) $ (49,450 )
Other comprehensive income (loss):
Net change in unrealized gain (loss) on available-for-sale marketable securities 10
(16 ) (5 ) 117
Other comprehensive income (loss) 10
(16 ) (5 ) 117
Comprehensive loss $ (18,477 ) $ (11,419 ) $ (47,018 ) $ (49,333 )

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

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 June 30, 2019	145,198,887	$	14	$	620,449	$	7	$	(433,960)	$	186,510
Vesting of restricted stock units	913,573	—		—		—		—		—
Exercise of stock options, net	53,506	1		78		—		—		79
Stock-based compensation	—	—		3,046		—		—		3,046
Comprehensive loss	—	—		—		—		(9,336)		(9,336)
Balances as of September 30, 2019	146,165,966	$	15	$	623,573	$	7	$	(443,296)	$	180,299

Balances as of June 30, 2018	137,729,010	$	14	$	598,963	$	(9)	$	(403,736)	$	195,232
Vesting of restricted stock units	1,219,444	—		—		—		—		—
Exercise of stock options, net	352,013	—		371		—		—		371
Stock-based compensation	—	—		4,323		—		—		4,323
Comprehensive loss	—	—		—		3		(7,265)		(7,262)
Balances as of September 30, 2018	139,300,467	$	14	$	603,657	$	(6)	$	(411,001)	$	192,664

Balances as of December 31, 2018	141,927,205	$	14	$	609,697	$	—	$	(415,040)	$	194,671
Vesting of restricted stock units	3,004,471	—		—		—		—		—
Exercise of stock options, net	1,234,290	1		1,923		—		—		1,924
Stock-based compensation	—	—		11,953		—		—		11,953
Comprehensive loss	—	—		—		7		(28,256)		(28,249)
Balances as of September 30, 2019	146,165,966	$	15	$	623,573	$	7	$	(443,296)	$	180,299








Balances as of December 31, 2017	134,539,275	$	13	$	586,900	$	(22)	$	(375,334)	$	211,557
Vesting of restricted stock units	2,881,870	—		—		—		—		—
Exercise of stock options, net	1,879,322	1		2,612		—		—		2,613
Stock-based compensation	—	—		14,145		—		—		14,145
Comprehensive loss	—	—		—		16		(35,667)		(35,651)
Balances as of September 30, 2018	139,300,467	$	14	$	603,657	$	(6)	$	(411,001)	$	192,664

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CASTLIGHT HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine Months Ended September 30,
	2019		2018
Operating activities:
Net loss	$	(28,256)	$	(35,667)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,368		5,271
Stock-based compensation	11,847		14,009
Amortization and impairment of deferred commissions	7,403		9,017
Amortization and impairment of deferred professional service costs	3,110		3,351
Non-cash operating lease expense	3,919		—
Lease exit and related charges	—		2,070
Accretion and amortization of marketable securities	(244)		(392)
Changes in operating assets and liabilities:
Accounts receivable and other, net	(8,626)		(8,302)
Deferred commissions	(4,503)		(5,180)
Deferred professional service costs	(1,301)		(2,110)
Prepaid expenses and other assets	(822)		(1,119)
Accounts payable	2,378		1,745
Operating lease liabilities	(4,267)		—
Accrued expenses and other liabilities	(3,072)		1,645
Deferred revenue	(2,890)		(2,315)
Accrued compensation	(428)		(8,080)
Net cash used in operating activities	(21,384)		(26,057)
Investing activities:
Purchase of property and equipment	(712)		(1,895)
Purchase of marketable securities	(23,069)		(25,430)
Maturities of marketable securities	14,670		36,350
Net cash (used in) provided by investing activities	(9,111)		9,025
Financing activities:
Proceeds from exercise of stock options	1,924		2,613
Principal payments on long-term debt	(1,394)		—
Net cash provided by financing activities	530		2,613

Net decrease in cash, cash equivalents and restricted cash	(29,965)		(14,419)
Cash, cash equivalents and restricted cash at beginning of period	67,330		62,644
Cash, cash equivalents and restricted cash at end of period	$	37,365	$	48,225

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	36,040	$	46,900
Restricted cash	1,325		1,325
Total cash, cash equivalents and restricted cash	$	37,365	$	48,225

Nine Months Ended September 30,
2017 2016
Operating activities:
Net loss $ (47,013 ) $ (49,450 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,572
2,407
Stock-based compensation 19,004
16,255
Amortization of deferred commissions 8,120
3,157
Release of deferred tax valuation allowance due to business combination (5,206 ) —
Change in fair value of contingent consideration liability 3,288
—
Accretion and amortization of marketable securities 22
406
Changes in operating assets and liabilities:
Accounts receivable (7,778 ) (3,137 )
Deferred commissions (6,678 ) (4,403 )
Prepaid expenses and other assets (393 ) (68 )
Accounts payable 401
300
Accrued expenses and other liabilities 2,623
(4,046 )
Deferred revenue 5,661
3,318
Net cash used in operating activities (23,377 ) (35,261 )
Investing activities:
Restricted cash (181 ) —
Purchase of property and equipment (2,276 ) (1,587 )
Purchase of marketable securities (56,852 ) (73,163 )
Maturities of marketable securities 80,633
126,157
Business combination, net of cash acquired (2,264 ) —
Net cash provided by investing activities 19,060
51,407
Financing activities:
Proceeds from the exercise of stock options 1,312
2,576
Proceeds from issuance of common stock and warrants

—
17,358
Payments of issuance costs related to equity (731 ) (122 )
Net cash provided by financing activities 581
19,812

Net increase (decrease) in cash and cash equivalents (3,736 ) 35,958
Cash and cash equivalents at beginning of period 48,722
19,150
Cash and cash equivalents at end of period $ 44,986
$ 55,108

Non-cash investing and financing activity:
Non-cash purchase consideration related to acquisition of Jiff

$ 101,692
$ —

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Organization and Description of Business

Castlight Health, Inc. (“Castlight” or “the Company”) ~~has historically offered~~offers a comprehensive software-as-a-service platform that simplifies health benefits navigation for millions of employees. The Castlight platform ~~that engages~~matches employees to the best resources their employers make ~~better~~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 ~~decisions~~costs, and enables employers to communicate and measure their benefit programs. The Company provides a simple, personalized, and powerful way for employees to shop for and manage their health care. At the same time,increase benefits satisfaction. In July 2019, the Company ~~enables employers~~announced plans to ~~understand their employees’ needs~~market its technology beyond its current employer market to health plans and ~~guide them to the right care, right providers and right programs~~other potential buyers who interact with healthcare users at the ~~right time. On April 3, 2017, the Company completed its acquisition~~point of Jiff, Inc. (“Jiff”). The acquisition enables the Company to provide the full spectrum of wellbeing, healthcare decision support and a benefits hub all in one complete package. Jiff still operates as a wholly-owned subsidiary of the Company. Jiff's results of operations have been included in the Company’s Condensed Consolidated Statements of Operations beginning April 3, 2017. See Note 5 for more information on the Jiff acquisition. The Company's comprehensive technology offering aggregates complex, large-scale data and applies sophisticated analytics to make health care data actionable and useful.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. ~~Summary of~~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~~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, ~~2016.~~ 2018.

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

Use of Estimates

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

•to the determination of:

•Variable consideration included in the transaction price of the ~~relative~~Company’s contracts with customers;

•The standalone selling ~~prices for~~price of the performance obligations in the Company’s ~~products and services~~contracts with customers;

• ~~certain assumptions~~Assumptions used in the valuation of ~~the Company’s~~certain equity ~~awards~~awards;

• ~~certain assumption~~The amortization period for deferred commissions and deferred professional services costs; and

•Assumptions used in the ~~determination~~calculation of right-of-use (“ROU”) assets and lease liabilities for operating leases, including lease terms and the Company’s ~~contingent consideration liability~~incremental borrowing rate.

▪ ~~the fair value of assets acquired and liabilities assumed for business combinations.~~

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

~~Critical~~Summary of Significant Accounting Policies

~~Except for~~Leases

The Company determines if an arrangement is a lease and its classification at lease inception. Operating lease liabilities are recognized at the ~~accounting policies below, there have been no changes~~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 ~~our critical accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2016.~~

Table of ~~Contents~~Content

CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(CONTINUED)~~

(unaudited)

~~Business Combinations, Goodwill, and Intangible Assets~~

compute the present value of lease payments when the implicit rate is not readily determinable. ROU assets are measured at lease inception based on the initial measurement of the lease liability, plus any prepaid lease amounts, less any lease incentives. The Company ~~allocates~~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 ~~fair value of purchase consideration to~~lease unless it is reasonably certain that the ~~tangible assets acquired, liabilities assumed, and intangible assets acquired based~~option will be exercised. Generally, lease expense for lease payments is recognized on ~~their estimated fair values. The excess of the fair value of purchase consideration~~a straight-line basis over the ~~fair values of these identifiable assets~~lease term. The Company's lease agreements have both lease and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users and acquired technology, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

~~The Company reviews goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.~~non-lease components. The Company has elected to ~~first assess~~account for the qualitative factors to determine whether it is more likely than not that the fair value of the Company’s single reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step will be performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. As of September 30, 2017, no impairment of goodwill has been identified.

~~Acquired finite-lived intangible assets are amortized over their estimated useful lives. The Company evaluates the recoverability~~non-lease components of its ~~intangible assets~~leases as part of their related lease components.

Concentrations of Risk and Significant Customers

No single direct customer accounted for ~~possible impairment whenever events or circumstances indicate that~~more than 10% of total revenue during the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. The Company has not recorded any such impairment charges.

~~Recently Adopted Accounting Pronouncements~~

~~Stock-based Compensation~~

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment.” The guidance will change how companies account for certain aspects of share-based payments to employees. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The Company adopted this guidance on January 1, 2017 and accordingly recorded a cumulative-effect adjustment charge of approximately $0.4 million to the beginning accumulated deficit for the impact of electing to account for forfeitures as they occur. The adoption of this standard did not have any impact to the Statement of Operations or the Statement of Cash Flows. The Company is subject to full valuation allowance and thus has not utilized any excess tax benefits or realized any cash tax benefit related to stock compensation expense. The adoption of this standard did not have any material impact to the Company’s results of operations for three and nine months ended September 30, ~~2017.~~2019 or more than 10% of accounts receivable as of September 30, 2019. Castlight had one channel partner, Anthem, Inc. (“Anthem”), that represented approximately 29% and 26% of total revenue during the three and nine months ended September 30, 2019, respectively, and approximately 41% of accounts receivable as of September 30, 2019.

~~Consolidation~~Recently Adopted Accounting Pronouncements

In October 2016, the FASB issued ASU 2016-17, “Consolidation.” The standard addresses how companies evaluate whether a reporting entity is the primary beneficiary of a VIE by changing how the reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The standard became effective forEffective January 1, 2019, the Company ~~beginning January 1, 2017. Based on~~adopted Accounting Standards Update (“ASU”) 2016-02, Leases, and subsequent amendments ("ASC 842") using the ~~Company’s evaluation,~~modified retrospective method, and chose to apply the ~~standard did not have a material impact on its consolidated financial statements.~~

~~Table of Contents~~

~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~

~~Recently Issued Accounting Pronouncements~~

~~Goodwill~~

In January 2017, the FASB issued ASU 2017-4, “Intangibles—Goodwill and Other.” The standard eliminates Step 2 from the goodwill impairment test, under which an entity had to perform procedures to determine the fair valueprovisions at the ~~impairment testing date~~beginning of ~~its assets and liabilities, instead requiring an entity to perform its annual, or interim, goodwill impairment test by comparing~~ the ~~fair value~~period of a reporting unit with its carrying amount. The standard will become effective for the Company beginning January 1, 2020, and early adoption is permitted. At this point in time, the Company does not intend to adopt the standard early. Based on the Company’s evaluation, the standard will not have a material impact on its consolidated financial statements.

~~Leases~~

~~In February 2016, the FASB issued ASU 2016-02, “Leases.”~~adoption. The guidance ~~will require~~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 in a manner similar to current practice.~~statements. The guidance states that a lessee would recognize a lease liability for the obligation to make lease payments and a ~~right-to-use~~right-of-use ("ROU") asset for the right to use the underlying asset for the lease term. ~~The guidance will be effective for~~

As a result of the ~~Company beginning~~adoption of ASC 842 as of January 1, 2019, reporting periods beginning on and ~~early adoption is permitted. At this point~~after January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in ~~time,~~accordance with prior accounting guidance under ASC 840. In addition, the Company ~~does not intend to adopt~~elected the ~~standard early. The Company is evaluating the accounting, transition and disclosure requirements~~package of ~~the standard and cannot currently estimate the impact of adoption on its consolidated financial statement.~~

~~Financial Instruments~~

In January 2016, the FASB issued ASU 2016-1, “Financial Instruments.” The guidance provides a new measurement alternative for equity investments that don’t have readily determinable fair values and don’t qualify for the net asset value practical expedient. Under this alternative, these investments can be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance will be effective for the Company beginning January 1, 2018 and earlier adoption is not permitted. The Company is evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the impact of adoption on its consolidated financial statements.

~~Revenue Recognition~~

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” and has since updated the ASU. This ASU replaces existing revenue recognition standards with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The new standard will be effective for the Company beginning January 1, 2018 with early adoptionexpedients permitted ~~beginning January 1, 2017. The Company has elected not to early adopt the new standard.~~

The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company currently plans to adopt under the ~~full retrospective method. However, a final decision regarding the adoption method has not been finalized at this time.~~

~~The Company is currently assessing the impact of~~transition guidance within the new standard, ~~on its accounting policies, processes, and controls, including system requirements and has assigned internal resources and has also engaged a third party service provider to assist in its assessment.~~

~~Based on its assessment to date,~~which among other things, allowed the Company ~~currently believes~~to carry forward the historical lease classification. As a ~~significant impact from~~result of the adoption of the new ~~standard will be related~~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 ~~costs to fulfill as well as its costs to obtain contracts with customers. For fulfillment costs,~~condensed consolidated statement of operations and had no impact on the ~~new standard states that an entity shall recognize an asset from the costs incurred to fulfill a contract if certain criteria are met.~~ cash flows. See Note 10 - Leases for more information on leases.

Recently Issued Accounting Pronouncements

The Company ~~believes these criteria will be met~~considers the applicability and ~~these costs will be recognized as an asset under~~impact of all ASUs issued by the ~~new standard.~~FASB. The ~~costs~~Company determined that the ASUs issued by the FASB during the nine months ended September 30, 2019 are either not applicable or are expected to ~~fulfill a contract that are recognized as an asset are then amortized~~have minimal impact on ~~a systematic basis that is consistent with~~ the ~~transfer~~Company's condensed consolidated financial results.

Note 3. Revenue, Deferred Revenue, Contract Balances and Performance Obligations

The Company sells to customers based in the ~~customer~~United States through direct sales and indirect channels. Indirect channel revenue represented approximately 31% and 13% of the ~~goods or services to which~~Company’s total revenue for the ~~asset relates. The Company currently expenses costs to fulfill a contract when they are incurred. Similar to fulfillment costs,~~three months ended September 30, 2019 and 2018, respectively. Indirect channel revenue represented approximately 28% and 11% of the Company’s total revenue for ~~costs to obtain a contract (which are primarily sales commissions~~the nine months ended September 30, 2019 and ~~broker fees),~~2018, respectively.

Deferred revenue as of September 30, 2019 and December 31, 2018 was $18.3 million and $21.2 million, respectively. Contract assets as of September 30, 2019 and December 31, 2018 were $1.1 million and $1.0 million, respectively.

$11.3 million and $16.0 million of revenue was recognized during the ~~standard states~~three months ended September 30, 2019 and 2018, respectively, that ~~costs to obtain a contract shall be amortized on a systematic basis~~was included in the Company’s deferred revenue balances at the beginning of the respective periods. $18.5 million and $26.6 million of revenue was recognized during the nine months ended September 30, 2019 and 2018, respectively, that iswas included in the Company’s deferred revenue balances at the beginning of the respective periods.

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CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(CONTINUED)~~

(unaudited)

The Company recorded unfavorable cumulative catch-up adjustments to revenue of $0.1 million during the three months ended September 30, 2019 and favorable cumulative catch-up adjustments to revenue of $0.7 million during the three months ended September 30, 2018, arising from changes in estimates of transaction price. The Company recorded favorable cumulative catch-up adjustments to revenue of $1.8 million during the nine months ended September 30, 2019 and favorable cumulative catch-up adjustments to revenue of $0.1 million during the nine months ended September 30, 2018, arising from changes in estimates of transaction price.

~~consistent~~

The aggregate balance of remaining performance obligations from non-cancelable contracts with customers as of September 30, 2019 was $121.9 million. The Company expects to recognize approximately 70% of this balance over the next 12 months, with the ~~transfer~~remaining balance recognized thereafter. Remaining performance obligations are defined as deferred revenue and amounts yet to ~~the customer of the goods or services to which the asset relates. The Company currently capitalizes certain sales commissions and amortizes those costs over~~be billed for the non-cancelable portion of ~~its subscription~~ contracts. ~~Under~~

Note 4. Deferred Costs

Changes in the ~~new standard,~~balance of total deferred commissions and total deferred professional service costs during the ~~amortization period~~nine months ended September 30, 2019 are as follows (in thousands):


	As of December 31, 2018					Expense recognized		As of September 30, 2019
					Additions
Deferred commissions	$	20,142	$	4,503		$	(7,403)	$	17,242
Deferred professional service costs	10,133		1,406			(3,110)		8,429
Total deferred commissions and professional service costs	$	30,275	$	5,909		$	(10,513)	$	25,671

These costs are reviewed for impairment quarterly. Impairment charges, included in expense recognized above, were $0.2 million and $0.3 million for the ~~Company’s costs to obtain a contract could be longer. Lastly, based on its assessment,~~three months ended September 30, 2019 and 2018, respectively, and were $0.8 million and $0.9 million for the Company currently believes areas of impact related to the Company’s revenue recognition will be in the accounting for termination provisions, the estimation of variable consideration, the accounting for contract modifications,nine months ended September 30, 2019 and ~~the allocation of the transaction price to the Company’s multiple performance obligations.~~2018, respectively.

While the Company continues to assess the potential impacts of the new standard, including the areas described above, and anticipates the standard could have a material impact on its consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the Company’s consolidated financial statements at this time.

Note ~~3. Marketable Securities~~5. Goodwill and Intangible Assets

~~All~~Goodwill

Currently, all of the Company’s ~~cash equivalents and marketable securities are classified as “available-for-sale” securities. These securities are reported at~~goodwill relates to the acquisition of Jiff. The excess of purchase consideration over the fair value ~~with~~of net tangible and identifiable intangible assets acquired was recorded as goodwill. There were 0 changes to goodwill for the three and nine months ended September 30, 2019.

Table of Content

CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Intangible assets, net

Identified intangible assets are recorded at their estimated fair values at the date of acquisition and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. Subsequent to the end of second quarter of 2019, the Company realized elevated churn related ~~unrealized gains~~to legacy Jiff customers. As a result, the Company performed an analysis of realized churn and ~~losses~~future forecasts and updated its estimate of the original useful life of customer relationships and backlog in the third quarter of 2019. The estimated useful life of customer relationships was revised from 10 years to 6 years, and the estimated useful life of backlog was revised from 3 years to 2.5 years. These updates in useful lives have been accounted for as a change in accounting estimate and will be applied prospectively to the remaining carrying amounts.

The following tables set forth the fair value components of identifiable acquired intangible assets (dollars in thousands):


	As of September 30, 2019
	Useful Life					Gross		Accumulated Amortization		Net
Customer relationships	6					$	10,900	$	(2,980)	$	7,920
Developed technology	5					10,600		(5,300)		5,300
Backlog	2.5					1,500		(1,500)		—
Other acquired intangible assets	1	-	3	900		(867)		33
Total identifiable intangible assets				$	23,900	$	(10,647)	$	13,253


	As of 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 September 30, 2019 and 2018 was $1.2 million and $1.0 million, respectively. Amortization expense from acquired intangible assets for the nine months ended September 30, 2019 and 2018 was $3.0 million and $3.1 million, respectively. Amortization expense is included in ~~accumulated other comprehensive income, a component~~cost of ~~shareholders’ equity.~~subscription, sales and marketing, and general and administrative expenses.

~~At September 30, 2017 and December 31, 2016, respectively, marketable securities consisted of~~Amortization expense for acquired intangible assets for the following five years is as follows (in thousands):


Remainder of 2019	$	1,075
2020	4,248
2021	4,232
2022	2,642
2023	1,056
Total amortization expense	$	13,253

Amortized
Cost

Unrealized
Gains

Unrealized
Losses
Fair Value
September 30, 2017
U.S. agency obligations $ 15,294
$ —
$ (2 ) $ 15,292
U.S. treasury securities 43,382
1
(4 ) 43,379
Money market mutual funds 3,647
—
—
3,647
62,323
1
(6 ) 62,318
Included in cash and cash equivalents 20,244
—
—
20,244
Included in marketable securities $ 42,079
$ 1
$ (6 ) $ 42,074

Table of Content

CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Amortized
Cost

Unrealized
Gains

Unrealized
Losses
Fair Value
December 31, 2016
U.S. agency obligations $ 33,019
$ 5
$ (3 ) $ 33,021
U.S. treasury securities 37,864
—
(2 ) 37,862
Money market mutual funds 7,965
—
—
7,965
78,848
5
(5 ) 78,848
Included in cash and cash equivalents 12,966
—
—
12,966
Included in marketable securities $ 65,882
$ 5
$ (5 ) $ 65,882

Note 4.6. 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 operations.

Marketable securities consisted of the following (in thousands):


	As of September 30, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. treasury securities	$	9,504	$	3	$	—	$	9,507
U.S. agency obligations	10,466		4		—		10,470
Money market mutual funds	11,703		—		—		11,703
	31,673		7		—		31,680
Included in cash and cash equivalents	11,703		—		—		11,703
Included in marketable securities	$	19,970	$	7	$	—	$	19,977


	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~~markets.

Level 2—Include other inputs that are directly or indirectly observable in the ~~marketplace~~

~~Table of Contents~~

~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~

marketplace.

Level 3—Unobservable inputs that are supported by little or no market ~~activity~~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.

