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 anticipated continued decline in ARPU as a result of significantFI MAU growth due to Wells Fargo and Chase launching theCardlytics Direct program; anticipated FI Share commitment shortfall penalty; the timing of the phased launch of Cardlytics Direct byU.S. Bank ; 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. 25 -------------------------------------------------------------------------------- Table of Contents Revenue, which is reported net of Consumer Incentives and gross of FI Share and other third-party costs, was$56.4 million and$46.1 million during the three months endedSeptember 30, 2019 and 2020, respectively, representing a decline of 18%. 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$82.8 million and$62.1 million during the three months endedSeptember 30, 2019 and 2020, respectively, representing a decline of 25%. Gross profit, which represents revenue less FI Share and other third-party costs and less delivery costs, was$20.9 million and$14.6 million during the three months endedSeptember 30, 2019 and 2020, respectively, representing a decline of 30%. Adjusted contribution, a non GAAP measure that represents our revenue less our adjusted FI Share and other third-party costs, was$24.7 million and$19.7 million during the three months endedSeptember 30, 2019 and 2020, respectively, representing a decline of 20%. 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 Nine Months Ended September 30, Change September 30, Change 2019 2020 $ % 2019 2020 $ % Billings(1)$ 82,792 $ 62,093 $ (20,699) (25) %$ 215,118 $ 169,390 $ (45,728) (21) % Consumer Incentives 26,373 16,014 (10,359) (39) 73,981 49,580 (24,401) (33) Revenue 56,419 46,079 (10,340) (18) 141,137 119,810 (21,327) (15) Adjusted FI Share and other third-party costs(1) 31,681 26,330 (5,351) (17) 76,921 67,280 (9,641) (13) Adjusted contribution(1) 24,738 19,749 (4,989) (20) 64,216 52,530 (11,686) (18) Delivery costs 3,070 3,498 428 14 9,686 10,403 717 7 Amortization and impairment of deferred FI implementation costs(2) 789 1,641 852 108 2,173 3,640 1,467 68 Gross profit$ 20,879 $ 14,610 $ (6,269) (30) %$ 52,357 $ 38,487 $ (13,870) (26) % (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. (2)Amortization and impairment of deferred FI implementation costs for the three and nine months endedSeptember 30, 2020 includes the impact of a$0.7 million write off related to certain user interface enhancements. During the three months endedSeptember 30, 2019 and 2020, our net loss was$7.7 million and$15.4 million , respectively. Our historical losses have been driven by our substantial investments in our purchase intelligence platform and infrastructure, which we believe will enable us to expand the use of our platform by both FIs and marketers. During the three months endedSeptember 30, 2019 and 2020, our net loss included stock-based compensation expense of$7.5 million and$11.6 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 was completed in the second quarter of 2020. Additionally, in the first quarter of 2020, we entered into an agreement withU.S. Bank, National Association ("U.S. Bank "), pursuant to which we have agreed to a national rollout of Cardlytics Direct toU.S. Bank . We expectU.S. Bank to begin a phased launch of the Cardlytics Direct program in the first half of 2021. For the three months endedSeptember 30, 2019 and 2020, our average FI monthly active users ("FI MAUs") were 128.3 million and 161.6 million and our average Cardlytics Direct revenue per user ("ARPU"), was$0.44 and$0.29 , respectively.FI MAU and ARPU are performance metrics defined under the heading "Non-GAAP Measures and Other Performance Metrics" below. The increase in FI MAUs is largely due to Wells Fargo completing their phased launch in the second quarter of 2020 and Chase launching our Cardlytics Direct program for its online banking channel in the second quarter of 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 and a decline in revenue as a result of the COVID-19 pandemic. 26 -------------------------------------------------------------------------------- Table of Contents FI Partner Commitments Agreements with certain FI partners require us to fund the development of user interface 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,$3.5 million of which had been recovered throughSeptember 30, 2019 . The scheduled FI Share payment reductions were completed inDecember 2019 . During the three months endedSeptember 30, 2020 , one of our FI partners notified us of plans to end the use of a certain user interface enhancement prior to the end of our contractual arrangement with the FI partner. As a result, we wrote off deferred FI implementation costs totaling$0.7 million to FI Share and other third-party costs on our consolidated statements of operation. We have 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 ofSeptember 30, 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 penalty will be accrued during the 12-month period following the completion of the milestones. Impacts of COVID-19 Pandemic We remain focused on supporting our