S-1 1 d338035ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on January 12, 2018.

Registration Statement No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CARDLYTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7370   26-3039436

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

675 Ponce de Leon Avenue NE, Suite 6000

Atlanta, Georgia 30308

(888) 798-5802

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Scott D. Grimes

Lynne M. Laube

Cardlytics, Inc.

675 Ponce de Leon Avenue NE, Suite 6000

Atlanta, Georgia 30308

(888) 798-5802

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Nicole C. Brookshire

Eric C. Jensen

Richard C. Segal

Cooley LLP

500 Boylston Street

Boston, Massachusetts 02116

(617) 937-2300

 

Kirk L. Somers
Cardlytics, Inc.
675 Ponce de Leon Avenue NE, Suite 6000

Atlanta, Georgia 30308

(888) 798-5802

 

Robert V. Gunderson, Jr.

Glen R. Van Ligten

Heidi E. Mayon

Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP

1200 Seaport Boulevard

Redwood City, California 94063

(650) 321-2400

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ☐

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ☐

   Accelerated Filer ☐    Non-accelerated Filer ☒    Smaller Reporting Company ☐    Emerging Growth Company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Securities Being Registered  

Proposed Maximum
Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

  Common Stock, $0.0001 par value per share

  $75,000,000   $9,338

 

 

(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended, the number of shares being registered and the proposed maximum offering price per share are not included in this table.
(2) Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 12, 2018

PRELIMINARY    PROSPECTUS

                 Shares

 

 

LOGO

Common Stock

 

 

We are selling                  shares of common stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $        and $        per share. We have applied to list our common stock on the Nasdaq Global Market under the symbol “CDLX.”

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

The underwriters have an option to purchase a maximum of                  additional shares from us solely to cover over-allotments of shares.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 18.

 

 

 

    

Price to
Public

    

Underwriting
Discounts and
Commissions(1)

    

Proceeds to
Cardlytics, Inc.

 

Per Share

   $      $      $  

Total

   $      $      $  

 

  (1) See “Underwriting” beginning on page 160 for additional information regarding underwriting compensation.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

BofA Merrill Lynch   J.P. Morgan
Wells Fargo Securities   SunTrust Robinson Humphrey
Raymond James   KeyBanc Capital Markets

 

 

The date of this prospectus is                 , 2018


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LOGO


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LOGO

WITH PURCHASE DATA FROM
+ FINANCIAL
2,000 INSTITUTIONS
WE HAVE A SECURE VIEW INTO WHERE AND WHEN CONSUMERS ARE SPENDING THEIR MONEY
WE ANALYZED
U.S. TRANSACTIONS U.S. SPEND
ACROSS DEBIT, CREDIT, ACH AND BILL PAY IN 2016
FOR EVERY DOLLAR MARKETERS SPENT IN OUR NATIVE CHANNEL IN THE U.S. IN 2016, THEY GENERATED APPROXIMATELY
RETURN ON
AD SPEND (ROAS)(1)
(1) We calculate ROAS by measuring the consumers to whom a Cardlytics Direct marketing incentive was shown via such consumer’s online or mobile banking application or email and who subsequently made an online or in-store purchase from the applicable marketer during the campaign period, regardless of whether such consumer redeemed the incentive, as compared to the amount the marketer spent with us on the campaign.


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LOGO

WE HELP MARKETERS IDENTIFY, REACH, AND INFLUENCE LIKELY BUYERS
BASED ON PURCHASE HISTORY
AND MEASURE THE TRUE SALES IMPACT OF THEIR MARKETING SPEND
REGIONS cashback rewards Earn cash back from Regions using your Regions Visa® CheckCard What’s this?
Available offers Earned Rewards $315.96 Expired Rewards
CLICK offer logos below to activate and view details
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You should rely only on the information contained in this document and any free writing prospectus we provide to you. We have not and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 

For investors outside the United States: We have not and the underwriters have not done anything that would permit this offering, or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

 

DEALER PROSPECTUS DELIVERY OBLIGATION

Through and including                     , 2018 (25 days after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus. Unless the context otherwise requires, we use the terms “Cardlytics,” “company,” “our,” “us,” and “we” in this prospectus to refer to Cardlytics, Inc. and, where appropriate, our consolidated subsidiaries.

CARDLYTICS, INC.

