Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review Item 1A. "Risk Factors" and "Special Note Regarding Forward-Looking Statements" in this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Our company's mission is to make commerce smarter and rewarding for everyone. We work to accomplish this mission by operating an advertising platform within our own and our partners' digital channels, which includes online, mobile applications, email and various real-time notifications (the "Cardlytics platform"). We also operate a customer data platform that utilizes point-of-sale ("POS") data, including product-level purchase data, to enable marketers to perform analytics and targeted loyalty marketing and also measure the impact of their marketing (the "Bridg platform"). The partners for the Cardlytics platform are predominantly financial institutions ("FI partners") that provide us with access to their anonymized purchase data and digital banking customers. The partners for the Bridg platform are predominantly merchants ("merchant data partners") that provide us with access to their POS data, including product-level purchase data. By applying advanced analytics to the purchase data we receive, we make it actionable, helping marketers reach potential 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, direct-to-consumer, and grocery and gas.
Working with a marketer, we design a campaign that targets consumers based on their purchase history. The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that we collect from marketers to provide these Consumer Incentives to customers after they make qualifying purchases ("Consumer Incentives"). We report our revenue on our consolidated statements of operations net of Consumer Incentives since we do not provide the goods or services that are purchased by customers from the marketers to which the Consumer Incentives relate.
We pay certain partners a negotiated and fixed percentage of our billings to marketers less any Consumer Incentives that we pay to customers and certain third-party data costs ("Partner Share"). We report our revenue gross of Partner Share. Partner Share costs are included in Partner Share and other third-party costs in our consolidated statements of operations, rather than as a reduction of revenue, because we and not our partners act as the principal in our arrangements with marketers.
We run campaigns offering compelling Consumer Incentives to drive an expected rate of return on advertising spend for marketers. At times, we may collaborate with a partner to enhance the level of Consumer Incentives to their respective customers, funded by their Partner Share. We believe that these investments by our partners positively impact our platforms by making their customers more highly engaged with our platforms. However, these investments negatively impact our GAAP revenue, which is reported net of Consumer Incentives.
41
Non-GAAP Measures and Other Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our metrics may be calculated in a manner different than similar metrics used by other companies.
Key Performance Metrics
Year Ended December 31,
in thousands except per user amounts 2023 2022 2021
Cardlytics MAUs 162,148 154,550 146,242
Cardlytics ARPU $ 1.91 $ 1.93 $ 1.83
Cardlytics Monthly Active Users ("MAUs")
We define MAUs as targetable customers that have logged in and visited online or mobile applications containing offers, opened an email containing an offer, or redeemed an offer from the Cardlytics platform during a monthly period. We then calculate a monthly average of these MAUs for the periods presented. We believe that MAUs is an indicator of the Cardlytics platform's ability to drive engagement and is reflective of the marketing base that we offer to marketers. Beginnging as of September 30, 2023, we are reporting only the total number of unique targetable customers within each FI, which we have applied to our reporting for current and prior periods in this Annual Report.
Year Ended December 31, Change Year Ended December 31, Change
in thousands 2023 2022 # % 2022 2021 # %
Cardlytics MAUs 162,148 154,550 7,598 5 154,550 146,242 8,308 6
Cardlytics MAUs increased by 7.6 million during 2023 compared to 2022 primarily driven by an increase in new MAUs (41% of total growth) and lapsed customers returning (59% of total growth).
Cardlytics MAUs increased by 8.3 million during 2022 compared to 2021, primarily driven by an increase in new or lapsed customers logging in and visiting online or mobile applications containing offers, opening an email containing an offer or redeeming an offer from the Cardlytics platform.
Cardlytics Average Revenue per User ("ARPU")
We define ARPU as the total Revenue generated in the applicable period calculated in accordance with generally accepted accounting principles in the United States ("GAAP"), divided by the average number of MAUs in the applicable period. We believe that ARPU is an indicator of the value of our relationships with our FI partners with respect to the Cardlytics platform.
Year Ended December 31, Change Year Ended December 31, Change
2023 2022 $ % 2022 2021 $ %
Cardlytics ARPU $ 1.91 $ 1.93 (0.02) (1) $ 1.93 $ 1.83 0.10 5
Cardlytics ARPU decreased by $0.02 during 2023 compared to 2022 as a result of a $10.7 million increase in revenue and a 7.6 million increase in Cardlytics MAUs.
Cardlytics ARPU increased by $0.10 during 2022 compared to 2021 as a result of a $31.4 million increase in revenue and an 8.3 million increase in Cardlytics MAUs.
42
Non-GAAP Metrics
Year Ended December 31,
in thousands 2023 2022 2021
Revenue $ 309,204 $ 298,542 $ 267,116
Billings $ 453,426 $ 442,477 $ 394,075
Gross Profit $ 130,378 $ 112,632 $ 103,340
Adjusted Contribution $ 158,626 $ 143,035 $ 129,628
Net Loss $ (134,702) $ (465,264) $ (128,565)
Adjusted EBITDA $ 3,771 $ (45,169) $ (12,220)
Adjusted Net Loss $ (11,436) $ (60,250) $ (38,727)
Net cash used in operating activities $ (185) $ (53,904) $ (38,523)
Free Cash Flow $ (12,577) $ (67,390) $ (51,087)
Definitions of Non-GAAP Measures
Billings
Billings represents the gross amount billed to customers and marketers for services in order to generate revenue. Cardlytics platform Billings is recognized gross of both Consumer Incentives and Partner Share. Cardlytics platform GAAP Revenue is recognized net of Consumer Incentives and gross of Partner Share. Bridg platform Billings is the same as Bridg platform GAAP Revenue.
We review billings for internal management purposes. We believe billings is an important indicator for the current health of the business because it directly represents our ability to bill customers for our services before any Consumer Incentives are paid. Nevertheless, our use of billings has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Other companies, including companies in our industry that have similar business arrangements, may address the impact of Consumer Incentives differently. You should consider Billings alongside our other GAAP financial results.
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 partners. Adjusted Contribution demonstrates how incremental revenue on our platforms 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 Partner Share and other third-party costs exclusive of deferred implementation costs, which is a non-cash cost. Adjusted Contribution does not take into account all costs associated with generating revenue from advertising campaigns, including sales and marketing expenses, research and development expenses, general and administrative expenses and other expenses, which we do not take into consideration when making decisions on how to manage our advertising campaigns.