The Company classifies its contingent consideration liability in connection with the acquisition of Jiff within the Level 3 category, as factors used to develop the estimated fair value are unobservable inputs that are not supported by market activity. The Company estimates the fair value of the contingent consideration liability based on the Monte Carlo simulation model. The fair value of the contingent consideration is calculated with numerous projected outcomes, the results of which are averaged and then discounted to estimate the present value. Some of the more significant assumptions inherent in the development of the Monte Carlo simulation model include bookings and revenue forecasts, asset-level volatility, stock price volatility, correlation between stock price and revenue, risk-free rate, weighted average cost of capital (“WACC”), and stock price. Any change in these assumptions could result in a significantly higher (lower) fair value measurement.

~~Except for new valuation for contingent consideration liability, there~~There have been no changes in valuation techniques in the periods presented. There were no significant transfers between fair value measurement levels as of September 30, ~~2017~~2019 and December 31, ~~2016.~~2018. As of September 30, 2019 and December 31, 2018, there were no securities within Level 3 of the fair value hierarchy.

Table of Content

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 September 30, 2019
	Level 1		Level 2		Total
Cash equivalents:


Money market mutual funds	$	11,703	$	—	$	11,703
Marketable securities:
U.S. treasury securities	—		9,507		9,507
U.S. agency obligations	—		10,470		10,470
	$	11,703	$	19,977	$	31,680

Level 1 Level 2 Level 3 Total
September 30, 2017
Cash equivalents:
Money market mutual funds $ 3,647
$ —
$ —
$ 3,647
U.S. agency obligations —
5,848
—
5,848
U.S. treasury securities —
10,749
—
10,749
Marketable securities:
U.S. agency obligations —
9,444
—
9,444
U.S. treasury securities —
32,630
—
32,630
$ 3,647
$ 58,671
$ —
$ 62,318

Accrued expenses and other current liabilities:
Contingent consideration liability⁽¹⁾
$ —
$ —
$ 3,959
$ 3,959

^{(1) Change in fair value is recorded in general and administrative expenses in the Company’s condensed consolidated statement of operations.}

Level 1 Level 2 Level 3 Total
December 31, 2016
Cash equivalents:
Money market mutual funds $ 7,965
$ —
$ —
$ 7,965
U.S. treasury securities —
5,000
—
5,000
Marketable securities:
U.S. agency obligations —
33,021
—
33,021
U.S. treasury securities —
32,862
—
32,862
$ 7,965
$ 70,883
$ —
$ 78,848

~~Table of Contents~~

~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~


	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 September 30, ~~2017~~2019 and December 31, ~~2016~~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 September 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

There were no0 realized gains or losses during the nine months ended September 30, 2017. All of the Company’s marketable securities at September 30, 2017 and December 31, 2016 mature within one year. Marketable securities on the balance sheets consist of securities with original or remaining maturities at the time of purchase of greater than three months, and the remainder of the securities is reflected in cash and cash equivalents.

~~The following is a reconciliation of the Level 3 contingent consideration liability (in thousands):~~

Contingent Consideration Liability
Balance as of December 31, 2016 $ —
Initial fair value as of acquisition date 671
Re-measurement of fair value on June 30, 2017 ⁽¹⁾
(643 )
Balance as of June 30, 2017 28
Re-measurement of fair value on September 30, 2017 ⁽¹⁾
3,931
Balance as of September 30, 2017 $ 3,959

_{(1) Changes in fair value are recorded in general and administrative expenses in our condensed consolidated statements of operations.}

The fair value estimate of this liability was $0.7 million at the date of acquisition. The changes in the fair value of the contingent consideration liability subsequent to the acquisition date are recognized in earnings in the period when the change in the estimated fair value occurs. The Company recognized a $3.9 million and $3.3 million loss related to change in the fair value of the contingent consideration liability in its condensed consolidated statements of operations for the three months and nine months ended September 30, 2017, respectively.

~~Note 5. Business Combinations~~

On April 3, 2017, the Company completed its acquisition of Jiff. Jiff provides an enterprise health benefits platform that serves as a central hub for employee wellbeing and employee benefit programs. The acquisition enables the Company to provide the full spectrum of wellbeing, healthcare decision support and a benefits hub all in one complete package. The Company acquired Jiff for approximately 27,000,000 in shares and options.

At the closing on April 3, 2017, Venrock, a holder of more than 5% of the Company’s capital stock, acquired a total of 3,965,979 shares of the Company’s Class B common stock in exchange for its shares of Jiff capital stock. Venrock will also receive its pro rata share of any additional contingent consideration further described below. Bryan Roberts, the Chairman of the Company’s Board of Directors, is a Partner at Venrock. Accordingly, this was a related party transaction.

The Company’s Board appointed a Special Committee (comprised solely of disinterested directors) to which it delegated the full and exclusive power, authority and discretion of the Castlight Board to evaluate, assess, and approve the Jiff transaction on its behalf, including retaining a financial advisor for an opinion on the fairness of the financial conditions of the transaction. The transaction was approved solely by the Special Committee which concluded that the transaction terms were fair to Castlight and the transaction was in the best interests of Castlight and its stockholders.

As part of the merger, certain stockholders and option holders will receive an aggregate of 1,000,000 shares of the Company’s Class B common stock or options if the Jiff business achieves at least $25 million in revenue in 2017 and an aggregate of 3,000,000 shares of Class B common stock or options if the Jiff business achieves at least $25 million in net new bookings during 2017 (“the milestones”). Additionally, all options for Jiff common stock held by Jiff employees who became employees of the combined company were converted into options to purchase the Company’s Class B common stock.

~~Table of Contents~~

~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~

~~The following table summarizes the components of the purchase consideration transferred based on the closing price of the Company’s stock as of the acquisition date (in thousands):~~

Fair value
Fair value of Company Class B common stock (25,054,049 shares @ $3.65 per share) $ 91,447
Fair value of contingent consideration 671
Fair value of assumed Jiff options attributable to pre-combination services 9,574
Transaction costs paid on behalf of Jiff 4,498
Estimated purchase price consideration $ 106,190

For the Jiff options assumed as part of the acquisition, the Company applied the ratio of pre-combination service provided, on a grant-by-grant basis, to the total service period and applied this ratio to the acquisition date fair value of the Jiff awards.

The Company determined that the contingent consideration shares associated with the milestones are one unit of account and the Company classified the contingent consideration as a liability as the arrangement can be settled in a variable number of shares and is not considered fixed-for-fixed. Based on the probability of completing the milestones and changes in the fair value of the Company’s common stock, the Company used a Monte Carlo simulation model to determine the fair value of the contingent consideration liability which was $0.7 million at the date of acquisition and $4.0 million at September 30, 2017. The Company classified the contingent consideration liability as a current liability on the condensed consolidated balance sheet and the contingent consideration liability will be subsequently remeasured to fair value at each reporting date. See Note 4 for the fair value measurement disclosure on the contingent consideration liability.

The Company has accounted for this acquisition as a business combination. The method requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date.

The allocation of purchase consideration to assets and liabilities is not yet finalized. The Company continues to evaluate the fair value of certain assets and liabilities related to the acquisition of Jiff. Additional information, which existed as of the acquisition date but was at that time unknown to us, may become known to us during the remainder of the measurement period. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill. The preliminary estimated fair values of assets acquired and liabilities assumed may be subject to change as additional information is received. The fair values of the assets acquired and liabilities assumed by major class in the acquisition of Jiff as of September 30, 2017 were recognized as follows (in thousands):

Cash $ 2,234
Current assets 5,159
Other assets 1,971
Acquired intangible assets 23,900
Goodwill 91,785
Total assets acquired 125,049
Deferred revenue (1,857 )
Other current liabilities (6,192 )
Debt (5,578 )
Noncurrent liabilities (5,232 )
Total net assets acquired $ 106,190

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~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~

The fair values assigned to tangible assets acquired, liabilities assumed and identifiable intangible assets are based on management’s estimates and assumptions. The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill balance is primarily attributed to the cross-selling opportunities, cost synergies, and a knowledgeable and experienced workforce which play an important role in the integration of the acquired customers and technology. The goodwill balance is not deductible for U.S. income tax purposes.

~~The following table sets forth the fair value components of identifiable acquired intangible assets (in thousands) and their estimated useful lives (in years):~~

Fair Value Useful Life
Customer relationships $ 10,900
10
Developed technology 10,600
5
Backlog 1,500
3
Other acquired intangible assets 900
1-3
Total identifiable intangible assets $ 23,900

Customer relationships represent the fair value of projected cash flows that will be derived from the sale of products to Jiff's existing customers based on existing, in-process, and future versions of the underlying technology. Developed technology represents Jiff’s benefits platform. The Company used the relief from royalty method to value the developed technology. To determine the net cash flow that a market participant would expect to realize from licensing the Company's technology, the Company estimated a net royalty rate, which excludes any expenses that would be incurred to maintain the current functionality of the technology.

~~The Company has included the financial results of Jiff in the condensed consolidated statements of operations from the date of acquisition. For~~ the three and nine months ended September 30, 2017 approximately $3.2 million and $6.4 million revenue attributable to Jiff was included in the consolidated results of operations respectively, the associated operating loss was immaterial. The Company incurred $3.1 million of total acquisition-related costs for the nine months ended September 30, 2017 that were recognized in general and administrative expenses.

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Jiff as if the companies were combined as of the beginning of 2016. The historical consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination and factually supportable. The unaudited pro forma financial information presented includes the business combination accounting effects resulting from the acquisition, including amortization charges from acquired intangible assets, stock-based compensation, and acquisition-related costs. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of 2016.

~~The unaudited pro forma financial information is as follows:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(in thousands)
Total revenue $ 34,538
$ 27,059
$ 97,991
$ 75,513
Net loss $ (17,632 ) $ (20,190 ) $ (53,362 ) $ (71,757 )

The pro forma revenue and net loss reflects material, nonrecurring adjustments, such as the tax benefit of $5.2 million that resulted from the acquisition, non-recurring acquisition-related compensation expense and non-recurring deferred revenue fair value adjustments.

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~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~

~~Note 6. Goodwill and Intangible Assets~~

~~Goodwill~~

~~Currently, all~~2019. 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.~~

~~The changes in the carrying amount of goodwill~~securities as of September 30, ~~2017 were as follows (in thousands):~~2019 and December 31, 2018 mature within one year.

Balance as of December 31, 2016 ⁽¹⁾
$ —
Acquisition of Jiff 91,398
Goodwill adjustments 387
Balance as of September 30, 2017 $ 91,785

_{(1) The Company had no goodwill prior to the acquisition of Jiff.}

~~Intangible assets, net~~

The following table sets forth the fair value components of identifiable acquired intangible assets (in thousands) and their estimated useful lives (in years) as of September 30, 2017 were as follows (in thousands):

Intangible Assets, Gross Accumulated Amortization Acquired Intangibles, Net Useful Life

December 31, 2016 ⁽¹⁾
Additions September 30, 2017 December 31, 2016 Expense September 30, 2017 September 30, 2017
Customer relationships $ —
$ 10,900
$ 10,900
$ —
$ (546 ) $ (546 ) 10,354
10
Developed technology —
10,600
10,600
—
(1,060 ) (1,060 ) 9,540
5
Backlog —
1,500
1,500
—
(442 ) (442 ) 1,058
3
Other acquired intangible assets —
900
900
—
(383 ) (383 ) 517
1-3
Total identifiable intangible assets $ —
$ 23,900
$ 23,900
$ —
$ (2,431 ) $ (2,431 ) $ 21,469

_{(1) The Company had no intangible assets prior to the acquisition of Jiff.}

Amortization expense from acquired intangible assets for the three and nine months ended September 30, 2017 was $1.2 million and $2.4 million, respectively and is included in cost of subscription, general and administrative, and sales and marketing expenses.

~~Estimated amortization expense for acquired intangible assets for the following five years and thereafter is as follows (in thousands):~~

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~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~

2017 1,216
2018 4,044
2019 3,505
2020 3,242
2021 3,210
Thereafter 6,252
Total estimated amortization expense 21,469

~~Note 7. Debt~~

~~Term Loan~~

In connection with the Company’s acquisition of Jiff, on April 3, 2017, the Company, Jiff and Silicon Valley Bank (“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. 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 September 30, 2017 are as follows (in thousands):~~

Remainder of 2017 $ —
2018 620
2019 1,859
2020 1,859
2021 1,240
Total future maturities of debt ⁽¹⁾
$ 5,578

^{(1) Includes $5.4 million classified as debt, non-current and $0.2 million classified as debt, current within accrued expenses and other current liabilities on the condensed consolidated balance sheet as of September 30, 2017.}

~~Revolving Line of Credit~~

The Loan Agreement also provides for an up to $25 million revolving credit facility (the “Revolving Line”). The Company may request borrowings under the Revolving Line prior to April 3, 2019, on which date the Revolving Line terminates. As of September 30, 2017, no borrowings have been made under the Revolving Line.

In relation to the Loan Agreement, the Company is subject to certain financial and reporting covenants. As of September 30, 2017, 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 September 30, 2017.

Note 8. Property and Equipment

Property and equipment consisted of the following (in thousands):

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~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~


	As of							As of
	September 30, 2017			December 31, 2016				September 30, 2019		December 31, 2018
Leasehold improvements	$	2,627		$	2,061		Leasehold improvements	$	3,102	$	3,102
Computer equipment	6,035			5,487			Computer equipment	7,373		6,860
Software	1,149			1,099			Software	1,110		1,097
Capitalization of internal-use software	2,925			2,925
Internal-use software							Internal-use software	2,925		2,925
Furniture and equipment	1,293			931			Furniture and equipment	1,085		1,018
Total	14,029			12,503			Total	15,595		15,002
Accumulated depreciation	(8,359		)	(7,218		)
Less: accumulated depreciation							Less: accumulated depreciation	(12,277)		(11,039)
Property and equipment, net	$	5,670		$	5,285		Property and equipment, net	$	3,318	$	3,963

Depreciation and amortization expense for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018 was ~~$0.7~~$0.5 million and ~~$0.8~~$0.7 million, respectively. Depreciation and amortization expense for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018 was ~~$2.1~~$1.4 million and ~~$2.4~~$2.2 million, respectively. Depreciation and amortization are recorded on a straight-line basis.

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CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 9. ~~Related Party Transactions and Variable Interest Entity~~Debt

~~Lyra Health~~ Term Loan

In ~~2015, the Company made a preferred stock investment in Lyra Health (”Lyra”) of $4.1 million, associated~~connection with ~~a strategic alliance with Lyra. Lyra is considered a related party to the Company because two of~~ the Company’s ~~directors, Dr. Roberts and Mr. Ebersman, serve~~acquisition of Jiff, on the Lyra board of directors and Mr. Ebersman is the Lyra chief executive officer. The Company has evaluated all its transactions with Lyra and has determined that Lyra is a variable interest entity (“VIE”) for the Company but that it is not required to consolidate the operations of the VIE. The Company’s maximum exposure to loss as a result of its involvement with this unconsolidated VIE is limited to its investment of $4.1 million and it is not obligated to provide incremental financial support to Lyra.

The investment in Lyra is accounted for under the cost method and is included under other assets in the Company’s consolidated financial statements. The Company assesses its investment for impairment on a quarterly basis or more frequently if facts and circumstances necessitates reassessment of fair value of its investment. As of September 30, 2017, the Company concluded that its investment was appropriately valued and not impaired.

~~Jiff Acquisition~~

On April 3, 2017, the Company, ~~acquired~~ Jiff ~~Inc. Venrock,~~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 ~~holder~~floating per annum rate equal to the greater of ~~more than 5%~~(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 ~~Company’s capital stock was~~Term Loan is September 1, 2021.

In addition to principal and interest payments, the Company is also ~~a stockholder~~required to pay $0.5 million as final payment on the earlier of ~~Jiff. At the closing~~maturity, termination or prepayment of the ~~acquisition, Venrock acquired a total of 3,965,979 shares~~Term Loan. The Company accrues for the final payment over the life of the ~~Company’s Class B common stock in exchange for its shares of Jiff capital stock. Venrock will also receive additional shares~~Term Loan using the effective interest method.

The future maturities of the ~~Company’s Class B common stock upon~~Term Loan by year as of September 30, 2019 are as follows (in thousands):


Remainder of 2019	$	465
2020	1,859
2021⁽¹⁾	1,395
Total future maturities of debt	3,719
Less current maturities⁽²⁾	(1,859)
Debt, non-current	$	1,860

⁽¹⁾Excludes the ~~achievement by~~$0.5 million required to be paid as final payment on the ~~Jiff business~~earlier of ~~certain milestones in 2017. Bryan Roberts, the Chairman~~maturity, termination or prepayment of the ~~Company’s Board~~Term Loan.

⁽²⁾ Classified within accrued expenses and other current liabilities on the condensed consolidated balance sheet as of ~~Directors~~September 30, 2019.

In relation to the Loan Agreement, the Company is ~~a Partner at Venrock.~~ subject to certain reporting covenants. The Company was in compliance with all reporting covenants in the Loan Agreement related to the outstanding principal balance as of September 30, 2019.

Note 10. Leases

The Company’s ~~Board appointed a Special Committee (comprised solely~~principal commitments primarily consist of ~~disinterested directors) to which it delegated~~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 ~~full and exclusive power, authority and~~option is at the sole discretion of the ~~Castlight Board~~Company. The Company subleases certain office facilities to ~~evaluate, assess,~~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 September 30, 2019		Nine Months Ended September 30, 2019
Lease cost:
Operating lease cost	$	1,654	$	4,942
Variable lease cost ⁽¹⁾	206		586
Short-term lease cost	34		41
Sublease income	(680)		(1,873)
Total lease cost	$	1,214	$	3,696

Other information:
Operating cash flows used in the measurement of operating lease liabilities			$	5,290
Weighted-average remaining lease term - operating leases (in years)			3.1
Weighted-average discount rate - operating leases			7.48		%

⁽¹⁾Includes variable payments such as common area maintenance, property taxes and ~~approve~~insurance.

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CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Maturities of Lease Liabilities

As of September 30, 2019, the ~~Jiff transaction on its behalf, including retaining~~future minimum lease payments under non-cancellable operating leases are as follows (in thousands):


Remainder of 2019	$	1,795
2020	6,524
2021	5,355
2022	3,050
2023	677
2024 and later	1,111
Total lease payments ⁽¹⁾	18,512
Less: Interest	(2,041)
Present value of lease liabilities	16,471
Less: current portion	(5,897)
Operating lease liabilities, non-current	$	10,574

⁽¹⁾ In October 2019, the Company entered into a ~~financial advisor~~lease agreement, which commenced in the same month, for an ~~opinion on~~office space in Salt Lake City, Utah. The lease agreement stipulates monthly payments over five years with total minimum lease payments of approximately $3.4 million and is excluded from the fairness of the financial conditions of the transaction. The transaction was approved solely by the Special Committee which concluded that the transaction terms were fair to Castlight and the transaction was in the best interests of Castlight and its stockholders.table above.

Note ~~10. Commitments and~~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

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~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~

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.

~~Leases and Contractual Obligations~~

The Company’s principal commitments primarily consist of obligations under leases for office space and co-location facilities for data center capacity. The Company’s existing lease agreements provide it with the option to renew and generally provide for rental payments on a graduated basis. The Company’s future operating lease obligations would change if it entered into additional operating lease agreements as the Company expands its operations and if it exercised these options.

In connection with the acquisition of Jiff on April 3, 2017, the Company assumed Jiff’s operating leases located in Mountain View, California, Oakland, California, Palo Alto, California, and Charlotte, North Carolina with various expiration dates through 2022, some of which are subleased. The total rent obligation of the Company under all operating leases is $21.9 million.

There were no other material changes in the Company’s contractual obligations from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2016. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in the Company’s Annual Report on Form 10-K for a description of its contractual obligations.

Note ~~11.~~12. Stock Compensation

Restricted Stock Units (“RSUs”)

A summary of unvested restricted stock unit activity for the nine months ended September 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 ⁽¹⁾	9,334,664	$	2.51
Vested	(3,004,471)	$	3.77
Forfeited and canceled ^{(2) (3)}	(3,502,993)	$	3.42
Balance as of September 30, 2019	12,355,802	$	2.71

⁽¹⁾ Includes 896,553 performance stock units ("PSUs") that were granted during the nine months ended September 30, 2019.

⁽²⁾ Includes PSUs that were granted in the prior year, which were canceled because performance targets were not achieved.

⁽³⁾ Includes market-based RSUs that were granted in the current year, which were canceled due to employee termination.

As of September 30, 2019, there was a total of $30.8 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.

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CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Company granted 519,000 market-based RSUs during the second quarter of 2019. NaN market-based RSUs were granted in prior periods or during the third quarter of 2019. 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 was based on values calculated under the Monte Carlo simulation model on the grant date and 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. During the third quarter of 2019, the Company reversed approximately $0.4 million of stock compensation expense that was previously recognized in connection with this award, upon the employee's termination in the third quarter.

The Company granted 896,553 PSUs during the third quarter of 2019. The number of shares that will eventually vest depends on achievement of certain performance targets, as determined by the compensation committee of the Company's board of directors. Once the performance is determined, the PSUs, if any, will vest, subject to recipients' continued service, on the later of (i) the attainment of the performance targets and (ii) a year after the grant date. The compensation expense associated with the PSUs is recognized using the accelerated method. For the three and nine months ended September 30, 2019, the Company recognized compensation expense of approximately $0.1 million and $0.3 million, respectively, related to these performance awards and performance awards granted in 2018.

Stock Options

A summary of stock option activity for the nine months ended September 30, ~~2017~~2019 is as ~~follows (in thousands, except share and per share amounts):~~follows:

Options
Outstanding

Weighted-
Average
Exercise
Price

Aggregate
Intrinsic
Value
Balance at December 31, 2016 7,642,953
$ 3.71
$ 18,537
Stock option grants 400,000
$ 3.60

Stock options assumed and awarded related to acquisition 5,382,613
$ 1.42

Stock options exercised (726,060 ) $ 1.81

Stock options canceled (1,742,228 ) $ 3.11

Balance at September 30, 2017 10,957,278
$ 2.80
$ 25,685


	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	2,792,000	$	1.70
Exercised	(1,234,290)	$	1.56
Forfeited and canceled	(367,391)	$	3.27
Balance as of September 30, 2019	7,455,542	$	2.45	$	760

The total grant-date fair value of stock options granted during the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$0.8~~$2.6 million and ~~$3.6~~$0.3 million, respectively.

