CARDLYTICS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management's discussion and analysis of financial condition and results of operations for the fiscal year endedDecember 31, 2019 included in our Annual Report on Form 10-K, filed with theSEC onMarch 3, 2020 . This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "will," "would" or the negative or plural of these words or similar expressions or variations, and such forward-looking statements include, but are not limited to, statements with respect to our business strategy, plans and objectives for future operations, including our expectations regarding our expenses; continued enhancements of our platform and new product offerings; our future financial and business performance; the continued phased launch of the Cardlytics Direct program by Wells Fargo; the anticipated continued decline in ARPU as a result of significantFI MAU growth due to Chase and Wells Fargo launching theCardlytics Direct program; anticipated FI Share commitment shortfalls; and the uncertain negative impacts that COVID-19 may have on our business, financial condition, results of operations and changes in overall level of spending and volatility in the global economy. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our otherSEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. OverviewCardlytics operates an advertising platform within financial institutions' ("FIs") digital channels, which include online, mobile, email, and various real-time notifications. Our partnerships with FIs provide us with access to their anonymized purchase data and digital banking customers. By applying advanced analytics to this aggregation of purchase data, we make it actionable, helping marketers identify, reach and influence likely buyers at scale, and measure the true sales impact of their marketing spend. We have strong relationships with leading marketers across a variety of industries, including national and regional restaurant and retail chains, large providers of cable satellite television and wireless services, and increasingly, travel and hospitality, grocery, e-commerce, and luxury brands. Using our purchase intelligence, we present customers with offers to save money at a time when they are thinking of their finances. We have historically derived substantially all of our revenue from sales of Cardlytics Direct. Cardlytics Direct 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 a marketer, we design a campaign that targets consumers based on their purchase history. The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that we collect from marketers to provide these consumer incentives to our FIs' customers after they make qualifying purchases ("Consumer Incentives"). We report our revenue on our condensed consolidated statements of operations net of Consumer Incentives since we do not provide the goods or services that are purchased by our FIs' customers from the marketers to which the Consumer Incentives relate. We generally pay our FI partners a negotiated and fixed percentage of our billings to marketers less any Consumer Incentives that we pay to the FIs' customers and certain third-party data costs ("FI Share"). We report our revenue gross of FI Share. FI Share costs are included in FI Share and other third-party costs in our consolidated statements of operations, rather than as a reduction of revenue, because we and not our FI partners act as the principal in our arrangements with marketers. We run campaigns offering compelling Consumer Incentives to drive an expected rate of return on advertising spend for marketers. At times, we may collaborate with an FI partner to enhance the level of Consumer Incentives to their respective FIs' customers funded by their FI Share. We believe that these investments by our FI partners positively impact our platform by making FIs' customers more highly engaged with our platform. However, these investments negatively impact our GAAP revenue, which is reported net of Consumer Incentives. 18
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Revenue, which is reported net of Consumer Incentives and gross of FI Share and other third-party costs, was$36.0 million and$45.5 million during the three months endedMarch 31, 2019 and 2020, respectively, representing a growth rate of 26%. Billings, a non-GAAP measure that represents the gross amount billed to marketers and is reported gross of both Consumer Incentives and FI Share, was$58.6 million and$67.8 million during the three months endedMarch 31, 2019 and 2020, respectively, representing a growth rate of 16%. Gross profit, which represents revenue less FI Share and other third-party costs and less delivery costs, was$13.7 million and$16.0 million during the three months endedMarch 31, 2019 and 2020, respectively, representing a growth rate of 16%. Adjusted contribution, a non GAAP measure that represents our revenue less our adjusted FI Share and other third-party costs, was$17.6 million and$20.4 million during the three months endedMarch 31, 2019 and 2020, respectively, representing a growth rate of 16%. Billings and adjusted contribution are further defined under the heading "Non-GAAP Measures and Other Performance Metrics" below. We believe these non-GAAP measures, alongside our GAAP revenue and GAAP gross profit, provide useful information to investors for period-to-period comparisons of our core business and in understanding and evaluating our results of operations in the same manner as our management and board of directors. The following table summarizes our results (dollars in thousands): Three Months Ended March 31, Change 2019 2020 $ % Billings(1)$ 58,550 $ 67,776 $ 9,226 16% Consumer Incentives 22,562 22,267 (295 ) (1) Revenue 35,988 45,509 9,521 26 Adjusted FI Share and other third-party costs(1) 18,351 25,130 6,779 37 Adjusted contribution(1) 17,637 20,379 2,742 16 Delivery costs 3,246 3,406 160 5 Amortization of deferred FI implementation costs 653 1,008 355 54 Gross profit$ 13,738 $ 15,965 $ 2,227 16%
(1) Billings, adjusted FI Share and other third-party costs and adjusted
contribution are non-GAAP measures, as detailed below in our reconciliations
of GAAP revenue to billings and GAAP gross profit to adjusted contribution.
