Cardlytics, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CARDLYTICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 64 Consolidated Balance Sheets 66 Consolidated Statements of Operations 67 Consolidated Statements of Comprehensive Loss 68 Consolidated Statements of Stockholders’ Equity 69 Consolidated Statements of Cash Flows 70 Notes to Consolidated Financial Statements 72 63 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Cardlytics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Cardlytics, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2021, expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or in the accounts or disclosures to which it relates. Revenue – Refer to Note 4 to the consolidated financial statements Critical Audit Matter Description The Company’s revenue generated from its Cardlytics platform consists 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 the Company’s transaction-based fees, the Company uses automated systems to process and record its revenue transactions. We identified revenue as a critical audit matter because the Company’s systems to process and record revenue are highly automated. This required an increased extent of effort, including the need for us to involve professionals with expertise in information technology (IT), to identify, test, and evaluate the Company’s systems, software applications, and automated controls. 64 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s systems to process revenue transactions included the following, among others: • With the assistance of our IT specialists, we: ◦ Identified the relevant systems used to process revenue transactions and tested the general IT controls over each of these systems, including testing of user access controls, change management controls, and IT operations controls. ◦ Performed testing of initial system set-up and monitoring controls, system interface controls, automated controls, and data monitoring controls within the relevant revenue streams, as well as the controls designed to ensure the accuracy and completeness of revenue. • We tested internal controls within the relevant revenue business processes, including those in place to reconcile the information from various systems to the Company’s general ledger. • For a sample of revenue transactions, we performed detail transaction testing by agreeing the amounts recognized to source documents and testing the mathematical accuracy of the recorded revenue. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia March 1, 2021 We have served as the Company’s auditor since 2012. 65 Table of Contents CARDLYTICS, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value amounts) December 31, 2019 2020 Assets Current assets: Cash and cash equivalents $ 104,458 $ 293,239 Restricted cash 129 110 Accounts receivable, net 81,452 81,249 Other receivables 3,908 5,306 Prepaid expenses and other assets 5,783 5,687 Total current assets 195,730 385,591 Long-term assets: Property and equipment, net 14,290 13,865 Right-of-use assets under operating leases, net — 10,764 Intangible assets, net 389 447 Capitalized software development costs, net 3,815 6,299 Deferred FI implementation costs, net 8,383 3,785 Other long-term assets, net 1,706 1,786 Total assets $ 224,313 $ 422,537 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 1,229 $ 1,363 Accrued liabilities: Accrued compensation 8,186 7,582 Accrued expenses 6,018 5,502 FI Share liability 41,956 37,457 Consumer Incentive liability 19,861 24,290 Deferred revenue 1,127 349 Current operating lease liabilities — 4,718 Current finance lease liabilities 24 13 Total current liabilities 78,401 81,274 Long-term liabilities: Convertible senior notes, net — 174,011 Deferred liabilities 2,632 — Long-term operating lease liabilities — 9,381 Long-term finance lease liabilities 13 — Other long-term liabilities — 679 Total liabilities 81,046 265,345 Stockholders’ equity: Common stock, $0.0001 par value—100,000 shares authorized and 26,547 and 27,861 shares issued and outstanding as of December 31, 2019 and December 31, 2020, respectively 8 8 Additional paid-in capital 480,578 551,429 Accumulated other comprehensive income (loss) 1,312 ( 192 ) Accumulated deficit ( 338,631 ) ( 394,053 ) Total stockholders’ equity 143,267 157,192 Total liabilities and stockholders’ equity $ 224,313 $ 422,537 See notes to the consolidated financial statements 66 Table of Contents CARDLYTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) 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 administration 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 ) Adjustments to the carrying value of redeemable convertible preferred stock ( 157 ) — — Net loss attributable to common stockholders $ ( 53,199 ) $ ( 17,144 ) $ ( 55,422 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 2.79 ) $ ( 0.72 ) $ ( 2.04 ) Weighted-average common shares outstanding, basic and diluted 19,060 23,746 27,213 See notes to the consolidated financial statements 67 Table of Contents CARDLYTICS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Amounts in thousands) Year Ended December 31, 2018 2019 2020 Net loss $ ( 53,042 ) $ ( 17,144 ) $ ( 55,422 ) Other comprehensive income (loss): Foreign currency translation adjustments 926 ( 680 ) ( 1,504 ) Total comprehensive loss $ ( 52,116 ) $ ( 17,824 ) $ ( 56,926 ) See notes to the consolidated financial statements 68 Table of Contents CARDLYTICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Amounts in thousands) Additional Paid-In Capital Accumulated Other Comprehensive Income (loss) Accumulated Deficit Total Common Stock Shares Amount Balance – December 31, 2017 3,439 $ — $ 58,693 $ 1,066 $ ( 268,445 ) $ ( 208,686 ) Exercise of common stock options 356 — 1,959 — — 1,959 Exercise of common stock warrants 1,142 — — — — — Stock-based compensation — — 26,813 — — 26,813 Issuance of common stock 5,821 1 66,100 — — 66,101 Issuance of common stock warrants — — 17,774 — — 17,774 Issuance of ESPP 177 — 1,958 — — 1,958 Issuance of restricted stock 888 — — — — — Conversion of preferred stock to common stock 10,643 6 196,588 — — 196,594 Conversion of preferred stock warrants to common stock warrants — — 1,735 — — 1,735 Accretion of redeemable stock — — ( 157 ) — — ( 157 ) Other comprehensive income — — — 926 — 926 Net loss — — — — ( 53,042 ) ( 53,042 ) Balance – December 31, 2018 22,466 $ 7 $ 371,463 $ 1,992 $ ( 321,487 ) $ 51,975 Exercise of common stock options 716 — 12,052 — — 12,052 Exercise of common stock warrants 821 — 17,659 — — 17,659 Stock-based compensation — — 15,888 — — 15,888 Issuance of restricted stock 486 — — — — — Issuance of common stock 1,904 1 61,308 — — 61,309 Issuance of ESPP 154 — 2,208 — — 2,208 Other comprehensive loss — — — ( 680 ) — ( 680 ) Net loss — — — — ( 17,144 ) ( 17,144 ) Balance – December 31, 2019 26,547 $ 8 $ 480,578 $ 1,312 $ ( 338,631 ) $ 143,267 Exercise of common stock options 467 — 10,176 — — 10,176 Exercise of common stock warrants 9 — — — — — Stock-based compensation — — 32,872 — — 32,872 Issuance of restricted stock 779 — — — — — Issuance of ESPP 59 — 2,837 — — 2,837 Issuance of convertible notes — — 51,416 — — 51,416 Purchases of capped calls — — ( 26,450 ) — — ( 26,450 ) Other comprehensive loss — — — ( 1,504 ) — ( 1,504 ) Net loss — — — — ( 55,422 ) ( 55,422 ) Balance – December 31, 2020 27,861 $ 8 $ 551,429 $ ( 192 ) $ ( 394,053 ) $ 157,192 See notes to the consolidated financial statements 69 Table of Contents CARDLYTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2018 2019 2020 Operating activities Net loss $ ( 53,042 ) $ ( 17,144 ) $ ( 55,422 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Credit loss expense 130 1,201 1,196 Depreciation and amortization 3,282 4,535 7,826 Amortization of financing costs charged to interest expense 282 95 312 Amortization of right-of-use asset — — 3,766 Accretion of debt discount and non-cash interest expense 2,326 — 2,486 Stock-based compensation expense 26,790 15,851 32,396 Change in the fair value of warrant liabilities, net 6,760 — — Other non-cash expense (income), net 4,641 ( 570 ) ( 1,003 ) Amortization and impairment of deferred FI implementation costs 1,618 2,869 4,598 Settlement of paid-in-kind interest ( 8,353 ) — — Change in operating assets and liabilities: Accounts receivable ( 9,426 ) ( 26,018 ) ( 2,396 ) Prepaid expenses and other assets ( 2,275 ) ( 2,224 ) ( 65 ) Deferred FI implementation costs ( 9,250 ) — — Recovery of deferred FI implementation costs 5,380 4,625 — Accounts payable 911 ( 601 ) 16 Other accrued expenses 3,255 6,152 ( 1,238 ) FI Share liability 3,742 14,301 ( 4,499 ) Customer Incentive liability 4,234 8,385 4,429 Net cash (used in) provided by operating activities ( 18,995 ) 11,457 ( 7,598 ) Investing activities Acquisition of property and equipment ( 5,920 ) ( 8,277 ) ( 5,408 ) Acquisition of patents ( 23 ) ( 31 ) ( 76 ) Capitalized software development costs ( 1,399 ) ( 2,712 ) ( 4,633 ) Net cash used in investing activities ( 7,342 ) ( 11,020 ) ( 10,117 ) Financing activities Proceeds from issuance of debt 47,435 — — Principal payments of debt ( 52,581 ) ( 46,698 ) ( 23 ) Proceeds from issuance of convertible senior notes — — 223,100 Purchase of capped calls related to convertible senior notes — — ( 26,450 ) Proceeds from issuance of common stock 72,334 91,216 10,185 Equity issuance costs ( 1,949 ) ( 196 ) — Debt issuance costs ( 48 ) ( 143 ) ( 382 ) Net cash provided by financing activities 65,191 44,179 206,430 Effect of exchange rates on cash, cash equivalents and restricted cash ( 246 ) 101 47 Net increase in cash, cash equivalents and restricted cash 38,608 44,717 188,762 Cash, cash equivalents, and restricted cash — Beginning of period 21,262 59,870 104,587 Cash, cash equivalents, and restricted cash — End of period $ 59,870 $ 104,587 $ 293,349 See notes to the consolidated financial statements 70 Table of Contents CARDLYTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2018 2019 2020 Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheet: Cash and cash equivalents $ 39,623 $ 104,458 $ 293,239 Restricted cash 20,247 129 110 Total cash, cash equivalents and restricted cash — End of period $ 59,870 $ 104,587 $ 293,349 Supplemental schedule of non-cash investing and financing activities: Cash paid for interest $ 9,733 $ 1,266 $ 63 Amounts accrued for property and equipment $ 640 $ 456 $ 242 Amounts accrued for capitalized software development costs $ — $ 10 $ 68 See notes to the consolidated financial statements 71 Table of Contents CARDLYTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Cardlytics, Inc. (“we,” “our,” “us,” the “Company,” or “Cardlytics”) is a Delaware corporation and was formed on June 26, 2008. We operate 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 presents customers with offers to save money at a time when they are thinking of their finances. We also operate in the U.K. through Cardlytics UK Limited ("Cardlytics UK"), a wholly-owned and operated subsidiary registered as a private limited company in England and Wales, and in India through Cardlytics Services India Private Limited, a wholly-owned and operated subsidiary registered as a private limited company in India. Reverse Stock Split On January 26, 2018, our board of directors approved an amended and restated certificate of incorporation to (1) effect a reverse split on outstanding shares of our common stock and redeemable convertible preferred stock on a one-for-four basis (the “Reverse Stock Split”), (2) modify the threshold for automatic conversion of our preferred stock into shares of our common stock in connection with an initial public offering to eliminate the requirement of gross proceeds to the Company of not less than $ 70.0 million and (3) authorize us to issue up to 100,000,000 shares of common stock, $ 0.0001 par value per share and 25,000,000 shares of redeemable convertible preferred stock, $ 0.0001 par value per share (collectively, the “Charter Amendment”). The authorized shares and par values of our common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. The Charter Amendment was approved by the Company’s stockholders on January 26, 2018 and became effective upon the filing of the Charter Amendment with the State of Delaware on January 26, 2018. All issued and outstanding common stock and preferred stock and related share and per share amounts contained in these financial statements have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented. 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. Upon the closing of the IPO, all of the outstanding shares of redeemable convertible preferred stock automatically converted into shares of common stock and all warrants to purchase shares of redeemable convertible preferred stock were automatically converted into warrants to purchase shares of common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock or warrants to purchase shares of redeemable convertible preferred stock outstanding. Upon the completion of our IPO, our amended and restated certificate of incorporation authorized us to issue up to 100,000,000 shares of common stock, $ 0.0001 par value per share, and 10,000,000 shares of preferred stock, $ 0.0001 par value per share, all of which shares of preferred stock are undesignated. Our board of directors may establish the rights and preferences of the preferred stock from time to time. 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. 72 Table of Contents During 2018, 2019 and 2020, we 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. 