Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review Item 1A. “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Cardlytics operates an advertising platform within financial institutions’ (“FIs”) digital channels, which include online, mobile, email, and various real-time notifications. Our partnerships with FIs provide us with access to their anonymized purchase data and digital banking customers. By applying advanced analytics to this aggregation of purchase data, we make it actionable, helping marketers identify, reach and influence likely buyers at scale, and measure the true sales impact of their marketing spend. We have strong relationships with leading marketers across a variety of industries, including retail, restaurant, travel and entertainment, telecommunications, subscription services, direct to consumer, and grocery. Using our purchase intelligence, we present customers with offers to save money at a time when they are thinking of their finances.
Working with a marketer, we design a campaign that targets consumers based on their purchase history. The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that we collect from marketers to provide these consumer incentives to our FIs’ customers after they make qualifying purchases ("Consumer Incentives"). We report our revenue on our consolidated statements of operations net of Consumer Incentives since we do not provide the goods or services that are purchased by our FIs’ customers from the marketers to which the Consumer Incentives relate.
We generally pay our FI partners a negotiated and fixed percentage of our billings to marketers less any Consumer Incentives that we pay to the FIs’ customers and certain third-party data costs ("FI Share"). We report our revenue gross of FI Share. FI Share costs are included in FI Share and other third-party costs in our consolidated statements of operations, rather than as a reduction of revenue, because we and not our FI partners act as the principal in our arrangements with marketers.
We run campaigns offering compelling Consumer Incentives to drive an expected rate of return on advertising spend for marketers. At times, we may collaborate with an FI partner to enhance the level of Consumer Incentives to their respective FIs' customers funded by their FI Share. We believe that these investments by our FI partners positively impact our platform by making FIs' customers more highly engaged with our platform. However, these investments negatively impact our GAAP revenue, which is reported net of Consumer Incentives.
Revenue, which is reported net of Consumer Incentives and gross of FI Share and other third-party costs, was $210.4 million and $186.9 million for December 31, 2019 and 2020, respectively, representing a decline of 11%. Billings, a non-GAAP measure that represents the gross amount billed to marketers and is reported gross of both Consumer Incentives and FI Share, was $316.1 million and $263.4 million for December 31, 2019 and 2020, respectively, representing a decline of 17%. Gross profit, which represents revenue less FI Share and other third-party costs and less delivery costs, was $79.5 million and $63.3 million for December 31, 2019 and 2020, respectively, representing a decline of 20%. Adjusted contribution, a non-GAAP measure that represents our revenue less our adjusted FI Share and other third-party costs, was $95.2 million and $82.2 million for December 31, 2019 and 2020, respectively, representing a decline of 14%.
Billings and adjusted contribution are further defined under the heading "Non-GAAP Measures and Other Performance Metrics" below. We believe these non-GAAP measures, alongside our GAAP revenue and GAAP gross profit, provide useful information to investors for period-to-period comparisons of our core business and in understanding and evaluating our results of operations in the same manner as our management and board of directors.
43
Table of Contents
The following table summarizes our results (dollars in thousands):
Year Ended December 31, Change Year Ended December 31, Change
2018 2019 $ % 2019 2020 $ %
Billings $ 218,980 $ 316,053 $ 97,073 44 % $ 316,053 $ 263,355 $ (52,698) (17) %
Consumer Incentives 68,296 105,623 37,327 55 105,623 76,463 (29,160) (28)
Revenue 150,684 210,430 59,746 40 210,430 186,892 (23,538) (11)
Adjusted FI Share and other third-party costs (1)(2)
81,234 115,211 33,977 42 115,211 104,710 (10,501) (9)
Adjusted contribution (2)
69,450 95,219 25,769 37 95,219 82,182 (13,037) (14)
Delivery costs 10,632 12,893 2,261 21 12,893 14,310 1,417 11
Non-cash equity expense included in FI Share 2,519 — (2,519) n/a — — — n/a
Deferred FI implementation costs (3)
1,618 2,869 1,251 77 2,869 4,598 1,729 60
Gross profit $ 54,681 $ 79,457 $ 24,776 45 % $ 79,457 $ 63,274 $ (16,183) (20) %
(1) Adjusted FI Share and other third-party costs excludes a non-cash equity expense included in FI Share and deferred FI implementation costs, as detailed below in our reconciliation of GAAP gross profit to adjusted contribution.
(2) Adjusted FI Share and other third-party costs and adjusted contribution include the impact of a $0.8 million gain during 2018 related to the renewal of our agreement with an FI partner, which contains certain amendments that are retroactively applied as of January 1, 2018.
(3) Deferred FI implementation costs for the year ended December 31, 2020 includes the impact of a $0.7 million write off related to certain platform features.
During 2018, 2019 and 2020, our net loss was $53.0 million, $17.1 million and $55.4 million, respectively. Our historical losses have been driven by our substantial investments in our purchase intelligence platform and infrastructure, which we believe will enable us to expand the use of our platform by both FIs and marketers. During 2018, 2019 and 2020, our net loss includes stock-based compensation expense of $26.8 million, $15.9 million and $32.4 million, respectively. In 2018, our net loss also includes a $6.8 million non-cash expense related to the change in fair value of our warrant liabilities and a $2.5 million non-cash expense related to the vesting of warrants issued to an FI partner that accelerated upon our IPO.
Acquisition of Dosh
On February 26, 2021, we entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with DOSH Holdings, Inc., a Delaware corporation (“Dosh”), BSPEARS MERGER SUB I, INC., a Delaware corporation and our wholly owned subsidiary (“Merger Sub 1”), BSPEARS MERGER SUB II, LLC, a Delaware limited liability company and our wholly owned subsidiary (“Merger Sub 2”), and certain other parties named therein. The Merger Agreement provides for Merger Sub 1 to merge with and into Dosh ( “Merger 1”), with Dosh surviving Merger 1 as our wholly owned subsidiary, immediately followed by the merger of Dosh with and into Merger Sub 2, with Merger Sub 2 surviving Merger 2 as our wholly owned subsidiary, subject to the terms and conditions set forth in the Merger Agreement.
Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, at the closing, we are required to pay the former equityholders of Dosh (other than former holders of unvested options to purchase Dosh’s common stock) (collectively, the “Dosh Equityholders”) consideration of $275.0 million, consisting of, and subject to adjustment with respect to, the following: (A) an amount in cash equal to $150.0 million, subject to adjustments and subject to escrows; and (B) $125.0 million million of shares of our common stock at an agreed-upon price of $136.33 per share. In addition, we will assume the unvested options held by the holders of unvested options to purchase Dosh’s common stock and issue up to $8.0 million in our performance stock units to certain key Dosh executives.