During the three months endedMarch 31, 2019 and 2020, our net loss was$6.3 million and$13.5 million , respectively. Our historical losses have been driven by our substantial investments in our purchase intelligence platform and infrastructure, which we believe will enable us to expand the use of our platform by both FIs and marketers. During the three months endedMarch 31, 2019 and 2020, our net loss included stock-based compensation expense of$1.7 million and$4.1 million , respectively.FI Partners Our FI partners includeBank of America, National Association ("Bank of America "),JPMorgan Chase Bank, National Association ("Chase") andWells Fargo Bank, National Association ("Wells Fargo") in theU.S. and Lloyds Bank plc ("Lloyds") and Santander UK plc ("Santander") in theU.K. , as well as many other national and regional financial institutions, including several of the largest bank processors and digital banking providers to reach customers of small and mid-sized FIs. Wells Fargo began a phased launch of our platform in the fourth quarter of 2019 that will continue into the second quarter of 2020. InMarch 2020 , we entered into a five-year agreement withU.S. Bank, National Association to begin a phased launch of the Cardlytics Direct program. For the three months endedMarch 31, 2019 and 2020, our average FI monthly active users ("FI MAUs") were approximately 108.5 million and 140.8 million and our average Cardlytics Direct revenue per user ("ARPU"), was$0.33 and$0.32 , respectively.FI MAU and ARPU are performance metrics defined under the heading "Non-GAAP Measures and Other Performance Metrics" below. The increase in FI MAUs is largely due to Chase launching our Cardlytics Direct program for its online banking channel inMay 2019 and Wells Fargo beginning their phased launch inNovember 2019 . We expect a continued increase in FI MAUs year over year as a result of the launch of Wells Fargo. We expect a continued decline in ARPU year over year as a result of significantFI MAU growth. 19
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As the amount of revenue that we can generate from marketers with respect to Cardlytics Direct is primarily a function of the number of active users on our FI partners' digital banking platforms, we believe that the number of FI MAUs contributed by any FI partner is indicative of our level of dependence on such FI partner. During the three months endedMarch 31, 2019 and 2020, Chase contributed 42% and 48% of our average FI MAUs, respectively.Bank of America contributed 29% and 24% of our average FI MAUs during the three months endedMarch 31, 2019 and 2020, respectively. We anticipate that Chase,Bank of America and, once the phased launch is complete, Wells Fargo will contribute a significant portion of our average FI MAUs for the foreseeable future. FI Partner Commitments Agreements with certain FI partners require us to fund the development of specific enhancements, pay for certain implementation fees, or make milestone payments upon the deployment of our solution. Certain of these agreements provide for future reductions in FI Share due to the FI partner. During 2019, we recovered$4.6 million through FI Share payment reductions,$1.2 million of which had been recovered throughMarch 31, 2019 . The scheduled FI Share payment reductions were completed inDecember 2019 . 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 by the FI partner, which were not met as ofMarch 31, 2020 . The timing of the completion of the milestones is uncertain; however we do not currently believe the FI partner will complete the milestones in 2020. Any expected shortfall will be accrued during the 12-month period following the completion of the milestones. Impacts of COVID-19 Pandemic We remain focused on supporting our marketers, FIs partners, employees and communities during the COVID-19 pandemic. The impact of COVID-19 on the global economy and on our business continues to be a fluid situation. We responded quickly to adopt a virtual corporate strategy to enable all of our employees to work productively from home, guard the health and safety of our team, support our marketers and FI partners, mitigate risk and maximize our financial performance. We are focused on ensuring continuity for our marketers and FI partners. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on industry events, and its effect on consumer spending, our marketers, FI partners, suppliers and vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted at this time. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel, employee work locations, and cancellation of marketing events. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, marketers, FI partners, suppliers, vendors and stockholders. At this point, the extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain. See "Risk Factors" for further discussion of the adverse impacts of the COVID-19 pandemic on our business. Revenue growth for the three months endedMarch 31, 2020 was unfavorably affected by the COVID-19 pandemic and its impact on both consumer discretionary spending and marketers' ability to spend advertising budgets on our solution. During the three months endedMarch 31, 2020 we deferred$0.7 million of revenue and recorded bad debt expense of$1.5 million associated with billings to marketers that we believe are likely to be materially and adversely affected by the slowdown in economic activity resulting from the COVID-19 pandemic. We expect both a reduction in consumer spending and a reduction in marketing campaigns in the near term, which will result in a decline in our revenue and an increase in our net loss in future periods. The severity and duration of this decline is difficult to estimate given the uncertainty that the impacts of COVID-19 will continue to have on the global economy. 20
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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.