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"). Refer to Note 7—Debt and Financing Arrangements for further details 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include revenue recognition, internal-use software development costs, income taxes, stock-based compensation, income tax valuation allowance, contingencies and changes in fair value of our preferred stock warrants and common stock warrants. We base our estimates on historical experience and also on assumptions that we believe are reasonable. Changes in facts or circumstances may cause us to change our assumptions and estimates in future periods and it is possible that actual results could differ from our current or revised future estimates. Restructuring During the first quarter of 2020, we began a strategic shift within our organization to increase productivity and optimize performance. This plan has resulted in severance and medical benefits totaling $1.3 million during the year ended December 31, 2020. We recognize these costs when the extent of our actions is determined and the costs can be estimated. These charges are reflected on our consolidated statement of operations for the year ended December 31, 2020, as follows: $1.1 million in sales and marketing expense, $0.1 million in general and administrative expense and $0.1 million in research and development expense. Severance and medical benefits of $0.9 million have been paid to former employees through December 31, 2020. Foreign Currency The functional currency of our foreign wholly-owned subsidiaries is the local currency. We translate the financial statements of these subsidiaries into U.S. dollars each reporting period for purposes of consolidation. Assets and liabilities are translated at the period-end currency exchange rates, certain equity accounts are translated at historical exchange rates and income and expense amounts are translated at average currency exchange rates in effect for the period. The effect of these translation adjustments is reported in a separate component of stockholders’ deficit titled accumulated other comprehensive income. We are also subject to gains and losses from foreign currency denominated transactions and the remeasurement of foreign currency denominated balance sheet accounts, both of which are included in other (expense) income, net in the accompanying consolidated statements of operations. We recorded a foreign currency loss (gain) totaling $1.2 million, $(0.8) million and $(1.6) million in 2018, 2019 and 2020, respectively. FI Share and Other Third-Party Costs 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"). FI Share and other third-party costs consist primarily of the FI Share that we pay our FI partners, media and data costs, and deferred FI implementation costs incurred pursuant to our agreements with certain FI partners, any incremental costs due to FIs as part of FI Share commitments, as well as a non-cash expense 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. 73 Table of Contents Delivery Costs Delivery costs consist primarily of personnel-related costs of our campaign, data operations and production support teams, including salaries, benefits, bonuses and payroll taxes, as well as stock-based compensation expense. Delivery costs also include hosting facility costs, internally developed and purchased or licensed software costs, outsourcing costs and professional services costs. Impacts of COVID-19 Pandemic The COVID–19 pandemic resulted in a global slowdown of economic activity that decreased demand for a broad variety of goods and services and consumer discretionary spending, including spending by consumers with our marketers, and such decreased demand is likely to continue. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. Actual results could differ from those estimates and any such differences may be material to our financial statements. 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. Accounts Receivable Accounts receivable are carried at the original invoiced amount less an allowance for credit losses (formerly allowance for doubtful accounts), determined based on the probability of future collection. When we become aware of circumstances that may decrease the likelihood of collection, we record a specific allowance against amounts due, which reduces the receivable to the amount that we believe will be collected. For all other accounts receivable, we determine the adequacy of the allowance for credit losses based on historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with specific accounts. The following table presents changes in the allowance for credit losses (in thousands): Year Ended December 31, 2018 2019 2020 Beginning balance $ 105 $ 169 $ 255 Credit loss expense 130 1,201 1,196 Write-offs, net of recoveries ( 66 ) ( 1,115 ) ( 864 ) Ending balance $ 169 $ 255 $ 587 Unbilled receivables were $ 0.4 million, $ 0.6 million and $ 0.5 million as of December 31, 2018, 2019 and 2020, respectively. An unbilled receivable represents revenue earned and recognized from customer activity that was not billed prior to the end of the reporting period. Unbilled receivables are included in accounts receivable, net on our consolidated balance sheets. Property and Equipment Property and equipment are stated at cost. Expenditures for maintenance and repairs are expensed as incurred, while betterments that materially extend the life of an asset are capitalized. The cost of assets sold, retired or otherwise disposed of, and the related accumulated depreciation, are eliminated from the accounts and any resulting gain or loss is recognized. Depreciation of property and equipment is determined using the straight-line method over the estimated useful lives of the applicable assets, which are as follows: Computer equipment: 2–3 years Furniture and fixtures: 5 years Leasehold improvements: Lesser of estimated useful life or life of the lease 74 Table of Contents Intangible Assets Intangible assets are recorded at cost and consist of costs incurred for software patent applications. As of December 31, 2020, we had four issued patents and are pursuing ten additional patents relating to our software. We received approval for three patents in 2013 and one patent in 2018 and began amortizing the costs of obtaining these patents over the estimated remaining lives of the patents. If a patent application is rejected or if we abandon efforts to obtain a new patent, all deferred patent costs are expensed immediately. Deferred patent costs related to patents for which we have not yet obtained approval totaled $ 0.3 million and $ 0.3 million as of December 31, 2019 and 2020, respectively. Based on deferred patent costs as of December 31, 2020, the related amortization expense will be less than $0.1 million in each of the next five years. Intangible assets are as follows (in thousands): December 31, 2019 2020 Deferred patent costs, gross $ 448 $ 518 Less accumulated amortization ( 59 ) ( 71 ) Deferred patent costs, net $ 389 $ 447 Internal-Use Software Development Costs Capitalized software development costs consist of costs incurred in the development of internal-use software, primarily associated with the development and enhancement of our offer management system and offer placement system. We capitalize the costs of software developed or obtained for internal use in accordance with ASC Topic 350-40, Internal Use Software . We begin to capitalize our costs upon completion of the preliminary project stage. We consider the preliminary project stage to be complete and the application development stage to have begun when preliminary development efforts are successfully completed, management has authorized and committed project funding and it is probable that the project will be completed and the software will be used as intended. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. Costs incurred in the preliminary project stage and post-implementation operation stages are expensed as incurred and recorded in research and development expense on our consolidated statements of operations. During 2018, 2019 and 2020, we capitalized the implementation of a new billing system as well as development costs for enhancements to our offer management system totaling $1.6 million, $2.6 million and $4.3 million, respectively. During the first quarter of 2020, we redesigned certain elements of this project and wrote off development costs totaling $1.0 million recognized in depreciation and amortization expense on our consolidated statement of operations. Capitalized software development costs are as follows (in thousands): December 31, 2019 2020 Capitalized software development costs, gross $ 5,537 $ 9,230 Less accumulated amortization ( 1,722 ) ( 2,931 ) Capitalized software development costs, net $ 3,815 $ 6,299 Debt Issuance Costs Costs incurred to obtain loans, other than lines of credit, are recorded as a reduction of the carrying amount of the related liability and amortized over the applicable loans’ life using the effective interest method. Costs incurred to obtain lines of credit are capitalized and included in other long-term assets on our consolidated balance sheets and amortized ratably over the term of the arrangement. As described in Note 7—Debt and Financing Arrangements, we entered into a 2018 Loan Facility in 2018 and deferred $ 0.1 million of debt issuance costs associated with obtaining the 2018 Loan Facility and deferred $ 0.1 million of unamortized debt issuance costs attributed to our 2016 Line of Credit and 2016 Term Loan. We recognized a $ 0.9 million loss on extinguishment of debt related to the unamortized discount and unamortized debt issuance costs associated with our 2016 Term Loan and 2016 Line of Credit. This expense is included within other (expense) income, net on our consolidated statements of operations and is presented in other non-cash expenses on our consolidated statements of cash flows. 75 Table of Contents Further, as described in Note 7—Debt and Financing Arrangements, on September 22, 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”), including the exercise in full of the initial purchasers’ option to purchase up to an additional $30.0 million principal amount of the Notes. The net proceeds from this offering were $ 222.7 million, after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by us. In accounting for the $7.3 million issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values. Amortization of debt issuance costs included in interest expense, net totaled $0.3 million, $0.1 million and $0.3 million in 2018, 2019 and 2020, respectively. Deferred debt issuance costs related to our lines of credit included in other long-term assets are as follows (in thousands): December 31, 2019 2020 Debt issuance costs, gross $ 388 $ 412 Less accumulated amortization ( 271 ) ( 377 ) Debt issuance costs, net $ 117 $ 35 Deferred debt issuance costs related to our Notes included in debt are as follows (in thousands): December 31, 2019 2020 Debt issuance costs, gross $ — $ 5,596 Less accumulated amortization — ( 217 ) Debt issuance costs, net $ — $ 5,379 Future amortization of debt issuance costs is as follows (in thousands): Years Ending December 31, Amortization 2021 $ 909 2022 1,006 2023 1,151 2024 1,312 2025 1,036 Total $ 5,414 76 Table of Contents Deferred Offering Costs Deferred offering costs consist of incremental costs directly attributable to equity offerings. Deferred offering costs are included in other long-term assets on our consolidated balance sheets. Upon completion of an offering, these amounts are offset against the proceeds of the offering. Deferred offering costs is as follows (in thousands): Year Ended December 31, 2018 2019 2020 Beginning balance $ 3,144 $ — $ — Deferred costs 1,135 196 — Recognized against offering proceeds ( 4,279 ) ( 196 ) — Ending balance $ — $ — $ — Advertising We expense advertising costs as incurred. These costs are included in sales and marketing expense on our consolidated statements of operations. Advertising costs include direct marketing costs such as print advertisements, market research, direct mail, public relations and trade show expenses and totaled $ 0.9 million, $ 1.4 million and $ 1.0 million in 2018, 2019 and 2020, respectively. Stock-Based Compensation We measure and recognize compensation expense based on the estimated fair value of the award on the grant date. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis when the only condition to vesting is continued service. We recognize the fair value of awards that contain performance conditions based upon the probability of the performance conditions being met. Expense for awards with performance conditions are estimated and adjusted on a quarterly basis based upon our assessment of the probability that the performance condition will be met. We recognize the fair value of awards that contain market conditions over the derived service period. Forfeitures are accounted for when they occur. Refer to Note 8—Stock-based Compensation for additional information regarding our specific award plans and estimates and assumptions used to determine fair value. Redeemable Convertible Preferred Stock Warrant Liability Warrants to purchase shares of our redeemable convertible preferred stock are accounted for as derivative liabilities in accordance with ASC Topic 815, Derivatives and Hedging due to the terms of the warrants and related agreements. We have determined that these warrants do not meet the scope exception of a contract indexed to our stock because of fair value protections contained in agreements governing our redeemable convertible preferred stock as described in Note 10—Redeemable Convertible Preferred Stock. We record preferred stock warrant liabilities on our consolidated balance sheets at their fair value. We record the changes in fair value of such instruments as non-cash gains or losses on our statements of operations. Upon the consummation of our IPO, all of the outstanding warrants to purchase shares of redeemable convertible preferred stock were automatically converted into warrants to purchase shares of common stock. Refer to Note 12—Fair Value Measurements for additional information. Common Stock Warrant Liability In connection with the Series G Stock financing, we issued warrants to purchase shares of our common stock that are accounted for as liabilities in accordance with ASC Topic 480, Distinguishing Liabilities From Equity due to the terms of the warrants and related agreements. We record these common stock warrant liabilities on our consolidated balance sheets at their fair value. We record the changes in fair value of such instruments as non-cash gains or losses in our statements of operations . Refer to Note 12—Fair Value Measurements for additional information. 