FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding the impact our future results of operations, financial position and cash flows, our business strategy, expansion opportunities, results and outcomes for customers and users, plans and our objectives for future operations, and the impact of the coronavirus ("COVID-19") pandemic on our business and theU.S. and global economies, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as "may," "can," "will," "would," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "forecasts," "potential," or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A "Risk Factors." Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations, except as required by law. OverviewCastlight Health, Inc. ("Castlight", "the Company" or "we") provides health navigation solutions for largeU.S. employers and health plans ("customers") and their respective employees and members ("users"). Castlight's offerings help individuals connect and engage with the right provider, benefit, or virtual care solution, at the right time, leveraging a combination of sophisticated technology and an expert team. Castlight's navigation offerings have demonstrated measurable results, driving high engagement and user satisfaction, increased program utilization, steerage to the right care and provider, and lower healthcare costs for our customers and millions of users. The foundation of Castlight's solutions is our proprietary software-as-a-service platform, which delivers the digital user experience and enables our high-touch services. We believe our platform is unique in its: • Breadth and depth of data and partner integrations across the healthcare ecosystem; • Ability to engage a user through digital self-service (mobile app, web) and human-powered modes (telephonic, chat), which are supported by the same underlying technology for a consistent, fluid experience; • Personalization engine that leverages data from these integrations and user inputs to customize each user experience and guide users to the right benefits and providers; • Comprehensive engagement across a user's health, wellbeing, and condition management needs; and • Broad ecosystem of third-party solutions, which facilitates streamlined procurement and management of a pre-vetted set of condition and wellbeing programs with turnkey integration. Our platform's services-oriented architecture enables us to extend our technology for use beyond our own applications. This enables us to serve health plans and other entities seeking to leverage our technology within their own member-facing applications or user touch points, including through white-labeling for our health plan customers. 15
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We sell our platform as a suite of branded and white-labeled digital health
navigation applications to large
InJuly 2019 , we expanded our strategy to include health plans as potential customers and to package our products to support user experiences beyond those of Castlight-powered websites and applications. In addition, we expanded our offerings to incorporate high-touch, human support, enabled by our technology platform, in addition to the mobile and web experience for users, which we call Castlight Care Guides.
Since this strategic expansion, we demonstrated proof points for our expanded strategy, including:
• InOctober 2019 , we announced an enterprise license agreement with Anthem, Inc. ("Anthem"), the largest for-profit managed health care company in theBlue Cross Blue Shield Association , that provides Anthem with access to key components of our platform and expands Engage, a white-labeled version of our digital solutions. •InJuly 2020 , we entered into an agreement with Cigna Corporation ("Cigna"), a global health services company, to support a portion of Cigna's Taft-Hartley and Federal Business segment with our healthcare navigation technology. • In the third quarter of 2020, our Castlight Care Guides offering became generally available as a supplemental service for our customers. From Castlight's launch, we have offered users both digital applications and telephonic support. In parallel with the roadmap for our digital platform, we have invested in and expanded our phone- and chat-based support services. Care Guides clinicians, trained to offer administrative and clinical support, will help our users with their health navigation using Castlight's core technology. We believe Castlight Care Guides will generate incremental user engagement and healthcare cost savings for our customers and users over time. •InDecember 2020 , we entered into an agreement withBlue Cross Blue Shield of Alabama ("BCBSAL"), a regionalBlue Cross Blue Shield licensee, to offer a complete health navigation solution for BCBSAL's largest employer clients. This agreement represents a third health plan partnership, and we believe it validates our health plan growth strategy. InFebruary 2021 , we expanded our relationship with BCBSAL to add Castlight Care Guides support for these large employers. Castlight was incorporated in theState of Delaware inJanuary 2008 . Our Class B common stock began trading publicly on theNew York Stock Exchange inMarch 2014 under the trading symbol "CSLT." Our principal executive offices are located inSan Francisco, California , and ourCustomer Center of Excellence is located inSandy, Utah .Castlight Health India Private Limited . In the second quarter of 2021, Castlight formed a wholly-owned subsidiary inIndia ,Castlight Health India Private Limited ("Castlight India"), and made offers of employment to and hired approximately 100 former employees of a third-party vendor we had previously retained to support our product development efforts. COVID-19 Update. During the second quarter of 2021, the global economy continued to experience the impact of the COVID-19 pandemic which initially caused us to curtail or modify employee travel; cancel physical participation in meetings, events, and conferences; and move to full remote work. Given the availability of vaccines and the substantial percentage of our employees who have been fully vaccinated against COVID-19, we implemented a return to work office protocol for employees located in ourUtah Customer Center of Excellence and have re-opened ourSan Francisco andSunnyvale, California offices to fully vaccinated employees. Our re-opening process remains subject to local health orders. Although the COVID-19 pandemic has caused minor