marketers, FIs partners, employees and communities during the COVID-19 pandemic. The impact of COVID-19 on the global economy and on our business continues to be a fluid situation. We responded quickly to adopt a virtual corporate strategy to enable all of our employees to work productively from home, guard the health and safety of our team, support our marketers and FI partners, mitigate risk and maximize our financial performance. We are focused on ensuring continuity for our marketers and FI partners. Revenue growth for the three and nine months endedSeptember 30, 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 nine months endedSeptember 30, 2020 , we deferred$0.3 million of revenue and recorded bad debt expense of$1.3 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 on a year-over-year basis in the near term, which will result in a year-over-year decline in our revenue and a year-over-year increase in our net loss in future periods. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on industry events, and its effect on consumer spending, our marketers, FI partners, suppliers and vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted at this time. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel, employee work locations, and cancellation of marketing events. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, marketers, FI partners, suppliers, vendors and stockholders. At this point, the extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain. See "Risk Factors" for further discussion of the adverse impacts of the COVID-19 pandemic on our business. Non-GAAP Measures and Other Performance Metrics We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our metrics may be calculated in a manner different than similar metrics used by other companies. Three Months Ended Nine Months Ended September 30, September 30, 2019 2020 2019 2020 (in thousands, except ARPU) FI MAUs 128,315 161,570 118,969 153,190 ARPU$ 0.44 $ 0.29 $ 1.19 $ 0.78 Billings$ 82,792 $ 62,093 $ 215,118 $ 169,390 Adjusted contribution$ 24,738 $ 19,749 $ 64,216 $ 52,530 Adjusted EBITDA$ 2,967 $ (596) $ (838) $ (12,273) 27
-------------------------------------------------------------------------------- Table of Contents 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 inthe 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 Nine Months Ended September 30, September 30, 2019 2020 2019 2020 Revenue$ 56,419 $ 46,079 $ 141,137 $ 119,810 Plus: Consumer Incentives 26,373 16,014 73,981 49,580 Billings$ 82,792 $ 62,093 $ 215,118 $ 169,390 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 and impairment 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. 28 -------------------------------------------------------------------------------- Table of Contents 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 Nine Months Ended September 30, September 30, 2019 2020 2019 2020 Revenue$ 56,419 $ 46,079 $ 141,137 $ 119,810 Minus: FI Share and other third-party costs 32,470 27,971 79,094 70,920 Delivery costs(1) 3,070 3,498 9,686 10,403 Gross profit 20,879 14,610 52,357 38,487 Plus: Delivery costs(1) 3,070 3,498 9,686 10,403 Amortization and impairment of deferred FI implementation costs(2) 789 1,641 2,173 3,640 Adjusted contribution$ 24,738 $ 19,749 $ 64,216 $ 52,530 (1)Stock-based compensation expense recognized in delivery costs totaled$0.2 million and$0.4 million for the three months endedSeptember 30, 2019 and 2020, respectively, and$0.5 million and$0.9 million for the nine months endedSeptember 30, 2019 and 2020, respectively. (2)Amortization and impairment of deferred FI implementation costs is excluded from adjusted FI Share and other third-party costs as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2019 2020 2019 2020 FI Share and other third-party costs$ 32,470 $ 27,971 $ 79,094 $ 70,920 Minus: Amortization and impairment of deferred FI implementation costs(1) 789 1,641 2,173 3,640
Adjusted FI Share and other third-party costs
(1) Amortization and impairment of deferred FI implementation costs for the three and nine months endedSeptember 30, 2020 includes the impact of a$0.7 million write off related to certain user interface enhancements. Adjusted EBITDA Adjusted EBITDA represents our net loss before income tax benefit; interest expense, net; depreciation and amortization expense; stock-based compensation expense; foreign currency (loss) gain; amortization and impairment of deferred FI implementation costs; restructuring costs and loss on extinguishment of debt . We do not consider these excluded items to be indicative of our core operating performance. The items that are non-cash include foreign currency loss, amortization and impairment 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. 