77 Table of Contents Fair Value of Financial Instruments When required by GAAP, assets and liabilities are reported at fair value on our consolidated financial statements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Valuation inputs are arranged in a hierarchy that consists of the following levels: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. • Level 2 inputs are inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 inputs are unobservable inputs for the asset or liability. Our nonfinancial assets that we recognize or disclose at fair value on our consolidated financial statements on a nonrecurring basis include property and equipment, intangible assets, capitalized software development costs and deferred FI implementation costs. The fair values for these assets are evaluated when events or changes in circumstances indicate the carrying value may not be recoverable. Refer to Note 12—Fair Value Measurements for information regarding the fair value of our financial instruments. 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 net 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. 78 Table of Contents 3. ACCOUNTING STANDARDS Recently Adopted Accounting Pronouncements In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) to increase the transparency and comparability among organizations as it relates to lease assets and lease liabilities, by requiring lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months, with exceptions. Effective January 1, 2020, we early adopted this guidance using a modified retrospective approach, which was required for all leases that exist at or commence after the date of the initial application with an option to use certain practical expedients. We have elected to use these practical expedients, which allow us to treat all components of our leases as a single component, not to reassess lease classification or whether an arrangement is or contains a lease and not to reassess its initial accounting for direct lease costs. During the first quarter of 2020, we recorded right-of-use assets of $ 10.3 million, lease liabilities of $ 13.5 million and eliminated deferred rent liabilities of $3.2 million. These amounts represent right-of-use assets of $7.4 million, lease liabilities of $10.6 million and deferred rent liabilities of $3.2 million as of the adoption date of ASU 2016-02 and right-of-use assets and lease liabilities of $2.9 million, respectively, for office space entered into during the quarter. The adoption of this guidance did not have a significant impact on our consolidated statements of operations or cash flows. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which is intended to provide more decision-useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses , and in April 2019, the FASB issued ASU No. 2019-04, C odification Improvements to Topic 326, Financial Instruments – Credit Losses , Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments . These ASUs provide supplemental guidance and clarification to ASU 2016-13 and must be adopted concurrently with the adoption of ASU 2016-13, cumulatively referred to as “Topic 326.” Effective January 1, 2020, we adopted this guidance. The adoption of this guidance did not have a material effect on our consolidated financial statements. On January 1, 2020, we adopted ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement , to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The adoption of this guidance did not have a material effect on our consolidated financial statements. On January 1, 2020, we adopted ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract , which addresses the accounting for implementation, setup and other upfront costs incurred in a hosting arrangement. The adoption of this guidance did not have a material effect on our consolidated financial statements. On January 1, 2019, we early adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , using the modified retrospective method, as permitted under ASU 2014-09. The adoption of ASU 2014-09 did not result in a material change in the timing or amount of revenue recognized, nor did it result in the capitalization of incremental contract costs. Accordingly, there was no cumulative effect adjustment recorded in the consolidated financial statements upon adoption. On January 1, 2019, we adopted ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The adoption of this guidance had no impact on our consolidated financial statements. 79 Table of Contents Recently Issued Accounting Pronouncements In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion Options (“Subtopic 470-20”) and Derivatives and Hedging—Contracts in Entity’s Own Equity (“Subtopic 815-40”) , which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. ASU 2020-06 also improves and amends the related Earnings Per Share guidance for both Subtopics. The ASU is part of the FASB's simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU 2020-06 will be effective for annual reporting periods beginning after December 15, 2021. Early adoption is permitted, but not before annual reporting periods beginning after December 15, 2020. We are currently evaluating the impact of the new guidance on our consolidated financial statements. 4. REVENUE We have generated revenue through the sale of two categories of solutions that leverage our intelligence platform: (1) our proprietary native banking channel, the Cardlytics platform, and (2) our Other Platform Solutions. We have generated substantially all of our revenue from sales of the Cardlytics platform since inception. Our Other Platform Solutions enabled marketers and marketing service providers to leverage the power of purchase intelligence outside the bank channel. We have shifted the majority of our efforts and resources to support the growth of the Cardlytics platform. As a result, we have not and do not expect to generate substantial, if any, revenue from Other Platform Solutions for the foreseeable future. The Cardlytics Platform The Cardlytics platform is our proprietary native bank advertising channel that enables marketers to reach consumers through the FIs' trusted and frequently visited digital banking channels. Working with the marketer, we design a campaign that targets customers 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"). The Cardlytics platform is priced predominantly in two ways: (1) Cost per Served Sale (“CPS”), and (2) Cost per Redemption (“CPR”). • CPS. Our primary pricing model is CPS, which we created to meet the media buying preferences of marketers. We generate revenue by charging a percentage, which we refer to as the CPS Rate, of all purchases from the marketer by consumers (1) who are served marketing and (2) subsequently make a purchase from the marketer during the campaign period, regardless of whether consumers select the marketing and thereby becomes eligible to earn the applicable Consumer Incentive. We set CPS Rates for marketers based on our expectation of the marketer’s return on spend for the relevant campaign. Additionally, we set the amount of the Consumer Incentives payable for each campaign based on our estimation of our ability to drive incremental sales for the marketer. We seek to optimize the level of Consumer Incentives to retain a greater portion of billings. However, if the amount of Consumer Incentives exceeds the amount of billings that we are paid by the applicable marketer we are still responsible for paying the total Consumer Incentive. This has occurred infrequently and has been immaterial in amount for each of the periods presented. In some instances, we may also charge the marketer the Consumer Incentive, in which case the marketer determines the level of Consumer Incentive for the campaign. • CPR. Under our CPR pricing model, marketers specify and fund the Consumer Incentive and pay us a separate negotiated, fixed marketing fee, which we refer to as the CPR Fee, for each purchase that we generate. We generate revenue if the consumer (1) is served marketing, (2) selects the marketing and thereby becomes eligible to earn the applicable Consumer Incentive and (3) makes a qualifying purchase from the marketer during the campaign period. We set the CPR Fee for marketers based on our estimation of the marketers’ return on spend for the relevant campaign. The CPR Fee is either a percentage of qualifying purchases or a flat amount. In some instances, we may solely charge the marketer the CPR Fee, in which case we determine the level of Consumer Incentive for the campaign. 80 Table of Contents The following table summarizes revenue by pricing model (in thousands): Year Ended December 31, 2018 2019 2020 Cost per Served Sale $ 101,087 $ 143,754 $ 131,045 Cost per Redemption 43,389 63,295 53,838 Other 6,208 3,381 2,009 Revenue $ 150,684 $ 210,430 $ 186,892 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 service, 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. 81 Table of Contents 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. Contract Costs Given the short-term nature of our marketing campaigns, all contract costs are expensed as incurred since the expected period of benefit is less than one year. Costs to fulfill a contract include immaterial costs to set up a campaign that we expense as incurred due to the short-term nature of our marketing campaigns 5. LEASES Effective January 1, 2020, we early adopted ASU 2016-02, Leases (Topic 842) . This standard requires us to recognize a right-of-use asset and a lease liability for all leases with an initial term in excess of twelve months. The asset reflects the present value of unpaid fixed lease payments coupled with initial direct costs, prepaid lease payments, and lease incentives. The amount of the lease liability is calculated as the present value of unpaid fixed lease payments. We evaluate each of our lease and service arrangements at inception to determine if the arrangement is, or contains, a lease and the appropriate classification of each identified lease. A lease exists if we obtain substantially all of the economic benefits of and have the right to control the use of an asset for a period of time. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease agreement. Lease costs are recognized as expense on a straight-line basis over the lease term. We consider a termination or renewal option in the determination of the lease term when it is reasonably certain that we will exercise that option. We adopted ASU 2016-02 using a modified retrospective approach and did not restate comparative periods. We elected to take the package of practical expedients allowing us to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We have elected to account for all components in a contract as part of the single lease component to which they are related. Significant assumptions and judgments in calculating the right-of-use assets and lease liability include the determination of the applicable borrowing rate for each lease. Because our leases generally do not provide a readily determinable implicit interest rate, we use an incremental borrowing rate to measure the lease liability and associated right-of-use asset at the lease commencement date. The incremental borrowing rate used is a fully collateralized rate that considers our credit rating, market conditions and the term of the lease at the lease commencement date. During the first quarter of 2020, we recorded right-of-use assets of $ 10.3 million, lease liabilities of $ 13.5 million and eliminated deferred rent liabilities of $ 3.2 million. These amounts represent right-of-use assets of $7.4 million, lease liabilities of $10.6 million and deferred rent liabilities of $3.2 million as of the adoption date of ASU 2016-02 and right-of-use assets and lease liabilities of $2.9 million, respectively, for office space entered into during the quarter. As of the adoption date, our office and data center leases have remaining lease terms ranging from one to six years. During 2020, we recorded additional right-of-use assets and lease liabilities of $1.0 million for data center equipment leases entered into during the year. We also renewed certain data center lease agreements resulting in a lease modification and the recognition of additional right-of-use assets and lease liabilities of $ 2.2 million. During 2020, we made cash payments of $4.0 million for operating leases which are included in cash flows (used in) provided by operating activities in our consolidated statement of cash flows. The following table summarizes activity related to our leases (in thousands): Year Ended December 31, 2020 Operating lease expense $ 4,078 Variable lease expense 847 Short-term lease expense 232 82 Table of Contents The following table presents our weighted average borrowing rate and weighted average lease term: December 31, 2020 Weighted average borrowing rate 3.4 % Weighted average remaining lease term (years) 3.25 The following table summarizes future maturities of lease liabilities as of December 31, 2020 (in thousands): Amount 2021 $ 5,097 2022 4,681 2023 2,692 2024 1,807 2025 611 Total lease payments 14,888 Imputed interest 789 Total operating lease liabilities $ 14,099 The following table summarizes future payments for operating leases as of December 31, 2019, prior to our adoption of ASU 2016-02 (in thousands): Minimum Lease Payments 2020 $ 3,040 2021 2,759 2022 2,808 2023 1,847 2024 1,807 Thereafter 611 Total $ 12,872 6. PROPERTY AND EQUIPMENT Significant components of property and equipment are as follows (in thousands): December 31, 2019 2020 Computer equipment $ 21,269 $ 27,105 Leasehold improvements 6,960 6,770 Furniture and fixtures 1,557 1,112 Construction in progress 1,125 125 Property and equipment, gross 30,911 35,112 Less accumulated depreciation ( 16,621 ) ( 21,247 ) Property and equipment, net $ 14,290 $ 13,865 83 Table of Contents Assets acquired under finance leases, included within computer equipment, are as follows (in thousands): December 31, 2019 2020 Finance lease assets, gross $ 1,096 $ 557 Less accumulated depreciation ( 1,067 ) ( 548 ) Finance lease assets, net $ 29 $ 9 Depreciation expense was $ 3.0 million, $ 4.0 million and $ 5.6 million in 2018, 2019 and 2020, respectively. 