We use Adjusted Contribution extensively to measure the efficiency of our advertising platform, make decisions to manage advertising campaigns and evaluate our operational performance. We view Adjusted Contribution as an important operating measure of our financial results. We believe that Adjusted Contribution provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Adjusted Contribution should not be considered in isolation from, or as an alternative to, measures prepared in accordance with GAAP. Adjusted Contribution should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, Adjusted Contribution may not necessarily be comparable to similarly titled measures presented by other companies. Refer to Note 15—Segments to our consolidated financial statements for further details on our Adjusted Contribution by segment.
43
Adjusted EBITDA
Adjusted EBITDA represents our Net Loss before income tax benefit; interest expense, net; depreciation and amortization; stock-based compensation expense; acquisition, integration and divestiture (benefits) costs; change in fair value of contingent consideration; foreign currency (gain) loss; impairment of goodwill and intangible assets; loss on divestiture; restructuring and reduction of force; income tax benefit; and deferred implementation costs. We do not consider these excluded items to be indicative of our core operating performance. The items that are non-cash include foreign currency gain (loss), impairment of goodwill and intangible assets, loss on divestiture, deferred implementation costs, depreciation and amortization, stock-based compensation expense and change in fair value of contingent consideration. Notably, any impacts related to minimum Partner Share commitments in connection with agreements with certain FI partners are not added back to net loss in order to calculate Adjusted EBITDA. Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends and to generate future operating plans, make strategic decisions regarding the allocation of capital and invest in initiatives that are focused on cultivating new markets for our solution. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Adjusted EBITDA is not a measure calculated in accordance with GAAP.
We believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Nevertheless, use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows: (1) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (2) Adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation; (3) Adjusted EBITDA does not reflect tax payments or receipts that may represent a reduction or increase in cash available to us and (4) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of the metric as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our net loss and other GAAP financial results.
Adjusted Net Loss
We define Adjusted Net Loss as our Net Loss before stock-based compensation expense; foreign currency (gain) loss; acquisition, integration and divestitures costs (benefits); amortization of acquired intangibles; change in fair value of contingent consideration; impairment of goodwill and intangible assets; loss on divestiture; restructuring and reduction of force; and income tax benefit. We define Adjusted Net Loss per share as Adjusted Net Loss divided by our weighted-average common shares outstanding, diluted.
Free Cash Flow
We define Free Cash Flow as net cash provided by (used in) operating activities, plus acquisition of property and equipment, acquisition of patents and capitalized software development costs. We believe free cash flow is useful to measure the funds generated in a given period that are available to invest in the business. We believe this supplemental information enhances stockholders' ability to evaluate our performance.
Results of Non-GAAP Measures
Billings
Year Ended December 31, Change Year Ended December 31, Change
in thousands 2023 2022 $ % 2022 2021 $ %
Billings $ 453,426 $ 442,477 10,949 2 $ 442,477 $ 394,075 48,402 12
Billings increased by $10.9 million during 2023 compared to 2022, primarily driven by an increase of $32.8 million in sales to new marketers, offset by a $21.9 million net decrease in sales to existing marketers.
Billings increased by $48.4 million during 2022 compared to 2021, primarily driven by a $6.9 million increase in sales to existing marketers and an increase of $41.5 million in sales to new marketers.
44
The following table presents a reconciliation of billings to revenue, the most directly comparable GAAP measure, for each of the periods indicated (in thousands):
Year Ended December 31,
2023 2022 2021
Consolidated
Revenue $ 309,204 $ 298,542 $ 267,116
Plus:
Consumer Incentives 144,222 143,935 126,959
Billings $ 453,426 $ 442,477 $ 394,075
Cardlytics platform
Revenue $ 285,425 $ 277,185 $ 258,754
Plus:
Consumer Incentives 144,222 143,935 126,959
Billings $ 429,647 $ 421,120 $ 385,713
Bridg platform
Revenue $ 23,779 $ 21,357 $ 8,362
Plus:
Consumer Incentives — — —
Billings $ 23,779 $ 21,357 $ 8,362
45
Adjusted Contribution
The following table presents a reconciliation of Adjusted Contribution to gross profit, the most directly comparable GAAP measure, for each of the periods indicated (in thousands):
Year Ended December 31,
2023 2022 2021
Consolidated
Revenue $ 309,204 $ 298,542 $ 267,116
Minus:
Partner Share and other third-party costs 150,578 155,507 141,273
Delivery costs (1)
28,248 30,403 22,503
Gross Profit 130,378 112,632 103,340
Plus:
Delivery costs (1)
28,248 30,403 22,503
Deferred implementation costs (2)
— — 3,785
Adjusted Contribution $ 158,626 $ 143,035 $ 129,628
Cardlytics platform
Revenue $ 285,425 $ 277,185 $ 258,754
Minus:
Partner Share and other third-party costs 149,907 154,204 140,864
Delivery costs (1)
21,447 24,112 18,111
Gross Profit 114,071 98,869 99,779
Plus:
Delivery costs (1)
21,447 24,112 18,111
Deferred implementation costs (2)
— — 3,785
Adjusted Contribution $ 135,518 $ 122,981 $ 121,675
Bridg platform
Revenue $ 23,779 $ 21,357 $ 8,362
Minus:
Partner Share and other third-party costs 671 1,303 409
Delivery costs (1)
6,801 6,291 4,392
Gross Profit 16,307 13,763 3,561
Plus:
Delivery costs (1)
6,801 6,291 4,392
Adjusted Contribution $ 23,108 $ 20,054 $ 7,953
(1) Stock-based compensation expense recognized in consolidated delivery costs totaled $2.4 million, $2.7 million and $1.9 million during 2023, 2022 and 2021, respectively.