29 -------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP measure (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2019 2020 2019 2020 Net loss$ (7,747) $ (15,356) $ (20,571) $ (48,645) Plus: Income tax benefit - - - - Interest expense, net 218 283 860 8 Depreciation and amortization expense 1,167 1,933 3,181 5,809 Stock-based compensation expense 7,486 11,578 12,266 24,811 Foreign currency loss (gain) 903 (1,066) 1,079 828 Amortization and impairment of deferred FI implementation costs 789 1,641 2,173 3,640 Restructuring costs - 391 - 1,276 Loss on extinguishment of debt 28 - 51 - Costs associated with financing events 123 - 123 - Adjusted EBITDA$ 2,967 $ (596) $ (838) $ (12,273) Results of Operations The following table presents our condensed consolidated statements of operations (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2019 2020 2019 2020 Revenue$ 56,419 $ 46,079 $ 141,137 $ 119,810 Costs and expenses: FI Share and other third-party costs 32,470 27,971 79,094 70,920 Delivery costs 3,070 3,498 9,686 10,403 Sales and marketing expense 11,074 11,432 31,458 32,805 Research and development expense 3,018 4,627 8,741 12,444 General and administrative expense 12,218 12,757 27,558 35,235 Depreciation and amortization expense 1,167 1,933 3,181 5,809 Total costs and expenses 63,017 62,218 159,718 167,616 Operating loss (6,598) (16,139) (18,581) (47,806) Other (expense) income: Interest expense, net (218) (283) (860) (9) Foreign currency (loss) gain (931) 1,066 (1,130) (830) Total other (expense) income (1,149) 783 (1,990) (839) Loss before income taxes (7,747) (15,356) (20,571) (48,645) Income tax benefit - - - - Net loss$ (7,747) $ (15,356) $ (20,571) $ (48,645) 30
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Table of Contents Comparison of Three and Nine Months EndedSeptember 30, 2019 and 2020 Revenue Three Months Ended September 30, Change Nine Months Ended September 30, Change 2019 2020 $ % 2019 2020 $ % Revenue$ 56,419 $ 46,079 $ (10,340) (18) %$ 141,137 $ 119,810 $ (21,327) (15) % The$10.3 million decrease in revenue during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 was comprised of a$14.9 million decrease in sales to existing marketers, partially offset by a$4.5 million increase in sales to new marketers. Revenue for the three months endedSeptember 30, 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. The$21.3 million decrease in revenue during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 comprised of a$30.0 million decrease in sales to existing marketers, partially offset with a$8.6 million increase in sales to new marketers. Revenue for the nine months endedSeptember 30, 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 nine months endedSeptember 30, 2020 , we deferred$0.3 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 on a year-over-year basis, which we believe will result in a year-over-year 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 September 30, Change Nine Months Ended September 30, Change 2019 2020 $ % 2019 2020 $ % (dollars in thousands) FI Share and other third-party costs: Adjusted FI Share and other third-party costs$ 31,681 $ 26,330 $ (5,351) (17) %$ 76,921 $ 67,280 $ (9,641) (13) % Amortization and impairment of deferred FI implementation costs 789 1,641 852 108 2,173 3,640 1,467 68 Total FI Share and other third-party costs$ 32,470 $ 27,971 $ (4,499) (14) %$ 79,094 $ 70,920 $ (8,174) (10) % % of revenue 58 % 61 % 56 % 59 % Adjusted FI Share and other third-party costs decreased by$4.5 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to decreased revenue from sales ofCardlytics Direct. Amortization and impairment of deferred FI implementation costs increased by$0.9 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to a write off of deferred FI implementation costs totaling$0.7 million relating to the discontinued use of certain user interface enhancements. 31 -------------------------------------------------------------------------------- Table of Contents Adjusted FI Share and other third-party costs decreased by$8.2 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to decreased revenue from sales ofCardlytics Direct. Amortization and impairment of deferred FI implementation costs increased by$1.5 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to an increase in the value of enhancements placed in service by our FI partners and a write off of deferred FI implementation costs totaling$0.7 million relating to the discontinued use of certain user interface enhancements. We believe the near-term fluctuations in revenue caused by the economic impact of COVID-19 would also result in similar percentage fluctuations in adjusted FI Share and other third-party costs in future periods. Delivery Costs Three Months Ended September 30, Change Nine Months Ended September 30, Change 2019 2020 $ % 2019 2020 $ % (dollars in thousands) Delivery costs$ 3,070 $ 3,498 $ 428 14 %$ 9,686 $ 10,403 $ 717 7 % % of revenue 5 % 8 % 7 % 9 % Delivery costs increased by$0.4 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 , primarily due to a$0.3 million increase in personnel costs associated with headcount and a$0.1 million increase in costs associated with hosting Cardlytics Direct for certain FI partners. Delivery costs increased by$0.7 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , primarily due to a$0.3 million increase in costs associated with hosting Cardlytics Direct for certain FI partners and a$0.4 million increase in stock-based