84 Table of Contents 7. DEBT AND FINANCING ARRANGEMENTS Our debt consists of the following (in thousands): December 31, 2019 2020 Convertible senior notes, net $ — $ 174,011 Finance leases 37 13 Total debt 37 174,024 Less current portion of long-term debt ( 24 ) ( 13 ) Long-term debt, net of current portion $ 13 $ 174,011 Accrued interest is included within accrued expenses in our consolidated balance sheet. We had no accrued interest on debt as of December 31, 2019 and $0.6 million of accrued interest as of December 31, 2020. 2020 Convertible Senior Notes On September 22, 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”), including the exercise in full of the initial purchasers’ option to purchase up to an additional $30.0 million principal amount of the Notes. The Notes were issued pursuant to an indenture, dated September 22, 2020 (the “Indenture”), between us and U.S. Bank National Association, as trustee. The Notes are general senior, unsecured obligations and will mature on September 15, 2025, unless earlier converted, redeemed or repurchased. The Notes bear interest at a rate of 1.00 % per year, payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2021. The Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding June 15, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the Notes on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of common stock and the conversion rate for the Notes on each such trading day; (3) if we call such Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events as set forth in the Indenture. On or after June 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances. Upon conversion, we may satisfy our conversion obligation by paying and/or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at our election, in the manner and subject to the terms and conditions provided in the Indenture. We currently intend to settle the principal amount of the Notes with cash. The conversion rate for the Notes will initially be 11.7457 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $ 85.14 per share of common stock. The conversion rate for the Notes is subject to adjustment under certain circumstances in accordance with the terms of the Indenture. In addition, following certain corporate events that occur prior to the maturity date of the Notes or if we deliver a notice of redemption in respect of the Notes, we will, in certain circumstances, increase the conversion rate of the Notes for a holder who elects to convert its Notes in connection with such a corporate event or convert its notes called for redemption during the related redemption period (as defined in the Indenture), as the case may be. We may not redeem the Notes prior to September 20, 2023. We may redeem for cash all or any portion of the Notes, at our option, on or after September 20, 2023 and prior to the 36th scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common stock has been at least 130 % of the conversion price for the Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes. If we elect to redeem less than all of the Notes, at least $75.0 million aggregate principal amount of Notes must be outstanding and not subject to redemption as of the relevant redemption notice date. 85 Table of Contents If we undergo a Fundamental Change (as defined in the Indenture), then, except as set forth in the Indenture, holders may require, subject to certain exceptions, us to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving us after which the Notes become automatically due and payable. The following events are considered “events of default” under the Indenture: • default in any payment of interest on any Note when due and payable and the default continues for a period of 30 days; • default in the payment of principal of any Note when due and payable at its stated maturity, upon optional redemption, upon any required repurchase, upon declaration of acceleration or otherwise; • failure by us to comply with our obligation to convert the Notes in accordance with the Indenture upon exercise of a holder’s conversion right, and such failure continues for three business days; • failure by us to give a fundamental change notice, notice of a make-whole fundamental change or notice of a specified corporate event, in each case when due and such failure continues for one business day; • failure by us to comply with its obligations in respect of any consolidation, merger or sale of assets; • failure by us to comply with any of our other agreements in the Notes or the Indenture for 60 days after written notice of such failure from the trustee or the holders of at least 25% in principal amount of the Notes then outstanding; • default by us or any of our significant subsidiaries (as defined in the Indenture) with respect to any mortgage, agreement or other instrument under which there may be outstanding, or by which there may be secured or evidenced, any indebtedness for money borrowed in excess of $35,000,000 (or its foreign currency equivalent), in the aggregate of us and/or any such significant subsidiary, whether such indebtedness now exists or shall hereafter be created, (i) resulting in such indebtedness becoming or being declared due and payable prior to its stated maturity date or (ii) constituting a failure to pay the principal of any such indebtedness when due and payable (after the expiration of all applicable grace periods) at its stated maturity, upon required repurchase, upon declaration of acceleration or otherwise, and in the cases of clauses (i) and (ii), such acceleration shall not have been rescinded or annulled or such failure to pay or default shall not have been cured or waived, or such indebtedness is not paid or discharged, as the case may be, within 30 days after written notice to us by the trustee or to us and the trustee by holders of at least 25% in aggregate principal amount of the Notes then outstanding in accordance with the Indenture; and • certain events of bankruptcy, insolvency or reorganization of us or any of our significant subsidiaries. If certain bankruptcy and insolvency-related events of default with respect to us occur, the principal of, and accrued and unpaid interest on, all of the then outstanding Notes shall automatically become due and payable. If an event of default with respect to the Notes, other than certain bankruptcy and insolvency-related events of default with respect to us, occurs and is continuing, the trustee by notice to us or the holders of at least 25% in principal amount of the outstanding Notes by notice to us and the trustee, may, and the trustee at the request of such holders shall, declare the principal of, and accrued and unpaid interest on, all of the then-outstanding Notes to be due and payable. Notwithstanding the foregoing, the Indenture provides that, to the extent we so elect, the sole remedy for an event of default relating to certain failures by us to comply with certain reporting covenants in the Indenture will, for the first 365 days after the occurrence of such event of default, consist exclusively of the right to receive additional interest on the Notes at a rate equal to 0.25% per annum of the principal amount of the Notes outstanding for each day during the first 180 days after the occurrence of such an event of default and 0.50% per annum of the principal amount of the Notes outstanding from the 181st day to, and including, the 365th day following the occurrence of such event of default, as long as such event of default is continuing (in addition to any additional interest that may accrue as a result of a registration default (as set forth in the Indenture). The Indenture provides that we shall not consolidate with or merge with or into, or sell, convey, transfer or lease all or substantially all of the consolidated properties and assets of our subsidiaries, taken as a whole, to, another person (other than any such sale, conveyance, transfer or lease to one or more of our direct or indirect wholly owned subsidiaries), unless: (i) the resulting, surviving or transferee person (if not us) is a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia, and such corporation (if not us) expressly assumes by supplemental indenture all of our obligations under the Notes and the Indenture; and (ii) immediately after giving effect to such transaction, no default or event of default has occurred and is continuing under the Indenture. The net proceeds from this offering were $ 222.7 million, after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by us. We used $ 26.5 million of the net proceeds to pay the cost of the capped call transactions described below. 86 Table of Contents The Notes are accounted for in accordance with FASB ASC Subtopic 470-20, Debt with Conversion and Other Options . Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument was computed using a discount rate of 6.50%, which was determined by estimating the fair value of a similar liability without the conversion option using Level 3 inputs. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective term of the Notes using the effective interest rate method. The equity component is recorded in Additional Paid-in Capital and is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values. The net carrying amount of the liability component of the Notes is as follows (in thousands): December 31, 2020 Principal $ 230,000 Minus: Unamortized debt discount ( 50,610 ) Minus: Unamortized issuance costs ( 5,379 ) Net carrying amount of the liability component $ 174,011 The net carrying amount of the equity component of the Notes is as follows (in thousands): December 31, 2020 Proceeds allocated to the conversion options (debt discount) $ 53,096 Minus: Issuance costs ( 1,680 ) Net carrying amount of the equity component $ 51,416 Interest expense recognized related to the Notes is as follows (in thousands): Year Ended December 31, 2020 Contractual interest expense (due in cash) $ 626 Amortization of debt discount 2,486 Amortization of debt issuance costs 217 Total interest expense related to the Notes $ 3,329 Capped Call Transactions In connection with the issuance of the Notes, we entered into privately negotiated capped call transactions (the "Capped Calls") with an affiliate of one of the initial Note purchasers and certain other financial institutions. 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. The Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $ 26.5 million incurred to purchase the Capped Calls was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheet. The Capped Calls each have an initial strike price of $85.14 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have an initial cap price of $128.51 per share, subject to certain adjustments. 87 Table of Contents 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. 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. 2016 Line of Credit In September 2016, we entered into a $ 50.0 million loan and security agreement ("2016 Line of Credit") maturing on March 14, 2019. The 2016 Line of Credit facility was repaid and terminated in May 2018 in connection with obtaining our 2018 Loan Facility. We recognized a $ 0.1 million loss on extinguishment of debt related to the unamortized debt issuance costs. This expense is included within other income (expense), net in our consolidated statements of operations and is presented in other non-cash expenses on our consolidated statement of statement of cash flows. 2016 Term Loan In July 2016, we entered into a $ 24.0 million credit agreement ("2016 Term Loan") maturing on July 21, 2019. The 2016 Term Loan was repaid and terminated in May 2018 in connection with obtaining our 2018 Loan Facility. We recognized a $ 0.8 million loss on extinguishment of debt related to the unamortized discount and unamortized debt issuance costs. This expense is included within other income (expense), net in our consolidated statements of operations and is presented in other non-cash expenses on our consolidated statement of statement of cash flows. 88 Table of Contents Future Payments Aggregate future payments of principal due upon maturity are as follows (in thousands): Years Ending December 31, Finance leases Convertible Senior Notes 2021 $ 13 $ — 2022 — — 2023 — — 2024 — — 2025 — 230,000 Total debt $ 13 $ 230,000 89 Table of Contents 8. STOCK-BASED COMPENSATION In January 2018, our board of directors and stockholders approved an increase in the total number of shares of common stock issuable under our 2008 Stock Plan ("2008 Plan") to 4,020,000 shares. Our board of directors has adopted and our stockholders have approved our 2018 Equity Incentive Plan ("2018 Plan"). Our 2018 Plan became effective on February 8, 2018, the date our registration statement in connection with our IPO was declared effective. We do not expect to grant any additional awards under the 2008 Plan. Any awards granted under the 2008 Plan will remain subject to the terms of our 2008 Plan and applicable award agreements. Initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under the 2018 Plan was the sum of (i) 1,875,000 shares plus (ii) 61,247 shares reserved, and remaining available for issuance, under our 2008 Plan at the time our 2018 Plan became effective and (iii) the number of shares subject to stock options or other stock awards granted under our 2008 Plan that would have otherwise returned to our 2008 Plan (such as upon the expiration or termination of a stock award prior to vesting). As of December 31, 2020, there were 1,222,316 shares of our common stock reserved for issuance under our 2018 Plan. The number of shares of our common stock reserved for issuance under our 2018 Plan will automatically increase on January 1 of each year, beginning on January 1, 2019 and continuing through and including January 1, 2028, by 5 % of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our board of directors. Accordingly, the number of shares of our common stock reserved for issuance under our 2018 Plan increased by 1,393,040 shares on January 1, 2021. The 2018 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards and other forms of equity compensation, which are collectively referred to as stock awards. Additionally, the 2018 Plan provides for the grant of performance cash awards. The following table summarizes the allocation of stock-based compensation on the consolidated statements of operations (in thousands): Year Ended December 31, 2018 2019 2020 Delivery costs $ 633 $ 711 $ 1,181 Sales and marketing expense 9,358 4,248 9,857 Research and development expense 4,087 1,619 4,713 General and administration expense 12,712 9,273 16,645 Total stock-based compensation expense $ 26,790 $ 15,851 $ 32,396 During 2018, 2019 and 2020, we capitalized less than $ 0.1 million, less than $ 0.1 million and $0.5 million, respectively, of stock-based compensation expense for software development. Common Stock Options The term of each option to purchase shares of our common stock pursuant to the Stock Plan is set by our board of directors or a committee thereof. Option awards are generally granted with an exercise price not less than the fair value per share of our common stock at the grant date. Option awards generally vest over four years and expire 10 years following the date of grant. 