(2) Deferred implementation costs is excluded from Adjusted Partner Share and other third-party costs as follows (in thousands):
Year Ended December 31, 2021
Cardlytics Platform Bridg Platform Consolidated
Partner Share and other third-party costs $ 140,864 $ 409 $ 141,273
Minus:
Deferred implementation costs 3,785 — 3,785
Adjusted Partner Share and other third-party costs $ 137,079 $ 409 $ 137,488
46
Adjusted EBITDA
The following table presents a reconciliation of Adjusted EBITDA to Net Loss, the most directly comparable GAAP measure, for each of the periods indicated (in thousands):
Year Ended December 31,
2023 2022 2021
Net Loss $ (134,702) $ (465,264) $ (128,565)
Plus:
Interest expense, net 2,336 2,556 12,563
Depreciation and amortization 26,460 37,544 29,871
Stock-based compensation expense 40,980 44,686 50,264
Acquisition, integration and divestiture (benefits) costs (6,313) (2,874) 24,372
Change in fair value of contingent consideration 1,246 (128,174) 1,374
Foreign currency (gain) loss (3,304) 6,376 1,267
Impairment of goodwill and intangible assets 70,518 453,288 —
Loss on divestiture 6,550 — —
Restructuring and reduction of force — 8,139 713
Income tax benefit — (1,446) (7,864)
Deferred implementation costs — — 3,785
Adjusted EBITDA $ 3,771 $ (45,169) $ (12,220)
47
The following table presents a reconciliation of Adjusted EBITDA to Adjusted Contribution, the most directly comparable segment income measure, for each of the periods indicated (in thousands):
Year Ended December 31,
2023 2022 2021
Consolidated
Adjusted Contribution $ 158,626 $ 143,034 $ 129,628
Minus:
Delivery costs 28,248 30,402 22,503
Sales and marketing expense 57,425 74,745 65,996
Research and development expense 51,352 54,435 38,104
General and administration expense 58,810 81,446 66,222
Stock-based compensation expense (40,980) (44,686) (50,264)
Restructuring and reduction of force — (8,139) (713)
Adjusted EBITDA $ 3,771 $ (45,169) $ (12,220)
Cardlytics platform
Adjusted Contribution $ 135,518 $ 122,981 $ 121,675
Minus:
Delivery costs 21,447 24,112 18,170
Sales and marketing expense 48,671 67,830 62,771
Research and development expense 45,746 47,579 35,393
General and administration expense 56,542 79,069 63,379
Stock-based compensation expense (37,782) (43,490) (47,223)
Restructuring and reduction of force — (8,139) (713)
Adjusted EBITDA $ 894 $ (43,980) $ (10,102)
Bridg platform
Adjusted Contribution $ 23,108 $ 20,053 $ 7,953
Minus:
Delivery costs 6,801 6,290 4,333
Sales and marketing expense 8,754 6,915 3,225
Research and development expense 5,606 6,856 2,711
General and administration expense 2,268 2,377 2,843
Stock-based compensation expense (3,198) (1,196) (3,041)
Restructuring and reduction of force — — —
Adjusted EBITDA $ 2,877 $ (1,189) $ (2,118)
48
Adjusted Net Loss
The following table presents a reconciliation of Adjusted Net Loss to Net Loss, the most directly comparable GAAP measure, for each of the periods indicated (in thousands):
Year Ended December 31,
2023 2022 2021
Net Loss $ (134,702) $ (465,264) $ (128,565)
Plus:
Stock-based compensation expense 40,980 44,686 50,264
Foreign currency (gain) loss (3,304) 6,376 1,267
Acquisition, integration and divestiture (benefits) costs (6,313) (2,874) 24,372
Amortization of acquired intangibles 13,589 25,019 19,712
Change in fair value of contingent consideration 1,246 (128,174) 1,374
Impairment of goodwill and intangible assets 70,518 453,288 —
Loss on divestiture 6,550 — —
Restructuring and reduction of force — 8,139 713
Income tax benefit — (1,446) (7,864)
Adjusted Net Loss $ (11,436) $ (60,250) $ (38,727)
Weighted-average number of shares of common stock used in computing Adjusted net loss per share:
Weighted-average common shares outstanding, diluted 36,488 33,419 32,202
Adjusted weighted-average common shares outstanding, diluted 36,488 33,419 32,202
Adjusted Net Loss per share attributable to common stockholders, diluted $ (0.31) $ (1.80) $ (1.20)
Free Cash Flow
The following is a reconciliation of free cash flow to the most comparable GAAP measure, net cash used in operating activities (in thousands):
Year Ended December 31,
2023 2022 2021
Net cash used in operating activities $ (185) $ (53,904) $ (38,523)
Plus:
Acquisition of property and equipment (667) (1,171) (3,108)
Acquisition of patents — (175) (133)
Capitalized software development costs (11,725) (12,140) (9,323)
Free Cash Flow $ (12,577) $ (67,390) $ (51,087)
Components of Results of Operations
Revenue
We sell our Cardlytics platform solution by entering into agreements directly with marketers or their marketing agencies, generally through the execution of insertion orders. The insertion orders state the terms of the arrangement, the negotiated fee, payment terms and the fixed period of time of the campaign. We invoice marketers monthly based on the qualifying purchases of our partners' customers as reported by our partners during the month. We report our revenue net of Consumer Incentives and gross of Partner Share and other third-party costs. The Bridg platform generates revenue through the sale of subscriptions to our cloud-based customer-data platform and the delivery of professional services, such as implementation, onboarding and technical support in connection with each subscription. We recognize subscription revenue on a ratable basis over the contract term beginning on the date that our service is made available to the customer.
49
Cost and Expense
We classify our expenses into the following categories: Partner Share and other third-party costs; delivery costs; sales and marketing expense; research and development expense; general and administrative expense; and depreciation and amortization expense.
Partner Share and Other Third-Party Costs
Partner Share and other third-party costs consist primarily of the Partner Share that we pay our partners, media and data costs and deferred implementation costs incurred pursuant to our agreements with certain partners. To the extent that we use a specific partners' customer's anonymized purchase data in the delivery of our solutions, we generally pay the applicable partner a Partner Share calculated based on the relative contribution of the data provided by the partner to the overall delivery of the services. We expect that our Partner Share and other third-party costs will increase in absolute dollars as a result of our revenue growth.
Delivery Costs
Delivery costs consist primarily of personnel costs of our campaign, data operations and production support teams, including salaries, benefits, bonuses, stock-based compensation and payroll taxes. Delivery costs also include hosting costs, purchased or licensed software costs, outsourcing costs and professional services costs. As we continue to migrate our technology to the cloud, our delivery costs will increase in absolute dollars and if such anticipated revenue growth does not occur, our delivery costs as a percentage of revenue will be adversely affected. Over time, we expect delivery costs will decline as a percentage of revenue.
Sales and Marketing Expense
Sales and marketing expense consists primarily of personnel costs of our sales, account management, marketing and analytics teams, including salaries, benefits, bonuses, commissions, stock-based compensation and payroll taxes. Sales and marketing expense also includes professional fees, marketing programs such as trade shows, marketing materials, public relations, sponsorships and other brand building expenses, as well as outsourcing costs, travel and entertainment expenses and company-funded consumer testing expenses for certain marketers that are not current customers. We expect that our sales and marketing expense will increase in absolute dollars as a result of hiring new sales representatives and as we invest to enhance our brand. Over time, we expect sales and marketing expenses will decline as a percentage of revenue.
Research and Development Expense
Research and development expense consists primarily of personnel costs of our information technology ("IT") engineering, IT architecture and product development teams, including salaries, benefits, bonuses, stock-based compensation and payroll taxes. Research and development expense also includes outsourcing costs, software licensing costs, professional fees and travel expenses. We focus our research and development efforts on improving our solutions and developing new ones. We expect research and development expense to increase in absolute dollars as we continue to create new solutions and improve the functionality of our existing solutions.