disruptions to our business operations, it has had a limited impact on our operating results overall and these minor disruptions did not impact the delivery of our products to our customers or users. During these uncertain times, we have used our core technology to help users, customers, and the community navigate through the COVID-19 pandemic, including, among other things, supporting our customers with COVID-19 education and communication of healthcare coverage changes; providing our symptom checker and COVID-19 testing site finder to the community at no charge; making our behavioral health solution available to all customers on the Castlight Complete platform for no additional cost; launching the Working Well and Working Well for Higher Education solutions which are aimed at helping employers and academic institutions manage safe workforce re-entry and campus openings, respectively; and supporting the work ofBoston Children's Hospital and theCenters for Disease Control and Prevention to manage inventory and data related to COVID-19 vaccines through vaccinefinder.org. Our initial agreement withBoston Children's Hospital , which was entered into in the fourth quarter of 2020, provides for payments to the Company totaling$8.5 million . InApril 2021 , our engagement withBoston Children's Hospital was extended to mid-2022 to include additional development and ongoing support. 16
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The amended agreement provides for additional payments of
The potential duration, and extent of the impact, of the COVID-19 pandemic on our future liquidity and operational performance will depend on certain developments, including the duration and spread of the outbreak, the continued impact on our customers' operations and the global economy generally, and the continued impact to our sales and renewal cycles. We continue to consider the potential impact of the COVID-19 pandemic on our business operations. The uncertainty of the COVID-19 pandemic affects our management's accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information become known. For further discussion of the possible impact of the COVID-19 pandemic on our business, financial condition, and results of operations, see the risk factor entitled "The COVID-19 pandemic has had a material adverse impact on theU.S. and global economies and could have a material adverse impact on our employees, suppliers, customers and users, which has negatively impacted our business, financial condition and results of operations and which could materially impact us in the future" in Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q. Key Factors Affecting Our Performance Sales of Products. Our revenue growth rate and long-term profitability are affected by our ability to sell products to new and existing customers, directly and through our channel partners. Additionally, we believe that there is a significant opportunity to sell subscriptions to add-on products as our customers become more familiar with our offering and seek to address additional needs.
Renewals of Customer Contracts. We believe that our ability to retain our customers and expand their subscription revenue growth over time will be an indicator of the stability of our revenue base and the long-term value of our customer relationships.
Ecosystem Partnerships. We have relationships with digital health partners that integrate with our platform to provide a more streamlined experience for our customers and users. We also have many third-party benefit solutions integrated with our products to enable simplified procurement and effortless access to these programs to our users. We believe these partnerships enable a single user experience that is essential to drive engagement and increase user satisfaction. Implementation Timelines. Our ability to convert backlog into revenue and improve our gross margin depends on how quickly we complete customer implementations. Our implementation timelines vary from customer to customer based on the source and condition of the data we receive from third parties, the configurations that we agree to provide and the size of the customer. Our implementation timelines for our core product offerings are typically three to 12 months after entering into an agreement with a customer. Professional Services Model. We believe our professional services capabilities support the adoption of our subscription offerings. As a result, our sales efforts have been focused primarily on our subscription offering, rather than the profitability of our professional services business. Our professional services are generally priced on a fixed-fee basis and the costs incurred to complete these services, which consist mainly of personnel-related costs, have been greater than the amount charged to the customer. We also concluded that our implementation services are not distinct for accounting purposes. Accordingly, we recognize implementation services revenue in the same manner as the associated subscription revenue, which is recognized on a straight-line basis, ratably over the contract term. Seasonality. We have historically observed seasonality related to employee benefits cycles as a significantly higher proportion of our customers enter into new subscription agreements with us in the second half of the year, compared to the first half of the year. As we continue to leverage our channel relationships and expand our business, there is no assurance this seasonality will continue. The impact from any seasonality in our new customer agreements is not immediately apparent in our revenue because we do not begin recognizing revenue from new customer agreements until we have implemented our offering, based on the implementation timelines discussed above. Revenue recognized in any quarter is primarily from customer agreements entered into in prior quarters. In addition, the mix of customers paying monthly, quarterly, or annually varies from quarter to quarter and impacts our deferred revenue balance. As a result of variability in our billing and implementation timelines, the deferred revenue balance does not represent 17
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the total value of our customer contracts, nor do changes in deferred revenue serve as a reliable indicator of our future subscription revenue. Key Business Metrics We review a number of operating metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, and make strategic decisions.