90 Table of Contents A summary of common stock option activity is as follows (in thousands, except per share amounts): Shares Weighted-Average Exercise Price Per Share Weighted Average Contractual Life (in years) Aggregate Intrinsic Value (1) (in thousands) Outstanding - December 31, 2017 2,514 $ 18.42 Granted 29 24.24 Exercised ( 357 ) 6.25 Forfeited ( 197 ) 24.10 Cancelled ( 215 ) 16.60 Outstanding - December 31, 2018 1,774 $ 20.55 Granted 39 20.64 Exercised ( 716 ) 16.84 Forfeited ( 31 ) 23.95 Cancelled ( 66 ) 22.37 Outstanding - December 31, 2019 1,000 $ 22.99 Granted — — Exercised ( 467 ) 21.78 $ 29,523 Forfeited ( 19 ) 27.83 Cancelled ( 1 ) 21.89 Outstanding - December 31, 2020 513 $ 23.91 5.67 $ 61,009 Exercisable - December 31, 2020 480 $ 23.72 5.62 $ 57,126 (1) For options exercised during the year, the aggregate intrinsic value represents the total pre-tax intrinsic value received by option holders based on the closing price of our common stock as reported on the Nasdaq Global Market on the exercise date. For options outstanding and exercisable at December 31, 2020, the aggregate intrinsic value represents the total pre-tax intrinsic value based on the $ 142.77 closing price of our common stock as reported on the Nasdaq Global Market on December 31, 2020 that would have been received by option holders had all in-the-money options been exercised on that date. The total fair value of options vested during 2018, 2019 and 2020 was approximately $ 6.0 million, $ 4.8 million and $2.3 million respectively. As of December 31, 2020, $0.3 million of unrecognized compensation expense related to unvested options will be recognized over a weighted-average period of 0.3 years. All stock option awards outstanding as of December 31, 2020 are expected to vest. 91 Table of Contents Restricted Stock Units We grant restricted stock units ("RSUs") to employees and our non-employee directors. The following table summarizes changes in RSUs, inclusive of performance-based RSUs: Shares (in thousands) Weighted-Average Grant Date Fair Value Per Share Weighted-Average Remaining Contractual Term (in years) Unamortized Compensation Costs (in thousands) Unvested - December 31, 2017 — $ — Granted 1,309 20.58 Vested ( 850 ) 21.93 Forfeited/canceled ( 78 ) 17.97 Unvested - December 31, 2018 381 $ 18.11 Granted 1,978 17.78 Vested ( 486 ) 14.97 Forfeited/canceled ( 132 ) 18.92 Unvested - December 31, 2019 1,741 $ 18.55 Granted 1,758 43.07 Vested ( 779 ) 28.56 Forfeited ( 286 ) 23.34 Unvested - December 31,2020 2,434 $ 32.49 2.80 $ 61,630 Service-based Restricted Stock Units During 2018, we granted 434,377 RSUs to our employees and non-employee directors, which have annual vesting periods ranging from one to four years. As of December 31, 2018, there was approximately $4.5 million of unrecognized compensation expense related to RSUs, which is expected to be recognized over a weighted-average period of 2.4 years. During 2019, we granted 725,832 RSUs to employees and our non-employee directors, which have annual vesting periods ranging from one to four years. As of December 31, 2019, there was approximately $ 20.4 million of unrecognized compensation expense related to RSUs, which is expected to be recognized over a weighted-average period of 3.1 years. During 2020, we granted 1,233,617 RSUs to employees, executives, and our non-employee directors, which have annual vesting periods ranging from one to four years. During 2020, we granted 47,690 immediately vesting RSUs to employees in lieu of cash-based incentive compensation. As of December 31, 2020, there was approximately $ 61.6 million of unrecognized compensation expense related to RSUs, which is expected to be recognized over a weighted-average period of 2.8 years. The aggregate intrinsic value based on the $ 142.77 closing price of our common stock as reported on the Nasdaq Global Market on December 31, 2020 of unvested RSUs is $ 347.5 million as of December 31, 2020. Subsequent to December 31, 2020, we granted 52,322 RSUs to employees, which have annual vesting periods ranging from one to four years. The unamortized stock-based compensation expense related to these RSUs is approximately $ 6.4 million. Performance-based Restricted Stock Units During 2018, we granted two separate tranches of performance-based RSUs ("2018 PSUs"), each to receive 437,500 shares of common stock, to executives. The vesting of the 875,000 2018 PSUs was contingent upon the completion of our IPO and includes other performance-based conditions. The performance condition in the first tranche was to be satisfied when we attained 70.0 million of FI monthly active users ("FI MAUs") within three years of the grant date. The performance condition in the second tranche was to be satisfied when we attained 85.0 million of average FI MAUs within five years of the grant date. FI MAUs is a performance metric defined within "Management's Discussion and Analysis of Financial Condition and Results of Operations." We recognize stock compensation for these 2018 PSUs based upon the expected timing of the achievement of these FI MAU targets. During 2018, 25,000 of the 2018 PSUs were forfeited prior to the FI MAU targets being reached. During 2018, both average FI MAU targets were reached, resulting in the vesting of both tranches of the 2018 PSUs and the issuance of 850,000 shares of our common stock to fully settle the 2018 PSUs. During 2018, we recognized $ 18.6 million of stock-based compensation expense related to these awards. 92 Table of Contents During 2019, we granted 1,252,500 performance-based RSUs (“2019 PSUs”). The 2019 PSUs are composed of four equal tranches, each of which have an independent performance-based vesting condition. The vesting criteria for the four tranches are as follows: • a minimum growth rate in adjusted contribution over a trailing 12-month period, • a minimum number of advertisers that are billed above a specified amount over a trailing 12-month period, • a minimum cumulative adjusted EBITDA target over a trailing 12-month period, and • a minimum trailing 30-day average closing price of our common stock. The vesting conditions of each of the four tranches must be achieved within four years of the grant date. Upon a vesting event, 50 % of the related tranche vests immediately, 25 % of the related tranche vests six months after the achievement date and 25 % of the related tranche vests 12 months after the achievement date. Adjusted EBITDA and adjusted contribution are performance metrics defined within Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations." In August and November 2019, the compensation committee of our board of directors certified that the target minimum trailing 30-day average closing price of our common stock and target minimum cumulative adjusted EBITDA over a trailing 12-month period, respectively, were achieved resulting in the immediate vesting of 50% of the related PSU tranches. In February 2020, 25% of the 30-day average closing price of our common stock PSU tranche vested upon the six-month anniversary of the tranche's achievement date and the remaining 25% of the tranche vested in August 2020 upon the twelve-month anniversary of the tranche's achievement date. In May 2020, 25% of the adjusted EBITDA tranche vested upon the six-month anniversary of the tranche's achievement date, and the remaining 25% of the tranche vested in November 2020 upon the twelve-month anniversary of the tranche's achievement date. In April 2020, we granted 476,608 performance-based restricted stock units ("2020 PSUs"), of which 443,276 units have a performance-based vesting condition based on a minimum average revenue per user ("ARPU") target over a trailing 12-month period and 33,332 units have the same performance-based vesting conditions as those that remain unmet under the 2019 PSUs described above. ARPU is a performance metric defined within Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The ARPU vesting condition must be achieved within four years of the grant date. Upon the vesting event, 50% of the award vests immediately, 25% of the award vests six months after achievement date and 25% of the award vests 12 months after the achievement date. Restricted Securities Units During 2016, we granted $ 1.0 million of restricted securities units to certain executives in lieu of cash bonuses. Upon issuance, the restricted securities units were indexed to the 2016 convertible promissory notes. As a result of the Series G Stock financing in 2017, the restricted securities units became indexed to our Series G’ Stock upon conversion of the 2016 convertible promissory notes. Upon the consummation of our IPO in February 2018, the restricted securities units became indexed to our common stock. Vesting requirements included both a service-based condition and a performance-based condition. The service-based condition required each recipient to remain employed until the earlier of i) the date 6 months from the restricted securities unit grant date, ii) the date of a qualified liquidity event, or iii) date of termination without cause. The performance-based condition required a sale of the Company or IPO event within a fixed period of time not more than 5 years from the restricted securities units grant date. The restricted securities units were considered liability classified awards, but due to the performance condition relating to sale of the Company or IPO, no compensation cost was recognized until one of these events occurred. These units vested upon the consummation of our IPO in February 2018, resulting in a non-cash expense of $ 0.5 million, and were settled upon the delivery of 37,406 shares of our common stock in August 2018. Employee Stock Purchase Plan Our board of directors adopted and our stockholders have approved our 2018 Employee Stock Purchase Plan ("2018 ESPP"). Our 2018 ESPP became effective on February 8, 2018, the date our registration statement in connection with our IPO was declared effective and enables eligible employees to purchase shares of our common stock at a discount. Purchases will be accomplished through participation in discrete offering periods. On each purchase date, eligible employees will purchase our common stock at a price per share equal to 85 % of the lesser of the fair market value of our common stock on the first trading day of the offering period or the date of purchase. During 2018, 2019 and 2020, a total of 177,238, 154,601 and 59,173 shares of common stock were purchased by employees under the 2018 ESPP, respectively. 93 Table of Contents As of December 31, 2020, 474,120 shares of common stock were reserved for issuance pursuant to our 2018 ESPP. Additionally, the number of shares of our common stock reserved for issuance under our 2018 ESPP will automatically increase on January 1 of each year, beginning on January 1, 2019 and continuing through and including January 1, 2026, by the lesser of (i) 1 % of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year, (ii) 500,000 shares of our common stock or (iii) such lesser number of shares of common stock as determined by our board of directors. Accordingly, the number of shares of our common stock reserved for issuance under our 2018 ESPP increased by 278,608 shares on January 1, 2021. Shares subject to purchase rights granted under our 2018 ESPP that terminate without having been issued in full will not reduce the number of shares available for issuance under our 2018 ESPP. 9. INCOME TAXES Domestic and foreign components of loss before income taxes are as follows (in thousands): Year Ended December 31, 2018 2019 2020 Domestic $ ( 48,897 ) $ ( 13,464 ) $ ( 42,613 ) Foreign ( 4,145 ) ( 3,680 ) ( 12,809 ) Loss before income taxes $ ( 53,042 ) $ ( 17,144 ) $ ( 55,422 ) The significant components of income tax (expense) benefit are as follows (in thousands): Year Ended December 31, 2018 2019 2020 Current: Federal $ — $ — $ — State — — — Foreign (1) — — — Total current — — — Deferred: Federal 6,896 1,326 23,062 State 1,264 622 3,744 Foreign 916 222 1,713 Change in uncertain tax positions ( 105 ) 598 ( 117 ) Change in valuation allowance ( 8,971 ) ( 2,768 ) ( 28,402 ) Total deferred — — — Income tax benefit $ — $ — $ — (1) The current income tax (expense) during 2019 and 2020 excludes Indian income tax expense of less than $0.1 million and $0.3 million, respectively. 