General and Administrative Expense
General and administrative expense consists of personnel costs of our executive, finance, legal, compliance, IT support and human resources teams, including salaries, benefits, bonuses, stock-based compensation and payroll taxes. General and administrative expense also includes professional fees for external legal, accounting and consulting services, financing transaction costs, facilities costs such as rent and utilities, royalties, bad debt expense, travel expense, property taxes and franchise taxes. We expect that general and administrative expenses will increase on an absolute dollar basis but decrease as a percentage of revenue as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business.
50
Acquisition, Integration and Divestiture Costs
Acquisition costs primarily represent diligence efforts, legal and advisory costs, broker fees and insurance premiums. Integration costs primarily represent integration-related employee compensation, advisory costs and travel costs. Divestiture costs primarily represent legal and other professional fees.
Change in Fair Value of Contingent Consideration
Our acquisition of Bridg included a component of contingent consideration to be paid to the sellers if certain performance levels were achieved by Bridg over a specific period of time. Contingent consideration is initially recorded at fair value on the acquisition date based, in part, on a range of estimated probabilities for achievement of these performance levels. The fair value is periodically adjusted as actual performance levels become known and updates are made to the estimated probabilities for future performance. A gain or loss is recognized in the income statement for fair value adjustments. If we make additional acquisitions, it is possible that we will incur gains or losses in the future due to the change in the fair value of contingent consideration.
Impairment of Goodwill and Intangible Assets
Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives. We evaluate the recoverability of our finite-lived intangible assets and other long-lived assets whenever events or substantive changes in circumstances indicate that the carrying amount may not be recoverable. The impairment analysis involves determining whether the estimated fair value of each intangible asset exceeds its carrying amount. Our estimation of the fair value of definite lived intangible assets include the use of discounted cash flow analyses, which reflected estimates of future revenue, customer attrition rates, royalty rates, cash flows and discount rates.
Goodwill represents the purchase consideration of an acquired business that exceeds the fair value of the net tangible and identifiable intangible assets. Goodwill is evaluated for impairment by reporting unit annually in the fourth quarter, specifically October 1, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate or a significant d ecrease in expected cash flows.
Loss on Divestiture
Loss on divestiture of businesses consists of loss on the sale of a business during the year ended December 31, 2023.
Depreciation and Amortization Expense
Depreciation and amortization expense includes depreciation of property and equipment over the estimated useful life of the applicable asset as well as amortization of acquired intangible assets, deferred patent costs and capitalized internal-use software development costs.
Interest Expense, Net
Interest expense, net consists of interest incurred on our debt facilities, as well as related discount amortization and financing costs, partially offset by interest income on our cash balances.
Foreign Currency Gain (Loss)
Foreign currency gain (loss) consists primarily of gains and losses on foreign currency transactions.
Income Tax Benefit
We have generated losses before income taxes in the U.S., U.K. and most U.S. state income tax jurisdictions. We have generated historical net losses and recorded a full valuation allowance against our net deferred tax assets, and 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. For the periods presented, income tax benefit represents the release of a portion of our valuation allowance in connection with deferred tax liabilities arising from our acquisitions of Dosh and Bridg.
51
Results of Operations
The following table sets forth our consolidated statements of operations (in thousands):
Year Ended December 31,
2023 2022 2021
Revenue $ 309,204 $ 298,542 $ 267,116
Costs and expenses:
Partner Share and other third-party costs 150,578 155,507 141,273
Delivery costs 28,248 30,403 22,503
Sales and marketing expense 57,425 74,745 65,996
Research and development expense 51,352 54,435 38,104
General and administrative expense 58,810 81,446 66,222
Acquisition, integration and divestiture (benefits) costs (6,313) (2,874) 24,372
Change in fair value of contingent consideration 1,246 (128,174) 1,374
Impairment of goodwill and intangible assets 70,518 453,288 —
Loss on divestiture 6,550 — —
Depreciation and amortization expense 26,460 37,544 29,871
Total costs and expenses 444,874 756,320 389,715
Operating loss (135,670) (457,778) (122,599)
Other income (expense):
Interest expense, net (2,336) (2,556) (12,563)
Foreign currency gain (loss) 3,304 (6,376) (1,267)
Total other income (expense) 968 (8,932) (13,830)
Loss before income taxes (134,702) (466,710) (136,429)
Income tax benefit — 1,446 7,864
Net Loss $ (134,702) $ (465,264) $ (128,565)
Comparison of Years Ended December 31, 2023 and 2022
In this section, we discuss the results of our operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022.
Revenue
Year Ended December 31, Change
in thousands 2023 2022 $ %
Billings $ 453,426 $ 442,477 $ 10,949 2 %
Consumer Incentives 144,222 143,935 287 —
Revenue $ 309,204 $ 298,542 $ 10,662 4 %
% of billings 68 % 67 %
The $10.7 million increase in revenue during 2023 compared to 2022 was comprised of a $10.9 million increase in billings, offset by a $0.3 million increase in Consumer Incentives. During 2023, our Consumer Incentives grew at a lower rate than billings, due changes in FI partner mix and pricing, as well as a one-time benefit of $2.2 million related to rewards in a prior period.
52
Costs and Expenses
Partner Share and Other Third-Party Costs
Year Ended December 31, Change
in thousands 2023 2022 $ %
Total Partner Share and other third-party costs $ 150,578 $ 155,507 $ (4,929) (3) %
% of Revenue 49 % 52 %
Partner Share and other third-party costs decreased by $4.9 million during 2023 compared to 2022. In 2023, we recognized $1.3 million of our expected minimum Partner Share commitment shortfall compared to $3.2 million in 2022. The balance in Partner Share and other third-party costs decreased by $3.0 million during 2023 compared to 2022 due to negotiated terms with FI share partners.
Delivery Costs
Year Ended December 31, Change
in thousands 2023 2022 $ %
Delivery costs excluding stock-based compensation expense and restructuring and reduction of force $ 25,821 $ 25,860 $ (39) — %
Plus:
Stock-based compensation expense 2,427 2,682 (255) (10)
Restructuring and reduction of force — 1,861 (1,861) (100)
Total delivery costs $ 28,248 $ 30,403 $ (2,155) (7) %
% of Revenue 9 % 10 %
Delivery costs decreased by $2.2 million during 2023 compared to the 2022 . Delivery costs expense excluding stock-based compensation and restructuring and reduction of force decreased by less than $0.1 million during 2023 compared to 2022 , due to a $3.9 million decrease in headcount, offset by a $3.9 million increase in hosting costs related to migrating certain data and applications to a cloud computing environment .
