Class Bemoans ‘Cloud’ Software Firm’s IPO

(CN) - In the 13 months since Castlight Health went public, shares in the provider of cloud-based software have declined by more than 50 percent, a class of investors claims in court.

On its way to the market, according to the April 2 complaint filed in San Mateo County Superior Court, Castlight purported that its Enterprise Healthcare Cloud software could lower the health care spending of enterprises with which it did business by employing "risk reassessments, lower health care premiums, and cash kept through punitive-premium-reimbursement programs."

Firerock Global Opportunity Fund LP claims that idea was an attractive one as federal health care reform drove up costs and "provided large companies with incentives to cut costs through benefits spending cuts, aggressive wellness programs, and increased reimbursement limits."

When San Francisco-based Castlight went public on March 13, 2014, its "stock skyrocketed 145% on its first day of trading, closing near $40 per share - and valuing the company at more than $4 billion," Firerock claims.

Firerock says Castlight negligently prepared the prospectus that it filed with the Securities and Exchange Commission, however, because it concealed that the company's "backlog was growing because of implementation delays which reflected significant obstacles to scalability."

The company had previously estimated that its "total backlog, which we define as including cancellable and non-cancellable portions of our customer agreements for which we have not yet billed, was $108. 7 million as of December 31, 2013, compared to $ 44.0 million as of December 31, 2012," according to the complaint.

Though Castlight had touted 109 percent "net dollar retention rate," Firerock says this statement failed to account for the "significant churn" that the company was experience with customers "not renewing at a high rate, let alone at an increasing rate."

Castlight's upsells also "were not sufficient to offset the revenues lost from churn, as the company's net dollar retention rate materially declined from the 109% reported as of December 31, 2013."

Firerock names as defendants in the complaint Castlight's underwriters: Venrock Partners LP; Goldman, Sachs & Co.; and Morgan Stanley & Co. LLC.

These underwriters received $14.3 million in fees from the $204.2 million that the initial public offering generated in gross proceeds for the company, according to the complaint.

"At the time of the filing of this action, Castlight stock is trading in the range of $7 -$8 per share, a decline of over 50% from the IPO price," the complaint states (emphasis in original).

The class seeks rescission and damages for violations of the Securities Act. It is represented by Shawn Williams with Robbins Geller Rudman & Dowd in San Francisco.

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