Three Months Ended March 31,
2019 2020
(in thousands, except ARPU)
FI MAUs 108,468 140,779
ARPU $ 0.33 $ 0.32
Billings $ 58,550 $ 67,776
Adjusted contribution $ 17,637 $ 20,379
Adjusted EBITDA $ (3,179 ) $ (3,982 )
FI Monthly Active Users
We define FI MAUs as targetable customers or accounts of our FI partners that
logged in and visited the online or mobile banking applications of, or opened an
email containing our offers from, our FI partners during a monthly period. We
then calculate a monthly average of these FI MAUs for the periods presented. We
believe that FI MAUs is an indicator of our and our FI partners' ability to
drive engagement with Cardlytics Direct and is reflective of the marketing base
that we offer to marketers through Cardlytics Direct.
Average Revenue per User
We define ARPU as the total Cardlytics Direct revenue generated in the
applicable period calculated in accordance with generally accepted accounting
principles in the United States ("GAAP"), divided by the average number of FI
MAUs in the applicable period. We believe that ARPU is an indicator of the value
of our relationships with our FI partners with respect to Cardlytics Direct.
Billings
Billings represents the gross amount billed to marketers for advertising
campaigns in order to generate revenue. Billings is reported gross of both
Consumer Incentives and FI Share. Our GAAP revenue is recognized net of Consumer
Incentives and gross of FI Share.
We review billings for internal management purposes. We believe that billings
provides useful information to investors for period-to-period comparisons of our
core business and in understanding and evaluating our results of operations in
the same manner as our management and board of directors. Nevertheless, our use
of billings has limitations as an analytical tool, and you should not consider
it in isolation or as a substitute for analysis of our financial results as
reported under GAAP. Other companies, including companies in our industry that
have similar business arrangements, may address the impact of Consumer
Incentives differently. You should consider billings alongside our other GAAP
financial results.
The following table presents a reconciliation of billings to revenue, the most
directly comparable GAAP measure (in thousands):
Three Months Ended March 31,
2019 2020
Revenue $ 35,988 $ 45,509
Plus:
Consumer Incentives 22,562 22,267
Billings $ 58,550 $ 67,776
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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 amortization of deferred FI 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. Adjusted contribution is also used to
determine the vesting of performance-based equity awards and is used to
determine the achievement of quarterly and annual bonuses across our entire
global employee base, including executives. We view adjusted contribution as an
important operating measure of our financial results. We believe that adjusted
contribution provides useful information to investors and others in
understanding and evaluating our results of operations in the same manner as our
management and board of directors. Adjusted contribution should not be
considered in isolation from, or as an alternative to, measures prepared in
accordance with GAAP. Adjusted contribution should be considered together with
other operating and financial performance measures presented in accordance with
GAAP. Also, adjusted contribution may not necessarily be comparable to similarly
titled measures presented by other companies. Refer to Note 11-Segments to our
condensed consolidated financial statements for further details on our 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):
Three Months Ended March 31,
2019 2020
Revenue $ 35,988 $ 45,509
Minus:
FI Share and other third-party costs 19,004 26,138
Delivery costs(1) 3,246 3,406
Gross profit 13,738 15,965
Plus:
Delivery costs(1) 3,246 3,406
Amortization of deferred FI implementation costs(2) 653 1,008
Adjusted contribution $ 17,637 $ 20,379 (1) Stock-based compensation expense recognized in delivery costs totaled
million and
respectively.