compensation expense. Sales and Marketing Expense Three Months Ended September 30, Change Nine Months Ended September 30, Change 2019 2020 $ % 2019 2020 $ % (dollars in thousands) Sales and marketing expense$ 11,074 $ 11,432 $ 358 3 %$ 31,458 $ 32,805 $ 1,347 4 % % of revenue 20 % 25 % 22 % 27 % Sales and marketing expense increased by$0.4 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to a$2.4 million increase in stock-based compensation expense and a$1.0 million increase in personnel costs associated with additional headcount, partially offset by a decrease of$2.7 million in incentive compensation and a$0.3 million decrease in travel and entertainment. Sales and marketing expense increased by$1.3 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to a$4.5 million increase in stock-based compensation expense and a$2.3 million increase in personnel costs associated with headcount, partially offset by a decrease of$4.9 million in incentive compensation and a$0.6 million decrease in travel and entertainment. 32 -------------------------------------------------------------------------------- Table of Contents Research and Development Expense Three Months Ended September 30, Change Nine Months Ended September 30, Change 2019 2020 $ % 2019 2020 $ % (dollars in thousands)
Research and development expense$ 3,018 $ 4,627 $ 1,609 53 %$ 8,741 $ 12,444 $ 3,703 42 % % of revenue 5 % 10 % 6 % 10 % Research and development expense increased by$1.6 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to a$0.9 million increase in stock-based compensation expense, a$1.0 million increase in personnel due to headcount partially offset by a$0.3 million decrease in personnel costs due to higher capitalization and a$0.2 million increase in professional fees, partially offset by a$0.2 million decrease in incentive compensation. Research and development expense increased by$3.7 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to a$2.3 million increase in stock-based compensation expense, a$2.3 million increase in personnel due to headcount partially offset by a$1.0 million decrease in personnel costs due to higher capitalization and a$0.9 million increase in professional fees, partially offset by a$0.7 million decrease in incentive compensation and a$0.1 million decrease in travel and entertainment. General and Administrative Expense Three Months Ended September 30, Change Nine Months Ended September 30, Change 2019 2020 $ % 2019 2020 $ % (dollars in thousands) General and administrative expense$ 12,218 $ 12,757 $ 539 4 %$ 27,558 $ 35,235 $ 7,677 28 % % of revenue 22 % 28 % 20 % 29 % General and administrative expense increased by$0.5 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to a$0.7 million increase in stock-based compensation expense, a$0.3 million increase in software licensing costs, a$0.3 million increase in personnel costs associated with additional headcount and a$0.2 million increase in professional fees, partially offset by a$0.5 million decrease in incentive compensation and$0.5 million decrease in bad debt expense. General and administrative expense increased by$7.7 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to a$5.4 million increase in stock-based compensation expense, a$1.2 million increase in software licensing costs, a$1.4 million increase in personnel costs associated with additional headcount, a$0.5 million increase in professional fees, a$0.3 million increase in bad debt, a$0.3 million increase in facility costs and a$0.3 million increase in insurance premiums partially offset by a$1.2 million decrease in incentive compensation and a$0.5 million decrease in travel and entertainment. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may further adjust our allowance for doubtful accounts in the future. 33 -------------------------------------------------------------------------------- Table of Contents 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 September 30, Change Nine Months Ended September 30, Change 2019 2020 $ % 2019 2020 $ % Delivery costs$ 176 $ 365 $ 189 107 %$ 539 $ 897 $ 358 66 % Sales and marketing expense 1,432 3,791 2,359 165 3,091 7,627 4,536 147 Research and development expense 638 1,510 872 137 1,204 3,514 2,310 192 General and administrative expense 5,240 5,912 672 13 7,432 12,773 5,341 72 Total stock-based compensation expense$ 7,486 $ 11,578 $ 4,092 55 %$ 12,266 $ 24,811 $ 12,545 102 % % of revenue 13 % 25 % 9 % 21 % Stock-based compensation expense increased by$4.1 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 due to a strategic shift of incentive compensation to stock based compensation as well as the accelerated vesting of certain restricted stock unit awards. As ofSeptember 30, 2020 , we have accrued$2.6 million of stock-based compensation for bonus and commissions in lieu of cash incentive compensation which has not been settled. Stock-based compensation expense increased by$12.5 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 due to an increase in expense relating to the 2020 performance stock units, which were granted inApril 2020 , a strategic shift of incentive compensation to stock