Signed Annual Recurring Revenue ("ARR")
As of June 30, 2021 December 31, 2020 (in millions) Signed Annual Recurring Revenue$ 128.2 $ 126.7 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 is a forward-looking metric based on contractual terms in existence as of the applicable ARR measurement date and is subject to change resulting from a number of factors including, but not limited to, addition of new customers, changes in user counts, terminations or non-renewals, renewal terms as well as upsells and cross-sells. As discussed above, we begin recognizing revenue from new customer agreements when we have implemented our offering, which can take from approximately three to 12 months after entering into an agreement with a customer. ARR represents the annualized value of subscription revenue under contract with customers at the end of a quarter, which we refer to for this purpose as a measurement date. To calculate ARR, we first calculate the annualized subscription value for each signed customer (whether implemented or not), as of the applicable measurement date, by multiplying the monthly contract value of the subscription services under contract by 12. We exclude from this calculation any customers that have provided us with formal notice of termination or non-renewal as of the measurement date. ARR does not take into account the (i) potential for customers to terminate, or decline to renew, their agreements with us, (ii) achievement of non-recurring or yet-to-be-earned performance guarantees, (iii) one-time engagement bonuses included within our customer contracts or (iv) revenues related to professional services, such as implementation services. ARR is not determined in reference to GAAP.
As of
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Table of Contents Components of Results of Operations Revenue We generate revenue from subscription fees from customers for access to the products they select. We also earn revenue from professional services primarily related to the implementation of our offering, products sold through our online marketplace and add-on subscription products made available from our ecosystem partners. Our subscription fees are based primarily on the number of users that employers identify as eligible to use our offering, which typically includes all of our customers' employees and adult dependents that receive health benefits. Typically, we recognize subscription fees on a straight-line basis ratably over the contract term beginning when our products are implemented and ready for launch. Our customer agreements generally have a term of three years. We generally invoice our customers in advance on a monthly, quarterly or annual basis. Amounts that have been invoiced are initially recorded as deferred revenue. Amounts that have not been invoiced where revenue has been recognized are reflected as contract assets and recorded as accounts receivable and other in our condensed consolidated balance sheets. 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 subscription 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 certain intangibles, and allocated overhead. Cost of professional services and other revenue consists primarily of employee-related expenses (including salaries, bonuses, benefits and stock-based compensation) associated with these services, the cost of subcontractors, travel costs and allocated overhead. The time and costs of our customer implementations vary based on the source and condition of the data we receive from third parties, the configurations that we agree to provide and the size of the customer. Our cost of subscription revenue is expensed as we incur the costs. The cost of professional services and other revenue, to the extent they are incurred and are directly attributable to fulfillment of performance obligations under a customer contract, are deferred and amortized over the benefit period of five years.
Operating Expenses
Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Sales and Marketing. Sales and marketing expenses consist primarily of employee-related expenses (including salaries, sales commissions and bonuses, benefits and stock-based compensation), travel-related expenses, marketing programs, amortization of certain intangibles and allocated overhead. Commissions earned by our sales force and third-party referral fees are deferred and amortized generally over a period of five years. Research and Development. Research and development expenses consist primarily of employee-related expenses (including salaries, bonuses, benefits and stock-based compensation), costs associated with subcontractors and allocated overhead. General and Administrative. General and administrative expenses consist primarily of employee-related expenses (including salaries, bonuses, benefits and stock-based compensation) for finance and accounting, legal, human resources and IT, legal costs, professional fees, other corporate expenses, 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. 19