The Merger Agreement contains customary representations, warranties, covenants and indemnities of each of us and Dosh. During the period from the date of the Merger Agreement to the closing, we and Dosh have agreed to carry on their respective businesses in the ordinary course and consistent with past practices and have agreed to certain other operating covenants.
The closing of the Mergers is subject to the satisfaction or waiver of a number of customary closing conditions in the Merger Agreement, including, among others, the absence of certain governmental restraints and the absence of a material adverse effect on Dosh.
44
Table of Contents
The Merger Agreement may be terminated prior to the closing date by mutual written agreement of us and Dosh. In addition, the Merger Agreement may be terminated by either we or Dosh in certain circumstances, including if the Acquisition has not been closed on or before May 31, 2021, or if the other party has materially breached any representation, warranty, covenant, obligation or agreement such that certain of the conditions to closing cannot be satisfied.
FI Partners
Our FI partners include Bank of America, National Association ("Bank of America"), JPMorgan Chase Bank, National Association (“Chase”) and Wells Fargo Bank, National Association (“Wells Fargo”), as well as many other national and regional financial institutions, including several of the largest bank processors and digital banking providers to reach customers of small and mid-sized FIs. Wells Fargo began a phased launch of our platform in the fourth quarter of 2019 that was completed in the second quarter of 2020.
For December 31, 2019 and 2020, our average FI monthly active users ("FI MAUs") were 122.6 million and 155.8 million and our average Cardlytics platform revenue per user ("ARPU") was 1.72 and 1.20, respectively. FI MAU and ARPU are performance metrics defined under the heading "Non-GAAP Measures and Other Performance Metrics" below. The increase in FI MAUs is largely due to Wells Fargo completing their phased launch in the second quarter of 2020 and Chase launching our Cardlytics platform for its online banking channel in the second quarter of 2019. We expect U.S. Bank to begin a phased launch of the Cardlytics platform in the first half of 2021, which will also impact FI MAU growth. We expect a continued increase in FI MAUs year over year as a result of the launch of Wells Fargo and U.S. Bank. Over time, we expect year-over-year increases in ARPU as both consumer spending and the advertising budgets of our clients recover from the negative impacts of the COVID-19 pandemic.
FI Partner Commitments
Agreements with certain FI partners require us to fund the development of specific enhancements, pay for certain implementation fees, or make milestone payments upon the deployment of our solution. Certain of these agreements provide for future reductions in FI Share due to the FI partner. During 2018, development payments to a certain FI partner totaled $9.3 million which was partially offset by recoveries through FI Share payment reductions of $4.6 million in 2019.
During 2020, one of our FI partners notified us of plans to end the use of certain platform features prior to the end of our contractual arrangement with the FI partner. As a result, we wrote off deferred FI implementation costs totaling $0.7 million to FI Share and other third-party costs on our consolidated statements of operation.
We have an FI Share commitment to a certain FI partner totaling $10.0 million over a 12-month period following the completion of certain milestones by the FI partner, which were not met as of December 31, 2020. Any expected shortfall penalty will be accrued during the 12-month period following the completion of the milestones.
Impacts of COVID-19 Pandemic
We remain focused on supporting our marketers, FIs partners, employees and communities during the COVID-19 pandemic. The impact of COVID-19 on the global economy and on our business continues to be a fluid situation. We responded quickly to adopt a virtual corporate strategy to enable all of our employees to work productively from home, guard the health and safety of our team, support our marketers and FI partners, mitigate risk and maximize our financial performance. We are focused on ensuring continuity for our marketers and FI partners.
Revenue for the year ended December 31, 2020 was unfavorably affected by the COVID-19 pandemic and its impact on both consumer discretionary spending and marketers' ability to spend advertising budgets on our solution. Revenue during the second quarter of 2020 was significantly affected by the COVID-19 pandemic and its negative impact on both consumer spending and marketers' ability to spend advertising budgets on our solution. During the third and fourth quarters of 2020, we saw a recovery of both consumer spending as well as the advertising budgets of our clients. Due to continuing uncertainty regarding the severity and duration of the impacts of COVID-19 on the global economy, we will continue to monitor this situation and the potential impacts to our business .
45
Table of Contents
The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on industry events, and its effect on consumer spending, our marketers, FI partners, suppliers and vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted at this time. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel, employee work locations, and cancellation of marketing events. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, marketers, FI partners, suppliers, vendors and stockholders. At this point, the extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain. See “Risk Factors” for further discussion of the adverse impacts of the COVID-19 pandemic on our business.
Non-GAAP Measures and Other Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our metrics may be calculated in a manner different than similar metrics used by other companies.
Year Ended December 31,
2018 2019 2020
(Amounts in thousands, except ARPU)
FI MAUs 65,012 122,586 155,784
ARPU $ 2.30 $ 1.72 $ 1.20
Billings $ 218,980 $ 316,053 $ 263,355
Adjusted contribution (1)
$ 69,450 $ 95,219 $ 82,182
Adjusted EBITDA (1)
$ (6,595) $ 6,052 $ (7,780)
(1) Adjusted contribution and Adjusted EBITDA includes the impact of a $0.8 million gain during 2018 related to the renewal of our agreement with an FI partner, which contains certain amendments that are retroactively applied as of January 1, 2018.
Monthly Active Users
We define FI MAUs as targetable customers or accounts of our FI partners that logged in and visited the online or mobile banking applications of, or opened an email containing our offers from, our FI partners during a monthly period. We then calculate a monthly average of these FI MAUs for the periods presented. We believe that FI MAUs is an indicator of our and our FI partners’ ability to drive engagement with the Cardlytics platform and is reflective of the marketing base that we offer to marketers through the Cardlytics platform.
Average Revenue per User
We define ARPU as the total Cardlytics platform revenue generated in the applicable period calculated in accordance with generally accepted accounting principles in the United States ("GAAP"), divided by the average number of FI MAUs in the applicable period. We believe that ARPU is an indicator of the value of our relationships with our FI partners with respect to the Cardlytics platform.
Billings
Billings represents the gross amount billed to marketers for advertising campaigns in order to generate revenue. Billings is reported gross of both Consumer Incentives and FI Share. Our GAAP revenue is recognized net of Consumer Incentives and gross of FI Share.