(2) Amortization of deferred FI implementation costs is excluded from adjusted FI
Share and other third party costs as follows (in thousands):
Three Months Ended March 31,
2019 2020
FI Share and other third-party costs $ 19,004 $ 26,138
Minus:
Amortization of deferred FI implementation costs 653
1,008
Adjusted FI Share and other third-party costs
25,130
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Adjusted EBITDA
Adjusted EBITDA represents our net loss before income tax benefit; interest
(expense) income, net; depreciation and amortization expense; stock-based
compensation expense; foreign currency (gain) loss; amortization of deferred FI
implementation costs; and restructuring 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, amortization of deferred FI
implementation costs, depreciation and amortization expense and stock-based
compensation expense. Notably, any impacts related to minimum FI Share
commitments in connection with agreements with certain FI partners are not added
back to net loss in order to calculate adjusted EBITDA. Adjusted EBITDA is a key
measure used by management to understand and evaluate our core operating
performance and trends and to generate future operating plans, make strategic
decisions regarding the allocation of capital and invest in initiatives that are
focused on cultivating new markets for our solution. In particular, the
exclusion of certain expenses in calculating adjusted EBITDA facilitates
comparisons of our operating performance on a period-to-period basis. Adjusted
EBITDA is not a measure calculated in accordance with GAAP.
We believe that adjusted EBITDA provides useful information to investors and
others in understanding and evaluating our operating results in the same manner
as our management and board of directors. Nevertheless, use of adjusted EBITDA
has limitations as an analytical tool, and you should not consider it in
isolation or as a substitute for analysis of our financial results as reported
under GAAP. Some of these limitations are: (1) adjusted EBITDA does not reflect
changes in, or cash requirements for, our working capital needs; (2) adjusted
EBITDA does not reflect the potentially dilutive impact of stock-based
compensation and equity instruments issued to our FI partners; (3) adjusted
EBITDA does not reflect tax payments or receipts that may represent a reduction
or increase in cash available to us; and (4) other companies, including
companies in our industry, may calculate adjusted EBITDA or similarly titled
measures differently, which reduces the usefulness of the metric as a
comparative measure. Because of these and other limitations, you should consider
adjusted EBITDA alongside our net loss and other GAAP financial results.
The following table presents a reconciliation of adjusted EBITDA to net loss,
the most directly comparable GAAP measure (in thousands):
Three Months Ended March 31,
2019 2020
Net loss $ (6,314 ) $ (13,531 )
Plus:
Interest expense (income), net 304 (284 )
Depreciation and amortization expense 961 2,331
Stock-based compensation expense 1,708
4,126
Foreign currency (gain) loss (491 )
1,886
Amortization of deferred FI implementation costs 653 1,008 Restructuring costs - 482 Adjusted EBITDA$ (3,179 ) $ (3,982 ) 23
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Results of Operations
The following table presents our condensed consolidated statements of operations
(in thousands):
Three Months Ended March 31,
2019 2020
Revenue $ 35,988 $ 45,509
Costs and expenses:
FI Share and other third-party costs 19,004 26,138
Delivery costs 3,246 3,406
Sales and marketing expense 9,337 10,968
Research and development expense 2,941 3,851
General and administrative expense 7,000 10,744
Depreciation and amortization expense 961 2,331
Total costs and expenses 42,489 57,438
Operating loss (6,501 ) (11,929 )
Other income (expense):
Interest (expense) income, net (304 ) 284
Foreign currency gain (loss) 491 (1,886 )
Total other income (expense) 187 (1,602 )
Loss before income taxes (6,314 ) (13,531 )
Net loss $ (6,314 ) $ (13,531 )
Comparison of Three Months Ended March 31, 2019 and 2020
Revenue
Three Months Ended March 31, Change
2019 2020 $ %
Revenue $ 35,988 $ 45,509 $ 9,521 26 %
The $9.5 million increase in revenue during the three months ended March 31,
2020 compared to the three months ended March 31, 2019 comprised of a $8.9
million increase in sales to existing marketers and a $0.6 million increase in
sales to new marketers. Revenue growth for the three months ended March 31, 2020
was unfavorably 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 three months ended March 31, 2020 we deferred $0.7
million of revenue associated with billings to marketers that we believe are
likely to be most affected by the slowdown in economic activity resulting from
the COVID-19 pandemic. We expect both a reduction in consumer spending and a
reduction in marketing campaigns in the near term, which we believe will result
in a decline in our revenue in future periods. The severity and duration of this
decline is difficult to estimate given the uncertainty that the impacts of
COVID-19 will continue to have on the global economy.