~~Assumed and Awarded Jiff Options~~

In connection with the acquisition of Jiff, the Company assumed 5.4 million options with a grant date fair value of $14.1 million. These options are categorized as performance stock options, as the final exercise price will be determined upon the achievement of certain milestones. These options were valued using the Monte Carlo simulation model. The total acquisition date fair value of $14.1 million allocation to the pre-combination services and post-combination services was $9.6 and $4.5 million, respectively. Any subsequent changes in the fair value of the assumed Jiff options resulting from achievement of the earn-out milestones will be accounted as post-combination stock compensation expense.

The relevant assumptions used in the Monte Carlo simulation model are presented in the table below. The Monte Carlo simulation model considers vesting schedules, stated expiration dates and potential early exercises based on market

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~~CASTLIGHT HEALTH, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~(unaudited)~~

~~performance in determining the effective holding period for the options.~~

Nine Months Ended September 30,
2017 2016
Volatility 75% *
Risk-free interest rate 2.35% *
Dividend yield —% *

_{* The Company has not used the Monte Carlo simulation model prior to the acquisition of Jiff.}

~~Except for the stock options assumed and granted related to acquisition, the~~ fair value of each option grant was estimated on the date of grant using the Black-Scholes option-valuation model with the following assumptions and fair value per share:


	Nine Months Ended September 30, 2019
	2019							2018
Volatility	57	%	-	58%	57%
Expected life (in years)	6.06							6.06
Risk-free interest rate	1.62	%	-	2.57%	2.72	%	-	2.74%
Dividend yield	—							—

Nine Months Ended September 30,
2017 2016
Volatility 61% 47%
Expected life (in years) 6.02 6.12
Risk-free interest rate 2.03% 1.37%
Dividend yield —% —%

As of September 30, ~~2017,~~2019, the Company had ~~$7.2~~$2.7 million in unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately ~~2.2~~3.6 years.

~~Restricted~~Employee Stock ~~Units~~Purchase Plan

~~A summary~~In March 2014, the Company's Board of ~~restricted stock unit activity for~~Directors adopted and its stockholders approved the ~~nine months ended September 30, 2017 is as follows:~~

Number of
Shares
Outstanding Weighted-
Average
Grant Date Fair Value
Balance at December 31, 2016 10,541,666
$ 4.82
Restricted Stock Units granted ⁽¹⁾
6,209,788
$ 3.62
Restricted Stock Units vested (3,130,004 ) $ 5.08
Restricted Stock Units forfeited/canceled ⁽²⁾
(3,395,161 ) $ 4.61
Balance at September 30, 2017 10,226,289
$ 4.10

_{(1) Includes}_{1.4 million}_{performance stock units (“PSUs”) that were granted during 2014 Employee Stock Purchase Plan ("the}_nine_{months ended}_{September 30, 2017}_ESPP").

_{(2) Includes PSUs that were granted in the prior year, which were canceled because performance targets were not achieved.}

~~As of September 30, 2017, there was a~~ A total of ~~$35.1 million in unrecognized compensation cost related to restricted~~6,000,000 shares of Class B common stock ~~units~~were initially reserved and ~~performance stock units, which is expected to be recognized over a weighted-average~~available for issuance under the ESPP. The ESPP provides for an initial three-month offering period ~~of approximately 2.81 years.~~

~~During 2017, the Company awarded 1.4 million PSUs to certain employees. The number of~~commencing December 1, 2019, and for regular six-month offering periods beginning each March 1 and September 1 thereafter. On each purchase date, ESPP participants will purchase shares ~~that will eventually vest depends on achievement of performance targets for 2017, as determined by the compensation committee~~ of the ~~Company's board of directors, and may range from 0~~Company’s Class B common stock at a price per share equal to ~~150%~~85% of the ~~targeted award amount. Once the performance is determined and a targeted award amount is fixed, the target number~~lesser of PSUs, if any, will vest in eight quarterly installments, subject to recipients' continued service, beginning on February 15, 2018. The compensation expense associated with the PSUs is recognized using the accelerated method. No expense has been recorded through September 30, 2017 as the Company determined the achievement of the performance targets was not probable.

(1)

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CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(CONTINUED)~~

(unaudited)

~~Note 12. Stockholders’ Equity~~

~~Common Stock~~

Asthe fair market value of ~~September 30, 2017,~~ the ~~Company had 53,005,558 shares of Class A common stock and 80,215,478 shares of~~ Class B common stock ~~outstanding.~~

~~Transactions with SAP Technologies, Inc.~~

~~In May 2016,~~on the ~~Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”)with SAP Technologies, Inc. (“SAP”) pursuant to which it sold and issued to SAP approximately 4.7 million shares (“Shares”)~~offering date or (2) the fair market value of ~~its~~the Class B ~~Common Stock and a warrant (“Warrant”) to~~common stock on the purchase ~~up to approximately 1.9 million shares of its Class B Common Stock. The net proceeds from this transaction were $17.8 million and will be used for working capital and other general corporate purposes.~~date.

The ~~exercise price of~~Company will begin recognizing stock-based compensation expense for the ~~Warrant remains at $4.91 per share and will expire four years from~~ESPP in the date the Company enters into an agreement with SAP related to the distribution and the reselling of the Company’s solutions (the “Alliance Agreement”) within a prescribed period. If the Company does not enter into the Alliance Agreement with SAP by the end of the prescribed period, then the Warrant will become void and will not be exercisable. In the secondfourth quarter of ~~2017, the Company and SAP modified the Warrant to extend the time period allowed to execute the Alliance Agreement from May 17, 2017 to November 17, 2017.~~2019.

The Shares and Warrant are considered freestanding instruments from each other and are classified within stockholders’ equity. The Company preliminarily allocated the net proceeds to the Shares and Warrant and also to a customer prepayment liability classified within accrued expenses and other current liabilities that represents the future obligations under the Alliance Agreement.

The Company updated its preliminary allocation of the net proceeds as a result of the modification of the Warrant in the second quarter of 2017, which resulted in a change in classification of customer prepayment liability into other assets. The Company expects to derive future economic benefit from a strategic partnership with SAP once the Alliance Agreement is executed.

Note 13. Income Taxes

The effective tax rate for each of the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~zero~~0 percent, primarily as a result of the estimated tax loss for the year and the change in valuation allowance. However, as a result of the acquisition of Jiff in April 2017, the Company recorded a tax benefit of $5.2 million as a discrete item in the second quarter. This tax benefit is a result of the partial release of its existing valuation allowance since the acquired deferred tax liabilities from Jiff will provide a source of income for the Company to realize a portion of its deferred tax assets, for which a valuation allowance is no longer needed.

At September 30, ~~2017,~~2019, all unrecognized tax benefits are subject to a full valuation allowance and, if recognized, will not affect the effective tax rate.

Note 14. 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 ~~Preferred Stock and~~ outstanding stock options and warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive.

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 September 30,												Nine Months Ended September 30,													Three Months Ended September 30,														Nine Months Ended September 30,
	2017						2016						2017						2016							2019						2018						2019				2018
	Class A			Class B			Class A			Class B			Class A			Class B			Class A			Class B				Class A		Class B		Class A		Class B		Class A		Class B		Class A		Class B
Net loss	$	(7,425	)	$	(11,062	)	$	(6,011	)	$	(5,392	)	$	(20,620	)	$	(26,393	)	$	(27,002	)	$	(22,448	)	Net loss	$	(2,245)	$	(7,091)	$	(2,260)	$	(5,005)	$	(7,009)	$	(21,247)	$	(12,850)	$	(22,817)
Weighted-average shares used to compute basic and diluted net loss per share	53,119			79,132			54,376			48,771			53,805			68,870			54,460			45,274			Weighted-average shares used to compute basic and diluted net loss per share	35,041		110,660		43,085		95,405		35,827		108,607		49,262		87,473
Basic and diluted net loss per share	$	(0.14	)	$	(0.14	)	$	(0.11	)	$	(0.11	)	$	(0.38	)	$	(0.38	)	$	(0.50	)	$	(0.50	)	Basic and diluted net loss per share	$	(0.06)	$	(0.06)	$	(0.05)	$	(0.05)	$	(0.20)	$	(0.20)	$	(0.26)	$	(0.26)

The following securities were excluded from the calculation of diluted net loss per share for common stock because their effect would have been anti-dilutive for the periods presented (in thousands):


	Three Months Ended September 30,			Nine Months Ended September 30,
	2019	2018	2019	2018
Stock options and restricted stock units	19,811	19,588	19,811	19,588
Warrants	115	115	115	115
Total	19,926	19,703	19,926	19,703

Note 15. Reduction in Workforce

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Stock options and restricted stock units 21,184
21,538
21,184
21,538
Warrants* 2,020
2,020
2,020
2,020
Contingent issuable shares related to Jiff 3,284
—
3,284
—
Total 26,488
23,558
26,488
23,558

*includes 1.9On July 30, 2018, the Company announced its intent to undertake a program to reduce its workforce in order to decrease expenses, align its operations with evolving business needs and improve efficiencies. This was in part due to the unexpected churn of a large customer. Under this program, the Company undertook an initiative to reduce its workforce by approximately 12%. For the three months ended September 30, 2018, the Company incurred charges of approximately $2.1 million ~~warrants issued~~for this reduction, all of which related to ~~SAP that become exercisable upon execution~~severance costs. As of September 30, 2018, $1.4 million of the ~~Alliance Agreements as described~~total was paid out, and the remaining balance of $0.7 million was paid in the fourth quarter of 2018.

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CASTLIGHT HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note ~~12.~~16. Subsequent Event

In October 2019, the Company entered into an agreement with Anthem, pursuant to which the Company will provide certain services to Anthem. For these services, Anthem will pay the Company license fees of $168 million over 30 months, starting January 1, 2020.

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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. ~~Except as required by law,~~

Although we ~~assume~~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 ~~obligation~~duty to update any of these forward-looking statements ~~publicly,~~after the date of this Quarterly Report on Form 10-Q or to ~~update the reasons~~conform these statements to actual results ~~could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.~~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, Castlight, Castlight Medical, Castlight Essentials, Castlight Pharmacy, Castlight Rewards, Castlight Reference-Based Pricing, Castlight Protect, Castlight Insights, Castlight Controls, Castlight Connect, Castlight Care, Castlight Dental, Castlight Elevate and Castlight Action are trademarks and/Inc. (“Castlight”, “the Company” or ~~registered trademarks~~"we") offers a comprehensive software-as-a-service (“SaaS”) platform that simplifies health benefits navigation for millions of ~~Castlight Health, Inc. in~~employees. Our platform matches employees to the United States and other countries. Health Outcomes Marketplace, Jiff and Jiff Launch Pad are the trademarks and/or registered trademarks of Jiff, Inc. in the United States and other countries. Other company and product names may be trademarks of the respective companies with whichbest resources their employers make available to them - whether they are ~~associated.~~

~~Overview~~

~~Castlight offers~~healthy, actively seeking medical care, or managing a ~~health benefits platform that engages employees to make better health care decisions~~condition - and enables employers to communicate and measure their benefit programs. We provide a simple, personalized, and powerful way for employees to shop for and manage their health care. At the same time, we enable employers to understand their employees’ needs and guidemotivates them to take the right care, right providers and right programs at the right time. Furthermore, on April 3, 2017, we completed our acquisition of Jiff, Inc. The acquisition enables us to provide the full spectrum of wellbeing, healthcare decision support andbest steps for their health. Castlight helps employers generate more value from their benefits hub all in one complete package. Our comprehensive technology offering aggregates complex, large-scale data and applies sophisticated analytics to make health care data transparent and useful. Our products are designed to deliver strong employee engagement and can be used to enable employers to integrate disparate benefit programs into a single platform available to employees and their families. Ultimately, we help enable organizations and their employeesinvestments by helping to improve outcomes, lower health care costs, and increase benefits satisfaction.

~~Since~~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 ~~inception~~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 ~~2008, we have been committed~~health programs, optimize their care utilization, and improve their daily habits. For employers, Castlight provides a simplified, cost-effective, and flexible way to ~~improving~~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 ~~efficiency~~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.

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Castlight was incorporated in the ~~U.S. health~~State of Delaware in January 2008. Its first generation care ~~industry. From 2008 to 2010, we focused our efforts on research~~guidance solutions addressed the needs of employees actively seeking care or managing a chronic condition and ~~development to build our consumer health care database, our analytic capabilities and~~serve as the ~~initial version~~foundation of our ~~cloud-based product which constitutes our core Castlight platform. After its release in 2010,~~current care guidance offering. In 2015, we ~~have continued to enhance that product, as well as release new products, including Castlight Pharmacy, Castlight Dental,~~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 ~~Elevate, Castlight Protect, and Castlight Rewards, as well as the suite of products~~Genius. In April 2017, we acquired in connection with our acquisition of Jiff. These products are delivered to our customers, and their employees and families, via our cloud-based offering and leverage consumer-oriented design principles that drive engagement and ease of use.

~~We market and sell our~~Jiff, Inc. Jiff provided an enterprise health benefits platform ~~to self-insured companies~~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 ~~broad range of industries~~single user experience: Engage (January) and ~~to governmental entities. We sell our offering to customers~~Castlight Complete (September). The Company's principal executive offices are located in the United States, some of whom offer our services to their international employee base. We market to our collective customers and potential customers through our direct sales force, as well as through relationships with health plans, benefits consultants, technology companies and other channel partners who may distribute it to their fully insured population. We intend to continue to invest aggressively in the success of our customers, expand our commercial operations and further develop our offering.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 ~~directly~~ to ~~our customer base~~new and existing customers, directly and through our channel partners. Additionally, we believe that there is a significant opportunity to sell subscriptions to ~~other~~add-on products as our customers become more familiar with our offering and seek to address additional ~~needs.~~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. See Note 16 - Subsequent Event for additional information.

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 ~~core Castlight platform~~products are typically three to ~~nine~~12 months after entering into an agreement with a customer. ~~Our implementation timelines for our other products currently range from approximately three to twelve months.~~

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. Prior to launching an individual customer, we incur significant costs associated with implementation activities, which we record as cost of revenue. Since we do not recognize significant revenues from an individual customer until it launches, we generate a negative gross margin at the customer level during the implementation period.

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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.

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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 September 30,
2017 2016
(in millions)
Signed Annual Recurring Revenue (ARR) $ 157.0
$ 118.1


	As of September 30,
	2019		2018
	(in millions)
Signed Annual Recurring Revenue	$	137.4	$	152.7

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 ~~twelve~~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 at~~As of September 30, ~~2017 was $157.0~~2019, ARR totaled $137.4 million compared to ~~$118.1~~$152.7 million atas of September 30, ~~2016, representing an increase~~2018. The decrease of approximately ~~33%,~~10% is primarily attributable to churn, partially offset by new customers and ~~cross-sales of Jiff products. We expect~~ ~~ARR~~ renewals. In October 2019, we entered into an agreement with Anthem, Inc. (“Anthem”), pursuant to ~~increase as we sign~~which the Company will provide certain services to Anthem. See Note 16 - Subsequent Event for additional ~~customers and cross-sell to existing customers.~~information.

Annual Net Dollar Retention Rate


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

Year Ended December 31,
2016 2015
Annual Net Dollar Retention Rate (NDR) 94 % 116 %

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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. ~~We observed an annual net dollar retention rate~~The addition or loss of ~~94% and 116% for our signed~~a significant customer ~~base, for~~or customers during the ~~years ended December 31, 2016 and 2015, respectively.~~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% for the year ended December 31, 2018 was primarily due to churn, partially offset by 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, 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. Historically, we have derived a substantial majority of~~dependents, products sold through our online marketplace and add-on subscription ~~revenue~~products made available from our ~~core Castlight platform.~~ 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’ ~~U.S.~~ employees and adult dependents that receive health benefits.

WeTypically, we recognize subscription fees on a straight-line basis ratably over the contract term beginning when our products are implemented and ready for ~~launch, which is based on the implementation timelines discussed above.~~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 ~~not~~ reflected as contract assets, recorded as accounts receivable in our condensed consolidated financial statements. ~~We generally invoice our implementation services upon contract signing on a fixed-fee basis, which is generally when we commence work.~~

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. ~~However,~~The cost of professional services and other revenue, to the ~~related revenue is~~extent they are incurred and are directly attributable to fulfillment of performance obligations under a customer contract, are deferred ~~until our products are ready for use by the customer~~ and ~~then recognized as revenue ratably~~amortized over the ~~related contract term. Therefore, we expense the cost incurred to provide our products and services prior to the recognition~~benefit period of ~~the corresponding revenue.~~five years.

Operating ~~Expenses.~~ Expenses

Operating expenses consist of sales and marketing, research and development and general and administrative expenses.

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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. ~~Commissions~~All commissions earned by our sales force and ~~broker~~third party referral fees ~~that can be associated specifically with the noncancelable portion of a subscription contract~~ are deferred and amortized generally over ~~the noncancelable period. Accordingly, commission expense can be materially impacted by changes in the termination provisions~~a period of ~~customer contracts that we execute in a given period compared with previous periods.~~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

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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 September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue:
Subscription	98	%	92	%	96	%	91	%
Professional services and other	2	%	8	%	4	%	9	%
Total revenue, net	100	%	100	%	100	%	100	%
Cost of revenue:
Cost of subscription	24	%	21	%	23	%	24	%
Cost of professional services and other	17	%	16	%	17	%	16	%
Total cost of revenue	41	%	37	%	40	%	40	%
Gross margin percentage	59	%	63	%	60	%	60	%
Operating expenses:
Sales and marketing	28	%	29	%	26	%	34	%
Research and development	40	%	38	%	42	%	41	%
General and administrative	18	%	15	%	19	%	17	%
Total operating expenses	86	%	82	%	87	%	92	%
Operating loss	(27)	%	(19)	%	(27)	%	(32)	%
Other income, net	1	%	1	%	1	%	1	%


Net loss	(26)	%	(18)	%	(26)	%	(31)	%

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(percentages of revenue)
Revenue:
Subscription 91 % 94 % 92 % 93 %
Professional services and other 9 % 6 % 8 % 7 %
Total revenue 100 % 100 % 100 % 100 %
Cost of revenue:
Cost of subscription 24 % 16 % 21 % 17 %
Cost of professional services and other 14 % 15 % 15 % 19 %
Total cost of revenue 38 % 31 % 36 % 36 %
Gross margin percentage 62 % 69 % 64 % 64 %
Operating expenses:
Sales and marketing 46 % 52 % 50 % 62 %
Research and development 40 % 41 % 42 % 43 %
General and administrative 30 % 21 % 28 % 28 %
Total operating expenses 116 % 114 % 120 % 133 %
Operating loss (54 )% (45 )% (56 )% (69 )%
Other income, net — % — % — % — %
Loss before income taxes (54 )% (45 )% (56 )% (69 )%
Income tax benefit — % — % 5 % — %
Net loss (54 )% (45 )% (51 )% (69 )%
Revenue


	Three Months Ended September 30,												Nine Months Ended September 30,
	2019		2018		% Change	$ Change		2019		2018		% Change	$ Change
	(In thousands, except percentages)
Revenue:
Subscription	$	34,900	$	36,702	(5)%	$	(1,802)	$	102,670	$	104,493	(2)%	$	(1,823)
Professional services and other	561		3,339		(83)%	(2,778)		4,191		9,811		(57)%	(5,620)
Total revenue, net	$	35,461	$	40,041	(11)%	$	(4,580)	$	106,861	$	114,304	(7)%	$	(7,443)

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~~Revenue~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 % Change $ Change 2017 2016 % Change $ Change
(dollars in thousands) (dollars in thousands)
Revenue:
Subscription $ 31,363
$ 23,867
31% $ 7,496
$ 86,963
$ 66,859
30% $ 20,104
Professional services and other 3,209
1,634
96% 1,575
7,453
4,944
51% 2,509
Total revenue $ 34,572
$ 25,501
36% $ 9,071
$ 94,416
$ 71,803
31% $ 22,613

~~Total~~Subscription revenue for the three months ended September 30, ~~2017 increased $9.1~~2019 decreased by $1.8 million, or ~~36%~~5%, primarily ~~attributable~~due to customer terminations in 2018 and 2019, partially offset by customer launches ~~that occurred~~in 2018 and 2019. Professional services and other revenue decreased primarily due to revenue from non-recurring professional services in the ~~trailing twelve~~three months ended September 30, ~~2017 which contributed $10.5 million of the increase in total revenue year over year, including the impact of customers acquired through Jiff. This increase was partially offset by churn.~~2018.

~~Total~~Subscription revenue for the nine months ended September 30, ~~2017 increased $22.6~~2019 decreased by $1.8 million, or ~~31%~~2%, primarily ~~attributable~~due to customer terminations in 2018 and 2019, partially offset by customer launches ~~that occurred~~in 2018 and 2019. Professional services and other revenue decreased primarily due to revenue from non-recurring professional services in the ~~trailing twelve~~nine months ended September 30, ~~2017 which contributed $31.8 million~~2018.