We review billings for internal management purposes. We believe that billings provides useful information to investors for period-to-period comparisons of our core business and in understanding and evaluating our results of operations in the same manner as our management and board of directors. Nevertheless, our use of billings has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Other companies, including companies in our industry that have similar business arrangements, may address the impact of Consumer Incentives differently. You should consider billings alongside our other GAAP financial results.
46
Table of Contents
The following table presents a reconciliation of billings to revenue, the most directly comparable GAAP measure, for each of the periods indicated (in thousands):
Year Ended December 31,
2018 2019 2020
Revenue $ 150,684 $ 210,430 $ 186,892
Plus:
Consumer Incentives 68,296 105,623 76,463
Billings $ 218,980 $ 316,053 $ 263,355
Adjusted Contribution
Adjusted contribution measures the degree by which revenue generated from our marketers exceeds the cost to obtain the purchase data and the digital advertising space from our FI partners. Adjusted contribution demonstrates how incremental marketing spend on our platform generates incremental amounts to support our sales and marketing, research and development, general and administration and other investments. Adjusted contribution is calculated by taking our total revenue less our FI Share and other third-party costs exclusive of a non-cash equity expense and deferred FI implementation costs, which are non-cash costs. Adjusted contribution does not take into account all costs associated with generating revenue from advertising campaigns, including sales and marketing expenses, research and development expenses, general and administrative expenses and other expenses, which we do not take into consideration when making decisions on how to manage our advertising campaigns.
We use adjusted contribution extensively to measure the efficiency of our advertising platform, make decisions to manage advertising campaigns and evaluate our operational performance. Adjusted contribution is also used to determine the vesting of performance-based equity awards and is used to determine the achievement of quarterly and annual bonuses across our entire global employee base, including executives. We view adjusted contribution as an important operating measure of our financial results. We believe that adjusted contribution provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Adjusted contribution should not be considered in isolation from, or as an alternative to, measures prepared in accordance with GAAP. Adjusted contribution should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, adjusted contribution may not necessarily be comparable to similarly titled measures presented by other companies. Refer to Note 16—Segments to our consolidated financial statements for further details on our adjusted contribution by segment.
The following table presents a reconciliation of adjusted contribution to gross profit, the most directly comparable GAAP measure, for each of the periods indicated (in thousands):
Year Ended December 31,
2018 2019 2020
Revenue $ 150,684 $ 210,430 $ 186,892
Minus:
FI Share and other third-party costs (1)
85,371 118,080 109,308
Delivery costs (2)
10,632 12,893 14,310
Gross profit (1)
54,681 79,457 63,274
Plus:
Delivery costs (2)
10,632 12,893 14,310
Non-cash equity expense included in FI Share (3)
2,519 — —
Deferred FI implementation costs (3)
1,618 2,869 4,598
Adjusted contribution (1)
$ 69,450 $ 95,219 $ 82,182
(1) FI Share and other third-party costs, gross profit and adjusted contribution include the impact of a $0.8 million gain during 2018 related to the renewal of our agreement with an FI partner, which contains certain amendments that are retroactively applied as of January 1, 2018.
(2) Stock-based compensation expense recognized in delivery costs totaled $0.6 million, $0.7 million and $1.2 million during 2018, 2019 and 2020, respectively.
47
Table of Contents
(3) Non-cash equity expense included in FI Share and deferred FI implementation costs are excluded from adjusted FI Share and other third-party costs as follows (in thousands):
Year Ended December 31,
2018 2019 2020
FI Share and other third-party costs $ 85,371 $ 118,080 $ 109,308
Minus:
Non-cash equity expense included in FI Share 2,519 — —
Deferred FI implementation costs (1)
1,618 2,869 4,598
Adjusted FI Share and other third-party costs $ 81,234 $ 115,211 $ 104,710
(1) Deferred FI implementation costs for the year ended December 31, 2020 includes the impact of a $0.7 million write off related to certain platform features.
Adjusted EBITDA
Adjusted EBITDA represents our net loss before income tax benefit; interest expense, net; depreciation and amortization expense; stock-based compensation expense; foreign currency gain; deferred FI implementation costs; costs associated with financing events; loss on extinguishment of debt; restructuring costs; change in fair value of warrant liabilities, net; and a non-cash equity expense recognized in FI Share. We do not consider these excluded items to be indicative of our core operating performance. The items that are non-cash include change in fair value of warrant liabilities, Other (expense) income, net, deferred FI implementation costs, depreciation and amortization expense, stock-based compensation expense and a non-cash equity expense included in FI Share. Notably, any impacts related to minimum FI Share commitments in connection with agreements with certain FI partners are not added back to net loss in order to calculate adjusted EBITDA. Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends and to generate future operating plans, make strategic decisions regarding the allocation of capital and invest in initiatives that are focused on cultivating new markets for our solution. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Adjusted EBITDA is not a measure calculated in accordance with GAAP.
We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Nevertheless, use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (1) adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (2) adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation and equity instruments issued to our FI partners; (3) adjusted EBITDA does not reflect tax payments or receipts that may represent a reduction or increase in cash available to us and (4) other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of the metric as a comparative measure. Because of these and other limitations, you should consider adjusted EBITDA alongside our net loss and other GAAP financial results.
48
Table of Contents
The following table presents a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP measure, for each of the periods indicated (in thousands):
Year Ended December 31,
2018 2019 2020
Net loss (1)
$ (53,042) $ (17,144) $ (55,422)
Plus:
Income tax benefit — — —
Interest expense, net 3,264 548 3,048
Depreciation and amortization expense 3,282 4,535 7,826
Stock-based compensation expense 26,790 15,851 32,396
Foreign currency (loss) gain 1,172 (781) (1,549)
Deferred FI implementation costs 1,618 2,869 4,598
Costs associated with financing events 118 123 —
Loss on extinguishment of debt 924 51 —
Restructuring costs — — 1,323
Change in fair value of warrant liabilities 6,760 — —
Non-cash equity expense included in FI Share 2,519 — —
Adjusted EBITDA (1)
$ (6,595) $ 6,052 $ (7,780)
(1) Net loss and adjusted EBITDA include the impact of a $0.8 million gain during 2018 related to the renewal of our agreement with an FI partner, which contains certain amendments that are retroactively applied as of January 1, 2018.
Components of Results of Operations
Revenue
We sell our solutions by entering into agreements directly with marketers or their marketing agencies, generally through the execution of insertion orders. The agreements state the terms of the arrangement, the negotiated fee, payment terms and the fixed period of time of the campaign. We invoice marketers monthly based on the qualifying purchases of the FIs' customers as reported by our FI partners during the month. We report our revenue net of Consumer Incentives and gross of FI Share.