Sales and Marketing Expense
Year Ended December 31, Change
in thousands 2023 2022 $ %
Sales and marketing expense excluding stock-based compensation expense and restructuring and reduction of force $ 44,803 $ 60,671 $ (15,868) (26) %
Plus:
Stock-based compensation expense 12,624 11,935 689 6
Restructuring and reduction of force (2) 2,139 (2,141) (100)
Total sales and marketing expense $ 57,425 $ 74,745 $ (17,320) (23) %
% of Revenue 25 % 25 %
Sales and marketing expense decreased by $17.3 million during 2023 compared to 2022. Sales and marketing expense excluding stock-based compensation and restructuring and reduction of force decreased by $15.9 million primarily due to a $10.7 million decrease in headcount , a $2.4 million decrease in marketing events, a $1.8 million decrease in professional fees, a $0.5 million decrease in facility expense, a $0.3 million decrease in software licensing costs and a $0.2 million decrease in travel expenses.
53
Research and Development Expense
Year Ended December 31, Change
in thousands 2023 2022 $ %
Research and development expense excluding stock-based compensation expense and restructuring and reduction of force $ 34,960 $ 39,573 $ (4,613) (12) %
Plus:
Stock-based compensation expense 16,392 13,262 3,130 24
Restructuring and reduction of force — 1,600 (1,600) (100)
Total research and development expense $ 51,352 $ 54,435 $ (3,083) (6) %
% of Revenue 17 % 18 %
Research and development expense decreased by $3.1 million during 2023 compared to 2022. Research and development expense excluding stock-based compensation and restructuring and reduction of force decreased by $4.6 million primarily due to a $5.9 million decrease in headcount, a $1.5 million increase in capital development and a $0.5 million tax benefit, partially offset by a $2.4 million increase in non staff software licensing and data storage costs related to operations and a $0.9 million increase in professional fees.
General and Administrative Expense
Year Ended December 31, Change
in thousands 2023 2022 $ %
General and administrative expense excluding stock-based compensation expense and restructuring and reduction of force $ 49,273 $ 62,168 $ (12,895) (21) %
Plus:
Stock-based compensation expense 9,537 16,807 (7,270) (43)
Restructuring and reduction of force — 2,471 (2,471) (100)
Total general and administrative expense $ 58,810 $ 81,446 $ (22,636) (28) %
% of Revenue 19 % 27 %
General and administrative expense decreased by $22.6 million during 2023 compared to 2022. General and administrative expense excluding stock-based compensation and restructuring and reduction of force decreased by $12.9 million primarily due to a $4.0 million decrease in software licensing costs, a $4.0 million decrease in headcount, a $1.0 million reduction in professional fees, a $0.8 million tax benefit, a $0.7 million reduction in bad debt, a $0.7 million reduction in other administrative expense, a $0.5 million reduction in training expenses and a $0.5 million reduction in marketing events, partially offset by a $0.7 million increase in our insurance premiums.
Stock-based Compensation Expense
The following table summarizes the allocation of stock-based compensation in the consolidated statements of operations (dollars in thousands):
Year Ended December 31, Change
2023 2022 $ %
Delivery costs $ 2,427 $ 2,682 $ (255) (10) %
Sales and marketing expense 12,624 11,935 689 6
Research and development expense 16,392 13,262 3,130 24
General and administrative expense 9,537 16,807 (7,270) (43)
Total stock-based compensation expense $ 40,980 $ 44,686 $ (3,706) (8) %
% of Revenue 13 % 15 %
54
Stock-based compensation expense decreased by $3.7 million during 2023 compared to 2022 primarily driven by the reversal of the 2021 PSUs and higher forfeitures related to executive departures that occurred in 2023. In 2022, we recorded a benefit related to the reversal of the 2020 PSUs. We believe that both the 2020 PSUs and 2021 PSUs are no longer likely to vest. Refer to Note 10—Stock-based Compensation to our consolidated financial statements for additional information regarding the change in stock compensation expense.
Acquisition, integration and divestiture benefits
Year Ended December 31, Change
in thousands 2023 2022 $ %
Acquisition, integration and divestiture (benefits) $ (6,313) (2,874) $ (3,439) 120 %
% of Revenue (2) % (1) %
Acquisition and integration benefits increased by $3.4 million during 2023 compared to 2022. During 2023, we incurred a $6.8 million benefit due to a reduction of brokerage fee related to the reduction of our estimate of contingent consideration related to the First Anniversary Payment Amount to Bridg, partially offset by a $0.5 million expense due to the divestiture of Entertainment. During 2022 we recognized a $2.9 million benefit primarily due to a reduction of brokerage fee related to the reduction of our estimate of contingent consideration related to the First Anniversary Payment Amount to Bridg, partially offset by $0.1 million of expense incurred by the acquisition of Entertainment. Refer to Note 4—Business Combinations to our consolidated financial statements for additional information regarding these acquisitions.
Change in fair value of contingent consideration
Year Ended December 31, Change
in thousands 2023 2022 $ %
Change in fair value of contingent consideration $ 1,246 $ (128,174) $ 129,420 (101) %
% of Revenue — % (43) %
During 2023 and 2022, we recognized a $1.2 million loss and $128.2 million gain, respectively, in the fair value of contingent consideration due to the change in value owed to the former Bridg shareholders. Refer to Note 12—Fair Value Measurements to our consolidated financial statements for additional information regarding the contingent consideration.
Impairment of goodwill and intangible assets
Year Ended December 31, Change
in thousands 2023 2022 $ %
Impairment of goodwill and intangible assets $ 70,518 $ 453,288 $ (382,770) (84) %
% of Revenue 23 % 152 %
During 2023, we recognized $70.5 million of impairment of goodwill and intangible assets related to the Bridg platform. During 2022, we recognized $453.3 million of impairment of goodwill and intangible assets related to the Cardlytics and Bridg platforms. The impairment of goodwill and intangible assets resulted from a continued slowdown in the economy, decreased consumer spend, and a sustained decline in our stock price. Refer to Note 5—Goodwill and Acquired Intangibles to our condensed consolidated financial statements for additional information regarding the goodwill impairment.
55
Loss on divestiture
Year Ended December 31, Change
in thousands 2023 2022 $ %
Loss on divestiture $ 6,550 $ — $ 6,550 n/a
% of Revenue 2 % n/a
On December 7, 2023 we sold and transferred substantially all of the assets of Entertainment for $6.0 million in cash, subject to a combined $1.1 million held in escrow for indemnities and sales and use taxes, as well as customary post-closing adjustment. The resulting loss on sale of $6.6 million is recorded within "Loss on divestiture" within the statement of operations. Refer to Note 4—Business Combinations to our condensed consolidated financial statements for additional information regarding the loss on divestiture.