based compensation as well as the accelerated vesting of certain restricted stock unit awards. As ofSeptember 30, 2020 , we have accrued$2.6 million of stock-based compensation for bonus and commissions in lieu of cash incentive compensation which has not been settled. Depreciation and Amortization Expense Three Months Ended September Nine Months Ended September 30, Change 30, Change 2019 2020 $ % 2019 2020 $ % (dollars in thousands) Depreciation and amortization expense$ 1,167 $ 1,933 $ 766 66 %$ 3,181 $ 5,809 $ 2,628 83 % % of revenue 2 % 4 % 2 % 5 % Depreciation and amortization expense increased by$0.8 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to additional hardware and software purchased in 2020. Depreciation and amortization expense increased by$2.6 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to additional hardware and software purchased in 2020 and the suspension of certain development efforts that resulted in a$1.0 million write off of capitalized internal-use software development costs. 34 -------------------------------------------------------------------------------- Table of Contents Interest Expense, Net Three Months Ended September Nine Months Ended September 30, Change 30, Change 2019 2020 $ % 2019 2020 $ % (dollars in thousands) Interest expense$ (379) $ (311) $ 68 (18) %$ (1,337) $ (391) $ 946 (71) % Interest income 161 27 (134) (83) 477 381 (96) (20) Interest expense, net$ (218) $ (283) $ (65) 30 %$ (860) $ (9) $ 851 (99) % % of revenue - % (1) % (1) % - % Interest expense decreased$0.1 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 , driven by a decrease in the amount outstanding on our 2018 Line of Credit and 2018 Term Loan partially offset by an increase in interest expense related to the Notes, and interest income decreased$0.1 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 , due to a lower interest rate earned on the cash held in our fullyFDIC -insured demand deposit accounts. Interest expense decreased$0.9 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 driven by a decrease in the amount outstanding on our 2018 Line of Credit and 2018 Term Loan partially offset by an increase in interest expense related to the Notes, and interest income decreased$0.1 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 ., due to a lower interest rate earned on the cash held in our fullyFDIC -insured demand deposit accounts. Foreign Currency (Loss) Gain Three Months Ended September Nine Months Ended September 30, Change 30, Change 2019 2020 $ % 2019 2020 $ % (dollars in thousands) Foreign currency (loss) gain$ (903) $ 1,066 $ 1,969 (218) %$ (1,079) $ (830) $ 249 (23) % Other (28) - 28 n/a (51) - 51 - Total foreign currency (loss) gain$ (931) $ 1,066 $ 1,997 (215) %$ (1,130) $ (830) $ 300 (27) % % of revenue (2) % 2 % (1) % (1) % Foreign currency (loss) gain increased by$2.0 million during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 primarily due to an increase in the value of the British pound relative to theU.S. dollar. Foreign currency loss increased by$0.3 million during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to an increase in the value of the British pound relative to theU.S. dollar. Liquidity and Capital Resources The following table summarizes our cash and cash equivalents, accounts receivable, working capital and unused available borrowings (in thousands): December 31, 2019 September 30, 2020
Cash and cash equivalents $ 104,458 $ 287,639 Accounts receivable, net
81,452 53,392
Working capital(1) 117,329 295,688
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.
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Table of Contents 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, the majority of our cash and cash equivalents are held in money market accounts and fullyFDIC -insured demand deposit accounts. As ofSeptember 30, 2020 , our demand deposit accounts earned up to a 0.25% annual rate of interest. As ofSeptember 30, 2020 ,$5.5 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. ThroughSeptember 30, 2020 , we have incurred accumulated net losses of$387.3 million since inception, including net losses of$20.6 million and$48.6 million for the nine months endedSeptember 30, 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, lines of credit and term loans and convertible senior notes. ThroughSeptember 30, 2020 , we have received net proceeds of$222.7 million from the issuance of convertible senior notes, net proceeds of$196.2 million from the issuance of preferred stock and convertible promissory notes and net proceeds of$127.1 million from public equity offerings. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the enhancement of our platform, the introduction of new solutions, the continued market acceptance of our solutions and the extent of the impact of COVID-19 on our operational and financial performance. We expect to continue to incur operating losses for the foreseeable future and may require additional capital resources to continue to grow our business. 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.
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