Cost and Expense
We classify our expenses into the following categories: FI Share and other third-party costs; delivery costs; sales and marketing expense; research and development expense; general and administrative expense; and depreciation and amortization expense.
FI Share and Other Third-Party Costs
FI Share and other third-party costs consist primarily of the FI Share that we pay our FI partners, media and data costs, deferred implementation costs incurred pursuant to our agreements with certain FI partners and a $2.5 million non-cash expense in 2018 related to the vesting of warrants issued to an FI partner that accelerated upon the consummation of our IPO. To the extent that we use a specific FI customer’s anonymized purchase data in the delivery of our solutions, we pay the applicable FI partner an FI Share calculated based on the relative contribution of the data provided by the FI partner to the overall delivery of the services. We expect that our FI Share and other third-party costs will increase in absolute dollars as a result of our revenue growth.
Delivery Costs
Delivery costs consist primarily of personnel costs of our campaign, data operations and production support teams, including salaries, benefits, bonuses, stock-based compensation and payroll taxes. Delivery costs also include hosting facility costs, purchased or licensed software costs, outsourcing costs and professional services costs. As we add data center capacity and support personnel in advance of anticipated growth, our delivery costs will increase in absolute dollars and if such anticipated revenue growth does not occur, our delivery costs as a percentage of revenue will be adversely affected. Over time, we expect delivery costs will decline as a percentage of revenue.
49
Table of Contents
Sales and Marketing Expense
Sales and marketing expense consists primarily of personnel costs of our sales, account management, marketing and analytics teams, including salaries, benefits, bonuses, commissions, stock-based compensation and payroll taxes. Sales and marketing expense also includes professional fees, marketing programs such as trade shows, marketing materials, public relations, sponsorships and other brand building expenses, as well as outsourcing costs, travel and entertainment expenses and company funded consumer testing expenses for certain marketers that are not current customers. We expect that our sales and marketing expense will increase in absolute dollars as a result of hiring new sales representatives and as we invest to enhance our brand. Over time, we expect sales and marketing expenses will decline as a percentage of revenue.
Research and Development Expense
Research and development expense consists primarily of personnel costs of our information technology ("IT") engineering, IT architecture and product development teams, including salaries, benefits, bonuses, stock-based compensation and payroll taxes. Research and development expense also includes outsourcing costs, software licensing costs, professional fees and travel expenses. We focus our research and development efforts on improving our solutions and developing new ones. We expect research and development expense to increase in absolute dollars as we continue to create new solutions and improve the functionality of our existing solutions.
General and Administrative Expense
General and administrative expense consists of personnel costs of our executive, finance, legal, compliance, IT support and human resources teams, including salaries, benefits, bonuses, stock-based compensation and payroll taxes. General and administrative expense also includes professional fees for external legal, accounting and consulting services, financing transaction costs, facilities costs such as rent and utilities, royalties, bad debt expense, travel expense, property taxes and franchise taxes. We expect that general and administrative expenses will increase on an absolute dollar basis but decrease as a percentage of revenue as we focus on processes, systems and controls to enable the our internal support functions to scale with the growth of our business.
Depreciation and Amortization Expense
Depreciation and amortization expense includes depreciation of property and equipment over the estimated useful life of the applicable asset as well as amortization of deferred patent costs and capitalized internal-use software development costs.
Interest Expense, Net
Interest expense, net consists of interest incurred on our debt facilities, as well as related discount amortization and financing costs, partially offset by interest income on our cash balances.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities represents adjustments to the fair value of certain warrants to purchase either preferred or common stock based upon changes in the fair value of the underlying stock.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of gains and losses on foreign currency transactions and expenses recorded in connection with the extinguishment of debt.
Income Taxes
We have generated losses before income taxes in the U.S., U.K. and most U.S. state income tax jurisdictions. We have generated historical net losses and recorded a full valuation allowance against our deferred tax assets. We expect to maintain a full valuation allowance in the near term. Due to our history of losses and our expectation of maintaining a full valuation allowance, we have not recorded an income tax provision or benefit during the periods presented. Realization of any of our deferred tax assets depends upon future earnings, the timing and amount of which are uncertain.
50
Table of Contents
Results of Operations
The following table sets forth our consolidated statements of operations (in thousands):
Year Ended December 31,
2018 2019 2020
Revenue $ 150,684 $ 210,430 $ 186,892
Costs and expenses:
FI Share and other third-party costs 85,371 118,080 109,308
Delivery costs 10,632 12,893 14,310
Sales and marketing expense 41,878 43,828 45,307
Research and development expense 16,210 11,699 17,532
General and administrative expense 34,228 36,720 46,532
Depreciation and amortization expense 3,282 4,535 7,826
Total costs and expenses 191,601 227,755 240,815
Operating loss (40,917) (17,325) (53,923)
Non-operating (expense) income:
Interest expense, net (3,264) (548) (3,048)
Change in fair value of warrant liabilities, net (6,760) — —
Other (expense) income, net (2,101) 729 1,549
Total non-operating (expense) income (12,125) 181 (1,499)
Loss before income taxes (53,042) (17,144) (55,422)
Income tax benefit — — —
Net loss $ (53,042) $ (17,144) $ (55,422)
51
Table of Contents
The following table sets forth our consolidated statements of operations expressed as a percentage of revenue (percentages may not sum due to rounding):
Year Ended December 31,
2018 2019 2020
Revenue 100 % 100 % 100 %
Costs and expenses:
FI Share and other third-party costs 57 56 58
Delivery costs 7 6 8
Sales and marketing expense 28 21 24
Research and development expense 11 6 9
General and administration expense 23 17 25
Depreciation and amortization expense 2 2 4
Total costs and expenses 127 108 129
Operating loss (27) (8) (29)
Non-operating (expense) income:
Interest expense, net (2) — (2)
Change in fair value of warrant liabilities, net (4) — —
Other (expense) income, net (1) — 1
Total non-operating (expense) income (8) — (1)
Loss before income taxes (35) (8) (30)
Income tax benefit — — —
Net loss (35) % (8) % (30) %
Comparison of Year Ended December 31, 2019 and 2020
In this section, we discuss the results of our operations for the year ended December 31, 2019 compared to the year ended December 31, 2020. For a discussion of the year ended December 31, 2018 compared to the year ended December 31, 2019, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.