Overview

Cardlytics makes marketing more relevant and measurable through our purchase intelligence platform. With purchase data from more than 2,000 financial institutions, we have a secure view into where and when consumers are spending their money. By applying advanced analytics to this massive 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. This collection of debit, credit, ACH, and bill pay data represented approximately $1.3 trillion in U.S. consumer spend in 2016. In 2016, our platform analyzed over 18.0 billion online and in-store transactions across more than 94.0 million accounts in the United States, representing one in five debit and credit card swipes in the United States.

Our founders understood the value of purchase data and have devoted nearly a decade to engineering a purchase intelligence platform. As former bankers, they recognized that banks and credit unions, which we refer to as financial institutions, or FIs, enable and collect the different types of electronic payments (e.g., debit, credit, bill pay) consumers and businesses use. This was especially crucial as electronic payments were becoming an increasing portion of all consumer spending. With this data distributed across approximately 10,000 FIs in the United States alone, it would need to be aggregated and standardized to provide effective foundational data for marketing technology and analytics. Given their deep insight into FIs’ rigorous security, privacy and regulatory concerns, our founders were well positioned to partner with FIs and architected our platform with their requirements in mind. Today, our platform leverages machine learning and a robust set of algorithms to ingest, process and analyze trillions of dollars of raw purchase data from tens of millions of accounts. As of September 30, 2017, we were a partner to 2,041 FIs, including Bank of America, National Association, or Bank of America; PNC Bank, National Association; Lloyds TSB Bank plc, or Lloyds; and Santander UK plc. Additionally, in the first quarter of 2018, we plan to launch a pilot implementation of Cardlytics Direct with Wells Fargo & Company, or Wells Fargo, directed at Wells Fargo customers located in Miami, Florida, Charlotte, North Carolina and San Francisco, California.

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 monthly active users, or FI MAUs, of any FI partner is indicative of our level of dependence on such FI partner. During 2016 and the nine months ended September 30, 2017, our largest FI partner, Bank of America, contributed approximately 47% and 51% of our total FI MAUs. Lloyds, our largest FI partner in the United Kingdom, contributed approximately 10% and 9% of our total FI MAUs in 2016 and the nine months ended September 30, 2017, respectively. As of September 30, 2017, we had direct contractual relationships with 17 of our FI partners, while our other FI partners became part of our network through bank processors and digital banking providers, such as Digital Insight Corporation, a subsidiary of NCR Corporation, or Digital Insight. Digital Insight contributed approximately 13% and 11% of our total FI MAUs in 2016 and the nine months ended September 30, 2017, respectively.

 



 

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Our platform helps solve fundamental problems for marketers. Marketers increasingly have access to data on the purchase behavior of their customers in their own stores and websites. However, they lack insight into their customers’ purchase behavior outside of their stores and websites, as well as the purchase behavior of individuals who are not yet customers. The reality is, no matter how robust their own customer data, marketers only see a small portion of their customers’ overall spend—both within and across categories. As a result, it is very difficult for businesses to focus their marketing investments on the most valuable customers. Marketers are also challenged to measure the performance of their marketing. This issue is particularly acute with respect to measuring the impact of marketing on in-store sales, where approximately 92% of consumer spending occurs, according to 2016 U.S. Census data. We believe purchase intelligence is the next disruptive opportunity in marketing and can comprehensively address these challenges. Our purchase intelligence platform is designed to enable marketers to identify, reach and influence likely buyers at scale, and precisely measure how marketing drives sales by “closing the loop”—both online and in-store. We have strong relationships with leading marketers across a variety of industries, including 20 of the top 25 U.S. restaurant chains based on the Nation’s Restaurant News 2016 ranking, 23 of the top 50 U.S. retailers based on the National Retail Federation 2016 ranking, as well as three of the five largest U.S. cable and satellite television providers and three of the four largest U.S. wireless carriers based on 2016 U.S. subscriber counts.

We have proven the power of purchase intelligence with our proprietary native advertising channel, Cardlytics Direct. Approximately 83%, 87% and 92% of our revenue in 2015, 2016 and the nine months ended September 30, 2017, respectively, was derived from sales of Cardlytics Direct. We have created a powerful, highly captive native advertising channel that reaches customers when they are thinking about their finances. By consolidating the largely untapped, high growth digital banking channels of more than 2,000 FIs, Cardlytics Direct enables marketers to reach consumers across these FIs through their online and mobile banking accounts, and increasingly through email and various real-time notifications. Using our purchase intelligence, our platform predicts where FI customers are likely to shop next and then presents them with offers to save money in these categories at a time when they are thinking of their finances. Since Cardlytics Direct reaches consumers in a trusted, uncluttered digital environment, we believe we see higher engagement in our channel. On average, bank customers in our channel logged into their mobile banking accounts 7.7 times per month in 2016. Customers are at least nine times more likely to engage with our marketers’ advertisements as compared to worldwide display digital advertisement click rates, as reported by eMarketer in December 2016. Cardlytics Direct offers compelling benefits to both marketers and FIs:

 

    Benefits to Marketers.  By leveraging Cardlytics Direct, marketers are able to understand who the most valuable customers are in their category and how effectively they are competing for those customers. Marketers grow their business by reaching customers through trusted banking channels and providing precisely tailored marketing to bring new customers to their business and to get current customers to spend more. In our Cardlytics Direct channel, we deliver strong, guaranteed return on advertising spend, or ROAS. For every dollar marketers spent in our Cardlytics Direct channel in the United States in 2016, they generated an ROAS of approximately $30. We calculate ROAS by measuring the consumers to whom a Cardlytics Direct marketing incentive was shown via such consumer’s online or mobile banking application or email and who subsequently made an online or in-store purchase from the applicable marketer during the campaign period, regardless of whether such consumer redeemed the incentive, as compared to the amount the marketer spent with us on the campaign.

 

   

Benefits to FIs.  Cardlytics Direct allows customers of our FI partners to receive personalized cash back offers. Since our company’s inception, our FIs’ customers have earned approximately $232 million in aggregate cash back incentives. We believe that these savings drove higher customer retention for our FI partners, as well as increased card spend, engagement, and loyalty for our FI partners in 2016. For the nine months ended September 30, 2017, our FI partners had 53.7 million FI MAUs. Based on aggregated data from approximately 10,000 randomly-selected customers of three of our 10 largest FIs,

 



 

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we calculated that monthly customer attrition was 17% lower on average among redeeming credit and debit card customers over the six-month period following a customer’s first redemption in 2016 as compared to average monthly customer attrition over the same comparison period for non-redeeming customers. In conducting this analysis, we deemed customers who do not have active spend in the applicable account within a given month to have attrited. We also calculated that the monthly card spend increased by 11% on average over the six-month period following a customer’s first redemption in 2016 as compared to the monthly average from the preceding three-month period. In contrast, the monthly card spend of non-redeeming customers over the same comparison periods increased by only 2% on average. Since we share a portion of the revenue that we generate from marketers with FIs, we provide an attractive incremental earnings opportunity. We also enable our FI partners to create competitively differentiated offerings that reinforce their broader strategic goals, including marketing their own products with the same precision targeting available to marketers.

We are extending the power of our platform beyond Cardlytics Direct. As we built scale, we recognized a significant opportunity to extend the impact of our purchase intelligence platform, which we refer to as our Other Platform Solutions. For example, we use purchase intelligence to help marketers measure the impact of marketing campaigns outside of the Cardlytics Direct channel on in-store and online sales. As we have in the past, we plan to continue to work in close collaboration with our FI partners to develop new purchase intelligence based analytic solutions.

We have experienced rapid growth in our revenue since inception. Our revenue, which excludes consumer incentives, was $53.8 million, $77.6 million and $112.8 million, for 2014, 2015 and 2016, respectively, representing a compound annual growth rate of 44.8%. Our revenue for the nine months ended September 30, 2017 was $91.1 million. For 2014, 2015, 2016 and the nine months ended September 30, 2017, our net loss was $38.9 million, $40.6 million, $75.7 million and $15.6 million, respectively. Our historical losses have been driven by our substantial investments in our platform and infrastructure, which we believe will enable us to expand the use of our platform by both FIs and marketers. In 2016, our net loss included a $25.9 million one-time non-cash charge related to the termination of our U.K. agreement with Aimia EMEA Limited and a $10.9 million non-cash charge related to the issuance and change in fair value of convertible promissory notes.

Industry Background

Recent Disruptions in the Marketing Industry

The fundamental imperative for marketers is to determine how, when, and where to spend marketing dollars effectively and to measure the efficacy of, and return on, their marketing investments. In the past 20 years, there have been a series of disruptive innovations impacting how marketers reach and influence likely buyers. The rise of internet-enabled online advertising drastically accelerated the pace of innovation across the marketing landscape. As the internet became mainstream, search-driven advertising brought the ability to more precisely connect marketing to consumer intent. The advent of social media provided marketers with a greater opportunity for consumer engagement and a wealth of additional data about consumer preferences. Each of these innovations has made digital marketing increasingly more effective and efficient than traditional media. As a result, digital media spending is expected to reach $202 billion in 2017, an increase of approximately 13% from $178 billion in 2016, according to MAGNA Global. However, like television and other traditional forms of advertising, these new forms of digital advertising still fail to provide marketers with visibility into whether an advertisement ultimately resulted in an in-store purchase. This information gap is particularly acute since approximately 92% of consumer spending continues to occur in-store. Marketers remain unable to close the last mile and comprehensively understand how marketing impacts actual in-store and online consumer purchases.