Costs and Expenses
FI Share and Other Third-Party Costs
Three Months Ended March 31, Change
2019 2020 $ %
(dollars in thousands)
FI Share and other third-party costs:
Adjusted FI Share and other third-party costs $ 18,351 $ 25,130 $ 6,779 37 %
Amortization of deferred FI implementation costs 653 1,008 355 54
FI Share and other third-party costs $ 19,004 $ 26,138 $ 7,134 38 %
% of revenue 53 % 57 %
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FI Share and other third-party costs increased by$6.8 million during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to increased revenue from sales of Cardlytics Direct. Amortization of deferred FI implementation costs increased by$0.4 million during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to an increase in the value of enhancements placed in service by our FI partners. We believe the expected near-term decline in revenue caused by the economic impact of COVID-19 would also result in a similar percentage decline in FI Share and other third-party costs in future periods. Delivery Costs Three Months Ended March 31, Change 2019 2020 $ % (dollars in thousands) Delivery costs$ 3,246 $ 3,406 $ 160 5 % % of revenue 9 % 7 % Delivery costs increased by$0.2 million during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , primarily due to a$0.2 million increase in costs associated with hosting Cardlytics Direct for certain FI partners. Sales and Marketing Expense Three Months Ended March 31, Change 2019 2020 $ % (dollars in thousands) Sales and marketing expense$ 9,337 $ 10,968 $ 1,631 17 % % of revenue 26 % 24 % Sales and marketing expense increased by$1.6 million during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to a$0.6 million increase in stock-based compensation expense, a$0.5 million restructuring cost, a$0.3 million increase in personnel costs associated with additional headcount and a$0.2 million increase in marketing costs. Research and Development Expense Three Months Ended March 31, Change 2019 2020 $ % (dollars in thousands)
Research and development expense
8 % 8 %
Research and development expense increased by
Three Months Ended March 31, Change
2019 2020 $ %
(dollars in thousands)
General and administration expense $ 7,000 $ 10,744 $ 3,744 53 %
% of revenue 19 % 24 %
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General and administrative expense increased by$3.7 million during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to a$1.4 million increase in stock-based compensation expense, a$1.2 million increase in bad debt expense, a$0.4 million increase in software licensing costs, a$0.4 million increase in personnel costs associated with additional headcount and a$0.3 million increase in other costs, such as facility costs and non-income based taxes. During the three months endedMarch 31, 2020 we also recorded bad debt expense of$1.5 million . We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may further adjust these reserves in the future. Stock-based Compensation Expense The following table summarizes the allocation of stock-based compensation in the consolidated statements of operations (in thousands): Three Months Ended March 31, Change 2019 2020 $ % Delivery costs $ 164 $ 175$ 11 7 % Sales and marketing expense 707 1,269 562 79 % Research and development expense 203 603 400 197 % General and administrative expense 634 2,078 1,444 228 % Total stock-based compensation expense$ 1,708 $ 4,125 $ 2,417 142 % % of revenue 5 % 9 % Stock-based compensation expense increased by$2.4 million during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 primarily due to an increase in expense relating to the 2019 PSUs, which were granted inApril 2019 and adjustments to the expected timing of the achievement of certain other performance-based vesting conditions. Depreciation and Amortization Expense Three Months Ended March 31, Change 2019 2020 $ % (dollars in thousands)
Depreciation and amortization expense
3 % 5 %
Depreciation and amortization expense increased by $1.4 million during the three
months ended March 31, 2020 compared to the three months ended March 31, 2019
primarily due to the suspension of certain development efforts that resulted in
a $0.8 million write off of capitalized internal-use software development costs.