Revenue
Year Ended December 31, Change
2019 2020 $ %
(dollars in thousands)
Revenue $ 210,430 $ 186,892 $ (23,538) (11) %
The $23.5 million decrease in revenue during 2020 compared to 2019 was comprised of a $42.5 million decrease in sales to existing marketers, partially offset by a $19.0 million increase in sales to new marketers. Revenue during the second quarter of 2020 was significantly affected by the COVID-19 pandemic and its negative impact on both consumer spending and marketers' ability to spend advertising budgets on our solution. During the third and fourth quarters of 2020, we saw a recovery of both consumer spending as well as the advertising budgets of our clients. Due to continuing uncertainty regarding the severity and duration of the impacts of COVID-19 on the global economy, we will continue to monitor this situation and the potential impacts to our business.
52
Table of Contents
Costs and Expenses
FI Share and Other Third-Party Costs
Year Ended December 31, Change
2019 2020 $ %
(dollars in thousands)
FI Share and other third-party costs:
Adjusted FI Share and other third-party costs $ 115,211 $ 104,710 $ (10,501) (9) %
Deferred FI implementation costs 2,869 4,598 1,729 60
Total FI Share and other third-party costs $ 118,080 $ 109,308 $ (8,772) (7) %
% of revenue 56 % 58 %
FI Share and other third-party costs decreased by $8.8 million during 2020 compared to 2019 primarily due to decreased revenue from sales of the Cardlytics platform. Deferred FI implementation costs increased by $1.7 million during the 2020 compared to the 2019 primarily due to a write off of deferred FI implementation costs totaling $0.7 million relating to the discontinued use of certain platform features.
We believe the near-term fluctuations in revenue caused by the economic impact of COVID–19 would also result in similar percentage fluctuations in adjusted FI Share and other third-party costs in future periods.
Delivery Costs
Year Ended December 31, Change
2019 2020 $ %
(dollars in thousands)
Delivery costs $ 12,893 $ 14,310 $ 1,417 11 %
% of revenue 6 % 8 %
Delivery costs increased by $1.4 million during 2020 compared to 2019 primarily due to a $0.7 million increase in hosting-related IT costs, a $0.5 million increase in stock-based compensation expense and a $0.2 million increase in personnel costs associated with additional headcount to host the Cardlytics platform for certain new FI partners.
Sales and Marketing Expense
Year Ended December 31, Change
2019 2020 $ %
(dollars in thousands)
Sales and marketing expense $ 43,828 $ 45,307 $ 1,479 3 %
% of revenue 21 % 24 %
Sales and marketing expense increased by $1.5 million during 2020 compared to 2019 primarily due to a $5.6 million increase in stock-based compensation expense, partially offset by a decrease of $3.0 million in incentive compensation and a $1.1 million decrease in travel and entertainment expense.
53
Table of Contents
Research and Development Expense
Year Ended December 31, Change
2019 2020 $ %
(dollars in thousands)
Research and development expense $ 11,699 $ 17,532 $ 5,833 50 %
% of revenue 6 % 9 %
Research and development expense increased by $5.8 million during 2020 compared to 2019 primarily due to a $3.1 million increase in stock-based compensation expense, a $3.0 million increase in personnel costs associated with additional headcount, a $0.9 million increase in professional fees, partially offset by a $1.0 million decrease in personnel costs due to higher capitalization and a $0.2 million decrease in travel and entertainment.
General and Administrative Expense
Year Ended December 31, Change
2019 2020 $ %
(dollars in thousands)
General and administration expense $ 36,720 $ 46,532 $ 9,812 27 %
% of revenue 17 % 25 %
General and administrative expense increased by $9.8 million during 2020 compared to 2019 primarily due to a $7.4 million increase in stock-based compensation expense, a $1.7 million increase in software licensing costs, a $0.9 million increase in professional fees, a $0.5 million increase in facility costs, partially offset by a $0.7 million decrease in travel and entertainment.
Stock-based Compensation Expense
The following table summarizes the allocation of stock-based compensation in the consolidated statements of operations (dollars in thousands):
Year Ended December 31, Change
2019 2020 $ %
Delivery costs $ 711 $ 1,181 $ 470 66 %
Sales and marketing expense 4,248 9,857 5,609 132
Research and development expense 1,619 4,713 3,094 191
General and administrative expense 9,273 16,645 7,372 79
Total stock-based compensation expense $ 15,851 $ 32,396 $ 16,545 104 %
% of revenue 8 % 17 %
Stock-based compensation expense increased by $16.5 million during 2020 compared to 2019 primarily due to an increase in expense relating to RSUs. During 2020, we recognized $19.0 million of expense related to RSUs compared to $4.4 million of expense in 2019 due to a change in mix between RSUs and PSUs and increased hiring activity throughout the organization. We also recognized $4.1 million of expense related to RSUs that were granted in lieu of cash-based incentive compensation.
54
Table of Contents
Depreciation and Amortization Expense
Year Ended December 31, Change
2019 2020 $ %
(dollars in thousands)
Depreciation and amortization expense $ 4,535 $ 7,826 $ 3,291 73 %
% of revenue 2 % 4 %
Depreciation and amortization expense increased by $3.3 million during 2020 compared to 2019 primarily due to additional hardware and software placed in service in 2020 and the suspension of certain development efforts that resulted in a $1.0 million write off of capitalized internal-use software development costs during the first quarter of 2020.
Interest Expense, Net
Year Ended December 31, Change
2019 2020 $ %
(dollars in thousands)
Interest expense $ (1,377) $ (3,488) $ (2,111) 153 %
Interest income 829 456 (373) (45)
Interest expense, net $ (548) $ (3,048) $ (2,500) 456 %
% of revenue — % (2) %
Interest expense, net increased by $2.5 million during 2020 compared to 2019 primarily driven by an increase in interest expense related to the Notes, partially offset by a decrease in the amount outstanding on our 2018 Line of Credit and 2018 Term Loan. Interest income decreased $0.4 million during 2020 compared to 2019 due to moving cash into fully FDIC-insured demand deposit accounts, which have lower interest rates.
Other (Expense) Income, Net
Year Ended December 31, Change
2019 2020 $ %
(dollars in thousands)
Foreign currency gain $ 781 $ 1,549 $ 768 98 %
Loss on extinguishment of debt (51) — 51 (100)
Other expense (1) — 1 (100)
Other (expense) income, net $ 729 $ 1,549 $ 820 112 %
% of revenue — % 1 %
The change in foreign currency gain was primarily due to the decrease in the value of the British pound relative to the U.S. dollar. During 2019, we also recognized a less than $0.1 million loss on extinguishment of debt related to the unamortized discount and unamortized debt issuance costs associated with our prior line of credit and prior term loan.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. Our most critical accounting policies are summarized below. Refer to the notes to our consolidated financial statements for additional information.