 



 

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Challenges to Efficient and Effective Marketing

The fundamental challenges faced by marketers include:

 

    Imprecise Targeting Across Media Channels.  Targeting based only on online behavior and demographic and behavioral data fails to capture important differences among consumers who may appear to be similar on the surface, but actually have drastically different interests and purchasing patterns.

 

    Inability to Measure Efficacy and Ensure ROAS.  Marketers are under immense pressure to show that their investments are creating value for their organizations. However, due to the fact that substantially all retail purchasing continues to occur in-store, it is difficult to calculate ROAS accurately because marketers cannot comprehensively connect online or offline marketing campaigns to in-store purchases.

 

    Narrow View of Existing and Potential Customers.  Marketers today increasingly have access to data on the purchase behavior of their customers in their stores and on their websites. However, they lack insight into these customers’ overall purchasing patterns outside of their stores and websites and the purchasing behavior of other likely buyers who are not yet customers.

Purchase Intelligence: The Next Disruptive Opportunity

We believe that purchase intelligence is the next disruptive opportunity in marketing. Aggregated consumer spending data analyzed with advanced analytics has the potential to make all marketing more relevant and measurable if it can be effectively analyzed and leveraged to help predict and measure future buying behavior, both in-store and online.

Massive and Fragmented Source of Purchase Data and Consumer Connectivity

We believe that FIs are a crucial source of purchase data and have a valuable, direct touchpoint with consumers. Over the past decade, the volume of consumer purchase data held by FIs has significantly increased. Today, more than 70% of U.S. consumer payments are electronic—debit card, credit card, ACH or bill pay—and this percentage is projected to continue to increase, according to The Nilson Report’s 2016 findings. These electronic transactions produce an immense amount of consumer purchase data, which can provide valuable insights on where and when consumers choose to shop, how frequently they shop at a particular store, and how much they spend within and across retail categories. More importantly, nearly 60% of electronic spending is in the form of debit and other non-credit transactions, and growth of these types of transactions is expected to be significant through 2020, according to The Nilson Report.

For purchase intelligence to be actionable, purchase data must be connected to the consumer through electronic touchpoints. FIs have uniquely reliable consumer touchpoints. Instead of walking into a branch, over 70% of consumers in 2015 managed some or all of their banking via digital channels, according to a 2016 survey by the Federal Reserve Bank. FIs’ touchpoints do not face the same issues as other digital channels. Consumers interact with FIs via authenticated online or mobile applications that are protected with state-of-the-art security.

Market Forces in the Banking Industry

While FIs play an important role in securely maintaining purchase data, market forces have only recently aligned to create incentives for FIs to leverage this data for the benefit of marketers. FIs operate in an increasingly regulated and competitive environment. Further, the rising popularity of alternative banking solutions and the emergence of non-banking players in the areas of lending and electronic payments increasingly threaten to

 



 

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disintermediate traditional FIs from their customers. These trends have keenly focused FIs on finding ways to engage customers and strengthen customer loyalty. Despite these incentives, FIs typically lack the specialized technological expertise, scale and visibility outside of their own customer bases to analyze and effectively leverage purchase data. As such, although purchase data from any single FI and access to that institution’s customer base may be very useful to marketers, aggregated purchase data across a meaningful portion of the fragmented banking landscape from a variety of electronic payment channels holds significantly greater value.

Challenges to Effective Purchase Data Aggregation

The challenges to effective aggregation of purchase data include:

 

    Lack of Scale.  Purchase data resides with approximately 10,000 FIs in the United States alone. To understand a consumer’s spending, marketers require an expansive view across the payment landscape, including debit card, credit card, bill pay and ACH, that no single FI is able to provide.

 

    Fragmented Touchpoints.  As with purchase data, FI digital touchpoints are spread across thousands of disparate institutions. Further, FIs generally lack the technology to connect purchase data to their customers’ online, mobile and television presences.

 

    Privacy and Regulatory Concerns.  FIs are highly regulated and are under strict obligations to safeguard their customers’ personal data. To be viable, any data aggregation strategy must navigate the complex privacy and regulatory compliance concerns and obligations of FIs.