Depreciation and Amortization Expense
Year Ended December 31, Change
in thousands 2023 2022 $ %
Depreciation and amortization expense $ 26,460 $ 37,544 $ (11,084) (30) %
% of Revenue 9 % 13 %
Depreciation and amortization expense decreased by $11.1 million during 2023 compared to 2022, primarily due to our impairment of intangible assets in the fourth quarter of 2023.
Interest Expense, Net
Year Ended December 31, Change
in thousands 2023 2022 $ %
Interest expense $ (6,183) $ (3,994) $ (2,189) 55 %
Interest income 3,847 1,438 2,409 168
Interest expense, net $ (2,336) $ (2,556) $ 220 (9) %
% of Revenue (1) % (1) %
Interest expense, net decreased by $0.2 million during 2023 compared to 2022 primarily as a result of an increase in interest income, which is driven by higher interest rates on our money market and direct deposits account, and partially offset by additional interest expense resulting from the borrowing of $30.0 million against our 2018 Line of Credit during the year ended December 31, 2023.
Foreign Currency Gain (Loss)
Year Ended December 31, Change
in thousands 2023 2022 $ %
Foreign currency gain (loss) $ 3,304 $ (6,376) $ 9,680 (152) %
% of Revenue 1 % (2) %
Foreign currency gain (loss) was $3.3 million during 2023 compared to foreign currency loss of $6.4 million during 2022, primarily due to the decrease in the value of the British pound relative to the U.S. dollar.
56
Income Tax Benefit
Year Ended December 31, Change
in thousands 2023 2022 $ %
Income tax benefit $ — $ 1,446 $ (1,446) (100) %
% of Revenue — % — %
Income tax benefit was $1.4 million during 2022 due to the release of a portion of our valuation allowance in connection with deferred tax liabilities arising from our acquisitions of Dosh and Bridg. There was no income tax benefit in 2023.
Liquidity and Capital Resources
The following table summarizes our cash and cash equivalents, restricted cash, working capital, accounts receivable and contract assets, net and unused available borrowings (in thousands):
December 31,
2023 2022
Cash and cash equivalents $ 91,830 $ 121,905
Restricted cash — 80
Working capital (1)
52,779 1,098
Accounts receivable and contract assets, net 120,622 115,609
Unused available borrowings 16,688 60,000
(1) We define working capital as current assets less current liabilities. See our consolidated financial statements for further details regarding our current assets and current liabilities.
Our cash and cash equivalents are available for working capital purposes. We do not enter into investments for trading purposes, and our investment policy is to invest any excess cash in short-term, highly liquid investments that limit the risk of principal loss. A significant 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. Although the Company deposits cash with high credit-quality financial institutions, its deposits, at times, may exceed federally insured limits. The Company believes no significant concentration risk exists with respect to its cash or cash equivalents. As of December 31, 2023, our demand deposit accounts earned an approximately 5.0% annual rate of interest. As of December 31, 2023, we had $3.4 million in cash and cash equivalents in the U.K. Our U.K. cash balances are denominated in British pounds and as a result, may fluctuate based on changes in the exchange rate. Refer to Item 7A. Qualitative and Quantitative Disclosures About Market Risk for additional information about our foreign currency exchange risk. While our investment in our operations in the U.K. is not considered indefinitely invested, we do not plan to repatriate these funds.
Through December 31, 2023, we have incurred accumulated net losses of $1,111.3 million since inception, including net losses of $134.7 million, $465.3 million and $128.6 million during 2023, 2022 and 2021, respectively. We expect to incur additional operating losses as we continue our efforts to grow our business. We have historically financed our operations and capital expenditures through convertible note financings, private placements of our redeemable convertible preferred stock, public offerings of our common stock as well as lines of credit and term loans.
As part of our acquisition of Bridg, Inc. ("Bridg") and pursuant to the terms of the Agreement and Plan of Merger dated as of April 12, 2021, as amended (the "Merger Agreement"), we agreed to make two earnout payments – the First Anniversary Payment Amount and the Second Anniversary Payment Amount – based on the First Anniversary ARR and the Second Anniversary ARR of Bridg, respectively.
As of December 31, 2023, we had paid the First Anniversary Payment Amount consisting of $50.1 million of cash and 2,740,418 shares of our common stock to the Stockholder Representative, inclusive of brokerage fees and transaction bonuses and accounting for all true-ups and credits.
57
On January 25, 2024, we entered into the Settlement Agreement with the Stockholder Representative to resolve all outstanding disputes related to the Merger Agreement, pursuant to which we agreed to pay $25.0 million in cash and issue 3,600,000 shares of our common stock to the Stockholder Representative, inclusive of broker fees and transaction bonuses. Pursuant to the Settlement Agreement, we paid the Stockholder Representative $20 million in cash on January 26, 2024 and we issued 3,600,000 shares of our common stock on February 1, 2024. The remaining cash payments related to the Settlement Agreement will be paid in two tranches, with $3.0 million to be paid by January 31, 2025 and $2.0 million to be paid by June 30, 2025. Refer to Note 13—Commitments and Contingencies for further information about the Bridg acquisition and related contingent consideration.
Our other future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, our merger and acquisition efforts, the continued expansion of sales and marketing activities, the enhancement of our platforms, the introduction of new solutions and the continued market acceptance of our solutions. We expect to continue to incur operating losses for the foreseeable future and may require additional capital resources to continue to grow our business. We believe that current cash and cash equivalents will be sufficient to fund our operations and capital requirements for at least the next 12 months following the date our consolidated financial statements were issued and in the long-term. However, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be materially and adversely impacted. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all.
Sources of Material Cash Requirements
The following table summarizes our material cash requirements for future periods (in thousands):
Material Cash Requirements Due by the Year Ended December 31,
2024 2025 - 2026 2027 - 2029 Thereafter Total
Convertible senior notes (1)
$ 2,300 $ 260,096 $ — $ — $ 262,396
Finance leases (2)
39 50 — — 89
Operating leases (3)
2,225 3,531 1,170 3,394 10,320
Cash portion of contingent consideration (4)
5,000 — — — 5,000
Partner share commitments (5)
3,300 — — — 3,300
Purchase obligations (6)
29,716 38,768 — — 68,484
Total $ 42,580 $ 302,445 $ 1,170 $ 3,394 $ 349,589
(1) Convertible senior notes were issued on September 22, 2020 and have an aggregate principal amount of $230.0 million bearing interest of 1.00%.
(2) Finance leases represent principal and interest payments.
(3) Operating lease obligations represent future minimum lease payments under our non-cancelable operating leases with an initial term in excess of one year.