Table of ~~the increase in total revenue year over year, including the impact of customers acquired through Jiff. This increase was partially offset by churn.~~Contents

Costs and Operating Expenses


	Three Months Ended September 30,										Nine Months Ended September 30,												Three Months Ended September 30,																		Nine Months Ended September 30,
	2017			2016			% Change		$ Change		2017			2016			% Change		$ Change				2019			2018			% Change		$ Change		2019			2018			% Change		$ Change
	(dollars in thousands)										(dollars in thousands)												(In thousands, except percentages)
Cost of revenue:																						Cost of revenue:
Subscription	$	8,123		$	3,988		104	%	$	4,135	20,075			12,218			64	%	$	7,857		Subscription	$	8,517		$	8,558		—	%	$	(41)	$	24,917		$	26,872		(7)	%	$	(1,955)
Professional services and other	4,898			3,978			23	%	920		13,679			13,941			(2	)%	(262		)	Professional services and other	5,984			6,237			(4)	%	(253)		17,857			18,596			(4)	%	(739)
Total cost of revenue	$	13,021		$	7,966		63	%	$	5,055	$	33,754		$	26,159		29	%	$	7,595		Total cost of revenue	$	14,501		$	14,795		(2)	%	$	(294)	$	42,774		$	45,468		(6)	%	$	(2,694)
Gross margin (loss) percentage:																						Gross margin (loss) percentage:
Subscription	74.1		%	83.3		%					76.9		%	81.7		%						Subscription	76		%	77		%					76		%	74		%
Professional services and other	(53		)%	(143		)%					(84		)%	(182		)%						Professional services and other	(967)		%	(87)		%					(326)		%	(90)		%
Total gross margin	62.3		%	68.8		%					64.2		%	63.6		%						Total gross margin	59		%	63		%					60		%	60		%
Gross profit	$	21,551		$	17,535		23	%	$	4,016	$	60,662		$	45,644		33	%	$	15,018		Gross profit	$	20,960		$	25,246		(17)	%	$	(4,286)	$	64,087		$	68,836		(7)	%	$	(4,749)

Cost of subscription revenue for the three months ended September 30, 2017 increased $4.1 million, or 104%, primarily driven by increase in head-count related costs due to the acquisition of Jiff in the second quarter of 2017. The acquisition drove a $2.1 million increase in employee-related expenses, $0.7 million increase in data and hosting services, and $0.8 million increase related to the amortization of acquired intangibles. Additionally, third party service fees increased by $0.3 million, which was a result of the rapid ramp up of our call center directly attributable to a growth in our customer base, increased usage, and internal operational investments.

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2019 remained flat.

Cost of subscription revenue for the nine months ended September 30, ~~2017 increased $7.9~~2019 decreased by $2.0 million, or ~~64%~~7%, primarily ~~driven by the acquisition~~due to decreases of ~~Jiff~~$0.9 million in ~~the second quarter~~amortization of ~~2017. The acquisition drove a $3.6~~internal-use software and intangibles, $0.8 million ~~increase~~ in employee-related expenses ~~$1.5~~and $0.4 million ~~increase~~ in data and hosting services and $1.5 million increase related to the amortization of acquired intangibles. Additionally, third party service fees increased by $0.9 million, which was a result of the rapid ramp up of our call center directly attributable to a growth in our customer base, increased usage, and internal operational investments.fees.

Cost of professional services revenue for the three months ended September 30, ~~2017 increased $0.9~~2019 decreased by $0.3 million or ~~23%~~4%, ~~year over year,~~ primarily due to a decrease in one-time, severance-related expenses as a result of ~~$0.5 million increase~~the reduction in ~~employee-related expenses from~~workforce in the ~~Jiff acquisition.~~third quarter of 2018.

Cost of professional services revenue for the nine months ended September 30, ~~2017~~2019 decreased ~~$0.3~~by $0.7 million or 2%4%, primarily due to a decrease ~~of $0.8 million~~ in employee-related expenses as a result of the reduction in workforce that took place in the second quarter of 2016 offset by an increase of $0.5 million in employee-related expenses resulting from the Jiff acquisition .third-party contractor and professional service fees.

Gross margin for the three months ended September 30, ~~2017~~2019 decreased primarily due to revenue decline of 11% compared to a ~~63% increase~~2% decline in ~~costs partially offset by a 36% increase in~~the associated ~~revenue.~~

costs. Gross margin for the nine months ended September 30, 2017 improved primarily due to a 31% increase in revenue and a corresponding increase in associated costs by 29%. In the short term, we expect an initial decline in gross margin due to the acquisition of Jiff, as Jiff is in an early stage of launching clients during their rapid growth phase. However, in the long term, we expect to continue to see favorable overall gross margin trends as we continue to increase the number of launched customers relative to customers who are in the implementation phase.2019 remained flat.

Sales and Marketing


	Three Months Ended September 30,														Nine Months Ended September 30,
	2019		2018		% Change		$ Change		2019		2018		% Change		$ Change
	(In thousands, except percentages)
Sales and marketing	$	9,829	$	11,497	(15)	%	$	(1,668)	$	27,933	$	38,715	(28)	%	$	(10,782)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 % Change $ Change 2017 2016 % Change $ Change
(dollars in thousands) (dollars in thousands)
Sales and marketing $ 16,006
$ 13,143
22 % $ 2,863
$ 47,024
$ 44,877
5 % $ 2,147

Sales and marketing expense for the three months ended September 30, ~~2017 increased $2.9~~2019 decreased by $1.7 million, or ~~22%. The increase was primarily~~15%, due to decreases of $1.1 million of one time severance-related expenses and $1.0 million of employee-related expenses, as a result of the reduction in workforce in the third quarter of 2018, partially offset by an increase of ~~$2.0~~$0.3 million in ~~employee related expenses attributable to acquisition of Jiff, $0.8 million increase in referral fees and $0.5 million increase related to the~~ amortization of ~~acquired intangibles. The increase was partially offset by~~intangibles as a ~~$0.4 million reduction in marketing spend as we leveraged our channel relationships.~~result of shortening the useful lives of customer relationships and backlog. See Note 5 - Goodwill and Intangible Assets.

Sales and marketing expense for the nine months ended September 30, ~~2017 increased $2.1~~2019 decreased by $10.8 million, or 5%28%, ~~primarily~~ due to ~~a $1.8~~decreases of $7.3 million ~~increase~~ in ~~employee related~~employee-related expenses ~~a $1.0~~and $1.1 million ~~increase~~of one-time severance-related expenses, primarily from the reduction in force in the third quarter of 2018, $0.6 million in marketing programs, $0.4 million in third-party referral fees and ~~a $0.9~~$0.4 million ~~increase due to the amortization~~in travel-related expenses.

Table of ~~acquired intangibles, partially offset by a $1.4 million reduction in marketing spend as we leveraged our channel relationships.~~Contents

Research and Development


	Three Months Ended September 30,														Nine Months Ended September 30,
	2019		2018		% Change		$ Change		2019		2018		% Change		$ Change
	(In thousands, except percentages)
Research and development	$	14,295	$	15,028	(5)	%	$	(733)	$	44,507	$	46,824	(5)	%	$	(2,317)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 % Change $ Change 2017 2016 % Change $ Change
(dollars in thousands) (dollars in thousands)
Research and development $ 13,809
$ 10,573
31 % $ 3,236
$ 40,074
$ 30,619
31 % $ 9,455

Research and development expense for the three months ended September 30, ~~2017 increased $3.2~~2019 decreased by $0.7 million, or ~~31%~~5%, primarily ~~attributable~~due to ~~the acquisition~~a decrease in third-party contractor and professional service fees of Jiff in the second quarter of 2017. The acquisition resulted in a $2.5 million increase in employee-related expenses, and a $0.4 million increase in facilities expense associated with a newly acquired operating lease in Mountain View.$0.6 million.

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Research and development expense for the nine months ended September 30, ~~2017 increased $9.5~~2019 decreased by $2.3 million, or ~~31%,~~5%. The decrease was primarily ~~attributable~~due to ~~the acquisition~~$2.0 million in lease exit and related charges recorded in 2018, a decrease in third-party contractor and professional service fees of ~~Jiff in the second quarter of 2017. The acquisition resulted in a $7.7~~$1.1 million, ~~increase in employee-related expenses, a $0.8 million increase in contractor spend and a $0.8 million~~partially offset by an increase in facilities ~~expense associated with a newly acquired operating lease~~cost of $0.5 million and an increase in ~~Mountain View.~~allocated overhead of $0.3 million.

General and Administrative


	Three Months Ended September 30,														Nine Months Ended September 30,
	2019		2018		% Change		$ Change		2019		2018		% Change		$ Change
	(In thousands, except percentages)
General and administrative	$	6,440	$	6,193	4	%	$	247	$	20,743	$	19,400	7	%	$	1,343

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 % Change $ Change 2017 2016 % Change $ Change
(dollars in thousands) (dollars in thousands)
General and administrative $ 10,307
$ 5,338
93 % $ 4,969
$ 26,071
$ 19,902
31 % $ 6,169

General and administrative expense for the three months ended September 30, ~~2017~~2019 increased ~~$5.0~~by $0.2 million, or ~~93%~~4%, primarily ~~attributable~~due to $3.9 million expense recognized for change in the fair value of the contingent consideration liability related to the Jiff acquisition, $0.8 million increase related to third party contractor and professional service fees, and a $0.2 millionan increase in ~~employees-related expenses due to the acquisition of Jiff.~~taxes and fees.

General and administrative expense for the nine months ended September 30, ~~2017~~2019 increased ~~$6.2~~by $1.3 million, or ~~31%,~~7%. The increase was primarily ~~attributable to $3.3 million expense recognized for change in the fair value of contingent consideration liability related to the Jiff acquisition, a $3.3 million increase~~ due to ~~acquisition related expenses, $1.3 million increase related to third party contractor and professional service fees, and $1.0 million~~an increase in ~~employee-related expense due to the acquisition~~taxes and fees of ~~Jiff~~$0.7 million and an increase in ~~2017. These increases were partially offset by a $2.6 million decrease in litigation expenses related to the settlement~~legal costs of ~~a class action lawsuit recorded in 2016.~~$0.5 million.

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Liquidity and Capital Resources


	Nine Months Ended September 30,							Nine Months Ended September 30,
	2017			2016				2019		2018
	(in thousands)							(In thousands)
Net cash used in operating activities	$	(23,377	)	$	(35,261	)	Net cash used in operating activities	$	(21,384)	$	(26,057)
Net cash provided by investing activities	19,060			51,407
Net cash (used in) provided by investing activities							Net cash (used in) provided by investing activities	(9,111)		9,025
Net cash provided by financing activities	581			19,812			Net cash provided by financing activities	530		2,613
Net increase (decrease) in cash and cash equivalents	$	(3,736	)	$	35,958
Net decrease in cash, cash equivalents and restricted cash							Net decrease in cash, cash equivalents and restricted cash	$	(29,965)	$	(14,419)

As of September 30, ~~2017,~~2019, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling ~~$87.1~~$56.0 million, which were held for working capital purposes. Our ~~cash, cash equivalents and marketable~~ securities are comprised ~~primarily~~ of U.S. agency obligations, U.S. treasury securities and money market funds.

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

On April 3, 2017, Castlight, Jiff and Silicon Valley Bank agreed to refinance the existing term loan facility owed by Jiff to the Silicon Valley Bank. ~~The loan agreement provides for an approximately $5.6 million term loan and up to a $25 million revolving credit facility.~~ Refer to Note 79-Debt to the condensed consolidated financial statements for further information on our debt.

During the second quarter of 2019, the Company entered into an agreement with a financial institution to process vendor payments using a credit card program, which carries a $20.0 million limit. The Company pays the financial institution monthly based on the terms of the credit card program.

We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

Operating Activities

Cash used in operating activities for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$23.4~~$21.4 million and ~~$35.3~~$26.1 million, respectively. The decrease in cash used in operations resulted primarily from lower average year-to-date headcount. Cash used in ~~operating activities has historically been affected by the amount of~~operations reflected our net loss ~~adjusted for non-cash expense items. The net loss~~of $28.3 million for the nine months ended September 30, ~~2017 was~~2019, adjusted ~~for $29.8~~by $30.4 million in non-cash expenses, ~~that included~~including stock-based compensation of ~~$19.0~~$11.8 million, amortization of deferred costs of $10.5 million, depreciation and amortization of ~~deferred commissions~~$4.4 million and non-cash operating lease expense of ~~$8.1 million, offset by the release of the valuation allowance of $5.2~~$3.9 million.

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~~Working capital uses~~ Uses of cash included an increase in accounts receivable of ~~$7.8~~$8.6 million, primarily as a result of the timing of billings and collections. Other uses ~~for working capital~~of cash included ~~a $6.7~~additions of deferred costs of $5.8 million, payments of operating lease liabilities of $4.3 million, an increase in other assets of $0.8 million, a decrease in deferred ~~commissions~~revenue of $2.9 million, a decrease in accrued expenses and other liabilities of $3.1 million and a decrease in accrued compensation of $0.4 million ~~increase in prepaid and other assets.~~primarily due to payout of 2018 bonuses. These ~~increases~~uses of cash were partially offset by an increase in ~~deferred revenue~~accounts payable of ~~$5.7~~$2.4 million, primarily ~~as a result of an increase in the amount billed year over year~~ due to ~~an increase in launched customers.~~

the credit card program discussed above.

Investing Activities

Cash ~~provided by investing activities for the nine months ended September 30, 2017 and 2016 was $19.1 million and $51.4 million, respectively. The net cash provided by~~used in investing activities was ~~primarily attributable to the timing of purchases, sales and maturities of marketable securities, the net result of which was $23.8 million, and $53.0~~$9.1 million for the nine months ended September 30, ~~2017,~~2019 and ~~2016, respectively. Other uses of~~ cash provided by investing activities was $9.0 million for the nine months ended September 30, 2018. Net cash used by investing activities during the nine months ended September 30, ~~2017 included $2.3~~2019 was attributable to $8.4 million ~~payments made for transaction costs on behalf~~ of ~~Jiff,~~purchases net of ~~cash acquired.~~maturities of marketable securities and $0.7 million of purchases of property and equipment.

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Financing Activities

Cash provided by financing activities for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$0.6~~$0.5 million and ~~$19.8~~$2.6 million, respectively. Net cash provided by financing activities during the nine months ended September 30, ~~2017~~2019 was ~~primarily related~~due to ~~the $1.3 million in~~ proceeds from ~~the issuance of common stock upon the~~ exercise of employee stock options of $1.9 million, partially offset by ~~the~~ payments on long-term debt of ~~$0.7 million attributed to deferred financing costs incurred for filing the Form S-4 for the acquisition of Jiff.~~$1.4 million.

Contractual Obligations and Commitments

Our principal commitments primarily consist of obligations under leases for office space and a term loan facility with Silicon Valley Bank and co-location facilities for data center capacity. Our existing lease agreements provide us with the option to renew and generally provide for rental payments on a graduated basis. Our future operating lease obligations would change if we entered into additional operating lease agreements as we expand our operations and if we exercised these options. See Note 79 – Debt and Note 10 – Leases to the condensed consolidated financial statements for a discussion of our term loan and lease commitments, respectively. There were no other material changes in the Company’s contractual obligations from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 other than those discussed in Note 11 –Contingencies to the condensed consolidated financial statements.

Other than the term loan and lease commitments discussed in Note 79 – Debt and Note 10 – Leases, respectively, to the condensed consolidated financial statements, we do not have commitments under lines of credit, or other such debt arrangements. We do not have any material non-cancelable purchase commitments as of September 30, ~~2017.~~2019.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

Critical Accounting Policies and Estimates

Due to the acquisition of Jiff in the second quarter of 2017, we have added policies regarding business combinations, goodwill, intangible assets, and impairment assessment of long-lived assets. Additionally, we adopted ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment” and ASU 2016-17, “Consolidation” on January 1, 2017. Refer to Note 2 to the condensed consolidated financial statements for detailed information on how the addition of these policies and the adoption of ASU 2016-09 impacted us.

~~Other than the above, during the nine months ended September 30, 2017, there~~There were no significant changes to our critical accounting policies ~~and estimates~~during the nine months ended September 30, 2019, as described in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018. Effective January 1, 2019, we adopted ASU 2016-02, Leases (“ASC 842”). As a result of this adoption, we were required to make certain estimates and assumptions. See Note 2 - Accounting Standards and Significant Accounting Policies under the captions “Use of Estimates,” “Summary of Significant Accounting Policies,” and “Recently Adopted Accounting Pronouncements” for more information.

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Item 3. Quantitative and Qualitative Disclosures ~~About~~about Market Risk

Interest Rate Sensitivity

We had cash and cash equivalents totaling $56.0 million as of September 30, 2019 and cash, cash equivalents and marketable securities totaling ~~$87.1 million at September 30, 2017 and $114.6~~$77.3 million as of December 31, ~~2016. This amount was~~2018. These are invested primarily in U.S. agency obligations, U.S. treasury securities and money market funds. The cash and cash equivalents ~~and short-term marketable securities~~ are held for working capital and other general corporate purposes. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes. All our investments are denominated in U.S. dollars.

Our cash equivalents ~~and our portfolio of marketable securities~~ are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our ~~marketable~~ securities as “available for ~~sale”,~~sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. Our fixed-income portfolio is subject to interest rate risk.

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An immediate increase of 100-basis points in interest rates would have resulted in a $0.2 million market value reduction in our investment portfolio as of September 30, 2017. All of our investments earn less than 100-basis points and as a result, an immediateor decrease of 100-basis points in interest rates would ~~have increased~~result in an immaterial change in the market value ~~by $0.2 million~~of our investments as of September 30, ~~2017.~~2019. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our investment securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.

We also have interest rate exposure as a result of our loan agreement, which provides a term loan, as described in Note 9 – Debt to the condensed consolidated financial statements. We currently do not hedge this risk. As of September 30, 2019, we had $3.7 million of borrowings outstanding under the term loan. Borrowings outstanding under the term loan are subject to variable interest rates based on the prime rate as published in the money rates section of The Wall Street Journal. Changes in the prime ratewill affect the interest on borrowings under the loan agreement. However, a 50-basis point increase in the interest rate on the term loan would not materially increase interest expense during 2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our management’s evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, ~~2017,~~2019, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

~~There was no change in~~In January 2019, we implemented changes to our lease related policies and processes to support the adoption of ASU 2016-02, Leases (“ASC 842”). We have also updated internal ~~control~~controls over financial reporting ~~identified in connection~~to ensure compliance with the ~~evaluation required by Rule 13a-15(d)~~new accounting and ~~15d-15(d)~~disclosure rules.

Table of ~~the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.~~Contents

Part II. OTHER INFORMATION

~~Table of Contents~~

Item 1. Legal Proceedings

For a discussion of legal proceedings, see Note 11 - Contingencies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, which is incorporated herein by reference.

From time to time, ~~the Company~~we may become subject to other legal proceedings, claims or litigation arising in the ordinary course of business. ~~In addition,~~We are not presently a party to any other legal proceedings that in the ~~Company may receive letters alleging infringement~~opinion of ~~patents~~our management, if determined adversely to us, would individually or ~~other intellectual property rights. If an unfavorable outcome were to occur in litigation, the impact could be~~taken together have a material ~~to the Company’s~~adverse effect on our business, operating results, financial condition, or 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.flows.

Item 1A. Risk Factors

The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occur, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event the market price of our Class B common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business

We rely on our channel partners and Anthem for a substantial portion of our sales, and if our channel partner relationships or our relationship with Anthem are unsuccessful, our sales results would be adversely affected and the growth of our business would be harmed.

Our sales strategy relies on relationships we have ~~a history of significant losses, which we expect to continue for the foreseeable future,~~developed with health plans, benefits consultants, brokers and other industry participants, and we ~~may never achieve or sustain profitability~~are continuing to invest in, ~~the future.~~

~~We have incurred significant net losses in each year since our incorporation in 2008~~ and expect to continue to ~~incur net losses~~increase our reliance on, these relationships with channel partners to access customers and grow our overall sales. However, there can be no assurance that our channel partner relationships will be successful, or will result in access to additional customers or growth in sales. Our channel partnerships do not always meet our expectations and could fail for a variety of reasons, including changes in our partners’ business priorities, insufficient or misaligned incentives for our partners to assist us with sales, competition, or other factors.

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

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

Certain relationships we will enter or have entered into with channel partners and with Anthem will require substantial investments of our resources to support these initiatives. We experienced net losses of $58.5 million, $79.9 million and $85.9 million, during the years ended December 31, 2016, 2015 and 2014, respectively and $47.0 million for the nine months ended September 30, 2017. As of September 30, 2017, we had an accumulated deficit of $403.0 million. The losses and accumulated deficit were primarily dueplan to invest resources into developing products that are targeted to the ~~substantial~~channels’ needs. There can be no assurance that the investments we ~~made~~make to ~~grow~~develop and support these channel relationships, or the effort required to do so or the products resulting from those efforts, will provide a positive return on our investment in the near term, or at all. If any of these events materialize, our business ~~enhance~~and results of operations could be materially adversely affected.

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If our ~~technology~~new products and services are not adopted by our customers, or if we fail to continue to innovate and develop new products and services that are adopted by customers, then our revenue and operating results will be adversely affected.

Prior to our acquisition of Jiff, we derived a substantial majority of our revenue from sales of our legacy care guidance platform, and our longer-term operating results and continued growth depend in part on our ability to successfully develop and sell new products and services that our new and existing customers want and are willing to purchase. In addition to our legacy core Castlight platform (now marketed as our care guidance solution), we continue to introduce a number of products and cross-sells, such as our latest offering ~~through~~of Castlight Complete, Care Guidance Navigator, Wellbeing Navigator, Elevate and Engage, but it is uncertain whether these products and services will result in significant revenue or comprise a significant portion of our total revenue. In addition, based on our belief that our customers are interested in acquiring wellness-related products, we devoted substantial efforts to our acquisition of Jiff, and expect to continue to devote substantial efforts to the integration and expansion of that portion of the business. We have also invested, and will continue to invest, significant resources in research and development to enhance our existing offering and ~~acquire~~introduce new high-quality products and ~~support customers. We anticipate that cost of revenue~~services. If existing customers are not willing to make additional payments for such new products, or if new customers do not value such new products, our business and operating ~~expenses~~results will ~~increase substantially~~be harmed. If we are unable to predict user preferences or our industry changes, or if we are unable to modify our offering and services on a timely basis, we might lose customers. Our operating results would also suffer if our innovations are not responsive to the needs of our customers, appropriately timed with market opportunity or effectively communicated and brought to market.

If our existing customers do not continue or renew their agreements with us, renew at lower fee levels or decline to purchase additional products and services from us, our business and operating results will suffer.

We expect to derive a significant portion of our revenue from renewal of existing customer agreements and sales of additional products and services to existing customers. Revenue recognized in ~~the foreseeable~~any quarter is largely derived from customer agreements signed in prior quarters. As a result, achieving a high renewal rate of our customer agreements and selling additional products and services is critical to our future operating results.