 

    Need to Create Uniformity Across Complex and Varied Data Sets.  Each FI captures and retains data differently and the underlying data is itself dynamic. As a result, sophisticated algorithms and analytics are required to make the complex web of purchase data meaningful and actionable for marketers.

To unlock the value of the FIs’ purchase data, we believe that there is a significant need for a trusted third party to serve as the nexus for purchase data aggregation and analytics.

Market Opportunity

Our platform solves fundamental problems for the marketing industry by utilizing proprietary purchase intelligence. The native bank advertising market was estimated to be approximately $11 billion in the United States in 2016, according to Frost & Sullivan in a study commissioned by us.

We believe that Cardlytics Direct is a leading native bank advertising solution addressing this market.

Key Benefits of Our Platform

We make marketing more relevant and measurable through our purchase intelligence platform while simultaneously driving customer engagement and loyalty for FIs.

Key benefits to marketers:

 

    Comprehensive View of Consumer Behavior.  We leverage the power of our platform to provide marketers with valuable insights into the preferences of their actual or potential customers both within and outside the context of a marketing campaign. We build on the insight marketers have today—how their customers are spending in their own stores and websites—with our insight into how their customers are spending elsewhere.

 



 

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    Precise Targeting in a Captive Channel.  With access to consumers’ aggregate purchase data at particular FIs, not just their spending with a single marketer, we enable marketers to identify, reach and influence likely buyers in the highly captive native bank advertising channel. With our purchase intelligence, marketers can reach the right consumer, at the right time, in this channel with a relevant message.

 

    Accurate Measurement of Marketing’s Impact on Sales.  We measure the impact of marketing efforts by analyzing actual purchase data—both online and in-store. This enables us to determine the actual return on advertising spend from marketing campaigns within and outside Cardlytics Direct and helps marketers optimize ongoing and future campaigns.

 

    Compelling Return on Advertising Spend.  For every dollar marketers spent in our Cardlytics Direct channel in the United States in 2016, they generated an ROAS of approximately $30.

Key benefits to FIs:

 

    Cash Back Incentives to FI Customers.  Cardlytics Direct allows customers of our FI partners to receive personalized offers and cash back rewards. Our FIs’ customers have earned approximately $232 million in aggregate cash back incentives to date, and we believe that these savings drive increased customer engagement and loyalty.

 

    Higher Customer Retention and Brand Loyalty.  We believe FIs on our platform see reduced account attrition rates. Based on aggregated data from approximately 10,000 randomly-selected customers of three of our 10 largest FIs, we calculated that monthly customer attrition was 17% lower on average among redeeming credit and debit card customers over the six-month period following a customer’s first redemption in 2016 as compared to average monthly customer attrition over the same comparison period for non-redeeming customers. See page 2 above for further information on this calculation.

 

    Increased Card Spend and Engagement.  Our platform provides FIs with a cash-back program that incentivizes their customers to use their cards more frequently. Based on aggregated data from approximately 10,000 randomly-selected customers of three of our 10 largest FIs, we calculated that monthly card spend increased by 11% on average over the six-month period following a customer’s first redemption in 2016 as compared to the monthly average from the preceding three-month period. In contrast, the monthly card spend of non-redeeming customers over the same comparison periods increased by only 2% on average.

 

    New Economics to FIs.  Because we share a portion of the revenue that we generate from marketers with FIs, we also provide FIs with an attractive incremental revenue opportunity.

 

    Support for FI Marketing and Business Initiatives.  We believe that we enable our FI partners to create competitively differentiated offerings that reinforce their broader strategic goals, including marketing their own products—such as mortgages, car loans or 529 plans—directly to customers with the same precision targeting available to marketers.

Competitive Strengths

We make marketing more relevant and measurable through our purchase intelligence platform. We believe that the following strengths provide us with competitive advantages:

 

    Deeply Embedded with FIs.  We have partnered with over 2,000 FIs and no FI partner with which we contract directly has unilaterally terminated its use of our platform.

 



 

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    Our Proprietary Consumer Touchpoints.  With all of our FI partners, we enable marketers to reach consumers in a captive, largely untapped and digitally engaging environment, when they are thinking about their finances.

 

    Massive Reach Informed by Purchase Intelligence.  Our platform aggregated and analyzed approximately $1.3 trillion in U.S. purchase data in 2016 across stores, retail categories and geographies, both online and in-store, representing over 18.0 billion transactions across more than 94.0 million accounts in the United States. These types of transactions represented approximately 40% of all U.S. consumer spending in 2016, based on a 2016 study from The Nilson Report.