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Results of Operations The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenue for each of the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenue: Subscription 87 % 97 % 89 % 97 % Professional services and other 13 % 3 % 11 % 3 % Total revenue, net 100 % 100 % 100 % 100 % Cost of revenue: Cost of subscription 22 % 25 % 23 % 26 % Cost of professional services and other 12 % 11 % 13 % 11 % Total cost of revenue 34 % 36 % 36 % 37 % Gross margin 66 % 64 % 64 % 63 % Operating expenses: Sales and marketing 20 % 22 % 20 % 24 % Research and development 35 % 37 % 35 % 36 % General and administrative 18 % 18 % 18 % 17 % Goodwill impairment - % - % - % 67 % Total operating expenses 73 % 77 % 73 % 144 % Operating loss (7) % (13) % (9) % (81) % Other income, net - % - % - % 1 % Net loss (7) % (13) % (9) % (80) % Revenue Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change $ Change 2021 2020 % Change $ Change (In thousands, except percentages)
Revenue: Subscription$ 31,128 $ 34,289 (9)%$ (3,161) $ 63,238 $ 72,672 (13)%$ (9,434) Professional services and other 4,475 1,211 270% 3,264 7,424 1,873 296% 5,551 Total revenue, net$ 35,603 $ 35,500 -%$ 103 $ 70,662 $ 74,545 (5)%$ (3,883) Subscription revenue for the three months endedJune 30, 2021 decreased by$3.2 million , or 9%, primarily due to customer terminations, partially offset by customer launches. Professional services and other revenue increased primarily due to revenue fromBoston Children's Hospital in the three months endedJune 30, 2021 . Subscription revenue for the six months endedJune 30, 2021 decreased by$9.4 million , or 13%, primarily due to customer terminations and a significant cancellation fee for one customer in the first quarter of 2020, partially offset by customer launches. Professional services and other revenue increased primarily due to revenue fromBoston Children's Hospital in the six months endedJune 30, 2021 . 20
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Costs of Revenue and Operating Expenses
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change $ Change 2021 2020 % Change $ Change (In thousands, except percentages)
Cost of revenue: Subscription$ 7,977 $ 8,819 (10) %$ (842) $16,076 $ 19,051 (16) %$ (2,975) Professional services and other 4,181 3,942 6 % 239 8,838 8,183 8 % 655 Total cost of revenue$ 12,158 $ 12,761 (5) %$ (603) $ 24,914 $ 27,234 (9) %$ (2,320) Gross margin (loss) percentage: Subscription 74 % 74 % 75 % 74 % Professional services and other 7 % (226) % (19) % (337) % Total gross margin 66 % 64 % 65 % 63 % Gross profit$ 23,445 $ 22,739 3 %$ 706 $ 45,748 $ 47,311 (3) %$ (1,563) Cost of subscription revenue for the three months endedJune 30, 2021 decreased by$0.8 million , or 10%, primarily due to decreases of$0.7 million of third-party contractor and professional service fees. Cost of subscription revenue for the six months endedJune 30, 2021 decreased by$3.0 million , or 16%, primarily due to decreases of$2.0 million of third-party contractor and professional service fees,$0.4 million of hosting costs, and$0.3 million of data fees. Cost of professional services revenue for the three months endedJune 30, 2021 increased by$0.2 million , or 6%, primarily due to an increase of$0.9 million of employee-related expenses, partially offset by decreases of$0.3 million of severance-related costs and$0.2 million of third-party contractor and professional service fees. Cost of professional services revenue for the six months endedJune 30, 2021 increased by$0.7 million , or 8%, primarily due to an increase of$1.5 million of employee-related expenses, partially offset by decreases of$0.4 million of third-party contractor and professional service fees and$0.3 million of severance-related costs.
Gross margin for the three months ended
Gross margin for the six months endedJune 30, 2021 increased primarily due to a 9% decrease in costs of revenue, partially offset by a 5% decrease in revenue. Sales and Marketing Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change $ Change 2021 2020 % Change $ Change (In thousands, except percentages) Sales and marketing$ 7,208 $ 7,683 (6) %$ (475) $ 14,121 $ 18,155 (22) %$ (4,034)
Sales and marketing expense for the three months ended
Sales and marketing expense for the six months endedJune 30, 2021 decreased by$4.0 million , or 22%, primarily due to decreases of$2.0 million of employee-related expenses,$0.5 million of third-party contractor and professional service fees,$0.3 million of travel-related expenses,$0.3 million of marketing costs and$0.3 million of severance-related costs. 21
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Table of Contents Research and Development Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change $ Change 2021 2020 % Change $ Change (In thousands, except percentages) Research and development$ 12,316 $ 13,043 (6) %$ (727) $ 24,429 $ 26,865 (9) %$ (2,436) Research and development expense for the three months endedJune 30, 2021 decreased by$0.7 million , or 6%, primarily due to decreases of$0.7 million of severance-related costs and$0.6 million of third-party contractor and professional service fees, partially offset by an increase of$0.7 million of employee-related expenses. The decrease in third-party contractor and professional service fees and the increase in employee-related expenses are primarily attributable to the hiring by our newly-formed subsidiary, CastlightIndia , of an engineering development team inIndia which had been employed previously by a third-party vendor.