We may experience significantly more difficulty than we anticipate in renewing existing customer agreements or in renewing them upon favorable terms, particularly as we seek to ~~continue~~convert customers who initially purchased our transparency-only offering to ~~grow~~ our full platform offering. Factors that may affect the renewal rate for our offering, terms of those renewals and our ability to sell additional products and services include:

•the price, performance and functionality of our offering;

•our customers’ user counts and benefit design features;

•the availability, price, performance and functionality of competing or alternative solutions;

•the potential for customers that are able to access lower-functionality versions of our offering that we provide through health plans or other channel partners to opt to use the lower-functionality versions of our offering;

•our ability to develop complementary products and services;

•our continued ability to access the pricing and claims data necessary to enable us to deliver reliable data in our cost estimation and price transparency offering to customers;

•the stability, performance and security of our hosting infrastructure and hosting services;

•changes in health care laws, regulations or trends; and

•the business ~~enhance~~environment of our customers, in particular, headcount reductions by our customers.

We enter into master services agreements with our customers. These agreements generally have stated terms of three years. Our customers have no obligation to renew their subscriptions for our offering after the term expires. In addition, our customers may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from these customers. Factors that are not within our control may contribute to a reduction in our contract revenue. For instance, our customers may reduce their number of employees, which would result in a corresponding reduction in the number of employee users eligible for our offering and ~~acquire customers. In addition, as~~thus a ~~result of~~lower aggregate monthly services fee. Our future operating results also depend, in part, on our ~~recently-completed acquisition of Jiff, we have incurred substantial transaction costs and expect~~ability to incur further increases in our cost of revenue and operating expenses in connection with the operation and integration of the Jiff business. Our efforts to grow our business, enhance our offering and acquire customers, and to operate and integrate the Jiff business, may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. Many of our efforts to generate revenue from our business are new and unproven, and any failure to increase our revenue or generate revenue fromsell new products and services ~~could prevent us from achieving or maintaining profitability. Furthermore,~~ to the extent we are successful in increasing our customer base, we could also incur increased losses because costs associated with entering into customer agreements are generally incurred up front, while customers are generally billed over the term of the agreement. Our prior losses, combined with our expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect to continue to incur operating losses for the foreseeable future and may never become profitable on a quarterly or annual basis, or if we do, we may not be able to sustain profitability in subsequent periods. As a result of these factors, we may need to raise additional capital through debt or equity financings in order to fund our operations, which could be dilutive to stockholders, and such capital may not be available on reasonable terms, if at all.

~~Our limited operating history makes it difficult to evaluate our current business and future prospects.~~

We were founded in 2008, began building the first version of our core Castlight platform in 2009, did not complete our first customer sale and implementation until 2010 and did not make substantial investments in sales and marketing until 2012. Jiff was founded in 2010 and had its first customer sale in 2016. Our limited operating history limits our ability to forecast our future operating results and such forecasts are subject to a number of uncertainties, including our ability to plan for and model future growth.

We have encountered and will continue to encounter risks and uncertainties frequently experienced by new and growing companies in rapidly changing industries, such as determining appropriate investments of our limited resources, market adoption of our existing ~~and future offerings, competition from other companies, acquiring and retaining~~customers. If our customers ~~managing customer deployments, hiring, integrating, training and retaining skilled personnel, developing~~fail to renew their agreements, renew their agreements upon less favorable terms or at lower fee levels, or fail to purchase new products and services ~~determining prices~~from us, our revenue may decline or our future revenue may be constrained.

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which is generally from three to 12 months from contract signing. If a customer terminates its agreement early and revenue and cash flows expected from a customer are not realized in the time period expected or not realized at all, our business, operating results and financial condition could be adversely affected.

We operate in a competitive industry, and if we are not able to compete effectively, our business and operating results will be harmed.

The market for our products ~~handling~~and services is competitive, and we expect the market to attract increased competition, which could make it hard for us to succeed. We currently face competition for portions of our offering from a range of companies, including healthcare information technology companies and specialized software and solution providers that offer similar solutions, often at substantially lower prices, and that are continuing to develop additional products and becoming more sophisticated and effective. Our market is in an early stage of development, but is rapidly evolving and competitive. We currently face competition from both existing and emerging vendors across a variety of categories, from specialists in the care guidance and wellbeing areas of the market, to broader offerings that compete with our full health navigation platform. There are a number of independent companies we compete with across the various functions of our health navigation platform. Care guidance competitors include Accolade, ClearCost Health, Compass, HealthAdvocate, Healthcare Bluebook, and Quantum Health. Wellbeing competitors include Limeade, VirginPulse, and Vitality. Platform competitors include Evive, Optum/Rally, Sharecare, and Welltok.

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

Some of our competitors, in particular health plans, have greater name recognition, longer operating histories and significantly greater resources than we do. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors might be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. In addition, current and potential competitors have established, and might in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their solutions in the marketplace. The field of healthcare and the services related to healthcare are subject to change, and there has been consolidation in the industry. Accordingly, new competitors or alliances might emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of our market, such as customers that desire a more narrow solution, which could create additional price pressure. In light of these factors, even if our offering is more effective than those of our competitors, current or potential customers might accept competitive offerings in lieu of purchasing our offerings.

Our proprietary software may not operate properly, which could damage our reputation, give rise to claims against us or divert application of our resources from other purposes, any of which could harm our business and operating results.

Proprietary software development is time-consuming, expensive and complex, and may involve unforeseen ~~expenses~~difficulties. We may encounter technical obstacles, and ~~managing challenges~~it is possible that we will discover additional problems that prevent our proprietary products from operating properly. We are currently developing new features and services in ~~forecasting accuracy.~~our proprietary software for all of our offerings. If any of our offerings does not function reliably or fails to achieve customer expectations in terms of performance, customers could assert liability claims against us or attempt to cancel their contracts with us. This could damage our reputation and impair our ability to attract or maintain clients which would adversely affect our operating results.

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products and services may arise in the future and may result from interface of our offering with systems and data that we did not develop and the function of which is outside of our control or undetected in our testing. These defects and errors and any failure by us to identify and address them could result in loss of revenue or market share, diversion of development resources, injury to our reputation and increased service and maintenance costs. Defects or errors in our health benefits platform might discourage existing or potential customers from purchasing our offering from us. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating results.

Any failure to offer high-quality technical support services may adversely affect our relationships with our customers and harm our financial results.

Our customers depend on our support organization to resolve any technical issues relating to our offering. In addition, our sales process is highly dependent on the quality of our offering, our business reputation and on strong recommendations from our existing customers. Any failure to maintain high-quality and highly-responsive technical support, or a market perception that we do not maintain high-quality and highly-responsive support, could harm our reputation, adversely affect our ability to sell our offering to existing and prospective customers, and harm our business, operating results and financial condition.

We offer technical support services with our offering and may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services, particularly as we increase the size of our customer base. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. It is difficult to predict customer demand for technical support services and if customer demand increases significantly, we may be unable to provide satisfactory support services to our customers and their employees. Additionally, increased customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results.

If we cannot implement our offering for customers in a timely manner, we may lose customers and our reputation may be harmed.

Our customers have a variety of different data formats, enterprise applications and infrastructure and our offering must support our customers’ data formats and integrate with complex enterprise applications and infrastructures. If our ~~assumptions regarding these~~platform does not currently support a customer’s required data format or appropriately integrate with a customer’s applications and ~~other similar risks and uncertainties,~~infrastructure, or if an existing customer switches to unsupported infrastructure, then we may have to configure our platform to do so, which increases our expenses. Additionally, we ~~use~~do not control our customers’ implementation schedules. As a result, if our customers do not allocate internal resources necessary to ~~plan our business, are incorrect or change as we gain more experience operating our business or due to changes in our industry,~~meet their implementation responsibilities or if we face unanticipated implementation difficulties, the implementation may be delayed. Further, our implementation capacity has at times constrained our ability to successfully implement our offering for our customers in a timely manner, particularly during periods of high demand. If the customer implementation process is not executed successfully or if execution is delayed, we could incur significant costs, customers could become dissatisfied and decide not to increase usage of our offering, or not to use our offering beyond an initial period prior to their term commitment or, in some cases, revenue recognition could be delayed. Our data dependencies and implementation procedures differ for each new product that we launch. Accordingly, our ability to convert sales of new products into billings and revenue depends on our ability to create a scalable launch infrastructure in each case. In addition, competitors with more efficient operating models with lower implementation costs could penetrate our customer relationships.

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

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recognition of revenue for, and the profitability of, that work might be impaired and the customer’s dissatisfaction with our offering could damage our ability to expand the number of products and services purchased by that customer. These customers may not renew their agreements, seek to terminate their relationship with us or renew on less favorable terms. Moreover, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to retain or compete for new business with current and prospective customers. If any of these were to occur, our revenue may fail to grow at historical rates or at all, or may even decline, and our operating results could be adversely affected.

If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase and we may be unable to implement our business strategy.

We have experienced significant growth since our inception, both organic and through acquisitions, which puts strain on our business, operations and employees. Future revenues may not grow at the same rates they have historically or may even stagnate or decline. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. Moreover, we may from time to time decide to undertake cost savings initiatives, such as the reductions in workforce we implemented in 2016 and 2018, or disposing of, or otherwise discontinuing certain products, in an effort to focus our resources on key strategic initiatives and streamline our business. We must also attract, train and retain a significant number of qualified personnel in key areas such as research and development, sales and marketing, customer support, professional services, and management, and the availability of such personnel, in particular software engineers, may be constrained. These and similar challenges, and the related costs, may be exacerbated by the fact that our headquarters is located in the San Francisco Bay Area.

A key aspect to managing our growth is our ability to scale our capabilities to implement our offering satisfactorily with respect to both large and demanding enterprise customers, who currently comprise the majority of our customer base, as well as smaller customers. Large customers often require specific features or functions unique to their particular business processes, which at a time of rapid growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully implement our offering to our customers in a timely manner. We may also need to ~~change~~make further investments in our ~~current operations infrastructure in order for us~~technology and automate portions of our offering or services to ~~achieve profitability and scale~~decrease our ~~operations efficiently, which makes our future prospects even more difficult to evaluate. For example, in order to~~costs, particularly as we grow sales of our health benefits platform to smaller customers. If we are unable to address the needs of our customers ~~in a financially sustainable manner, we may need to further automate implementations, tailor~~or their employees, or our customers or their employees are unsatisfied with the quality of our offering or services, they may not renew their agreements, seek to cancel or terminate their relationship with us or renew on less favorable terms. In addition, many of our customers adjust their benefit plan designs, benefits providers and ~~modify~~eligibility criteria at the start of each new benefits plan year, requiring additional configurations for those customers. As our ~~go-to-market approaches to reduce our service delivery and~~ customer

~~Table~~ base grows, the complexity of ~~Contents~~

~~acquisition costs.~~these activities can increase. If we fail to automate these operations sufficiently and implement these changes on a timely basis or are unable to implement them effectively, our business may suffer.

~~Following~~We may experience additional challenges with managing our growth relating to our acquisition of ~~Jiff, we may be unable to integrate successfully the businesses of Castlight and Jiff and realize the anticipated benefits of the transaction~~.

Following the acquisition, as a combined company we will be required to devote significant management attention and resources to integrating its business practices and operations. As a combined company we may fail to realize some or all of the anticipated benefits of the acquisition if the integration process takes longer than expected or is more costly than expected. As a combined company we may encounter difficulties in the integration process that include the following:

the inability to successfully combine the businesses of Castlight and Jiff in a manner that permits the combined company to achieve the synergies anticipated to result from the acquisition, which would result in the anticipated benefits of the acquisition not being realized partly or wholly in the time frame currently anticipated or at all;

~~lost sales and customers as a result of certain customers of either of the two companies deciding not to do business with the combined company;~~

~~complexities associated with managing the combined businesses;~~

~~integrating personnel from the two companies;~~

~~creation of uniform standards, controls, procedures, policies and information systems;~~

~~potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the combination;~~

performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the acquisition and integrating the companies’ operations; and

~~potential loss of brand awareness or confusion as a result of our rebranding activities.~~

It is possible that the integration process could result in the diversion of management’s attention, the disruption or interruption of, or the loss of momentum in, the ongoing business or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect our ability as a combined company to maintain relationships with customers, partners and employees or its ability to achieve the anticipated benefits of the acquisition, or could reduce the earnings or otherwise adversely affect the business and financial results of the combined company. Moreover, in addition to the possible failure to realize the anticipated benefits of any acquisition, including revenues or return on investment assumptions, we may be exposed to unknown liabilities or impairment charges as a result of such acquisitions.

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

Our market is new and unproven, and it is uncertain whether we will achieve and sustain high levels of demand and market adoption. Our success depends to a substantial extent on the willingness of employers to increase their use of our health benefits platform, the ability of our products to increase employee engagement, as well as on our ability to demonstrate the value of our offering to customers and their employees and to develop new products that provide value to customers and users. If employers do not perceive the benefits of our offering or our offering does not drive employee engagement, then our market might develop more slowly than we expect or even shrink, which could significantly adversely affect our operating results. In addition, we have limited insight into trends that might develop and affect our business. We might make errors in predicting and reacting to relevant business, legal and regulatory trends, which could harm our business. If any of these events occur, it could materially adversely affect our business, financial condition or results of operations.

~~In addition, we have devoted substantial efforts to our recently-completed acquisition of Jiff, and expect to continue to devote substantial efforts to the~~ operation and integration of the ~~Jiff business.~~ acquired technologies has required, and we expect will continue to require, substantial financial costs and substantial management attention. If we fail to effectively manage the continued integration process in a timely manner, our business and financial results may suffer.

Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. Our growth is expected to require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. In addition, data and content fees, which are one of our primary operational costs, are not fixed as they vary based on the source and condition of the data we receive from third parties, and if they remain variable or increase over time, we would not be able to realize the economies of scale that we expect as we grow renewals and implementation of new customers, which may negatively impact our gross margin. If our management is unable to effectively manage our growth, our expenses might increase more than expected, our revenue may not increase or might grow more slowly than expected and we might be unable to implement our business strategy. The quality of our offering might also suffer, which could negatively affect our reputation and harm our ability to retain and attract customers.

We have ~~undertaken these efforts based on~~experienced turnover in our ~~belief that~~senior management team, and the loss of one or more of our ~~customers are interested in a combined suite of offerings that address both health care management~~executive officers or key employees or an inability to attract and ~~wellness~~retain highly skilled employees or key subcontractor services could adversely affect our business.

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Our success depends largely upon the continued services of our key executive officers. We have in the past and may in the future experience changes in our executive management team resulting from the departure of executives or subsequent hiring of new executives, which may be disruptive to our business. For example, effective July 26, 2019, Maeve O’Meara assumed the role of Chief Executive Officer, following the departure of John C. Doyle, and Will Bondurant will be assuming the role of Chief Financial Officer, effective November 15, 2019. Transitions such as this may have a disruptive impact on our ability to implement our business strategy and could have a material adverse effect on our business. Any changes in business strategies can create uncertainty, may negatively impact our ability to execute our business strategy quickly and effectively and may ultimately be unsuccessful. The impact of hiring new executives may not be immediately realized.

~~needs. However, if customer demand~~These executive officers are at-will employees and therefore may terminate employment with us at any time with no advance notice. We do not maintain “key person” insurance for ~~a combined suite~~any of ~~offerings~~these executive officers or any of our other key employees. We also rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and cost and may significantly delay or prevent the achievement of our business objectives.

To continue to execute our growth strategy, we also must attract and retain highly skilled personnel, particularly in research and development and sales and marketing. Competition is ~~lower than expected, or takes longer than~~intense for engineers with high levels of experience in designing and developing software and Internet-related services, particularly in the San Francisco Bay Area where we are located. We might not be successful in maintaining our unique culture and continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to ~~develop, then~~continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel with Software-as-a-Service, or SaaS, experience or experience working with the health care market is limited overall. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have. We supplement our hired skilled personnel through the use of subcontractors, particularly in the area of research and development, a significant portion of which perform services outside of the United States. If these subcontractors cease to perform services for us for any reason, our ability to meet our development goals may be impaired, and our business ~~will~~and future growth prospects could be ~~harmed~~severely harmed.

In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options or other equity instruments they are to receive in connection with their employment. Volatility or performance trends in the price of our ~~operating~~stock might, therefore, adversely affect our ability to attract or retain highly skilled personnel. Furthermore, the requirement to expense stock options and other equity instruments might discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

Our marketing efforts depend significantly on our ability to receive positive references from our existing customers.

Our marketing efforts depend significantly on our ability to call on our current customers to provide positive references to new, potential customers. Given our limited number of long-term customers, the loss or dissatisfaction of any customer could substantially harm our brand and reputation, inhibit the market adoption of our offering and impair our ability to attract new customers and maintain existing customers. Any of these consequences could have a material adverse effect on our business, financial condition and results ~~will suffer.~~of operations.

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If our security measures are breached and ~~unauthorized access to a~~ customer’s data are ~~obtained,~~compromised, our offering may be perceived as insecure, we may incur significant liabilities, our reputation may be harmed and we could lose sales and customers.

Our offering involves the storage and transmission of customers’ proprietary information, personally identifiable information, and protected health information of our customers’ employees and their dependents, which is regulated under the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations, collectively HIPAA. Because of the extreme sensitivity of this information, the security features of our offering are very important. If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons may be able to obtain access to sensitive customer or employee data, including HIPAA-regulated protected health information. A security breach or failure could result from a variety of circumstances and events, including third-party action, employee negligence or error, malfeasance, computer viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, telecommunication failures, user errors, and catastrophic events.

If our security measures were to be breached or fail, our reputation could be severely damaged, adversely affecting customer or investor confidence, customers may curtail their use of or stop using our offering and our business may suffer. In addition, we could face litigation, damages for contract breach, penalties and regulatory actions for violation of HIPAA and other laws or regulations applicable to data protection and significant costs for remediation and for measures to prevent future occurrences. In addition, any potential security breach could result in increased costs associated with liability for stolen assets or information, repairing system damage that may have been caused by such breaches, incentives offered to customers or other business partners in an effort to maintain the business relationships after a breach and implementing measures to prevent future occurrences, including organizational changes, deploying additional personnel and protection technologies, training employees and engaging third-party experts and consultants. While we maintain insurance covering certain security and privacy damages and claim expenses we may not carry insurance or maintain coverage sufficient to compensate for all liability and such insurance may not be available for renewal on acceptable terms or at all, and in any event, insurance coverage would not address the reputational damage that could result from a security incident.

We outsource important aspects of the storage and transmission of customer information, and thus rely on third parties to manage functions that have material cyber-security risks. These outsourced functions include services such as software design and product development, software engineering, database consulting, call center operations, co-location data centers, data-center security, IT, network security and Web application firewall services. We attempt to address these risks by requiring outsourcing subcontractors who handle customer information to sign business associate agreements contractually requiring those subcontractors to adequately safeguard personal health data and in some cases by requiring such outsourcing subcontractors to undergo third-party security examinations. However, we cannot assure you that these contractual measures and other safeguards will adequately protect us from the risks associated with the storage and transmission of customers proprietary and protected health information.

We may experience cyber-security and other breach incidents that may remain undetected for an extended period. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against us, we may be unable to anticipate these techniques or to implement adequate preventive measures. In addition, in the event that our customers authorize or enable third parties to access their data or the data of their employees on our systems, we cannot ensure the complete integrity or security of such data in our systems as we would not control that access. Third parties may also attempt to fraudulently induce our employees or customers and their employees into disclosing sensitive information such as user names, passwords or other information or otherwise compromise our security measures in order to gain access to customer information, which could result in significant legal and financial exposure, a loss of confidence in the security of our offering, interruptions or malfunctions in our operations, and, ultimately, harm to our future business prospects and revenue. Because our offering offers single sign-on capabilities for our customers and their employees to point solutions offered by our partners, unauthorized access to our offering could also result in security breaches of customer information and data in offerings by our partners. We may be required to expend significant capital and financial resources to invest in security measures, protect against such threats or to alleviate problems caused by breaches in security. If an actual or perceived breach of our security occurs, or if we are unable to effectively resolve such breaches in a timely manner, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers or suffer other reputational harm.

~~Our errors and omissions insurance may be inadequate or may not be available in~~Regardless of the ~~future on acceptable terms, or at all. In addition, our policy may not cover all claims made against us and~~merits of any such suit, defending ~~a suit, regardless of its merit,~~it could be costly and divert management’s attention from leading our business.

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We have a history of significant GAAP losses, which we expect to continue for the foreseeable future, and we may never achieve or sustain profitability in the future.

We have incurred significant GAAP net losses in each year since our incorporation in 2008 and expect to continue to incur GAAP net losses for at least fiscal year 2019. We experienced GAAP net losses of $28.3 million, $39.7 million, $51.9 million and $58.7 million during the nine months ended September 30, 2019, and the years ended 2018, 2017, and 2016, respectively. As of September 30, 2019, we had an accumulated deficit of $443.3 million. The GAAP losses and accumulated deficit were primarily due to the substantial investments we made to grow our business, enhance our technology and offering through research and development and acquire and support customers. We announced a restructuring program in July 2018 to reduce our workforce and better align our operations with evolving business needs, under which we reduced our expected expenses by approximately 12%. However, our estimates and forecasts relating to the success of our cost-savings measures may prove to be inaccurate. We anticipate that cost of revenue and operating expenses will increase in the foreseeable future as we seek to continue to grow our business, enhance our offerings and acquire additional customers. Many of our efforts to generate revenue from our business are new and unproven, and any failure to increase our revenue or generate revenue from new products and services could prevent us from achieving or maintaining profitability. Furthermore, to the extent we are successful in increasing our customer base, we could also incur increased GAAP losses because costs associated with entering into customer agreements are generally incurred up front, while customers are generally billed over the term of the agreement. Our prior GAAP losses, combined with our expected future GAAP losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. We expect to continue to incur GAAP operating losses for the foreseeable future and may never become profitable on a quarterly or annual basis, or if we do, we may not be able to sustain profitability in subsequent periods. As a result of these factors, we may need to raise additional capital through debt or equity financings in order to fund our operations, which could be dilutive to stockholders, and such capital may not be available on reasonable terms, or at all.

Our limited operating history makes it difficult to evaluate our current business and future prospects.

We were founded in 2008, began building the first version of our care guidance platform in 2009, did not complete our first customer sale and implementation until 2010 and did not make substantial investments in sales and marketing until 2012. Jiff was founded in 2010 and had its first customer implementation in 2013 before being acquired by us in April of 2017. The limited operating histories of these two businesses, standalone and as combined, limit our ability to forecast our future operating results and such forecasts are subject to a number of uncertainties, including our ability to plan for and model future growth.