55
Table of Contents
Revenue Recognition
Our revenue generated from our platform consist of transaction-based fees made up of a significant volume of low-dollar transactions, sourced from multiple databases. The processing and recording of revenue is highly automated and is based on contractual terms with marketers, FIs, and other parties. Because of the nature of our transaction-based fees, we use automated systems to process and record our revenue transactions
We determine revenue recognition through the following steps:
• identification of a contract with a customer,
• identification of the performance obligation(s) in the contract,
• determination of the transaction price,
• allocation of the transaction price to the performance obligation(s) in the contract, and
• recognition of revenue when or as the performance obligation(s) are satisfied.
We sell our solutions by entering into agreements directly with marketers or their marketing agencies, generally through the execution of insertion orders. The agreements state the terms of the arrangement, the negotiated fee, payment terms and the fixed period of time of the campaign. We consider a contract to exist when a campaign, which typically lasts 45 days, is published to an FI partner under the terms of an insertion order.
With respect to our Cardlytics platform, our performance obligation is to offer incentives to FIs' customers to make purchases from the marketer within a specified period. This performance obligation is a series that represents a stand ready obligation to provide a targeted campaign for the marketer to FIs' customers. The Cardlytics platform fees represent variable consideration that is resolved when FIs' customers make qualifying purchases during the marketing campaign term.
Subsequent to a qualifying purchase, the associated fees are generally not subject to refund or adjustment unless the fees from the marketing campaign exceed a contractual maximum (marketer budget). We have not constrained our revenue because adjustments have historically been immaterial and given the short duration of our marketing campaigns, any adjustments are recognized during the period of the marketing campaign. We recognize revenue for the Cardlytics platform fees over time using the right to invoice practical expedient because the amount billed is equal to the value delivered to marketers through qualified purchases by FIs' customers during that period.
Consumer Incentives
We report our revenue on our consolidated statements of operations net of Consumer Incentives. We do not provide the goods or services that are purchased by our FIs’ customers from the marketers to which the Consumer Incentives relate. Accordingly, the marketer is deemed to be the principal in the relationship with the customer and, therefore, the Consumer Incentive is deemed to be a reduction in the purchase price paid by the customer for the marketer’s goods or services. While we are responsible for remitting Consumer Incentives to our FI partners for further payment to their customers, we function solely as an agent of marketers in these arrangements.
We invoice marketers monthly based on the qualifying purchases of FIs' customers as reported by our FI partners during the month. Invoice payment terms, negotiated on a marketer-by-marketer basis, are typically between 30 to 60 days. However, for certain marketing agencies with sequential liability terms, payments are not due to us until such marketing agency has received payment from its marketer client. Accounts receivable is recorded at the amount of gross billings to marketers, net of allowances, for the fees and Consumer Incentives that we are responsible to collect. Our accrued liabilities also include the amount of Consumer Incentives due to FI partners. As a result, accounts receivable and accrued liabilities may appear large in relation to revenue, which is reported on a net basis. During 2018, 2019 and 2020, Consumer Incentives totaled $68.3 million, $105.6 million and $76.5 million, respectively.
FI Share and Other Third-Party Costs
We report our revenue on our consolidated statements of operations gross of FI Share. FI Share costs are included in FI Share and other third-party costs in our consolidated statements of operations, rather than as a reduction of revenue, because we and not our FI partners act as the principal in our arrangements with marketers. We are responsible for the fulfillment and acceptability of the services purchased by marketers. We also have latitude in establishing the price of our services, have discretion in supplier selection and earn variable amounts. FI partners only supply consumer purchase data and digital marketing space and generally have no involvement in the marketing campaigns or contractual relationship with marketers.
56
Table of Contents
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. Valuation allowances are provided when we determine that it is more likely than not that all of, or a portion of, deferred tax assets will not be utilized in the future.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Estimates of future taxable income are based on assumptions that are consistent with our plans. Assumptions represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. If actual amounts differ from our estimates, the amount of our tax expense and liabilities could be materially impacted.
We have recorded a full valuation allowance related to our deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.
We recognize the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date, and then, only in an amount more likely than not to be sustained upon review by the tax authorities. Where applicable, we classify associated interest and penalties as income tax expense. The total amounts of interest and penalties were not material. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Recent Accounting Pronouncements
Refer to Note 3—Accounting Standards to our consolidated financial statements for additional information.
Liquidity and Capital Resources
The following table summarizes our cash and cash equivalents, restricted cash, accounts receivable, working capital, total debt and unused available borrowings (in thousands):
December 31,
2019 2020
Cash and cash equivalents $ 104,458 $ 293,239
Restricted cash 129 110
Working capital (1)
117,329 304,317
Accounts receivable, net 81,452 81,249
Total debt (2)
37 174,024
Unused available borrowings 40,000 50,000
(1) We define working capital as current assets less current liabilities. See our consolidated financial statements for further details regarding our current assets and current liabilities.
(2) Total debt as of December 31, 2020 includes finance leases liabilities and convertible senior notes, which is presented net of unamortized issuance costs of $5.4 million and unamortized debt discount of $50.6 million.
Our cash and cash equivalents are available for working capital purposes. We do not enter into investments for trading purposes, and our investment policy is to invest any excess cash in short-term, highly liquid investments that limit the risk of principal loss. A majority of our cash and cash equivalents are held in fully FDIC–insured demand deposit accounts that distribute funds, and credit risk, over a vast number of financial institutions. Our remaining cash and cash equivalents are held in treasury obligation funds and money market accounts with three financial institutions, which we believe are of high credit quality. As of December 31, 2020, our demand deposit accounts earned up to a 0.50% annual rate of interest. As of December 31, 2020, we had $3.9 million in cash and cash equivalents in the U.K. While our investment in Cardlytics UK is not considered indefinitely invested, we do not plan to repatriate these funds.
57
Table of Contents
Through December 31, 2020, we have incurred accumulated net losses of $394.1 million since inception, including losses of $53.0 million, $17.1 million and $55.4 million during 2018, 2019 and 2020, respectively. We expect to incur additional operating losses as we continue our efforts to grow our business. We have historically financed our operations and capital expenditures through convertible note financings, private placements of our redeemable convertible preferred stock, public offerings of our common stock as well as lines of credit and term loans. Through December 31, 2020, we have received net proceeds of $222.7 million from the issuance of convertible senior notes, net proceeds of $196.2 million from the issuance of preferred stock and convertible promissory notes and net proceeds of $127.1 million from public equity offerings.
Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the enhancement of our platform, the introduction of new solutions, the continued market acceptance of our solutions and the extent of the impact of COVID-19 on our operational and financial performance. We expect to continue to incur operating losses for the foreseeable future and may require additional capital resources to continue to grow our business. We believe that current cash and cash equivalents will be sufficient to fund our operations and capital requirements for at least the next 12 months following the date our consolidated financial statements were issued. However, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be materially and adversely impacted. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all.
Sources of Funds
2020 Convertible Senior Notes
In September 2020, we issued convertible senior notes with an aggregate principal amount of $230.0 million bearing an interest rate of 1.00% due in 2025 (the "Notes"). The net proceeds from this offering were $222.7 million, after deducting the initial purchasers' discounts and commissions and the estimated offering expenses payable by us. We used $26.5 million of the net proceeds to pay the cost of capped call transactions (the "Capped Calls") described under the Financing Activities section below.
Proceeds from Issuance of Common Stock
On February 13, 2018, we closed our initial public offering (“IPO”), in which we issued and sold 5,400,000 shares of common stock at a public offering price of $13.00 per share, resulting in gross proceeds of $70.2 million. On February 14, 2018, pursuant to the underwriters’ partial exercise of their over-allotment option to purchase up to an additional 810,000 shares from us, we issued and sold an additional 421,355 shares of our common stock, resulting in additional gross proceeds to us of $5.5 million. In total, we issued 5,821,355 shares of common stock and raised $75.7 million in gross proceeds, or $66.1 million in net proceeds after deducting underwriting discounts and commissions of $5.3 million and offering costs of $4.3 million.
On September 13, 2019, we closed a public equity offering in which we sold 1,904,154 shares of common stock, which included 404,154 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $34.00 per share. We received total net proceeds of $61.3 million after deducting underwriting discounts and commissions of $3.2 million and offering costs of $0.2 million. Selling stockholders, including certain of our executive officers and entities affiliated with certain of our directors, sold 1,194,365 shares of common stock in the offering at a public offering price of $34.00. We did not receive any proceeds from the sale of common stock by the selling stockholders.
During 2018, 2019 and 2020, we also received $2.0 million, $29.7 million and $10.2 million in proceeds from the exercise of options and warrants to purchase shares of common stock, respectively.
2018 Loan Facility
On May 21, 2018, we entered into a Loan and Security Agreement with Pacific Western Bank (the “Lender”) consisting of a $30.0 million asset–based revolving line of credit ("2018 Line of Credit") and a $20.0 million term loan ("2018 Term Loan") (collectively, the “2018 Loan Facility”). We used the entire $20.0 million in proceeds from the 2018 Term Loan and an advance of $27.4 million under the 2018 Line of Credit to repay all outstanding obligations under our prior line of credit and term loan.
On May 14, 2019, we amended our 2018 Loan Facility to increase the capacity of our Line of Credit, from $30.0 million to $40.0 million, and decrease the capacity of our 2018 Term Loan from $20.0 million to $10.0 million. This amendment also extended the maturity date of the 2018 Loan Facility from May 21, 2020 to May 14, 2021. We repaid $10.0 million of the principal balance of the 2018 Term Loan upon the execution of the amendment in May 2019 and repaid the remaining $10.0 million principal balance in September 2019.
58
Table of Contents
On September 17, 2020, we amended our 2018 Loan Facility to allow for the issuance of the Notes. On December 30, 2020, we amended our 2018 Loan Facility to increase the capacity of our Line of Credit, from $40.0 million to $50.0 million. This amendment also extended the maturity date of the 2018 Loan Facility from May 14, 2021 to December 31, 2022. As of December 31, 2020, we had $50.0 million of unused borrowings available under our 2018 Line of Credit.
Prior to the December 2020 amendment, the 2018 Loan Facility contained moving trailing 12-month billing covenants, which ranged from $210.0 million to $255.0 million, during the term of the facility. The former terms of the 2018 Loan Facility also required us to maintain a total cash balance plus liquidity under the 2018 Line of Credit of not less than $5.0 million. Effective with the December 2020 amendment, the former billings and liquidity covenants were removed and were replaced with a requirement to maintain a cash to funded senior debt ratio under the 2018 Line of Credit of 1.25:1.00.
Under the 2018 Loan Facility relating to the 2018 Line of Credit, we are able to borrow up to the lesser of $50.0 million or 85% of the amount of our eligible accounts receivable. Interest on advances under the 2018 Line of Credit bears an interest rate equal to the prime rate minus 0.50%, or 2.75% as of December 31, 2020. In addition, we are required to pay an unused line fee of 0.15% per annum on the average daily unused amount of the $50.0 million revolving commitment. Interest accrued on the 2018 Term Loan at an annual rate of interest equal to the prime rate minus 2.75%, or 2.00% at the date of repayment in September 2019.
The 2018 Loan Facility includes customary representations, warranties and covenants (affirmative and negative), including restrictive covenants that prohibits mergers, acquisitions and dispositions of assets, incurrence of indebtedness and encumbrances on our assets and the payment or declaration of dividends; in each case subject to specified exceptions.
The 2018 Loan Facility also includes standard events of default, including in the event of a material adverse change. Upon the occurrence of an event of default, the lender may declare all outstanding obligations immediately due and payable and take such other actions as are set forth in the 2018 Loan Facility and increase the interest rate otherwise applicable to advances under the 2018 Line of Credit by an additional 3.00%. All of our obligations under the 2018 Loan Facility are secured by a first priority lien on substantially all of our assets. The 2018 Loan Facility does not include any prepayment penalties.
We believe we were in compliance with all financial covenants as of December 31, 2020.
Uses of Funds
Our collection cycles can vary from period to period based on the payment practices of our marketers and their agencies. We are generally obligated to pay Consumer Incentives between one and three months following redemption, regardless of whether we have collected payment from a marketer or its agency. We are generally obligated to pay our FI partners’ FI Share by the end of the month following our collection of payment from the applicable marketer or its agency. As a result, timing of cash receipts from our marketers can significantly impact our operating cash flows for any period. Further, the timing of payment of commitments and implementation fees to our FI partners may also result in variability of our operating cash flows for any period.