Interest (Expense) Income, Net
Three Months Ended March 31, Change
2019 2020 $ %
(dollars in thousands)
Interest expense $ (489 ) $ (40 ) $ 449 (92 )%
Interest income 185 324 139 75
Interest (expense) income, net $ (304 ) $ 284 $ 588 (193 )%
% of revenue (1 )% 1 %
Interest expense, net decreased
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Foreign Currency Gain (Loss)
Three Months Ended March 31, Change
2019 2020 $ %
(dollars in thousands)
Foreign currency gain (loss)
1 % (4 )%
Foreign currency gain (loss) decreased by $2.4 million during the three months
ended March 31, 2020 compared to the three months ended March 31, 2019 primarily
due to a decrease in the value of the British pound relative to the U.S. dollar.
Liquidity and Capital Resources
The following table summarizes our cash and cash equivalents, restricted cash,
accounts receivable and working capital (in thousands):
December 31, 2019 March 31, 2020
Cash and cash equivalents $ 104,458 $ 102,174
Accounts receivable, net 81,452 57,668
Working capital (1) 117,329 111,634
Unused available borrowings 40,000 40,000
(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. Currently, our cash and cash equivalents are held in fullyFDIC -insured demand deposit accounts. As ofMarch 31, 2020 , our demand deposit accounts earned up to a 1.50% annual rate of interest. As ofMarch 31, 2020 ,$5.0 million of our cash and cash equivalents were in theUnited Kingdom . While our investment inCardlytics UK Limited is not considered indefinitely invested, we do not plan to repatriate these funds. ThroughMarch 31, 2020 , we have incurred accumulated net losses of$352.2 million since inception, including net losses of$6.3 million and$13.5 million for the three months endedMarch 31, 2019 and 2020, respectively. We expect to incur additional operating losses as we continue our efforts to grow our business. We have historically financed our operations and capital expenditures through convertible note financings, private placements of preferred stock, public offerings of our common stock as well as lines of credit and term loans. ThroughMarch 31, 2020 , we have received net proceeds of$196.2 million from the issuance of preferred stock and convertible promissory notes and net proceeds of$127.1 million from public equity offerings. Our historical uses of cash have primarily consisted of cash used in operating activities to fund our operating losses and working capital needs. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the enhancement of our platform, the introduction of new solutions, the continued market acceptance of our solutions and the extent of the impact of COVID-19 on our operational and financial performance. We expect to continue to incur operating losses for the foreseeable future and may require additional capital resources to continue to grow our business. Despite the economic impacts of COVID-19, we believe that current cash and cash equivalents will be sufficient to fund our operations and capital requirements for at least the next 12 months following the date our consolidated financial statements were issued. However, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be materially and adversely impacted. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. 27
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The following table summarizes our cash flows (in thousands):
Three Months
Ended
2019 2020
Cash, cash equivalents and restricted cash - Beginning of period$ 59,870 $ 104,587 Net cash used in operating activities (1,483 ) (3,406 ) Net cash used in investing activities (1,981 ) (1,437 ) Net cash from financing activities 162
3,139
Effect of exchange rates on cash, cash equivalents and restricted cash
120 (588 )
Cash, cash equivalents and restricted cash - End of
period $ 56,688 $ 102,295
Sources of Funds
Proceeds from Issuance of Common Stock
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.
2018 Loan Facility
On May 14, 2019 , we amended our loan facility with Pacific Western Bank to
increase the capacity of our asset-based revolving line of credit ("2018 Line of
Credit") and decreased the capacity of our term loan ("2018 Term Loan"). This
amendment also extended the maturity date of the term loan 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 . As of March 31, 2020 , we had
$40.0 million of unused borrowings available under our 2018 Line of Credit and
had no outstanding borrowings. Under the amended terms, we are able to borrow up
to the lesser of $40.0 million or 85% of the amount of our eligible accounts
receivable. Interest on advances bears an interest rate equal to the prime rate
minus 0.50%, or 2.75% as of March 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
$40.0 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 . We believe that we were in compliance with
all financial covenants as of March 31, 2020 .
Uses of Funds
Our collection cycles can vary from period to period based on the payment
practices of our marketers and their agencies. We are generally obligated to pay
Consumer Incentives with respect to our Cardlytics Direct solution between one
and three months following redemption, regardless of whether we have collected
payment from a marketer or its agency. We are generally obligated to pay our FI
partners' FI Share either three months following marketer billings, regardless
of whether we have collected payment from a marketer or its agency, or 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 payment of Consumer Incentives 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.