94 Table of Contents The following table summarizes the significant differences between the U.S. federal statutory tax rate and our effective tax rate: Year Ended December 31, 2018 2019 2020 Tax benefit at federal statutory rate 21.00 % 21.00 % 21.00 % State income taxes, net of federal benefit 1.91 % — % — % Change in federal and state statutory rate 0.03 % 0.34 % 0.35 % Foreign rate differential ( 0.06 ) % ( 0.20 ) % ( 0.62 ) % Other adjustments ( 5.97 ) % ( 5.18 ) % 7.36 % Valuation allowance ( 16.91 ) % ( 16.18 ) % ( 28.57 ) % Income tax benefit — % ( 0.22 ) % ( 0.48 ) % The significant components of deferred income taxes are as follows (in thousands): December 31, 2019 2020 Net operating loss carry-forwards $ 64,348 $ 92,387 Allowance for credit losses 28 94 Depreciation and amortization ( 1,321 ) ( 13,601 ) Stock-based compensation 2,727 3,769 Deferred costs 2,275 1,462 IRC Section 163(j) interest expense limitation 436 89 Other tax credit carry-forward 1,419 1,771 Other temporary differences 319 20 Valuation allowance ( 70,231 ) ( 85,991 ) Net long-term deferred tax asset $ — $ — On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Key provisions of the CARES Act include one-time payments to individuals, strengthened unemployment insurance, additional health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code. The corporate income tax provisions of the CARES Act include allowing the carryback of NOLs generated in recent tax years, temporary removal of the 80% NOL usage limitation put in place under the Tax Cuts and Jobs Act ("TCJA"), temporary favorable adjustments to the business interest expense limitation calculated under Sec. 163(j), and the acceleration of refundable AMT credits. We believe that the corporate income tax provisions of the CARES Act will not have a materially beneficial impact on the Company. Due to the Company’s history of losses, there is no potential for the carryback of NOLs. The temporary removal of the 80% income limitation on NOL usage has no impact as the Company generated a taxable loss for 2020 and has substantial NOLs generated in years prior to the enactment of the TCJA not subject to this 80% limitation. The changes to Sec. 163(j) are not expected to have a beneficial impact as the Company’s interest expense is limited under Sec. 163(j) due to taxable losses rather than the 30% ATI limit enacted under the TCJA. The Company did take advantage of payroll tax deferrals under the CARES Act and as a result has established a $0.8 million deferred tax asset for nondeductible payroll tax accruals that are being deferred to the December 31, 2021 and December 31, 2022 payment dates. We have generated historical net losses and recorded a full valuation allowance against our net deferred tax assets. We expect to maintain a full valuation allowance in the near term. Realization of any of our net deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. 95 Table of Contents The following table presents changes in our valuation allowance (in thousands): Year Ended December 31, 2018 2019 2020 Beginning balance $ ( 58,649 ) $ ( 67,463 ) $ ( 70,231 ) Allowance for domestic and foreign net operating loss carry-forwards ( 9,863 ) ( 3,598 ) ( 26,277 ) Rate change on domestic net operating loss carry-forwards ( 17 ) ( 32 ) ( 82 ) Change in foreign currency 157 — — Convertible debt additional paid-in capital tax adjustment - valuation allowance impact — — 12,642 Other changes 909 862 ( 2,043 ) Ending balance $ ( 67,463 ) $ ( 70,231 ) $ ( 85,991 ) As of December 31, 2019 and 2020 we have $ 266.8 million and $ 371.2 million, respectively, of gross U.S. federal net operating loss carry forwards that will begin to expire in the 2028 tax year. Additionally, we have $ 98.4 million and $ 155.8 million of gross state net operating loss carry-forwards as of December 31, 2019 and 2020, respectively that will expire between the 2021 and 2040 tax years for states that do not have indefinite carry-forward periods for net operating losses generated in recent years. Ownership changes, as defined by IRC Section 382, may limit the amount of net operating losses that a company may utilize to offset future taxable income and taxes payable. Pursuant to IRC Section 382, an ownership change occurs when the stock ownership of 5% stockholders increases by more than 50% over a testing period of three years. We have experienced ownership changes in the past, and it is possible that we have undergone ownership changes subsequent to December 5, 2018, the date of our most recent evaluation, or that we may undergo such a change in the future. Any such ownership change may limit our ability to utilize net operating losses. Our results during 2018, 2019 and 2020 reflect state tax credits related to hiring and research activities that are utilized through the reduction of state payroll tax withholdings totaling $ 0.7 million, $ 1.3 million and $ 1.4 million, respectively. As of December 31, 2019 and 2020, Cardlytics UK had gross net operating losses of $ 12.1 million and $ 25.7 million, respectively. Foreign net operating loss carry-forwards expire according to the rules of each country. In the U.K., there is an indefinite carry-forward period. As of December 31, 2020, Cardlytics UK held cash and cash equivalents of $3.9 million. While our investment in Cardlytics UK is not considered to be permanently invested, we do not plan to repatriate these funds. Further, although the tax basis of our investment in Cardlytics UK exceeds its book basis, we have not recorded a deferred tax asset since we do not believe that a reversal of this temporary difference will occur in the foreseeable future. The following table summarizes the activity related to our gross unrecognized tax benefits that would affect our effective tax rate, if recognized (in thousands): Year Ended December 31, 2018 2019 2020 Beginning balance $ 678 $ 783 $ 185 Increase related to current year tax position 105 ( 598 ) 117 Ending balance $ 783 $ 185 $ 302 All such positions, if recognized, would impact our effective tax rate. We do not currently anticipate any of our positions to change significantly in the next 12 months. Our tax filings from inception remain subject to income tax examinations. 96 Table of Contents 10. REDEEMABLE CONVERTIBLE PREFERRED STOCK Upon the consummation of our IPO in 2018, all of the outstanding shares of redeemable convertible preferred stock were automatically converted into shares of common stock. Refer to Note 1—Nature of Operations for additional information regarding our IPO. A summary of the change in carrying amount of the outstanding redeemable convertible preferred stock is as follows (in thousands): Series G’ Stock Series G Stock Shares Amount Shares Amount Balance — December 31, 2017 1,296 $ 44,672 346 $ 5,110 Accretion of redeemable convertible preferred stock — — — 108 Conversion of preferred stock to common stock (1,296) (44,672) (346) (5,218) Balance — December 31, 2018 — $ — — $ — Series F-R Stock Series E-R Stock Series D-R Stock Shares Amount Shares Amount Shares Amount Balance — December 31, 2017 1,199 58,449 795 $ 29,972 1,396 $ 32,728 Accretion of redeemable convertible preferred stock — 38 — 1 — 7 Conversion of preferred stock to common stock (1,199) (58,487) (795) (29,973) (1,396) (32,735) Balance — December 31, 2018 — $ — — $ — — $ — Series C-R Stock Series B-R Stock Series A-R Stock Shares Amount Shares Amount Shares Amount Balance — December 31, 2017 1,508 $ 18,366 2,247 $ 5,288 1,857 $ 1,852 Accretion of redeemable convertible preferred stock — 3 — — — — Conversion of preferred stock to common stock (1,508) (18,369) (2,247) (5,288) (1,857) (1,852) Balance — December 31, 2018 — $ — — $ — — $ — Common Stock Warrants Issued in Connection with the Series G Stock Financing In connection with the Series G Stock financing in May 2017, we issued warrants to purchase an aggregate number of shares of common stock equal to the product obtained by multiplying 346,334 by a fraction, the numerator of which is the difference between $ 68.9516 and the volume weighted average closing price of our common stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants vest and become exercisable and the denominator of which is such volume weighted average closing price, which warrants vested and became exercisable on August 8, 2018, which was 180 days following the date of our IPO, at an exercise price of $ 0.0004 per share. In August 2018, we issued warrants to purchase 792,434 shares of common stock at an exercise price of $ 0.0004 per share to the cash investors of our Series G financing, pursuant to our Series G stock purchase agreement. The warrants had a valuation of $ 15.3 million upon issuance and were immediately exercised. Refer to Note 12—Fair Value Measurements for additional information regarding the valuation of the warrants issued in connection with the Series G Stock financing. Redemption At any time on or after May 4, 2022, upon written request of the holders of not less than 66 2/3% of the shares of redeemable convertible preferred stock then-outstanding, voting together as a single class on an as-converted to common stock basis, we were required to redeem all outstanding shares of redeemable convertible preferred stock in eight quarterly installments. The Series A-R Stock, Series B-R Stock, Series C-R Stock, Series D-R Stock, Series E-R Stock, Series F-R Stock, Series G Stock and Series G’ Stock were redeemable at prices equal to $ 1.00 , $ 2.3567 , $ 12.2686 , $ 23.64 , $ 37.7344 , $ 58.40 , $ 34.4758 and $ 34.4758 per share, plus any declared or accumulated but unpaid dividends, respectively. 97 Table of Contents To the extent that we had insufficient funds to redeem all outstanding shares of redeemable convertible preferred stock, we were required to first redeem shares of Series G Stock and Series G’ Stock, then shares of Series F-R Stock, then shares of Series E-R Stock, then shares of Series D-R Stock, then shares of Series C-R Stock and then shares of Series B-R Stock and Series A-R Stock pari passu , in each case on a pro rata basis among the holders thereof. The redeemable convertible preferred stock carrying amount was increased by periodic accretions, using the interest method, so that the carrying amount would equal the redemption amount at May 4, 2022. Accretion was recorded through a charge against additional paid-in capital. Liquidation Upon us (i) selling or otherwise disposing of all or substantially all of our property or business or merging with or into or consolidation with any other corporation, limited liability company or other entity, (ii) a majority of the voting power of our outstanding capital stock being transferred or disposed of as a result of a transaction or series of related transactions that are not issuances of capital stock by us primarily for the purposes of raising equity capital or (iii) any dissolution or winding-up of our business, the holders of Series A-R Stock, Series B-R Stock, Series C-R Stock, Series D-R Stock, Series E-R Stock, Series F-R Stock, Series G Stock and Series G’ Stock were entitled to receive payments in amounts per share equaling $ 1.00 , $ 2.3567 , $ 21.4701 , $ 23.64 , $ 37.7344 , $ 58.40 , $ 68.9516 , and $ 34.4758 , plus any declared but unpaid dividends, respectively. Holders of Series G Stock and Series G’ Stock are pari passu and were to be paid prior, and in preference to, any distribution of assets to the holders of all other classes of capital stock. Holders of Series F-R Stock were to be paid prior, and in preference to, any distribution of assets to the holders of Series E-R Stock, Series D-R Stock, Series C-R Stock, Series B-R Stock and Series A-R Stock. Holders of Series E-R Stock were to be paid prior, and in preference to, any distribution of assets to the holders of Series D-R Stock, Series C-R Stock, Series B-R Stock and Series A-R Stock. Holders of Series D-R Stock were to be paid prior, and in preference to, any distribution of assets to the holders of Series C-R Stock, Series B-R Stock and Series A-R Stock. Holders of Series C-R Stock were to be paid prior, and in preference to, any distribution of assets to the holders of Series B-R Stock and Series A-R Stock. Holders of Series A-R Stock and Series B-R Stock are pari passu and were to be paid prior, and in preference to, any distribution of assets to the holders of common stock. Upon completion of the distributions detailed above, any remaining assets were to be distributed to the holders of common stock, Series A-R Stock, Series B-R Stock, Series C-R Stock, Series D-R Stock, Series E-R Stock, Series F-R Stock, Series G Stock and Series G’ Stock; such participation in the distribution of remaining assets would cease, however, when the amount that the holders of Series A-R Stock, Series B-R Stock, Series C-R Stock, Series D-R Stock, Series E-R Stock, Series F-R Stock, Series G Stock and Series G’ Stock were entitled to receive upon liquidation equals $ 2.00 per share, $ 4.7134 per share, $ 36.8058 per share, $ 70.92 per share, $ 113.2032 per share, $ 175.20 per share, $ 103.4274 per share and $ 103.4274 per share, respectively, plus any declared but unpaid dividends thereon. If, however, as a result of a conversion from redeemable convertible preferred stock to common stock, a holder would receive, in the aggregate, an amount greater than the amount that would be distributed to such holder if such holder did not convert such series of redeemable convertible preferred stock into shares of common stock, such holder would have been deemed to have converted such holder’s shares of redeemable convertible preferred stock into shares of common stock for the purposes of determining the amount that such holder is entitled to receive upon liquidation and would not have been entitled to any distribution that would have otherwise been made to the holders of redeemable convertible preferred stock detailed above. Dividends No dividends have been declared or paid as of December 31, 2020. Conversion The holders of our redeemable convertible preferred stock also had the right, at any time, to convert any or all of their shares into such number of shares of common stock as is determined by dividing $ 1.00 in the case of Series A-R Stock, $ 2.3567 in the case of the Series B-R Stock, $ 12.2686 in the case of Series C-R Stock, $ 23.64 in the case of Series D-R Stock, $ 37.7344 in the case of Series E-R Stock, $ 50.0568 in the case of Series F-R Stock, and $ 34.4758 in the case of Series G Stock and Series G’ Stock by the applicable conversion price. The initial conversion price was $ 1.00 in the case of Series A-R Stock, $ 2.3567 in the case of the Series B-R Stock, $ 2.3567 in the case of Series C-R Stock, $ 23.64 in the case of Series D-R Stock, $ 37.7344 in the case of Series E-R Stock, $ 50.0568 in the case of Series F-R Stock and $ 34.4758 in the case of Series G Stock and Series G’ Stock. If, at any time following the initial issuance of shares of Series G Stock, we had issued any additional shares of capital stock without consideration or for a consideration per share less than the then-effective conversion price for our redeemable convertible preferred stock, the conversion price for all series of outstanding redeemable convertible preferred stock would have been subject to adjustment. 