Our operating cash flows also vary from quarter to quarter due to the seasonal nature of our marketers’ advertising spending. Many marketers tend to devote a significant portion of their marketing budgets to the fourth quarter of the calendar year to coincide with consumer holiday spending and reduce marketing spend in the first quarter of the calendar year. Any lag between the timing of our payments to FI partners and our receipt of payment from marketers and their agencies can exacerbate our need for working capital during the first quarter of the calendar year.
59
Table of Contents
Historical Cash Flows
In this section, we discuss the activity of our cash flows for the year ended December 31, 2019 and the year ended December 31, 2020. For a discussion of the year ended December 31, 2018, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year ended December 31, 2019.
The following table shows a summary of our cash flows for the periods presented (in thousands):
Year Ended December 31,
2019 2020
Cash, cash equivalents and restricted cash at beginning of period $ 59,870 $ 104,587
Net cash provided by (used in) operating activities 11,457 (7,598)
Net cash used in investing activities (11,020) (10,117)
Net cash provided by financing activities 44,179 206,430
Effect of exchange rates on cash, cash equivalents and restricted cash 101 47
Cash, cash equivalents and restricted cash at end of period $ 104,587 $ 293,349
Operating Activities
Historically, we have experienced negative operating cash flows, which reflects our investments to grow our business. Over time, we expect our business to generate positive operating cash flows. Given the seasonal nature of our marketer's advertising spending and our continued investment in our business, we may experience periods of negative operating cash flows from operations.
Operating activities used $7.6 million of cash in 2020, which reflected our net loss of $55.4 million, $51.6 million of which were non-cash charges, and a $3.8 million change in our net operating assets and liabilities. The non-cash charges primarily related to stock-based compensation expense, depreciation and amortization expense, amortization of right–of–use assets, deferred FI implementation costs and bad debt expense. The change in our net operating assets and liabilities was primarily due to a $2.4 million increase in accounts receivable, a $1.2 million decrease in other accrued expenses and a $4.5 million decrease in FI Share liability, partially offset by a $4.4 million increase in our Consumer Incentive liability. These changes were primarily a result of significantly lower sales during 2020, primarily caused by the COVID–19 pandemic, compared to 2019.
Operating activities provided $11.5 million of cash in 2019, which reflected our net loss of $17.1 million offset by $24.0 million of non-cash charges and a $4.6 million change in our net operating assets and liabilities. The non-cash charges primarily related to stock-based compensation expense, depreciation and amortization expense and deferred FI implementation costs. Changes in our net operating assets and liabilities were significantly impacted by the growth of the business as reflected by increases in revenue, Consumer Incentives and FI Share. The net change in our accounts receivable, Consumer Incentive liability and FI Share liability, including the impact from recoveries of development payments to a certain FI partner through FI Share payment reductions, was a positive cash flow impact of $1.4 million. This reflects our efforts to negotiate longer payment terms with our FI partners. Other changes in our net operating assets and liabilities include a $2.2 million increase in prepaid expenses and other assets, offset by a $5.6 million increase in accounts payable and accrued expenses.
Investing Activities
Our cash flows from investing activities are primarily driven by our investments in, and purchases of, property and equipment and costs to develop internal-use software. We expect that we will continue to use cash for investing activities as we continue to invest in and grow our business.
Investing activities used cash totaling $11.0 million and $10.1 million, in 2019 and 2020, respectively. Our investing cash flows during these periods primarily consisted of purchases of technology hardware and the capitalization of costs to develop internal-use software.
60
Table of Contents
Financing Activities
Our cash flows from financing activities have primarily been composed of borrowings and repayments under our debt facilities, proceeds from the issuance of common and preferred stock and payments for costs related to debt issuances and equity offerings.
Financing activities provided $206.4 million in cash in 2020. Our financing activities during this period primarily consisted of $223.1 million of net proceeds from our issuance of the Notes, of which we used $26.5 million to purchase the Capped Calls and proceeds from the exercise of options to purchase shares of common stock. The Capped Calls are intended to reduce potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be.
Financing activities provided $44.2 million in cash in 2019. We raised net proceeds of $61.3 million from our public equity offering and received $29.7 million in proceeds from the exercise of options and warrants to purchase shares of common stock. We also reduced our outstanding borrowings under our 2018 Line of Credit by $26.7 million and 2018 Term Loan by $20.0 million.
Contractual Obligations and Commitments
The following table summarizes our commitments to settle contractual obligations as of December 31, 2020 (in thousands):
Less than 1 Year
(2021) 1 to 3 Years
(2022 - 2023) 3 to 5 Years
(2024 - 2026) More than
5 Years
(thereafter) Total
Convertible senior notes (1)
$ 2,159 $ 4,600 $ 234,696 $ — $ 241,455
Finance leases (2)
$ 13 $ — $ — $ — $ 13
Operating leases (3)
5,097 7,373 2,418 — 14,888
Purchase obligations (4)
3,484 3,141 — — 6,625
Total $ 10,753 $ 15,114 $ 237,114 $ — $ 262,981
(1) Convertible senior notes includes total interest due of $11.5 million.
(2) Finance leases represent principal and interest payments.
(3) Operating lease obligations represent future minimum lease payments under our non-cancelable operating leases with an initial term in excess of one year.
(4) Purchase obligations include all legally binding contracts such as hardware, software, licenses and legally binding service contracts. Purchase orders that are not binding agreements are excluded from the table above.
The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table above does not include obligations under agreements that we can cancel without a significant penalty.
We have a minimum FI Share commitment with a certain FI partner totaling $10.0 million over a 12-month period following the completion of certain milestones, which were not met as of December 31, 2020. The table above does not include these obligations.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign exchange rates.
Interest Rate Risk
The interest rates under the 2018 Line of Credit are variable. Interest on advances under the 2018 Line of Credit bears an interest rate of the prime rate minus 0.50%, or 2.75%. As of December 31, 2020 the prime rate was 3.25% and a 10% increase in the current prime rate would, for example, result in a $0.2 million annual increase in interest expense if the maximum borrowable amount under the 2018 Line of Credit were outstanding for an entire year.
61
Table of Contents
Foreign Currency Exchange Risk
Both revenue and operating expense of Cardlytics UK Limited are denominated in British pounds, and we bear foreign currency risks related to these amounts. For example, if the average value of the British pound had been 10% higher relative to the U.S. dollar during the 2018, 2019 and 2020, our operating expense would have increased by $1.2 million, $1.4 million and $0.8 million, respectively. Our foreign currency risks related to expenses denominated in Indian rupees are insignificant.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
62
Table of Contents