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Operating Activities Cash used in operating activities is primarily driven by our operating losses. We expect that we will continue to use cash from operating activities in 2020 as we invest in our business. Operating activities used$3.4 million of cash during the three months endedMarch 31, 2020 , which reflected our net loss of$13.5 million and a$1.6 million change in our net operating assets and liabilities, partially offset by$11.7 million of non-cash charges. The non-cash charges primarily related to stock-based compensation expense and depreciation and amortization expense, which included$0.9 million amortization of right-of-use assets and a$0.8 million charge related to the write off of certain development costs previously capitalized related to the development of new technology for building and launching marketing campaigns. The change in our net operating assets and liabilities was primarily due to a$22.1 million decrease in accounts receivable, offset by a$10.9 million decrease in FI Share liability and a$5.6 million decrease in our Consumer Incentive liability as a result of seasonally lower sales during the first quarter of 2020 compared to the fourth quarter of 2019. Operating activities used$1.5 million of cash during the three months endedMarch 31, 2019 , which reflected growth in revenue, offset by continued investment in our operations. Cash used in operating activities reflected our net loss of$6.3 million , partially offset by$3.1 million of non-cash charges and a$1.7 million change in our net operating assets and liabilities. The non-cash charges primarily related to stock-based compensation expense, depreciation and amortization expense, and amortization of deferred FI implementation costs. The change in our net operating assets and liabilities was primarily due to a$4.7 million decrease in accounts receivable and a$4.3 million decrease in FI Share liability resulting from seasonally lower sales during the first quarter of 2019 compared to the fourth quarter of 2018 and a$2.5 million increase in accounts payable and accrued expenses, as well as a$1.2 million increase in prepaid expenses and other assets. Consumer Incentive liability increased$3.7 million as a result of longer payment terms negotiated within more recent contracts with our FI partners. Investing Activities Our cash flows from investing activities are primarily driven by our investments in, and purchases of, property and equipment and costs to develop internal-use software. We expect that we will continue to use cash for investing activities in 2020 as we continue to invest in and grow our business. Investing activities used$1.4 million in cash in the three months endedMarch 31, 2020 . Our investing cash flows during this period primarily consisted of purchases of technology hardware and the capitalization of costs to develop internal-use software. Investing activities used$2.0 million in cash in the three months endedMarch 31, 2019 . Our investing cash flows during this period primarily consisted of purchases of technology hardware and the capitalization of costs to develop internal-use software. Financing Activities Our cash flows from financing activities have primarily been composed of net proceeds from our borrowings under our debt facilities and the issuance of common and preferred stock. Financing activities provided$3.1 million in cash during the three months endedMarch 31, 2020 . Our financing activities during this period primarily consisted of proceeds from the exercise of options to purchase shares of common stock. Financing activities provided$0.2 million in cash during the three months endedMarch 31, 2019 . Our financing activities during this period primarily consisted of proceeds from the exercise of options to purchase shares of common stock. Contractual Obligations & Commitments There have been no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC onMarch 3, 2020 . Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. The future effects of the COVID-19 pandemic on our results of operations, cash flows, and financial position are unclear, however we believe we have used reasonable estimates and assumptions in preparing our condensed consolidated financial statements. Our actual results could differ from these estimates. 29
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We believe that the assumptions and estimates associated with the evaluation of revenue recognition criteria, including the determination of revenue recognition as net versus gross in our revenue arrangements, the assumptions used in the valuation models to determine the fair value of equity awards and stock-based compensation expense, and the assumptions required in determining any valuation allowance recorded against deferred tax assets have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates. Except for the adoption of ASU 2016-02, Leases (Topic 842) described in Note 2-Recent Accounting Standards to our condensed consolidated financial statements, which resulted in the recognition of right-of-use assets and lease liabilities of$9.0 million and$12.1 million , respectively, there have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Recent Accounting Pronouncements Refer to Note 2-Recent Accounting Standards to our condensed consolidated financial statements for a description of recent accounting pronouncements. Emerging Growth Company Status InApril 2012 , the Jumpstart Our Business Startups Act of 2012 ("JOBS Act") was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period and, as a result, we may not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. 30
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