Research and development expense for the six months ended
General and Administrative Three Months Ended June 30, Six Months Ended June 30, 2021 2020 % Change $ Change 2021 2020 % Change $ Change (In thousands, except percentages) General and administrative$ 6,366 $ 6,340 - %$ 26 $ 12,732 $ 12,916 (1) %$ (184)
General and administrative expense for the three months ended
General and administrative expense for the six months ended
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Table of Contents Liquidity and Capital Resources Six Months EndedJune 30, 2021 2020 (In thousands)
Net cash provided by (used in) operating activities
$ (11,262) Net cash (used in) provided by investing activities (245) 13,108 Net cash used in financing activities (471) (589) Effect of exchange rate changes on cash, cash equivalents, and restricted cash (19) - Net increase in cash, cash equivalents and restricted cash$ 11,464 $ 1,257
As of
Since our inception, we have financed our operations primarily through sales of equity securities and receipts from our customers. We believe that our existing cash will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, new customer acquisitions, subscription renewal activity, the timing and extent of spending to support development efforts, the introduction of new and enhanced service offerings and the continuing market acceptance of our cloud-based subscription services. Although we currently are not a party to any agreement and do not have any understanding with any third parties with respect to potential investments in, or acquisitions of, businesses or technologies, we may in the future enter into these types of arrangements. We process certain vendor payments using a financial institution's credit card program, which carries a$20.0 million limit. We pay the financial institution monthly based on the terms of the credit card program. OnMay 5, 2020 , we entered into the Third Amended and Restated Loan and Security Agreement (the "Amended Loan Agreement") withSilicon Valley Bank (the "Bank"). Under the Amended Loan Agreement, the Bank agreed to extend a$25.0 million revolving credit facility (the "Revolving Line") to us. We may request borrowings under the Revolving Line prior toMay 4, 2023 , on which date the Revolving Line terminates. Refer to Note 7 - Debt to the condensed consolidated financial statements for additional information on debt. We may be required to seek additional equity or debt financing in the future. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. For additional information regarding risks related to debt or equity financings, see the risk factor entitled "We may require additional capital to support business growth, and this capital might not be available to us on acceptable terms, or at all" in Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q. Operating Activities Cash provided by operating activities for the six months endedJune 30, 2021 was$12.2 million and cash used in operating activities for the six months endedJune 30, 2020 was$11.3 million . Cash provided by operations reflected our net loss of$5.4 million for the six months endedJune 30, 2021 , adjusted by$15.5 million in non-cash expenses, including:
•Stock-based compensation expense of
Changes in assets and liabilities for the six months ended
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Table of Contents Sources of Cash •Accounts receivable decreased$10.0 million , primarily as a result of the timing of billings and collections; •Deferred revenue increased$2.6 million .
Uses of Cash
•Accrued compensation decreased$1.5 million ; •Payments of operating lease liabilities of$2.8 million ; •Accounts payable decreased$1.5 million , primarily due to timing of payments and vendor invoicing; •Accrued expenses and other liabilities decreased$1.9 million ; •Prepaid expenses and other assets increased$2.0 million ; and •Deferred costs increased$0.7 million . Investing Activities Cash used in investing activities for the six months endedJune 30, 2021 was$0.2 million and cash provided by investing activities for the six months endedJune 30, 2020 was$13.1 million , respectively. Cash used in investing activities during the six months endedJune 30, 2021 was attributable to$0.2 million of purchase of property and equipment. Financing Activities Cash used in financing activities for the six months endedJune 30, 2021 and 2020 was$0.5 million and$0.6 million , respectively. Cash used in financing activities during the six months endedJune 30, 2021 was due to principal payments on debt of$0.9 million , partially offset by proceeds from exercises of employee stock options of$0.2 million and ESPP offering of$0.2 million . Contractual Obligations and Commitments Our principal commitments primarily consist of debt obligations and lease obligations for office space and data centers. Our existing lease agreements provide us with the option to renew and generally provide for rental payments on a graduated basis. Our future operating lease obligations would change if we entered into additional operating lease agreements as we expand our operations and if we exercised these options. Contractual agreements represent future cash commitments and liabilities under agreements with third parties and exclude purchase orders for goods and services. See Note 7 - Debt to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of our borrowings. Other than our borrowings described in Note 7 - Debt and lease obligations, we do not have any other debt arrangements. We do not have any material non-cancelable purchase commitments as ofJune 30, 2021 . Critical Accounting Policies and Estimates There were no significant changes to our critical accounting policies and estimates during the six months endedJune 30, 2021 , from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company,SEC rules do not require us to provide the information required by this Item. 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. 24
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In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Our management recognizes that there are inherent limitations in the effectiveness of any internal control and that effective internal control over financial reporting may not prevent or detect misstatements. In addition, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Based on our management's evaluation, our principal executive officer and principal financial officer concluded that, as ofJune 30, 2021 , 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 inSecurities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are continually monitoring the COVID-19 pandemic to minimize any impact of the situation on the design and operating effectiveness of our internal controls. 25
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