98 Table of Contents 11. COMMON STOCK WARRANTS We have granted warrants to purchase shares of our common stock to certain FI partners that include both time-based and performance-based vesting conditions. These warrants are accounted for under ASC Topic 505-50, Equity-Based Payments to Non-Employees . Since the performance conditions contained in these warrants are directly related to revenue-producing activities, we incur non-cash expense in FI Share and other third-party costs on our consolidated statements of operations based on the vesting-date fair value of our common stock underlying these warrants. A summary of common stock warrant activity, exclusive of the common stock warrants issued in connection with our Series G financing is as follows (in thousands, except per share amounts): Shares Weighted-average exercise price per share Warrants Outstanding - December 31, 2017 600 $ 8.11 Granted 644 23.64 Exercised ( 349 ) 4.69 Redeemable convertible preferred stock warrants converted to common stock warrants 110 12.16 Forfeited/canceled ( 138 ) 5.85 Warrants Outstanding - December 31, 2018 867 21.89 Exercised ( 821 ) 21.89 Forfeited/canceled ( 34 ) 21.29 Warrants Outstanding - December 31, 2019 12 23.64 Exercised ( 9 ) 23.64 Forfeited/canceled ( 3 ) 23.64 Warrants Outstanding - December 31, 2020 — $ — The performance-based warrants to purchase 644,365 shares of our common stock vested upon the consummation of our IPO in February 2018 as discussed in Note 13—Related Parties. The conversion date fair value of the Series A Stock warrants and Series B Stock warrants, which were converted to common stock warrants upon our IPO, was reclassified from redeemable convertible preferred stock warrant liability to additional paid-in capital. See Note 12—Fair Value Measurements for more information. 12. FAIR VALUE MEASUREMENTS Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table summarizes our liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): December 31, 2017 Level 1 Level 2 Level 3 Total Liabilities: Preferred stock warrant liabilities (1) $ — $ — $ 2,285 $ 2,285 Common stock warrant liabilities (1) — — 7,945 7,945 Total liabilities $ — $ — $ 10,230 $ 10,230 (1) Warrant liabilities were zero as of December 31, 2018, 2019 and 2020. 99 Table of Contents Instruments Recorded at Fair Value Using Level 3 Inputs Our redeemable convertible preferred stock warrants and common stock warrants issued in connection with the Series G Stock financing are measured and recorded at fair value on a recurring basis using Level 3 inputs. The carrying amount of the liability component of the Convertible Senior Notes was determined by estimating the fair value of a similar liability without the conversion option using Level 3 inputs. See Note 7—Debt and Financing Arrangements for additional information about the Convertible Senior Notes. The table below provides a roll forward of the changes in fair value of our preferred stock warrant and common stock warrant financial instruments (in thousands): Preferred Stock Warrant Liabilities Common Stock Warrant Liabilities Balance at December 31, 2017 $ 2,285 $ 7,945 Conversion of redeemable convertible preferred stock warrants to common stock warrants ( 1,736 ) — Issuance of common stock warrants ( 549 ) 7,309 Changes in fair value — ( 15,254 ) Balance at December 31, 2018 $ — $ — Prior to our IPO, in valuing our instruments recorded at fair value using Level 3 inputs, our board of directors determined the equity value of our business generally using a combination of the income approach and the market approach valuation methods. The income approach estimates value based on the expectation of future cash flows that a company will generate, such as cash earnings, cost savings, tax deductions and the proceeds from disposition. These future cash flows are discounted to their present values using a discount rate derived based on an analysis of the cost of capital of comparable publicly traded companies in similar lines of business, as of each valuation date, and is adjusted to reflect the risks inherent in our cash flows. The market approach estimates the fair value of a company by applying market multiples of comparable publicly traded companies in a similar line of business. The market multiples are based on relevant metrics implied by the price that investors have paid for the equity of publicly traded companies. Given our significant focus on investing in and growing our business, we primarily utilized the forward-looking revenue multiple when performing valuation assessments under the market approach and considered both trading and transaction multiples. When considering which companies to include as our comparable industry peer companies, we focused on U.S.-based publicly traded companies that were broadly comparable to us based on consideration of industry, market and line of business. From the comparable companies, a representative market value multiple was determined and applied to our operating results to estimate the value of our company. The market value multiple was determined based on consideration of multiples of revenue to each of the comparable companies’ historical and forecasted revenue. In addition, the market approach considers IPO and merger and acquisition transactions involving companies similar to the company’s business being valued. Multiples of revenue are calculated for these transactions and then applied to the business being valued, after reduction by an appropriate discount. Once an equity value was determined, we utilized probability-weighted expected return method (“PWERM”) to allocate the overall value of equity to the various share classes. The PWERM relies on a forward-looking analysis to predict the possible future value of a company. Under this method, discrete future outcomes, including an IPO and non-IPO scenarios, are weighted based on the estimated the probability of each scenario. The PWERM is used when discrete future outcomes can be predicted with reasonable certainty based on a probability distribution. We relied on the PWERM to allocate the value of equity under a liquidity scenario. The projected equity value relied upon in the PWERM scenario was based on (i) guideline IPO transactions involving companies that were considered broadly comparable to us and (ii) our expectation of the pre-money valuation that we needed to achieve to consider an IPO as a viable exit strategy. 100 Table of Contents Preferred Stock Warrants Upon the consummation of our IPO, all of the outstanding warrants to purchase shares of redeemable convertible preferred stock were automatically converted into warrants to purchase shares of common stock. Refer to Note 10—Redeemable Convertible Preferred Stock for additional information regarding our IPO. A summary of our preferred stock warrants is as follows (in thousands, except per share amounts): Preferred Series Grant date Expiration date Exercise price December 31, 2017 Series B-R 2/26/2010 2/25/2020 $ 2.36 59 Series D-R 9/21/2012 9/20/2022 $ 23.64 38 Series D-R 9/21/2012 9/20/2022 $ 23.64 13 Total preferred stock warrants 110 The fair value of the warrants to purchase Series B-R Stock and Series D-R Stock decreased from $ 26.80 per share and $ 13.63 per share on December 31, 2017 to $ 20.18 per share and $ 10.57 per share on February 8, 2018, respectively, the date at which they converted to warrants to purchase shares of our common stock and were reclassified to additional paid-in capital on our consolidated balance sheet. The decrease in the fair value of the warrants to purchase Series B-R Stock and Series D-R Stock primarily resulted from the timing of future potential liquidity events, changes to our forecasted financial results and changes in the valuation of comparable companies. Warrant liabilities related to redeemable convertible preferred stock were zero as of December 31, 2018, 2019 and 2020. Common Stock Warrants Common Stock Warrants Issued in Connection with the Series G Stock Financing In connection with the Series G Stock financing in 2017, we issued warrants to purchase an aggregate number of shares of common stock equal to the product obtained by multiplying 346,334 by a fraction, the numerator of which is the difference between $ 68.9516 and the volume weighted average closing price of our common stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants vest and become exercisable and the denominator of which is such volume weighted average closing price, which warrants vested and became exercisable on August 8, 2018, which was 180 days following the date of our IPO, at an exercise price of $ 0.0004 per share. To determine the fair value of our common stock warrant liability issued in connection with our Series G Stock financing, we utilized a Monte Carlo simulation, which allows for the modeling of complex securities and evaluates many possible outcomes to forecast the stock price of the company post-IPO. As part of the valuation, we considered various scenarios related to the pricing, timing and probability of an IPO. We applied an annual equity volatility of 59 % and a discount for lack of marketability of 11 % to arrive at a valuation of $ 7.5 million on the issuance date. Subsequent to our IPO, the fair value of the common stock warrant liability was estimated based on the fair market value of our common stock at each reporting period, discounted from the date of settlement. In August 2018, we issued warrants to purchase 792,434 shares of common stock at an exercise price of $ 0.0004 per share to the cash investors of our Series G financing, pursuant to our Series G stock purchase agreement. The warrants had a valuation of $ 15.3 million upon issuance and were subsequently exercised, resulting in the issuance of 792,434 shares of our common stock. As a result of change in fair value of the common stock warrant liability, we recognized a non-cash loss of $ 7.3 million in 2018. Performance-based Warrants Issued to FIS In May 2013, we granted 10 -year performance-based warrants to purchase up to 644,365 shares of Series E Stock at an exercise price of $ 23.64 per share. Since FIS did not participate in the convertible promissory note financing in 2016, their warrants to purchase preferred stock were converted to warrants to purchase common stock. The warrants vested upon the completion of our IPO in February 2018 resulting in a non-cash expense of $ 2.5 million. We determined the fair value of these common warrants on the date of IPO using the Black-Scholes option pricing model, which is affected by the fair value of our common stock as well as the following significant inputs: 101 Table of Contents February 8, 2018 Weighted-average grant date fair value $ 3.91 Significant inputs: Value of common stock $ 13.00 Expected term 5.3 years Volatility 50 % Risk-free interest rate 2.0 % Dividend yield — % 13. RELATED PARTIES Common Stock Warrants Issued in Connection with the Series G Stock Financing In connection with the Series G Stock financing in 2017, we issued warrants to purchase an aggregate number of shares of common stock equal to the product obtained by multiplying 346,334 by a fraction, the numerator of which is the difference between $ 68.9516 and the volume weighted average closing price of our common stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants vest and become exercisable and the denominator of which is such volume weighted average closing price, which warrants vested and became exercisable on August 8, 2018, which was 180 days following the date of our IPO, at an exercise price of $ 0.0004 per share. In August 2018, we issued warrants to purchase 792,434 shares of common stock at an exercise price of $ 0.0004 per share to the cash investors of our Series G financing, pursuant to our Series G stock purchase agreement. The warrants had a valuation of $ 15.3 million upon issuance and were subsequently exercised, resulting in the issuance of 792,434 shares of our common stock. The following table summarizes the participation in the common stock warrants issued in connection with the Series G Stock financing by our directors, executive officers and holders of more than 5 % of any class of our capital stock as of the date of such transactions (in thousands): Related Party Warrants to Purchase Common Stock Entities affiliated with Polaris Venture Partners (1) 66 Canaan VIII L.P. (2) 123 Entities affiliated with Mark A. Johnson (3) 80 John Klinck 13 David Adams 7 (1) Consists of 64,038 warrants to purchase common stock issued to Polaris Venture Partners V, L.P. ("PVP V"), 1,247 warrants to purchase common stock issued to Polaris Venture Partners Entrepreneurs’ Fund V, L.P. (“PVP EF V”), 438 warrants to purchase common stock issued to Polaris Venture Partners Founders’ Fund V, L.P. (“PVP FF V”), and 641 warrants to purchase common stock issued to Polaris Venture Partners Special Founders’ Fund V, L.P. (“PVP SFF V”). Polaris Venture Management Co. V, L.L.C. is a general partner of each of PVP V, PVP EF V, PVP FF V and PVP SFF V and may be deemed to have the sole voting and dispositive power over the shares held by PVP V, PVP EF V, PVP FF V and PVP SFF V. Bryce Youngren, an active member of our board of directors at the time of transaction, is a Managing Partner of Polaris Partners and may be deemed to share voting and dispositive power over the shares held by PVP V, PVP EF V, PVP FF V and PVP SFF V. (2) John V. Balen, a member of our board of directors, is a managing member of Canaan Partners VIII LLC, the general partner of Canaan VIII L.P. Mr. Balen does not have voting or investment power over any shares held directly by Canaan VIII