(4) On January 25, 2024, we entered into the Settlement Agreement with the Stockholder Representative to resolve all outstanding disputes related to the Merger Agreement, pursuant to which we agreed to pay $25.0 million in cash and issue 3,600,000 shares of our common stock to the Stockholder Representative, inclusive of broker fees and transaction bonuses. This amount represents the remaining portion to be paid out according to the terms of the Settlement Agreement, inclusive of broker fees and transaction bonuses.
(5) We had a minimum Partner Share commitment to a certain FI partner totaling $10.0 million over a 12-month period which ended on March 31, 2023 and resulted in an accrual of $4.5 million for the Partner Share shortfall as of that date. The Partner Share shortfall is included within Partner Share liability on our condensed consolidated balance sheet. As of December 31, 2023, we paid our shortfall of $1.2 million and will pay the remaining installments on a quarterly basis over the next three quarters. During the years ended December 31, 2023 and 2022, we recognized $1.3 million and $3.2 million, respectively, of expected minimum Partner Share commitment shortfalls within Partner Share and other third-party costs on our condensed consolidated statements of operations.
(6) Purchase obligations include all legally binding contracts such as hardware, software, licenses and service contracts. Purchase orders that are not binding agreements are excluded from the table above.
The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table above does not include obligations under agreements that we can cancel without a significant penalty.
58
2018 Loan Facility
On April 29, 2022, we amended our 2018 Loan Facility to increase the capacity of our Line of Credit from $50.0 million to $60.0 million with an option to increase to $75.0 million upon syndication. This amendment also extended the maturity date of the 2018 Loan Facility from December 31, 2022 to April 29, 2024, and further stated that if we had positive Adjusted EBITDA by December 31, 2023, we could extend the maturity date of the loan to April 29, 2025. Additionally with this amendment, the former cash covenant, as described below, was removed and was replaced with a requirement to maintain a minimum level of Adjusted Contribution and a minimum adjusted cash of $25.0 million, which is reduced by eligible accounts receivable in excess of the loan capacity. On November 29, 2022, we amended our 2018 Loan Facility to modify the eligible account receivable to exclude U.K. accounts, reduce the ability to borrow up to 85% of the amount of our eligible accounts receivable to 50% and adjusted the required minimum level of Adjusted Contribution. On February 16, 2023, we amended our 2018 Loan Facility to remove and replace the former Adjusted Contribution covenant with a requirement to maintain a minimum level of Adjusted EBITDA. On May 3, 2023, we amended our 2018 Loan Facility to modify the covenants related to the maximum amount of cash we are allowed to pay for the First Anniversary Payment Amount and Second Anniversary Payment Amount under the Merger Agreement. On February 9, 2024, we amended our 2018 Loan Facility to increase the ability to borrow up to 75% of the amount of our eligible accounts receivable, adjusted the required minimum level of Adjusted EBITDA and increased the interest rate to the prime rate plus 0.25%. We also confirmed the extension of the maturity date of the loan to April 29, 2025 based on our positive Adjusted EBITDA result.
As of December 31, 2023, interest on advances under the 2018 Line of Credit bore an interest rate equal to the prime rate of 8.50%. In addition, we are required to pay an unused line fee of 0.15% per annum on the average daily unused amount of the $60.0 million revolving commitment, which remains unchanged in the most recent amendment.
The 2018 Loan Facility includes customary representations, warranties and covenants (affirmative and negative), including restrictive covenants that prohibit mergers, acquisitions, dispositions of assets, inccurrence of indebtedness, 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.
During the year ended December 31, 2023, we borrowed $30.0 million against our 2018 Line of Credit. Interest on advances bears an interest rate equal to the prime rate of 8.50% as of December 31, 2023. During the year ended December 31, 2023, we incurred approximately $2.1 million of interest expense associated with the 2018 Loan Facility. In addition, we are required to pay an unused line fee of 0.15% per annum on the average daily unused amount of the revolving commitment. As of December 31, 2023, we had $16.7 million of unused available borrowings under our 2018 Line of Credit. We believe we are in compliance with all financial covenants as of December 31, 2023.
Uses of Funds
Our collection cycles can vary from period to period based on the payment practices of our marketers and their agencies. We are generally obligated to pay Consumer Incentives between one and four months following redemption, regardless of whether we have collected payment from a marketer or its agency. We are generally obligated to pay our FI partners' Partner Share by the end of the month following our collection of payment from the applicable marketer or its agency. As a result, timing of cash receipts from our marketers can significantly impact our operating cash flows for any period. Further, the timing of payment of commitments and implementation fees to our FI partners may also result in variability of our operating cash flows for any period.
Our operating cash flows also vary from quarter to quarter due to the seasonal nature of our marketers’ advertising spending. Many marketers tend to devote a significant portion of their marketing budgets to the fourth quarter of the calendar year to coincide with consumer holiday spending and reduce marketing spend in the first quarter of the calendar year. Any lag between the timing of our payments to FI partners and our receipt of payment from marketers and their agencies can exacerbate our need for working capital during the first quarter of the calendar year.
59
Historical Cash Flows
In this section, we discuss the activity of our cash flows for the year ended December 31, 2023 and the year ended December 31, 2022. For a discussion of the year ended December 31, 2022, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year ended December 31, 2021.
The following table shows a summary of our cash flows for the periods presented (in thousands):
Year Ended December 31,
2023 2022
Cash, cash equivalents and restricted cash at beginning of period $ 121,985 $ 233,562
Net cash used in operating activities (185) (53,904)
Net cash used in investing activities (10,062) (15,760)
Net cash used in financing activities (20,026) (39,987)
Effect of exchange rates on cash, cash equivalents and restricted cash 118 (1,926)
Cash, cash equivalents and restricted cash at end of period $ 91,830 $ 121,985
Operating Activities
Historically, we have experienced negative operating cash flows, which reflects our investments to grow our business. Over time, we expect our business to generate positive operating cash flows. Given the seasonal nature of our marketer's advertising spending and our continued investment in our business, we may experience periods of negative operating cash flows from operations.
Operating activities used $0.2 million of cash in 2023, which reflected our net loss of $134.7 million, $148.0 million of which were non-cash charges, and a $13.5 million change in our net operating assets and liabilities. The non-cash charges primarily related to stock-based compensation expense, depreciation and amortization expense (including the amortization of acquired intangible assets) impairment of goodwill and intangible assets, amortization of right-of-use assets, changes in the fair value of our contingent consideration, and credit loss expense. The change in our net operating assets and liabilities was primarily due to a $7.7 million increase in accounts receivable and contract assets, a $7.5 million decrease in other accrued expenses, and a $1.4 million decrease in our Consumer Incentive liability, partially offset by a $2.5 million decrease in prepaid expense and other assets and a $0.4 million increase in Partner Share liability.