We have encountered and will continue to encounter risks and uncertainties frequently experienced by new and growing companies in rapidly changing industries, such as determining appropriate investments of our limited resources, market adoption of our existing and future offerings, competition from other companies, acquiring and retaining customers, managing customer deployments, hiring, integrating, training and retaining skilled personnel, developing new products and services, determining prices for our products, handling unforeseen expenses and managing challenges in forecasting accuracy. If our assumptions regarding these and other similar risks and uncertainties, which we use to plan our business, are incorrect or change as we gain more experience operating our business or due to changes in our industry, or if we do not address these risks and uncertainties successfully, our operating and financial results could differ materially from our expectations and our business could suffer.

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

We may be unable to fully realize the anticipated benefits of the Jiff acquisition.

Following the acquisition of Jiff, Inc., as a combined company we have been and will continue to be required to devote significant management attention and resources to the adoption and migration to our integrated platform. As a combined company, we may fail to realize some or all of the anticipated benefits of the acquisition if the integration process is not successful or is more costly than expected. As a combined company we may encounter difficulties in the integration process that include the following:

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•the inability to successfully market and sell the combined product offerings;

•lost sales and customers as a result of certain customers deciding not to migrate their pre-combination product selection to our combined product:

•complexities associated with managing the combined businesses;

•creating uniform standards, controls, procedures, policies and information systems;

•performance shortfalls as a result of the diversion of management’s attention caused by integrating the companies’ operations and functionality, or developing new functionality; and

•potential loss of brand awareness or confusion as a result of our re-branding activities.

It is possible that the need to support pre-combination legacy product offerings could result in the diversion of management’s attention, the disruption or interruption of, or the loss of momentum in, the ongoing business or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect our ability as a combined company to maintain relationships with customers, partners and employees or its ability to achieve the anticipated benefits of the acquisition, or could reduce the earnings or otherwise adversely affect the business and financial results of the combined company. Moreover, in addition to the possible failure to realize the anticipated benefits of any acquisition, including revenues or return on investment assumptions, we may be exposed to unknown liabilities or impairment charges as a result of such acquisitions.

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

Our market is immature and volatile, and it is uncertain whether we will achieve and sustain high levels of demand and market adoption. Our success depends to a substantial extent on the willingness of employers to increase their use of our health navigation platform, the ability of our products to increase employee engagement, as well as on our ability to demonstrate the value of our offering to customers and their employees and to develop new products that provide value to customers and users. If employers do not perceive the benefits of our offering or our offering does not drive employee engagement, then our market might develop more slowly than we expect, or even shrink, which could significantly and adversely affect our operating results. In addition, we have limited insight into trends that might develop and affect our business. We might make errors in predicting and reacting to relevant business, legal and regulatory trends, which could harm our business. If any of these events occur, it could materially and adversely affect our business, financial condition or results of operations.

In addition, we have devoted substantial efforts to our acquisition of Jiff, and expect to continue to devote substantial efforts to the operation and integration of the Jiff and Castlight functionalities. We have undertaken these efforts based on our belief that our customers are interested in a combined suite of offerings that address both health benefit management and wellness needs. However, if customer demand for a combined suite of offerings is lower than expected, then our business will be harmed and our operating results will suffer.

Our quarterly results may fluctuate significantly, which could adversely impact the value of our Class B common stock.

Our quarterly results of operations, including our revenue, gross margin, net loss and cash flows, may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, including, without limitation, those listed elsewhere in this “Risk Factors” section and those listed below:

•the addition or loss of large customers, including through acquisitions or consolidations of such customers;

•seasonal and other variations in the timing of the sales of our offering, as a significantly higher proportion of our customers either enter into new subscription agreements ~~with us~~ or renew previous agreements with us in the ~~third and fourth quarters~~second half of the ~~year compared to the first and second quarters;~~year.

•the timing of recognition of revenue, including possible delays in the recognition of revenue due to lengthy and sometimes unpredictable implementation ~~timelines;~~timelines or changes brought about by new accounting pronouncements;

•failure to meet our contractual commitments under service-level agreements with our customers;

•the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;

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•our access to pricing and claims data managed by health plans and other third parties, or changes to the fees we pay for that data;

•the timing and success of introductions of new products, services and pricing by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners;

•our ability to attract new customers;

•customer renewal rates and the timing and terms of customer renewals;

•network outages or security breaches;

•the mix of products and services sold or renewed during a period;

•general economic, industry and market conditions;

•the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies; and

~~impact~~•other impacts of new accounting pronouncements.

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

~~If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase and we may be unable to implement our business strategy.~~

We have experienced rapid growth in recent periods, which puts strain on our business, operations and employees. For example, our revenue has increased from $71.8 million for the nine months ended September 30, 2016 to $94.4 million for the nine months ended September 30, 2017. To manage our current and anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems and controls. Moreover, we may from time to time decide to undertake cost savings initiatives, such as the reduction in workforce we implemented in 2016, or disposing of,

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or otherwise discontinuing certain products, in an effort to focus our resources on key strategic initiatives and streamline our business. We must also attract, train and retain a significant number of qualified personnel in key areas such as, sales and marketing, customer support, professional services, engineering and management, and the availability of such personnel, in particular software engineers, may be constrained. These and similar challenges, and the related costs, may be exacerbated by the fact that our headquarters are located in the San Francisco Bay Area.

A key aspect to managing our growth is our ability to scale our capabilities to implement our offering satisfactorily with respect to both large and demanding enterprise customers, who currently comprise the substantial majority of our customer base, as well as smaller customers. Large customers often require specific features or functions unique to their particular business processes, which at a time of rapid growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully implement our offering to our customers in a timely manner. We may also need to make further investments in our technology and automate portions of our offering or services to decrease our costs, particularly as we grow sales of our health benefits platform to smaller customers. If we are unable to address the needs of our customers or their employees, or our customers or their employees are unsatisfied with the quality of our offering or services, they may not renew their agreements, seek to cancel or terminate their relationship with us or renew on less favorable terms. In addition, many of our customers adjust their benefit plan designs, benefits providers and eligibility criteria at the start of each new benefits plan year, requiring additional configurations for those customers. As our customer base grows, the complexity of these activities can increase. If we fail to automate these operations sufficiently and implement these changes on a timely basis or are unable to implement them effectively, our business may suffer.

We may experience additional challenges with managing our growth relating to our recently-completed acquisition of Jiff. We expect that the operation and integration of the Jiff business will require substantial financial costs and substantial management attention. If we fail to effectively manage the integration process, our business and financial results may suffer.

Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. Our growth is expected to require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. In addition, data and content fees, which are one of our primary operational costs, are not fixed as they vary based on the source and condition of the data we receive from third parties, and if they remain variable or increase over time, we would not be able to realize the economies of scale that we expect as we grow renewals and implementation of new customers, which would negatively impact our gross margin. If our management is unable to effectively manage our growth, our expenses might increase more than expected, our revenue may not increase or might grow more slowly than expected and we might be unable to implement our business strategy. The quality of our offering might also suffer, which could negatively affect our reputation and harm our ability to retain and attract customers.

We incur significant upfront costs in our customer relationships, and if we are unable to maintain and grow these customer relationships over time, we are likely to fail to recover these costs and our operating results will suffer.

We devote significant resources and incur significant upfront costs to establish relationships with our customers and implement our offering and related services, particularly in the case of large enterprises that ~~often request~~in the past have requested or ~~require~~required specific features or functions unique to their particular business processes. Accordingly, our operating results will depend in substantial part on our ability to deliver a successful customer experience and persuade our customers to maintain and grow their relationship with us over time. For example, if we are not successful in implementing our offering or delivering a successful customer experience, a customer could terminate or ~~fail~~decline to renew their agreement with us, we would lose or be unable to recoup the significant upfront costs that we had expended on such customer and our operating results would suffer. As we grow, our customer acquisition costs could outpace our build-up of recurring revenue, and we may be unable to reduce our total operating costs through economies of scale such that we are unable to achieve profitability.

Our ability to deliver our full offering to customers depends in substantial part on our ability to access ~~pricing~~data and ~~claims data~~other resources that are managed by a limited number of health plans and other third parties.

In order to deliver the full functionality offered by our health benefits platform, we need continued access, on behalf of our customers, to sources of pricing and claims data, much of which is managed by a limited number of health plans and other third parties. We have developed various long-term and short-term processes to obtain data from certain health plans and other

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third parties. We are limited in our ability to offer the full functionality of our offering to customers of health plans with whom we do not have a data-sharing or joint customer support process or arrangement.

The terms of the arrangements under which we have access to data managed by health plans and other third parties vary, which can impact the offering we are able to deliver. Many of our arrangements with health plans and third parties have terms that limit our access to and permitted uses of claims or pricing data to the data associated with our mutual customers. Also, some agreements, processes, or arrangements may be terminated if the underlying customer contracts do not continue, or may otherwise be subject to termination or non-renewal in whole or in part.

In addition, in order to deliver current and potential future functionality of our full health navigation platform, including third-party integrated services, we need access to other resources and services that are largely or fully controlled by third-party integration partners. While we have developed and expect to continue to develop relationships with third parties in order to allow us and our customers to access these resources and services, we are exposed to the risk that third parties may

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limit or eliminate our access, which would hinder our ability to provide certain integrated health navigation functionality to our customers and harm our business.

The health plans and other third parties that we currently work with may, in the future, change their position and limit or eliminate our access to ~~pricing~~data and ~~claims data,~~resources, increase the costs for access, toprovide data ~~provide data~~and resources to us in more limited or less useful formats, or restrict our permitted uses of ~~data.~~data and resources. Furthermore, some health plans and third parties that we rely on to supply data and resources have developed or are developing their own proprietary ~~price~~products and ~~quality estimation tools~~services that may compete with aspects of our platform, and so may perceive continued cooperation with us as a competitive disadvantage and choose to limit or discontinue our access to ~~pricing~~these data and ~~claims data.~~resources. Failure to continue to maintain and expand our access to suitable pricing and ~~claims~~other data and resources may adversely impact our ability to continue to serve existing customers and expand our offering to new customers.

If our access to ~~pricing~~the data and ~~claims data~~resources necessary to deliver health navigation functionality is eliminated, reduced or becomes more costly to us, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results would suffer.

We rely on channel partners for a substantial portion of our sales, and if our channel partner relationships are unsuccessful then our sales results will be adversely affected and the growth of our business will be harmed.

Our sales strategy relies in part on relationships we have developed with health plans, benefits consultants, brokers and other industry participants, and we are continuing to invest in, and expect to continue to increase our reliance on, these relationships with channel partners to access customers and grow our overall sales. In addition, we have expanded the range of our channel partner relationships, and the degree to which we rely on channel partners as part of our sales strategy, as a result of our recently-completed acquisition of Jiff. However, there can be no assurance that our channel partner relationships will be successful, or will result in access to additional customers or growth in sales. Our channel partnerships could fail for a variety of reasons, including changes in our partners’ business priorities, insufficient or misaligned incentives for our partners’ to assist us with sales, competition, or other factors.

Certain relationships we will enter or have entered into with channel partners will require substantial investments of our resources to support these initiatives. There can be no assurance that the investments we make to develop and support these channel relationships, or the effort required to do so, will provide a positive return on our investment in the near term, or at all. If any of these events materialize, our business and results of operations could be materially adversely affected.

We expect to derive a significant portion of our revenue from renewal of existing customer agreements and sales of additional products and services to existing customers. Revenue recognized in any quarter is largely derived from customer agreements signed in prior quarters. As a result, achieving a high renewal rate of our customer agreements and selling additional products and services is critical to our future operating results.

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However, we have a limited operating history and do not yet have enough experience with customer renewals to predict our customer renewal rate. We may experience significantly more difficulty than we anticipate in renewing existing customer agreements or in renewing them upon favorable terms. Factors that may affect the renewal rate for our offering, terms of those renewals and our ability to sell additional products and services include:

~~the price, performance and functionality of our offering;~~

~~our customers’ user counts and benefit design features;~~

~~the availability, price, performance and functionality of competing or alternative solutions;~~

the potential for customers that are able to access lower-functionality versions of our offering that we provide through health plans or other channel partners to opt to use the lower-functionality versions of our offering;

~~our ability to develop complementary products and services;~~

~~our continued ability to access the pricing and claims data necessary to enable us to deliver reliable data in our cost estimation and price transparency offering to customers;~~

~~the stability, performance and security of our hosting infrastructure and hosting services;~~

~~changes in health care laws, regulations or trends; and~~

~~the business environment of our customers, in particular, headcount reductions by our customers.~~

In addition, a significant number of our customer agreements allow customers to terminate such agreements for convenience at certain times, typically with one to three months advance notice. We typically incur the expenses associated with integrating a customer’s data into our health care database and related training and support prior to recognizing meaningful revenue from such customer. Customer subscription revenue is not recognized until our products are implemented for launch, which is generally from three to twelve months from contract signing. If a customer terminates its agreement early and revenue and cash flows expected from a customer are not realized in the time period expected or not realized at all, our business, operating results and financial condition could be adversely affected.

A significant portion of our revenue comes from a limited number of customers, the loss of which would adversely affect our financial results.

Historically, we have relied on a limited number of customers for a substantial portion of our total revenue. For the ~~year~~nine months ended ~~December 31, 2016,~~September 30, 2019, our top 10 customers by revenue accounted for ~~33%~~approximately 27% of our total revenue. In calculating our top 10 customers by revenue, ~~and the Administrative Committee of the Wal-Mart Stores, Inc., Associates’ Health and Welfare Plan represented approximately 10%~~we include only direct customers, not channel partners. In addition, Anthem, one of our channel partners accounted for approximately 26% of total ~~revenue.~~revenue for the nine months ended September 30, 2019 and we expect this revenue to increase both in absolute dollars and as a percentage of our revenue in upcoming periods. We rely on our reputation and recommendations from key customers in order to promote our offering to potential customers. The loss of any of our key customers, or a failure of some of them to renew or expand user subscriptions, could have a significant impact on the growth rate of our revenue, reputation and our ability to obtain new customers. For example, during the third quarter of 2018, one of our largest customers adopted a new benefits strategy and did not renew its agreement with us, and that agreement expired on December 31, 2018. In addition, mergers and acquisitions involving our customers could lead to cancellation or non-renewal of our agreements with those customers or by the acquiring or combining companies, thereby reducing the number of our existing and potential customers.

Because we generally bill our customers and recognize revenue over the term of the contract, near term declines in new or renewed agreements may not be reflected immediately in our operating results and may be difficult to discern.

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Most of our revenue in each quarter is derived from agreements entered into with our customers during previous quarters. Consequently, a decline in new or renewed agreements in any one quarter may not be fully reflected in our revenue for that quarter. Such declines, however, would negatively affect our revenue in future periods and the effect of significant downturns in sales of and market demand for our offering, and potential changes in our rate of renewals or renewal terms, may not be fully reflected in our results of operations until future periods. Accordingly, management measures sales performance and forecasts future subscription revenue based on signed annual recurring revenue, or ARR. ARR is a forward-looking metric based on contractual terms in existence as of the end of a reporting period 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, as well as upsells and cross-sells. For all of these reasons, the amount of subscription revenue we actually recognize may be different from ARR at the end of a period in which it was recorded. In addition, we may be unable to adjust our cost structure rapidly, or at all, to take account of reduced revenue. Our subscription model also makes it difficult for us to rapidly increase our total revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable term of the agreement. Accordingly, the effect of changes in the industry impacting our business or changes we experience in our new sales may not be reflected in our short-term results of operations.

Our sales and implementation cycle can be long and unpredictable and require considerable time and expense, which may cause our operating results to fluctuate.

The sales cycle for our health benefits platform, from initial contact with a potential lead to contract execution and implementation, varies widely by customer, ranging from three to 24 months. Some of our customers undertake a significant and prolonged evaluation process, including whether our offering meets a customer’s unique benefits program needs, that frequently involves not only the review of our offering but also of our competitors, which has in the past resulted in extended

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sales cycles. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our offering. Moreover, our large enterprise customers often begin to deploy our service on a limited basis, but nevertheless demand extensive configuration, integration services and pricing concessions, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our offering widely enough across their organization to justify our substantial upfront investment. It is possible that in the future we may experience even longer sales cycles, more complex customer needs, higher upfront sales costs and less predictability in completing some of our sales as we continue to expand our direct sales force and thereby increase the percentage of our sales personnel with less experience in selling our service, expand into new territories and add additional products and services.sales. In addition, even after contracts are signed, our implementation timelines can delay recognition of related revenue for several periods. If our sales cycle lengthens or our substantial upfront sales and implementation investments do not result in sufficient sales or revenue to justify our investments, our operating results may be harmed.

The health care industry is heavily regulated. Our failure to comply with regulatory requirements could create liability for us, result in adverse publicity and otherwise negatively affect our business.

The health care ~~industry is~~and wellness industries are heavily regulated and is constantly evolving due to the changing political, legislative and regulatory landscape and other factors. Many health care and wellness laws are complex, and their application to specific services and relationships may not be clear. Further, some health care laws differ from state to state and it is difficult to ensure our business complies with evolving laws in all states. Our operations may be adversely affected by enforcement initiatives. By offering partner applications we may become subject to additional regulations that don’t ordinarily apply to our own core business. Our failure to accurately anticipate the application of these laws and regulations to our business, or any other failure to comply with regulatory requirements, could create liability for us, result in adverse publicity and negatively affect our business. For example, failure to comply with these requirements could result in the unwillingness of current and potential customers to work with us. Federal and state legislatures and agencies periodically consider proposals to revise aspects of the legal rules applicable to the health care industry, or to revise or create additional statutory and regulatory requirements. Such proposals, if implemented, could impact our operations, the use of our offering and our ability to market new products and services, or could create unexpected liabilities for us. We cannot predict what changes to laws or regulations might be made in the future or how those changes could affect our business or our operating costs.

If we fail to comply with applicable health information privacy and security laws and other applicable state, federal and international privacy and security laws, we may be subject to significant liabilities, reputational harm and other negative consequences, including decreasing the willingness of current and potential customers to work with us.

We are subject to data privacy and security regulation within the jurisdictions where our users reside; these regulations address matters central to our business, including privacy and data protection, personal information, content, data security, data

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retention and deletion, and user communications. For example, we are subject to the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations ~~collectively HIPAA,~~(collectively “HIPAA”), which established uniform federal standards for certain “covered entities,” which include health care providers and health plans, governing the conduct of specified electronic health care transactions and protecting the security and privacy of protected health information ~~or PHI.~~(“PHI”). The Health Information Technology for Economic and Clinical Health Act ~~or HITECH,~~(“HITECH”) which became effective on February 17, 2010, makes HIPAA’s privacy and security standards directly applicable to “business associates,” which are independent contractors or agents of covered entities that create, receive, maintain, or transmit PHI in connection with providing a service for or on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA’s requirements and seek attorney’s fees and costs associated with pursuing federal civil actions.

A portion of the data that we obtain and handle for or on behalf of our customers is considered PHI, subject to HIPAA as well as other regulations. Under HIPAA and our contractual agreements with our HIPAA covered entity health plan customers, we are considered a “business associate” to those customers, and are required to maintain the privacy and security of PHI in accordance with HIPAA and the terms of our business associate agreements with customers, including by implementing HIPAA-required administrative, technical and physical safeguards. We have incurred, and will continue to incur, significant costs to establish and maintain these safeguards and, if additional safeguards are required to comply with HIPAA regulations or our customers’ requirements, our costs could increase further, which would negatively affect our operating results. Furthermore, if we fail to maintain adequate safeguards, or we or our agents and subcontractors use or disclose PHI in a manner prohibited or not permitted by HIPAA or our business associate agreements with our customers, or if the privacy or security of PHI that we obtain and handle is otherwise compromised, we could be subject to significant liabilities and consequences, including, without limitation:

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•breach of our contractual obligations to customers, which may cause our customers to terminate their relationship with us and may result in potentially significant financial obligations to our customers;

•investigation by regulatory authorities empowered to enforce HIPAA and other applicable regulations, including but not limited to the U.S. Department of Health and Human Services and state attorneys general, and the possible imposition of civil penalties;

•private litigation by individuals adversely affected by any violation of HIPAA, HITECH or comparable laws for which we are responsible; and

•negative publicity, which may decrease the willingness of current and potential future customers to work with us and negatively affect our sales and operating results.

In addition, we are subject to various state laws, including the California Consumer Privacy Act (“CCPA”), which recently was enacted by California, where our corporate headquarters is located. The CCPA will, among other things, require covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain sales of personal information, when it goes into effect on January 1, 2020. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and it remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted. We cannot yet predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply.

We also have ongoing compliance obligations with respect to applicable portions of the EU General Data Protection Regulation ("GDPR"), which became effective on May 25, 2018, which we have to comply with to the extent we have applicable users in the European Union, and we cannot assure you that our compliance efforts will be effective. The introduction of new products or expansion of our activities may subject us to additional laws and regulations. We have incurred, and will continue to incur, significant costs to establish and maintain compliance with new regulations that may apply to us, which would negatively affect our operating results.

Further, we publish statements to end users of our services that describe how we handle and protect personal information. If federal or state regulatory authorities or private litigants consider any portion of these statements to be untrue, we may be subject to claims of deceptive practices, which could lead to significant liabilities and consequences, including, without limitation, costs of responding to investigations, defending against litigation, settling claims and complying with regulatory or court orders.

We also send SMS text messages to potential end users who are eligible to use our service through certain customers and partners. While we get consent from or on behalf of these individuals to send text messages, federal or state regulatory authorities or private litigants may claim that the notices and disclosures we provide, form of consents we obtain or our SMS texting practices are not adequate. These SMS texting campaigns are potential sources of risk for class action lawsuits and liability for our company. Numerous class-action suits under federal and state laws have been filed in recent years against companies who conduct SMS texting programs. Many of those suits have resulted in multi-million dollar settlements to the plaintiffs.

Our growth depends in part on the success of our ~~new~~strategic relationships with third parties.