L.P. (3) Consists of 66,365 warrants to purchase common stock issued to TTV Ivy Holdings, LLC, and 13,273 warrants to purchase common stock issued to Mr. Johnson. TTV Capital is a provider of management services to TTP GP II, LLC, which is a general partner of TTP Fund II, L.P. TTV Capital is the manager of TTV Ivy Holdings Manager, LLC, which is the general partner of TTV Ivy Holdings, LLC. Mark A. Johnson, a member of our board of directors, is a member of each of TTP GP II, LLC and TTV Ivy Holdings Managers, LLC and holds the title of partner of TTV Capital, and may be deemed to share voting and dispositive power over the shares held by TTP Fund II L.P. and TTV Ivy Holdings, LLC. 102 Table of Contents Agreements with Fidelity Information Services, LLC We are party to a reseller agreement with Fidelity Information Services LLC (“FIS”). Pursuant to the reseller agreement, FIS markets and sells our services to financial institutions that are current or potential customers of FIS in exchange for a revenue share percentage. We are also obligated to make milestone payments to FIS related to the integration and deployment of our solutions. Prior to our IPO, FIS was entitled to elect a member of our board of directors, who was Robert Legters until his resignation immediately prior to our IPO in February 2018. In May 2013, FIS purchased 397,515 shares of our Series E Stock. We also granted 10 -year performance-based warrants to purchase up to 644,365 shares of Series E Stock at an exercise price of $ 23.64 per share. The warrants were exercisable subject to the attainment of certain milestones related to the number of active accounts for which our solutions have been enabled with accelerated vesting upon an IPO. Since FIS did not participate in the convertible promissory note financing in 2016, their warrants to purchase preferred stock were converted to warrants to purchase common stock. The warrants vested upon the completion of our IPO in February 2018, resulting in a non-cash expense of $ 2.5 million based on the vesting-date fair value of our common stock underlying these warrants. Since the performance conditions were directly related to revenue-producing activities, we recognized this expense in FI Share and other third-party costs on our consolidated statement of operations. This expense is presented in other non-cash expenses on our consolidated statement of cash flows. Refer to Note 12—Fair Value Measurements for additional information regarding the valuation of the performance-based warrants issued to FIS. In September 2019, FIS exercised all of their warrants to purchase common stock, resulting in cash proceeds of $ 15.2 million and the issuance of 644,365 shares of our common stock. 103 Table of Contents 14. COMMITMENTS AND CONTINGENCIES FI Implementation Costs 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. Amounts paid to FI partners are included in deferred FI implementation costs on our consolidated balance sheets the earlier of when paid or earned and are amortized over the remaining term of the related contractual arrangements. Amortization and impairment is included in FI Share and other third-party costs on our consolidated statements of operations and is presented in amortization and impairment of deferred FI implementation costs on our consolidated statement of cash flows. Certain of these agreements provide for future reductions in FI Share due to the FI partner. These reductions in FI Share are recorded as a reduction to deferred implementation costs and also result in a cumulative adjustment to accumulated amortization. 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 recognized a write off of deferred FI implementation costs totaling $0.7 million in FI Share and other third-party costs on our consolidated statements of operations. The following table presents changes in deferred FI implementation costs (in thousands): December 31, 2018 2019 2020 Beginning balance $ 13,625 $ 15,877 $ 8,383 Deferred costs 9,250 — — Recoveries through FI Share ( 5,380 ) ( 4,625 ) — Amortization ( 1,618 ) ( 2,869 ) ( 3,915 ) Impairment — — ( 683 ) Ending balance $ 15,877 $ 8,383 $ 3,785 Payments to FI partners for enhancements not yet placed in service totaled $ 1.0 million as of December 31, 2020. Future amortization, based on the amounts earned as of December 31, 2020, is $ 2.8 million in 2021. 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. Any expected shortfall penalty will be accrued during the 12-month period following the completion of the milestones. Other Commitments We lease property and equipment under non-cancelable operating lease agreements. Refer to Note 5—Leases for further details. 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. Refer to Note 7—Debt and Financing Arrangements for further details. 104 Table of Contents Litigation From time to time, we may become involved in legal actions arising in the ordinary course of business including, but not limited to, intellectual property infringement and collection matters. We make assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. We record a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range. If no amount within the range is a better estimate than any other amount, we accrue the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, we disclose the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, we disclose the nature and estimate of the possible loss of the litigation. We do not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss would not be material. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on our liquidity, results of operations, business or financial condition. 105 Table of Contents 15. EARNINGS PER SHARE Diluted net loss per share is the same as basic net loss per share for 2018, 2019 and 2020 because the effects of potentially dilutive items were anti-dilutive, given our net loss during these periods. The following securities have been excluded from the calculation of diluted weighted-average common shares outstanding because the effect is anti-dilutive (in thousands): December 31, 2018 2019 2020 Common stock options 1,774 1,000 513 Common stock warrants 867 12 — Convertible Senior Notes — — 2,701 Restricted stock units 381 1,741 2,434 Common stock issuable pursuant to the ESPP 36 7 4 16. SEGMENTS As of December 31, 2020, we have three operating segments: the Cardlytics platform in the U.S. and U.K. and Other Platform Solutions, as determined by the information that our Chief Executive Officer, who we consider our chief operating decision-maker, uses to make strategic goals and operating decisions. Our Cardlytics platform operating segments in the U.S. and U.K. represent our proprietary native bank advertising channels and are aggregated into one reportable segment given their similar economic characteristics, nature of service, types of customers and method of distribution. Prior to the year ended December 31, 2020, we referred to the Cardlytics platform as Cardlytics Direct. Our Other Platform Solutions enabled marketers and marketing service providers to leverage the power of purchase intelligence outside the bank channel. We have shifted the substantial majority of our efforts and resources to support the growth of Cardlytics platform. As a result, we no longer generate revenue from Other Platform Solutions and do not expect to generate revenue from Other Platform Solutions for the foreseeable future. Revenue can be directly attributable to each segment. With the exception of a non-cash equity expense and deferred FI implementation costs, FI Share is also directly attributable to each segment. Our chief operating decision maker allocates resources to, and evaluate the performance of, our operating segments based on revenue and adjusted contribution. The accounting policies of each of our reportable segments are the same as those described in the summary of significant accounting policies. 106 Table of Contents The following table provides information regarding our reportable segments (in thousands): Year Ended December 31, 2018 2019 2020 Cardlytics platform: Adjusted contribution (2) $ 69,364 $ 95,219 $ 82,182 Plus: FI Share and other third-party costs (1)(2) 79,959 115,211 104,710 Revenue $ 149,323 $ 210,430 $ 186,892 Other Platform Solutions: Adjusted contribution (2) $ 86 $ — $ — Plus: FI Share and other third-party costs (1)(2) 1,275 — — Revenue $ 1,361 $ — $ — Total: Adjusted contribution (2) $ 69,450 $ 95,219 $ 82,182 Plus: FI Share and other third-party costs (1)(2) 81,234 115,211 104,710 Revenue $ 150,684 $ 210,430 $ 186,892 (1) Adjusted FI Share and other third-party costs presented above represents GAAP FI Share and other third-party data costs less a non-cash equity expense included in FI Share and deferred FI implementation costs, which are detailed below in our reconciliation of GAAP loss before income taxes to adjusted contribution. (2) Adjusted contribution and FI Share and other third-party costs 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. 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. 107 Table of Contents The following table presents a reconciliation of loss before income taxes presented in accordance with GAAP to adjusted contribution (in thousands): Year Ended December 31, 2018 2019 2020 Adjusted contribution (1)(2)(3) $ 69,450 $ 95,219 $ 82,182 Minus: Non-cash equity expense included in FI Share (1) 2,519 — — Deferred FI implementation costs (3) 1,618 2,869 4,598 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 administration expense 34,228 36,720 46,532 Depreciation and amortization expense 3,282 4,535 7,826 Total non-operating expense (income) 12,125 ( 181 ) 1,499 Loss before income taxes $ ( 53,042 ) $ ( 17,144 ) $ ( 55,422 ) (1) Non-cash equity expense included in FI Share and deferred FI implementation costs are excluded from FI Share and other third-party costs, which is shown above in our reconciliation of GAAP revenue to non-GAAP adjusted contribution. (2) Adjusted contribution 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. (3) Deferred FI implementation costs for 2020 includes the impact of a $0.7 million write off related to certain platform features. The following tables provide geographical information (in thousands): Year Ended December 31, 2018 2019 2020 Revenue: United States $ 131,563 $ 186,864 $ 172,808 United Kingdom 19,121 23,566 14,084 Total $ 150,684 $ 210,430 $ 186,892 December 31, 2019 2020 Property and equipment: United States $ 12,052 $ 9,549 United Kingdom 2,010 4,162 India 228 154 Total $ 14,290 $ 13,865 Capital expenditures within the United Kingdom were $0.1 million, $ 2.0 million and $ 2.8 million during 2018, 2019 and 2020, respectively. 108 Table of Contents Concentrations of Risk Cash and Cash Equivalents Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. 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. Marketers Our accounts receivable are diversified among a large number of marketers segregated by both geography and industry. During 2018, 2019 and 2020, our top five marketers accounted for 23%, 27% and 35% of our revenue. No marketer represented a significant concentration of our accounts receivable as of December 31, 2018. As of December 31, 2019 and December 31, 2020 our top five marketers accounted for 26% and 31% of our accounts receivable, respectively, with one marketer representing over 10% as of December 31, 2019 and December 31, 2020, respectively. FI Partners Our business is substantially dependent on a limited number of FI partners. We require participation from our FI partners in the Cardlytics platform and access to their purchase data in order to offer our solutions to marketers and their agencies. We must have FI partners with a sufficient number of customers and levels of customer engagement to ensure that we have robust purchase data and marketing space to support a broad array of incentive programs for marketers. Our agreements with a substantial majority of our FI partners have terms of three to seven years but are generally terminable by the FI partner on 90 days or less prior notice. If an FI partner terminates its agreement with us, we would lose that FI as a source of purchase data and online banking customers. During 2018, Bank of America, National Association (“Bank of America”) accounted for over 60% of the total FI Share we paid to all FIs. No other FI partner accounted for over 10% of FI Share during this period. For each year during 2019 and 2020, Bank of America and JPMorgan Chase Bank, National Association (“Chase”) combined to account for over 75% of the total FI Share we paid to all FIs, with each representing over 25%. No other FI partner accounted for over 10% of FI Share during these periods. 17. SUBSEQUENT EVENTS Acquisition of Dosh On February 26, 2021, the Company 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 a wholly owned subsidiary of the Company (“Merger Sub 1”), BSPEARS MERGER SUB II, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“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 a wholly owned subsidiary of the Company, immediately followed by the merger of Dosh with and into Merger Sub 2, with Merger Sub 2 surviving Merger 2 as a wholly owned subsidiary of the Company, 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, the Company is 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 the Company’s common stock at an agreed-upon price of $136.33 per share. In addition, the Company 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 the Company’s performance stock units to certain key Dosh executives. The Merger Agreement contains customary representations, warranties, covenants and indemnities of each of the Company and Dosh. During the period from the date of the Merger Agreement to the closing, the Company 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. 109 Table of Contents The Merger Agreement may be terminated prior to the closing date by mutual written agreement of the Company and Dosh. In addition, the Merger Agreement may be terminated by either the Company 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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.