Operating activities used $53.9 million of cash in 2022, which reflected our net loss of $465.3 million, $422.7 million of which were non-cash charges, and a $11.3 million change in our net operating assets and liabilities. The non-cash charges primarily related to stock-based compensation expense, depreciation and amortization expense (including the amortization of acquired intangible assets) impairment of goodwill and intangible assets, amortization of right-of-use assets, changes in the fair value of our contingent consideration, credit loss expense and income tax benefit. The change in our net operating assets and liabilities was primarily due to a $4.5 million increase in accounts receivable and contract assets, a $9.5 million decrease in other accrued expenses and a $1.7 million decrease in Partner Share liability, partially offset by a $1.4 million increase in our Consumer Incentive liability.
Investing Activities
Our cash flows used in investing activities are primarily driven by our investments in, and purchases of, property and equipment and costs to develop internal-use software. We expect that we will continue to use cash for investing activities as we continue to invest in and grow our business.
Investing activities used cash totaling $10.1 million and $15.8 million, in 2023 and 2022, respectively. Our investing cash outflows during these periods primarily consisted of funds used for the purchases of technology hardware and costs to develop internal-use software. Additionally, in 2023, we had cash inflows of $2.3 million related to proceeds from divestitures, net of cash divested and in 2022, we had cash outflows of $2.3 million related to business acquisitions, net of cash acquired. Refer to Note 4—Business Combinations to our consolidated financial statements for additional disclosures related to our acquisitions and divestitures.
60
Financing Activities
Our cash flows used in financing activities have primarily been composed of contingent consideration payments to Bridg, repurchasing shares of our common stock, offset by borrowings and repayments under our debt facilities, proceeds from the issuance of common stock and payments for costs related to debt issuances and equity offerings.
Financing activities used $20.0 million in cash in 2023, consisting of $50.1 million paid for the First Anniversary Payment, partially offset by $30.0 million borrowed under our 2018 Line of Credit. Financing activities used $40.0 million in cash in 2022, consisting of $40.0 million used to repurchase shares of our common stock.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. Our most critical accounting policies are summarized below. Refer to the notes to our consolidated financial statements for additional information.
Business Combinations
We estimate the fair value of assets acquired and liabilities assumed in a business combination. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.
Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired technology, useful lives, and discount rates. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. On the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
Fair Value of Contingent Consideration
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 and Impairment of goodwill and intangible assets
Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives. The intangible assets are evaluated whenever events or changes in circumstances indicated that we should estimate the fair value of our individual long-lived assets to determine if any impairment charges were present. Our estimation of the fair value of definite lived intangible assets include the use of discounted cash flow analyses which reflected estimates of future revenue, customer attrition rates, royalty rates, cash flows, and discount rates. Given the significant level of uncertainty that currently exists, management applied several alternative scenarios for market and Company performance over the next several years to determine an estimated fair value. Other key assumptions were updated as appropriate, including the discount rate, which increased as a result of an increase in the equity risk premium, which was partially offset by a decrease in the risk free rate.
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination. We evaluate our goodwill for impairment annually during the fourth quarter and whenever events or changes in circumstances indicate that the fair value of a reporting unit is more likely than not less than the carrying amount. Our reporting units are one level below the operating segments at which level our segment management conducts regular reviews of the operating results.
61
Our impairment evaluation consists of a qualitative assessment. If this assessment indicates that the fair value of the reporting unit is not more likely than not less than the carrying amount, goodwill is not considered impaired. Otherwise, a quantitative impairment test is performed by comparing the fair value of a reporting unit to its carrying value, including goodwill. We can bypass the qualitative assessment for any period and proceed directly to the quantitative impairment test. If the carrying value of the net assets associated with the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and the impairment will be determined as the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
We performed our annual impairment test as of October 1, 2023 and determined that the carrying value of the Bridg platform exceeded its fair value, and accordingly, we recognized goodwill impairment of $70.5 million. The significant judgments in the discounted cash flow analysis for our Bridg platform included the selected discount rate and forecasts of future revenues and cash flows
We performed a quantitative assessment for goodwill in our Cardlytics platform in the U.S. reporting unit and our Bridg platform reporting unit at June 30, 2022, which resulted in a goodwill impairment of $83.1 million recorded to our Bridg platform reporting unit. We performed our annual impairment test as of October 1, 2022, which resulted in goodwill impairment of $313.1 million recorded between our Cardlytics platform in the U.S. and our Bridg platform reporting units. We utilized a discounted cash flow method under the income approach, and to a lesser extent the market approach to value our reporting units. The significant judgments in the discounted cash flow analysis for both our Cardlytics platform in the U.S. and our Bridg platform included the selected discount rate and forecasts of future revenues and cash flows. See Note 5—Goodwill and Acquired Intangibles in our consolidated financial statements for additional information.
We continue to closely monitor developments related to global events and macroeconomic conditions. Changes in market conditions, laws and regulations, and key assumptions made in future quantitative assessments, including forecasted revenues and expected cash flows, competitive factors and discount rates, could negatively impact the results of future impairment testing and could result in the recognition of an additional impairment charge.
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 carry-forwards. 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 net 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.
Recent Accounting Pronouncements
Refer to Note 3—Accounting Standards to our consolidated financial statements for additional information.
62
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign exchange rates.
Interest Rate Risk
The interest rate under the 2018 Line of Credit is variable. Interest on advances under the 2018 Line of Credit bears an interest rate of the prime rate of 8.50%. As of December 31, 2023, the prime rate was 8.50% and a 10% increase in the current prime rate would, for example, result in a $0.5 million annual increase in interest expense if the maximum borrowable amount under the 2018 Line of Credit were outstanding for an entire year. The interest rate on the Notes is fixed at 1.00%. Refer to Note 9—Debt and Financing Arrangements to our consolidated financial statements for additional disclosures related to our debt.
Foreign Currency Exchange Risk
Both revenue and operating expense of Cardlytics UK Limited are denominated in British pounds. We bear foreign currency risks related to the extent that any unfavorable fluctuation in the exchange rate between U.S. dollars and the British pound could result in an adverse impact to either revenue or expense. For example, if the average value of the British pound had been 10% lower relative to the U.S. dollar during 2023, 2022 and 2021, our revenue would have decreased by $1.8 million, 2.3 million and 2.1 million, respectively. The overall impact to net loss would be partially mitigated by decreases in operating expense of $0.5 million, $1.1 million and $1.0 million in 2023, 2022 and 2021, respectively.
63