In order to grow our business, we anticipate that we will continue to depend on our relationships with third parties, including Anthem, Inc. We have continued to expand our ongoing relationship with Anthem, including Anthem’s offering of Engage, a Castlight-powered health navigation platform, and our development and support of the base technology underlying Anthem’s core care guidance offering. Apart from channel partners and data partners, our offering also includes the integration of products supplied by strategic partners, who offer complementary products and services. We rely on these strategic partners in the timely and successful deployment of our offering to our customers. If the products provided by these partners have defects or do not operate as expected, if the services provided by these partners are not ~~adopted by~~completed in a timely manner, if our ~~customers,~~partners have organizational or supply issues, or if we do not effectively integrate and support products supplied by these strategic partners, then we may have difficulty with the deployment of our offering that may result in loss of, or delay in, revenues, increased service and support costs and a diversion of development resources. We also may compete in some areas with these same partners. If these strategic partners fail to ~~continue~~perform or choose not to ~~innovate~~cooperate with us on certain projects, in addition to the effects described above, we could experience loss of customers and ~~develop~~market share; and failure to attract new ~~products~~customers or achieve market acceptance for our products. Identifying partners, negotiating and ~~services that~~documenting relationships and building integrations with them, requires significant time and resources. If we are ~~adopted by customers, then our revenue and operating results will be adversely affected.~~

unsuccessful in establishing or maintaining

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~~To date we have derived a substantial majority of~~ our ~~revenue from sales of our core Castlight platform, and our longer-term operating results and continued growth depend in part on~~relationships with Anthem, or other third parties, our ability to ~~successfully develop~~compete in the marketplace or to grow our revenue could be impaired and ~~sell new products and services~~our operating results may suffer. Even if we are successful, we cannot assure you that our new and existing customers want and are willing to purchase. In addition to our core Castlight platform, we have introduced a number of product cross-sells, such as our Castlight Pharmacy, Castlight Dental, Castlight Action, Castlight Elevate, Castlight Protect, and Castlight Rewards, as well as the suite of products acquired in connection with our acquisition of Jiff, but it is uncertain whether these ~~products and services~~relationships will result in ~~significant revenue or comprise a significant portion~~increased customer use of our ~~total~~platform or increased revenue. In addition, based on our belief that our customers are interested in acquiring wellness-related products, we have devoted substantial efforts to our acquisition of Jiff, and expect to continue to devote substantial efforts to the integration and expansion of the Jiff business. We have also invested, and will continue to invest, significant resources in research and development to enhance our existing offering and introduce new high quality products and services. If existing customers are not willing to make additional payments for such new products, or if new customers do not value such new products, our business and operating results will be harmed. If we are unable to predict user preferences or our industry changes, or if we are unable to modify our offering and services on a timely basis, we might lose customers. Our operating results would also suffer if our innovations are not responsive to the needs of our customers, appropriately timed with market opportunity or effectively communicated and brought to market.

~~We operate in a competitive industry, and if we are not able to compete effectively, our business and operating results will be harmed.~~

The market for our products and services is competitive, and we expect the market to attract increased competition, which could make it hard for us to succeed. We currently face competition for sub-components of our offering from a range of companies, including specialized software and solution providers that offer similar solutions, often at substantially lower prices, and that are continuing to develop additional products and becoming more sophisticated and effective. These competitors include but are not limited to Change Healthcare Corporation, Healthcare Bluebook, HealthSparq Inc., MDX Medical, Limeade and Virgin Pulse. In addition to traditional competitors, we are also beginning to encounter competitive pressure during sales opportunities in which a single platform, high touch concierge services, or employee communications is the primary focus for the customer as well as vendors selling primarily to health plans. Vendors in these categories include Evive Health, Compass, Health Advocate, Welltok and Rally Health. In addition, large, well-financed health plans, with whom we cooperate and on whom we depend in order to obtain the pricing and claims data we need to deliver our offering to customers, have in some cases developed their own cost and quality estimation tools and provide these solutions to their customers at discounted prices or often for free. These health plans include, for example, Aetna Inc., Cigna Corporation, and UnitedHealth Group, Inc. Competition from specialized software and solution providers, health plans and other parties may result in pricing pressure, which may lead to price decline in certain product segments, which could negatively impact our sales, profitability and market share. In addition, if health plans perceive continued cooperation with us as a threat to their business interests, they may take steps that impair our access to pricing and claims data, or that otherwise make it more difficult or costly for us to deliver our offering to customers.

Some of our competitors, in particular health plans, have greater name recognition, longer operating histories and significantly greater resources than we do. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors might be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. In addition, current and potential competitors have established, and might in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their solutions in the marketplace. Accordingly, new competitors or alliances might emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of our market, such as customers that desire a more narrow solution, which could create additional price pressure. In light of these factors, even if our offering is more effective than those of our competitors, current or potential customers might accept competitive offerings in lieu of purchasing our offerings.

Shifts in health care benefits trends, including any potential decline in the number of self-insured employers, or the emergence of new technologies may render our offering obsolete or require us to expend significant resources in order to remain competitive.

The U.S. health care industry is ~~massive,~~extensive and complex, with a number of large market participants with conflicting agendas, is subject to significant government regulation and is currently undergoing significant change. Changes in our industry, for

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example, towards private health care exchanges or away from high deductible health plans, or the emergence of new technologies as more competitors enter our market, could result in our offering being less desirable or relevant.

For example, we currently derive ~~substantially all~~the vast majority of our revenue from ~~sales to~~ customers that are self-insured employers. The demand for significant portions of our offering depends on the need of self-insured employers to manage the costs of health care services that they pay on behalf of their employees. While the percentage of employers who are self-insured has been increasing over the past decade, there is no assurance that this trend will continue. Various factors, including changes in the health care insurance market or in government regulation of the health care industry, could cause the percentage of self-insured employers to decline, which would adversely affect the market for our offering and would negatively affect our business and operating results. Furthermore, such trends and our business could be affected by changes in health care spending resulting from changes in the law like we saw with the Patient Protection and Affordable Care Act ~~or the ACA, which was enacted in March 2010 and is currently being implemented. For example, under~~(the “ACA”). Under the ACA, the federal government and several state governments established public exchanges in which consumers can purchase health insurance. In the event that the ~~implementation~~ACA, any amendment or repeal of the ACA, or other changes to the legal landscape causes our customers to change their health care benefits plans or move to use of exchanges such that it reduces the need for our offering, or if the number of self-insured employers otherwise declines, we would be forced to compete on additional product and service attributes or to expend significant resources in order to alter our offering to remain competitive.

If health care benefits trends shift or entirely new technologies, services or programs are developed that replace or disrupt existing offerings, our existing or future offerings could be rendered obsolete and our business could be adversely affected. In addition, we may experience difficulties with software development, industry standards, design or marketing that could delay or prevent our development, introduction or implementation of new products and ~~enhancements~~enhancements.

We may require additional capital to support business growth, and this capital might not be available to us on acceptable terms or at all.

Our operations have consumed substantial amounts of cash since inception and we intend to continue to make significant investments to support our business growth, respond to business challenges or opportunities, develop new products and services, enhance our existing offering and services, enhance our operating infrastructure and potentially acquire complementary businesses and technologies. For the nine months ended September 30, ~~2017~~2019 and ~~2016,~~September 30, 2018, our net cash used in operating activities was ~~$23.4~~$21.4 million and ~~$35.3~~$26.1 million, respectively. Our future capital requirements may be significantly different from our current estimates and will depend on many factors including our growth rate, new customer acquisitions, subscription renewal activity, operation and integration of the Jiff and Castlight functionalities, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings and the continuing market acceptance of our cloud-based subscription services. Accordingly, we might need to engage in equity or debt financings or collaborative arrangements to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class B common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We might have to obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to our technologies or offering that we otherwise would not relinquish. In addition, ~~during the recent economic instability,~~ it ~~has been~~may be difficult ~~for many companies~~ to obtain financing in the public markets or to obtain debt financing, and we might not be able to obtain additional financing on commercially reasonable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

Proprietary software development is time-consuming, expensive and complex, and may involve unforeseen difficulties. We may encounter technical obstacles, and it is possible that we will discover additional problems that prevent our proprietary products from operating properly. In addition to our core Castlight platform, we are currently implementing software with respect to a number of new products and services, including our Castlight Pharmacy, Castlight Dental, Castlight Action, Castlight Elevate, Castlight Protect and Castlight Rewards, as well as the suite of products acquired in connection with our acquisition of Jiff. If our offering does not function reliably or fails to achieve customer expectations in terms of

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performance, customers could assert liability claims against us or attempt to cancel their contracts with us. This could damage our reputation and impair our ability to attract or maintain clients which would adversely affect our operating results

Moreover, data services that are as complex as those we offer have in the past contained, and may in the future develop or contain, undetected defects or errors. Material performance problems, defects or errors in our existing or new software and products and services may arise in the future and may result from interface of our offering with systems and data that we did not develop and the function of which is outside of our control or undetected in our testing. These defects and errors and any failure by us to identify and address them could result in loss of revenue or market share, diversion of development resources, injury to our reputation and increased service and maintenance costs. Defects or errors in our health benefits platform might discourage existing or potential customers from purchasing our offering from us. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating results.

~~If we cannot implement our offering for customers in a timely manner, we may lose customers and our reputation may be harmed.~~

Our customers have a variety of different data formats, enterprise applications and infrastructure and our offering must support our customers’ data formats and integrate with complex enterprise applications and infrastructures. If our platform does not currently support a customer’s required data format or appropriately integrate with a customer’s applications and infrastructure, or if an existing customer switches to unsupported infrastructure, then we must configure our platform to do so, which increases our expenses. Additionally, we do not control our customers’ implementation schedules. As a result, if our customers do not allocate internal resources necessary to meet their implementation responsibilities or if we face unanticipated implementation difficulties, the implementation may be delayed. Further, our implementation capacity has at times constrained our ability to successfully implement our offering for our customers in a timely manner, particularly during periods of high demand. If the customer implementation process is not executed successfully or if execution is delayed, we could incur significant costs, customers could become dissatisfied and decide not to increase usage of our offering, or not to use our offering beyond an initial period prior to their term commitment or, in some cases, revenue recognition could be delayed. Our data dependencies and implementation procedures differ for each new product that we launch. Accordingly, our ability to convert sales of new products into billings and revenue depends on our ability to create a scalable launch infrastructure in each case. In addition, competitors with more efficient operating models with lower implementation costs could penetrate our customer relationships.

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

In addition, supporting large customers could require us to devote significant development services and support personnel and strain our personnel resources and infrastructure. Furthermore, if we are unable to address the needs of these customers in a timely fashion or further develop and enhance our offering, or if a customer or its employees are not satisfied with our quality of work, our offering or professional services then we could incur additional costs to address the situation. In addition, we may be required to issue credits or refunds for pre-paid amounts related to unused services, the timing of recognition of revenue for, and the profitability of, that work might be impaired and the customer’s dissatisfaction with our offering could damage our ability to expand the number of products and services purchased by that customer. These customers may not renew their agreements, seek to terminate their relationship with us or renew on less favorable terms. Moreover, negative publicity related to our customer relationships, regardless of its accuracy, may further damage our business by affecting our ability to retain or compete for new business with current and prospective customers. If any of these were to occur, our revenue may fail to grow at historical rates or at all, or may even decline, and our operating results could be adversely affected.

~~Any failure to offer high-quality technical support services may adversely affect our relationships with our customers and harm our financial results.~~

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from our existing customers. Any failure to maintain high-quality and highly-responsive technical support, or a market perception that we do not maintain high-quality and highly-responsive support, could harm our reputation, adversely affect our ability to sell our offering to existing and prospective customers, and harm our business, operating results and financial condition.

We depend on data centers operated by third parties for our offering, and any disruption in the operation of these facilities could adversely affect our business.

We provide our Castlight health ~~benefits~~navigation platform through computer hardware that is currently located in two geographically-dispersed third-party data centers in ~~Colorado and Arizona,~~the U.S., each of which are operated by the same IT hosting company. Our ~~Jiff~~Wellbeing services are hosted on Amazon Web Services hardware through virtual private clouds. ~~Primary hosting is located at the US-West availability zone in Oregon with disaster recovery/business continuity plan hosting located at the US-East availability zone in Virginia.~~ While we control and have access to our owned servers and all of the components of our network that are located in these external data centers, we do not control the operation of these ~~facilities.~~facilities and there could be performance or availability issues outside our control. The owners of our data centers and hosting services have no obligation to renew the agreements with us on commercially reasonable terms, or at all. If we are unable to renew these types of agreements on commercially reasonable terms, or if our data center operators and hosting services are acquired or cease operations, we may be required to transfer our servers and other infrastructure to new data center facilities or hosting services, and we may incur significant costs and possible service interruption in connection with doing so.

Problems faced by our third-party data center and hosting locations could adversely affect the experience of our customers. The operators of the data centers and hosting services could decide to close the facilities or change and suspend their service offerings without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by the operators of the data centers or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers and hosting facilities are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. For example, a rapid expansion of our business could affect the service levels at our data centers and hosting locations or cause such data centers and systems to fail. Any changes in third-party service levels at our data centers and hosting locations or any disruptions or other performance problems with our product offering could adversely affect our reputation and may damage our customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services might reduce our revenue, increase our costs associated with remediation or cause us to issue refunds to customers for prepaid and unused subscriptions, subject us to potential liability or adversely affect our renewal ~~rates~~rates.

The information that we provide to our customers, and their employees and families, could be inaccurate or incomplete, which could harm our business, financial condition and results of operations.

We provide price, quality and other health care-related information for use by our customers, and their employees and families, to search and compare options for health care services. Third-party health plans and our customers provide us with most of these data. Because data in the health care industry is fragmented in origin, inconsistent in format and often incomplete, the overall quality of data in the health care industry is poor, and we frequently discover data issues and errors. If the data that we provide to our customers are incorrect or incomplete or if we make mistakes in the capture or input of these data, our reputation may suffer and our ability to attract and retain customers may be harmed.

In addition, a court or government agency may take the position that our storage and display of health information exposes us to personal injury liability or other liability for wrongful delivery or handling of health care services or erroneous health information. While we maintain insurance coverage, this coverage may prove to be inadequate or could cease to be available to us on acceptable terms, if at all. Even unsuccessful claims could result in substantial costs, harm to our reputation and diversion of management resources. A claim brought against us that is uninsured or under-insured could harm our business, financial condition and results of operations.

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We depend on our senior management team, and the loss of one or more of our executive officers or key employees or an inability to attract and retain highly skilled employees or key subcontractor services could adversely affect our business.

Our success depends largely upon the continued services of our key executive officers. These executive officers are at-will employees and therefore may terminate employment with us at any time with no advance notice. We do not maintain “key person” insurance for any of these executive officers or any of our other key employees. We also rely on our leadership team in the areas of research and development, marketing, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The replacement of one or more of our executive officers or other key employees would likely involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.

To continue to execute our growth strategy, we also must attract and retain highly skilled personnel. Competition is intense for engineers with high levels of experience in designing and developing software and Internet-related services, particularly in the San Francisco Bay Area where we are located. We might not be successful in maintaining our unique culture and continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel with Software-as-a-Service, or SaaS, experience or experience working with the health care market is limited overall. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have. We supplement our hired skilled personnel through the use of subcontractors, particularly in the area of research and development, a significant portion of which perform services outside of the United States. If these subcontractors cease to perform services for us for any reason, our ability to meet our development goals may be impaired, and our business and future growth prospects could be severely harmed.

In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options or other equity instruments they are to receive in connection with their employment. Volatility or performance trends in the price of our stock might, therefore, adversely affect our ability to attract or retain highly skilled personnel. Furthermore, the requirement to expense stock options and other equity instruments might discourage us from granting the size or type of stock option or equity awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

If we cannot maintain our corporate culture as we grow, we could lose the elements of our culture that we believe contribute to our success and our business may be harmed.

We believe that a critical asset for our business, and a source of our competitive strength, is our unique company culture, which we believe fosters a high level of cross-functional collaboration and desire for excellence in our performance and product. As we grow and change, we may find it difficult to maintain these important aspects of our corporate culture. ~~Our recently-completed acquisition~~The continued integration of the Jiff and Castlight functionalities, or the ~~integration of Jiff’s~~ business and personnel ~~into our company,~~of any acquisitions we may make in the future, may present additional challenges to our ability to maintain our corporate culture. Any failure to preserve our culture could also negatively affect our ability to attract and retain personnel, our reputation and our ability to continue to build and advance our offering and may otherwise adversely affect our future success.

If we fail to develop widespread brand awareness cost-effectively, our business may suffer.

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We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread adoption of our offering and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue, and even if they do, any increase in revenue may not offset the expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our offering.

~~Our marketing efforts depend significantly on our ability to receive positive references from our existing customers.~~

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~~customers and maintain existing customers. Any of these consequences could have a material adverse effect on our business, financial condition and results of operations~~

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success depends in part on our ability to enforce our intellectual property and other proprietary rights. We rely upon a combination of patent, trademark, copyright and trade secret laws, as well as license and access agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring certain of our employees, consultants and contractors to enter into confidentiality, noncompetition and assignment of inventions agreements. These laws, procedures and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. While we have three U.S. patent applications pending, and we currently have one issued U.S. patent, we cannot ensure that any of our pending patent applications will be granted or that our issued patent will adequately protect our intellectual property. In addition, if any patents are issued in the future, they may not provide us with any competitive advantages, or may be successfully challenged by third parties. To the extent that our intellectual property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market solutions similar to ours, or use trademarks similar to ours, each of which could materially harm our business. Further, unauthorized parties may attempt to copy or obtain and use our technology to develop products with the same functionality as our offering, and policing unauthorized use of our technology and intellectual property rights is difficult and may not be effective. The failure to adequately protect our intellectual property and other proprietary rights could materially harm our business.

We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Companies in the Internet and technology industries are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights, and our competitors and other third parties may hold patents or have pending patent applications, which could be related to our business. These risks have been amplified by the increase in third parties, which we refer to as non-practicing entities, whose sole or primary business is to assert such claims. We expect that we may receive in the future notices that claim we or our customers using our offering have misappropriated or misused other parties’ intellectual property rights, particularly as the number of competitors in our market grows and the functionality of products amongst competitors overlaps. If we are sued by a third party that claims that our technology infringes its rights, the litigation, whether or not successful, could be extremely costly to defend, divert our management’s time, attention and resources, damage our reputation and brand and substantially harm our business. We do not currently have an extensive patent portfolio of our own, which may limit the defenses available to us in any such litigation.

In addition, in most instances, we have agreed to indemnify our customers against certain third-party claims, which may include claims that our offering infringes the intellectual property rights of such third parties. Our business could be adversely affected by any significant disputes between us and our customers as to the applicability or scope of our indemnification obligations to them. The results of any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to do one or more of the following:

•cease offering or using technologies that incorporate the challenged intellectual property;

•make substantial payments for legal fees, settlement payments or other costs or damages;

•obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology; or

•incur substantial costs and reallocate resources to redesign our technology to avoid infringement.

If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or costs could have a material adverse effect upon our business and financial results.

Our use of open source technology could impose limitations on our ability to commercialize our software platform.

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Our offering incorporates open source software components that are licensed to us under various public domain licenses. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software or make available any derivative works of the open source code

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on unfavorable terms or at no cost. There is little or no legal precedent governing the interpretation of many of the terms of these licenses and therefore the potential impact of such terms on our business is somewhat unknown. There is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our software platform. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our offering, discontinue sales of our offering in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could cause us to breach customer contracts, harm our reputation, result in customer losses or claims, increase our costs or otherwise adversely affect our business and operating results.

We may face risks related to securities litigation that could result in significant legal expenses and settlement or damage awards.

We have been in the past and may in the future become subject to claims and litigation alleging violations of the securities laws or other related claims, which could harm our business and require us to incur significant costs. For example, during the second quarter of 2015, four purported securities class action lawsuits, which were later consolidated into a single action, were filed in the Superior Court of the State of California, County of San Mateo, against ~~the Company,~~us, certain of ~~its~~our current and former directors, executive officers, significant stockholders and underwriters associated with ~~its~~our initial public offering (“IPO”). The lawsuits were brought by purported stockholders of the Company seeking to represent a class consisting of all those who purchased the Company’s stock pursuant or traceable to the Registration Statement and Prospectus issued in connection with its IPO, alleging claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. We are generally obliged, to the extent permitted by law, to indemnify our current and former directors and officers who are named as defendants in these types of lawsuits.offering. On ~~March~~October 28, 2016, the ~~parties to the consolidated actions reached a mutually acceptable resolution by way of~~Court approved a mediated cash settlement ~~for~~of an aggregate amount of $9.5 ~~million and the Court entered final approval of the settlement on October 28, 2016.~~million. As a result of the settlement, ~~Castlight~~we recorded a net charge of $2.9 million to general and administrative expense in 2016. This amount represents the portion of settlement that was not covered by insurance and legal fees incurred in 2016 regarding this matter. Future litigation may require significant attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on our financial position, results of operations and cash flows.

The development and expansion of our business through acquisitions of other companies or technologies or other strategic transactions could divert our management’s attention, result in dilution to our stockholders and otherwise disrupt our operations and adversely affect our operating results.

On April 3, 2017, we completed our acquisition of Jiff, and issued approximately 27 million shares and options to former Jiff equity holders, representing approximately ~~20 percent~~20% of the combined company on a fully-diluted basis. ~~In addition, we may issue up to an additional 4 million shares contingent on the achievement of specific growth objectives for the Jiff business in 2017.~~ The process of integrating the Jiff business, team and technology has created, and ~~will~~could continue to create, unforeseen operating difficulties and expenditure requirements. We may not be able to effectively manage the combined Castlight and Jiff business or effectively integrate the personnel, operations and technologies of ~~Jiff.~~Jiff or any other company we may acquire in the future.

~~In addition, as~~As we have done in the past, we may in the future seek to acquire or invest in businesses, products and services or technologies or enter into other strategic transactions that we believe could complement or expand our offering, enhance our technical capabilities or otherwise offer growth opportunities. We have limited experience in acquiring other businesses and entering into strategic transactions. We may not achieve any of the anticipated benefits of any of these strategic transactions. The pursuit of potential acquisitions and other strategic transactions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions and strategic alliances or transactions, whether or not they are consummated. We may not achieve any of the anticipated benefits or stated objectives from these or other strategic transactions we may enter into in the future.

Factors affecting our ability to achieve the benefits of the Jiff acquisition, or other acquisitions or other strategic alliances could include:

•inability to integrate or benefit from acquired technologies or services or strategic collaborations or alliances in an efficient, effective or profitable manner;

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•unanticipated costs or liabilities associated with the acquisition or strategic transaction;

~~difficulty integrating the accounting systems, operations and personnel of the acquired business~~

•challenges in achieving strategic objectives, cost savings and other benefits expected from such transactions;

•the lack of unilateral control over a strategic alliance and the risk that strategic partners have business goals and interests that are not aligned with ours;

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•delays, difficulties or unexpected costs in the integration, assimilation, implementation or modification of platforms, systems, functions, technologies and infrastructure to support the combined business or strategic alliance, as well as maintaining and integrating accounting systems and operations, uniform standards, controls (including internal accounting controls), procedures and policies;

•difficulty converting the customers of the acquired business onto our platform and contract terms, including disparities in the revenue, licensing, support or professional services model of the acquired company;

•diversion of management’s attention from other business concerns;

•adverse effects to our existing business relationships with business partners and customers as a result of the acquisition or strategic transaction;

•the potential loss of key employees;

~~use~~•the risk that we do not realize a satisfactory return on our investments;

•diversion of resources that are needed in other parts of our business; and

•use of substantial portions of our available cash to consummate the acquisition or strategic transaction.

In addition, a significant portion of the purchase price of Jiff, and other companies we acquire or invest in,, may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.

The acquisition of Jiff ~~will result,~~resulted, and other acquisitions and strategic transactions could also result, in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business or other strategic transaction fails to meet our expectations, our operating results, business and financial position may suffer.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class B common stock may be negatively affected.

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, provide a management report on the internal control over financial reporting. Our independent registered public accounting firm is not required to audit the effectiveness of our internal control over financial reporting until ~~after~~ we ~~are no longer~~cease to be an “emerging growth company”, as defined in the JOBS ~~Act.~~Act, on December 31, 2019. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal control over financial reporting required to comply with this obligation, which process will be time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm concludes we have a material weakness in our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our Class B common stock could be negatively affected and we could become subject to investigations by the New York Stock Exchange, on which our securities are listed, the SEC or other regulatory authorities, which could require us to obtain additional financial and management resources.

Changes in accounting principles may cause previously unanticipated fluctuations in our financial results, and the implementation of such changes may impact our ability to meet our financial reporting obligations.

We prepare our financial statements in accordance with U.S. GAAP which are subject to interpretation or changes by the Financial Accounting Standards Board, or FASB, the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. New accounting pronouncements and changes in accounting principles have occurred in the past and are expected to occur in the future which may have a significant effect on our financial results. For example, effective January 1, 2018, we adopted Accounting Standard Codification Topic 606 ("ASC 606"), Revenue from Contracts with Customers. We adopted the requirements of the new standard utilizing the full retrospective method, which required us to recast prior reporting periods. While the adoption of the new standard did not change the cash flows we receive from our contracts

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with customers, the changes to our reporting practices and the fluctuations in our reported revenue could cause a decline and/or fluctuations in the price of our common stock.

The adoption of ASC 606 significantly impacted our costs to fulfill as well as our costs to obtain contracts with customers. For fulfillment costs, the new standard states that an entity shall recognize an asset from the costs incurred to fulfill a contract if certain criteria are met. Similar to fulfillment costs, for costs to obtain a contract (which are primarily sales commissions and broker fees), the standard states that costs to obtain a contract shall be amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. Prior to adoption, we expensed costs to fulfill a contract when they were incurred, capitalized certain sales commissions and amortized those costs over the non-cancelable portion of our subscription contracts. Under the new standard, the amortization period for our costs to obtain a contract could be longer. Additionally, the timing of revenue recognition for certain of our revenue arrangements was impacted by the changes imposed by the new standard. Any difficulties in implementation of changes in accounting standards, including the ability to modify our accounting systems, could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.

We incur significantly increased costs and devote substantial management time as a result of operating as a public company.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we are subject to the reporting requirements of the Exchange Act and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as

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well as rules and regulations subsequently implemented by the SEC and the New York Stock Exchange, including the establishment and maintenance of effective disclosure and financial controls, changes in corporate governance practices and required filing of annual, quarterly and current reports with respect to our business and operating results. Compliance with these requirements increases our legal and financial compliance costs and makes some activities more time consuming and costly. In addition, our management and other personnel divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as defined by the JOBS Act.

Operating as a public company makes it more expensive for us to obtain director and officer liability insurance, and in the future we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. This could also make it more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

We are classified as an emerging growth company, and the reduced disclosure requirements applicable to emerging growth companies may make our Class B common stock less attractive to investors.

~~We are~~Until December 31, 2019, we will continue to be an emerging growth company, as defined under the JOBS Act. For as long as we ~~continue to be~~are an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our Class B common stock less attractive because we ~~will~~ rely on these exemptions. If some investors find our Class B common stock less attractive as a result, there may be a less active trading market for our Class B common stock and our stock price may be more volatile.

We will remain an emerging growth company until the earliest of (i) the end of the year in which the market value of our Class B common stock that is held by non-affiliates exceeds $700 million as of June 30, (ii) the end of the year in which we have total annual gross revenue of $1 billion or more during such year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (iv) December 31, 2019.

We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our profitability.

Our primary tax jurisdiction is the United States. All of our tax years are open to examination by U.S. federal and state tax ~~authorities due to our history of tax losses.~~authorities. We have provided a full valuation allowance for our deferred tax assets due to the uncertainty surrounding the future realization of such assets. Therefore, no benefit has been recognized for the net operating loss carryforwards and other deferred tax assets. The net operating loss could expire unused and be unavailable to reduce future income tax liabilities, which could adversely affect our profitability.

Economic uncertainties or downturns in the general economy or the industries in which our customers operate could disproportionately affect the demand for our offering and negatively impact our results of operations.

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General worldwide economic conditions have experienced aperiods of significant downturn, and market volatility and uncertainty remain widespread, making it extremely difficult for our customers and us to accurately forecast and plan future business activities. For example, in June 2016, the decision by referendum to withdraw the United Kingdom (U.K.) from the European Union caused significant volatility in global stock markets, including those in the U.S., and fluctuations in currency exchange rates. The results of this referendum, or other global events, may continue to create global economic uncertainty not only in the U.K., but in other regions, including where we do business. In addition, these conditions could cause our customers or prospective customers to decrease headcount, benefits or human resources budgets, which could decrease corporate spending on our products and services, resulting in delayed and lengthened sales cycles, a decrease in new customer acquisition and loss of customers. Furthermore, during challenging economic times, our customers may have difficulty gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us and adversely affect our revenue. If that were to occur, our financial results could be harmed. Further, challenging economic conditions might impair the ability of our customers to pay for the products and services they already have purchased from us and, as a result, our write-offs of accounts receivable could increase. We cannot predict the timing, strength, or duration of any

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economic slowdown or recovery. If the condition of the general economy or markets in which we operate worsens, our business could be harmed.

Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Our estimates and forecasts relating to the size and expected growth of the market for our products and services may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all.

Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our results of operations and financial condition.

Our offices may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, fires, floods, nuclear disasters and acts of terrorism or other criminal activities, which may render it difficult or impossible for us to operate our business for some period of time. For example, our headquarters ~~are~~is located in the San Francisco Bay Area, a region known for seismic activity. Any disruptions in our operations related to the repair or replacement of our office could negatively impact our business and results of operations and harm our reputation. In addition, we may not carry business insurance sufficient to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, results of operations and financial condition. In addition, the facilities of significant customers, health plans or major strategic partners may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or material adverse effects on our business.

Risks Related to Our Class B Common Stock

The stock price of our Class B common stock may be volatile or may decline regardless of our operating performance.

The market price of our Class B common stock has fluctuated significantly since our initial public offering and may continue to fluctuate. These fluctuations could cause you to lose all or part of your investment in our Class B common stock. Factors, many of which are beyond our control, that could cause additional fluctuations in the market price of our Class B common stock include the following:

•overall performance of the equity markets;

•our operating performance and the performance of other similar companies;

•changes in the estimates of our operating results that we provide to the public or our failure to meet these projections;

•failure of securities analysts to maintain coverage of us, changes in financial estimates by securities analysts who follow our company or our failure to meet these estimates or the expectations of investors or changes in recommendations by securities analysts that elect to follow our Class B common stock;

•sales of shares of our Class B common stock by us or our ~~stockholders;~~stockholders, including same day sales to cover tax withholdings as a result of settlement of restricted stock units;

•announcements of technological innovations, new products or enhancements to services, acquisitions, strategic alliances or significant agreements by us or by our competitors;

•disruptions in our services due to computer hardware, software or network problems;

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•announcements of customer additions and customer cancellations or delays in customer purchases;

•recruitment or departure of key personnel;

•the economy as a whole, market conditions in our industry and the industries of our customers;

•litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

•developments or disputes concerning our intellectual property or other proprietary rights;

•new laws or regulations or new interpretations of existing laws or regulations applicable to our business; and

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•the size of our market float.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in new securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.

If there are substantial sales of shares of our Class B common stock, the price of our Class B common stock could decline.

The price of our Class B common stock could decline if there are substantial sales of our Class B common stock, particularly sales by our directors, executive officers and significant stockholders, or the perception in the market that the holders of a large number of shares of our Class B common stock intend to sell their shares, and may make it more difficult for stockholders to sell Class B common stock at a time and price that they deem appropriate. We are unable to predict the effect that sales may have on the prevailing market price of our Class B common stock.

In addition, certain of our stockholders have rights, subject to some conditions, to require us to file registration statements covering their shares and to include their shares in registration statements that we may file for ourselves or our stockholders. Registration of the resale of these shares under the Securities Act would generally result in the shares becoming freely tradable without restriction. Any sales of securities by existing stockholders could adversely affect the trading price of our Class B common stock. We also registered shares of Class B common stock that we have issued and may issue under our employee equity incentive and employee stock purchase plans. These shares may be sold freely in the public market upon issuance.

The dual class structure of our Class A and Class B common stock will have the effect of concentrating significant voting influence or control with our executive officers, directors and their affiliates; this will limit or preclude a stockholder's ability to influence corporate matters.

Each share of Class A common stock and each share of Class B common stock has one vote per share, except on the following matters (in which each share of Class A common stock has ten votes per share and each share of Class B common stock has one vote per share):

•adoption of a merger or consolidation agreement involving our company;

•a sale, lease or exchange of all or substantially all of our property and assets;

•a dissolution or liquidation of our company; or

•every matter, if and when any individual, entity or “group” (as such term is used in Regulation 13D of the Exchange Act) has, or has publicly disclosed (through a press release or a filing with the SEC) an intent to have, beneficial ownership of 30% or more of the number of outstanding shares of Class A common stock and Class B common stock, combined.

Because of our dual class common stock structure, the holders of our Class A common stock, who in large part consist of our founders, early investors, directors, executives, employees, will continue to be able to exert significant influence over the corporate matters listed above if any such matter is submitted to our stockholders for approval even if they ~~come to~~ own less than 50% of the outstanding shares of our Class A and Class B common ~~stock.~~stock, combined. As of September 30, ~~2017, our executive officers and directors and their affiliates own approximately 19%~~2019, holders of our Class A common stock owned approximately 24% of the outstanding shares of our Class A and Class B common stock, ~~combined. However, because~~combined, however, holders of our ~~dual class~~Class A common stock, ~~structure~~including our executive officers and directors and their affiliates, have approximately ~~36%~~76% of the ~~total votes in each~~voting power of our outstanding capital stock with respect to the matters ~~identified in the list~~specified above. This concentrated control by holders of our Class A common stock will limit or preclude the ability of a holder of our Class B common stock to influence those corporate matters for the foreseeable future and, as a result, we may take actions that our

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stockholders do not view as beneficial. The market price of our Class B common stock could be adversely affected by the structure. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for capital stock that a stockholder may feel are in its best interests.

Transfers by holders of our Class A common stock will generally result in those shares converting to our Class B common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of

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our Class A common stock to our Class B common stock will have the effect, over time, of increasing the relative voting power of those holders of Class A common stock who retain their shares in the long term. If, for example, ~~our executive officers (including our Chief Executive Officer),~~ directors and their affiliates retain a significant portion of their holdings of our Class A common stock for an extended period of time, they could continue to significantly influence the combined voting power of our Class A and Class B common stock with respect to each of the matters identified in the list above.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class B common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our Class B common stock or publish inaccurate or unfavorable research about our business, our Class B common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class B common stock could decrease, which might cause our Class B common stock price and trading volume to decline.

Anti-takeover provisions under Delaware law and in our restated certificate of incorporation and restated bylaws could make a merger, tender offer, or proxy contest difficult, limit attempts by our stockholders to replace or remove members of our board of directors or current management and depress the trading price of our Class B common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders.

In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company or changes in our board of directors or management more difficult, including the following:

~~our~~•Our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause, which may delay the replacement of a majority of our board of directors or impede an acquirer from rapidly replacing our existing directors with its own slate of ~~directors;~~directors.

~~subject~~•Subject to the rights of the holders of any series of preferred stock to elect directors under specified circumstances, only our board of directors has the right to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of ~~directors;~~directors.

~~our~~•Our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our Class A and Class B common stock are not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings, which special meetings may only be called by the chairman of our board, our chief executive officer, our president, or a majority of our board of ~~directors;~~directors.

~~certain~~•Certain litigation against us can only be brought in ~~Delaware;~~Delaware.

~~our~~•Our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, by our board of directors without the approval of the holders of Class B common stock, which makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire ~~us;~~us.

~~advance~~•Advance notice procedures and additional disclosure requirements apply for stockholders to nominate candidates for election as directors or to bring matters before a meeting of stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our ~~company;~~company.

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~~our~~•Our restated certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director ~~candidates;~~candidates.

~~amendment~~•Amendment of the anti-takeover provisions of our restated certificate of incorporation require super majority approval by holders of at least two-thirds of our outstanding Class A and Class B common stock, ~~combined;~~combined. and

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In certain circumstances pertaining to change in control, the sale of all or substantially all of our assets and liquidation matters, and on all matters if and when any individual, entity or group has, or has publicly disclosed an intent to have, beneficial ownership of 30% or more of the number of outstanding shares of our Class A and Class B common stock, combined, holders of our Class A common stock are entitled to ten votes per share and holders of our Class B common stock are entitled to one vote per share. As of September 30, ~~2017,~~2019, holders of our Class A common stock owned approximately ~~40%~~24% and holders of our Class B common stock owned approximately ~~60%~~76% of the outstanding shares of our Class A and Class B common stock, combined. However, because of our dual class common stock structure these holders of our Class A common stock have approximately ~~87%~~76% and holders of our Class B common stock have approximately ~~13%~~24% of the total votes with respect to the matters specified above. In all other circumstances, holders of our Class A and Class B common stock are each entitled to one vote per share, and in these other circumstances the holders of our Class A common stock have approximately ~~40%~~24% and holders of our Class B common stock have approximately ~~60%~~76% of the total votes.

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~


~~(a)~~	~~Unregistered Sales of Equity Securities~~

~~None~~


~~(b)~~	~~Use of Proceeds from Public Offering of Common Stock~~

On March 19, 2014, we closed our IPO, in which we sold 12.8 million shares of Class B common stock at a price to the public of $16.00 per share pursuant to a registration statement on Form S-1 (File No. 333-193840), which was declared effective by the SEC on March 13, 2014. We raised approximately $185.6 million in net proceeds from the offering, after deducting underwriter discounts and commissions of approximately $14.3 million and other offering expenses of approximately $4.3 million.

~~There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on March 14, 2014 pursuant to Rule 424(b).~~


~~(c)~~	~~Issuer Purchases of Equity Securities~~

~~None~~

~~Item 3. Defaults Upon Senior Securities~~

~~None~~

~~Item 4. Mine Safety Disclosures~~

~~None~~

~~Item 5. Other Information~~

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~~None~~

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Item 6. Exhibits

(a) Exhibits.

~~The Exhibits listed below are filed as part of this Form 10-Q~~

Incorporate by Reference

Exhibit

Number

Description of Document

Form

File

No.

Filing Date

Exhibit

Filed

Herewith

10.1*

2014 Employee Stock Purchase Plan, as amended.

~~31.1~~10.2*

Form of 2014 Employee Stock Purchase Plan enrollment/change form.

31.1

Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

~~31.2~~

Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**

32.1*

Certification of Chief Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.

32.2**

32.2*

Certification of Chief Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.

101.INS

~~101.INS~~

XBRL Instance Document

101.SCH

~~101.SCH~~

XBRL Taxonomy Schema Linkbase Document

101.CAL

~~101.CAL~~

XBRL Taxonomy Calculation Linkbase Document

101.DEF

~~101.DEF~~

XBRL Taxonomy Definition Linkbase Document

101.LAB

~~101.LAB~~

XBRL Taxonomy Labels Linkbase Document

101.PRE

~~101.PRE~~

XBRL Taxonomy Presentation Linkbase Document

_______________________



*			Indicates a management contract, compensatory plan or arrangement.
**			The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



	~~CASTLIGHT HEALTH, INC.~~
~~Date: October 27, 2017~~	~~By:~~	~~/s/ Siobhan Nolan Mangini~~
		~~Siobhan Nolan Mangini~~
		~~Chief Financial Officer~~ ~~(Principal Financial Officer)~~

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~~EXHIBIT INDEX~~

CASTLIGHT HEALTH, INC.

~~Incorporate by Reference~~

~~Exhibit~~

~~Number~~

Date:

October 31, 2019

~~Description of Document~~By:

~~Form~~/s/ Siobhan Nolan Mangini

~~File~~

~~No.~~

~~Filing Date~~

~~Exhibit~~

~~Filed~~

~~Herewith~~

~~31.1~~

~~Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.~~

~~31.2~~

~~Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.~~

32.1*

~~Certification of Chief Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.~~

32.2*

~~Certification of Chief Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.~~

~~101.INS~~

~~XBRL Instance Document~~

~~101.SCH~~

~~XBRL Taxonomy Schema Linkbase Document~~

~~101.CAL~~

~~XBRL Taxonomy Calculation Linkbase Document~~

~~101.DEF~~

~~XBRL Taxonomy Definition Linkbase Document~~

~~101.LAB~~

~~XBRL Taxonomy Labels Linkbase Document~~

~~101.PRE~~

~~XBRL Taxonomy Presentation Linkbase Document~~

~~_____________________~~

Siobhan Nolan Mangini

~~The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Securities~~

President and Exchange Act of 1934, as amended, or otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.Chief Financial Officer (Principal Financial Officer)



	Level 1		Level 2		Level 3		Total
September 30, 2017
Cash equivalents:
Money market mutual funds	$	3,647	$	—	$	—	$	3,647
U.S. agency obligations	—		5,848		—		5,848
U.S. treasury securities	—		10,749		—		10,749
Marketable securities:
U.S. agency obligations	—		9,444		—		9,444
U.S. treasury securities	—		32,630		—		32,630
	$	3,647	$	58,671	$	—	$	62,318

Accrued expenses and other current liabilities:
Contingent consideration liability⁽¹⁾	$	—	$	—	$	3,959	$	3,959



	Contingent Consideration Liability
Balance as of December 31, 2016	$	—
Initial fair value as of acquisition date	671
Re-measurement of fair value on June 30, 2017 ⁽¹⁾	(643		)
Balance as of June 30, 2017	28
Re-measurement of fair value on September 30, 2017 ⁽¹⁾	3,931
Balance as of September 30, 2017	$	3,959



	Fair value
Fair value of Company Class B common stock (25,054,049 shares @ $3.65 per share)	$	91,447
Fair value of contingent consideration	671
Fair value of assumed Jiff options attributable to pre-combination services	9,574
Transaction costs paid on behalf of Jiff	4,498
Estimated purchase price consideration	$	106,190



Cash	$	2,234
Current assets	5,159
Other assets	1,971
Acquired intangible assets	23,900
Goodwill	91,785
Total assets acquired	125,049
Deferred revenue	(1,857		)
Other current liabilities	(6,192		)
Debt	(5,578		)
Noncurrent liabilities	(5,232		)
Total net assets acquired	$	106,190



Balance as of December 31, 2016 ⁽¹⁾	$	—
Acquisition of Jiff	91,398
Goodwill adjustments	387
Balance as of September 30, 2017	$	91,785



	Intangible Assets, Gross						Accumulated Amortization								Acquired Intangibles, Net		Useful Life
	December 31, 2016 ⁽¹⁾		Additions		September 30, 2017		December 31, 2016		Expense			September 30, 2017			September 30, 2017		Useful Life
Customer relationships	$	—	$	10,900	$	10,900	$	—	$	(546	)	$	(546	)	10,354		10
Developed technology	—		10,600		10,600		—		(1,060		)	(1,060		)	9,540		5
Backlog	—		1,500		1,500		—		(442		)	(442		)	1,058		3
Other acquired intangible assets	—		900		900		—		(383		)	(383		)	517		1-3
Total identifiable intangible assets	$	—	$	23,900	$	23,900	$	—	$	(2,431	)	$	(2,431	)	$	21,469



2017	1,216
2018	4,044
2019	3,505
2020	3,242
2021	3,210
Thereafter	6,252
Total estimated amortization expense	21,469



Remainder of 2017	$	—
2018	620
2019	1,859
2020	1,859
2021	1,240
Total future maturities of debt ⁽¹⁾	$	5,578



	Options Outstanding		Weighted- Average Exercise Price		Aggregate Intrinsic Value
Balance at December 31, 2016	7,642,953		$	3.71	$	18,537
Stock option grants	400,000		$	3.60
Stock options assumed and awarded related to acquisition	5,382,613		$	1.42
Stock options exercised	(726,060	)	$	1.81
Stock options canceled	(1,742,228	)	$	3.11
Balance at September 30, 2017	10,957,278		$	2.80	$	25,685



	Number of Shares Outstanding		Weighted- Average Grant Date Fair Value
Balance at December 31, 2016	10,541,666		$	4.82
Restricted Stock Units granted ⁽¹⁾	6,209,788		$	3.62
Restricted Stock Units vested	(3,130,004	)	$	5.08
Restricted Stock Units forfeited/canceled ⁽²⁾	(3,395,161	)	$	4.61
Balance at September 30, 2017	10,226,289		$	4.10



	Year Ended December 31,
	2016		2015
Annual Net Dollar Retention Rate (NDR)	94	%	116	%