 

    Significant Scale with Marketers and Compelling ROAS.  We work with companies across a variety of industries. By serving these marketers at scale, we have developed deep insight into consumer behavior, which has allowed us to optimize how we reach and influence likely buyers. For every dollar marketers spent in our Cardlytics Direct channel in the United States in 2016, they generated an average of approximately $30 of ROAS.

 

    Powerful, Self-Reinforcing Network Effects.  We see significant network effects within Cardlytics Direct. By adding new marketers and increasing the potential incentives provided to our FIs’ customers, we are able to increase engagement within our FIs’ digital banking channels. This, in turn, attracts more FIs to our platform, adding to our scale, and making our platform more valuable to marketers.

 

    Ability to Improve Marketing.  Consumers spend 92% of their purchase dollars in physical stores and digital marketers have long sought efficient and effective ways to understand online-to-offline attribution. We enable marketers to leverage purchase intelligence to better understand their customers and potential customers. In addition to reaching consumers through our proprietary Cardlytics Direct channel, we use purchase intelligence to help marketers measure the impact of marketing campaigns outside of the Cardlytics Direct channel on in-store and online sales.

 

    Proprietary Technology Architecture and Advanced Analytics Capabilities.  We have designed our purchase intelligence platform to protect highly sensitive first-party data. Our proprietary, distributed architecture helps facilitate both the effective delivery of our solutions and the protection of our FI customers’ personally identifiable information, or PII. No PII is shared by the FIs with Cardlytics.

 

    World-Class Management Team with Unique Combination of Backgrounds and Experiences.  Our team’s extensive experience across banking, technology and marketing is invaluable in our ability to forge relationships with financial and marketing partners, and understand the technical complexities inherent in building a platform that is transforming and disrupting the marketing industry.

Our Growth Strategies

The principal components of our strategy include the following:

 

    Grow Our Cardlytics Direct Business with Marketers.  We intend to continue to expand our sales and marketing efforts to grow our Cardlytics Direct business with existing marketers and attract new brands, retailers and service providers.

 

    Drive Growth through Existing FI Partners.  We intend to drive revenue growth by continuing to increase customer adoption and improve the effectiveness of FIs’ digital channels.

 

    Expand our Network of FI Partners.  We will continue to focus on growing our network of FI partners by integrating directly with large regional and national banks and by reselling our solution through financial processors and payment networks.

 



 

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    Grow Our Platform Through Integrations with Partners.  We intend to continue to partner with other media platforms, marketing technology providers and marketing agencies that can utilize our platform to serve a broad array of customers.

 

    Continue to Innovate and Evolve Our Platform.  As we continue to grow our data asset and enhance our platform, we are developing new solutions and increasingly sophisticated analytical capabilities.

Selected Risks Affecting Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

    We may not be able to sustain our revenue growth rate in the future.

 

    We are dependent upon our Cardlytics Direct solution.

 

    We are substantially reliant on Bank of America and a limited number of other FI partners.

 

    We do not have direct contractual relationships with a substantial majority of our FI partners, which became part of our network through bank processors and digital banking providers.

 

    Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.

 

    We have a short operating history, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

 

    Our future success will depend, in part, on our ability to expand demand for our Other Platform Solutions, which are dependent upon our FI partners allowing us to utilize their purchase data for such solutions.

 

    Our business could be adversely affected if marketers or their agencies are not satisfied with our solutions or our systems and infrastructure fail to meet their needs.

 

    We generally do not have long-term commitments from marketers, and if we are unable to retain and increase sales of our solutions to marketers and their agencies or attract new marketers and their agencies, our business, financial condition and operating results would be adversely affected.

 

    We operate in an emerging industry and future demand and market acceptance for our solutions is uncertain.

 

    The market in which we participate is competitive and we may not be able to compete successfully with our current or future competitors.

 

    Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.

 

    Assertions by third parties of infringement or other violations by us of their intellectual property rights, whether or not correct, could result in significant costs and harm our business, financial condition and operating results.

 



 

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    Our existing directors, executive officers and holders of 5% or more of our outstanding common stock, together with their affiliates, will beneficially own     % of the voting power of our outstanding capital stock after the completion of this offering, assuming an initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus. This concentration of ownership may prevent new investors from influencing significant corporate decisions.

Corporate Information

Cardlytics, Inc. was initially incorporated under the laws of the State of Delaware in June 2008.

Our principal executive offices are located at 675 Ponce de Leon Avenue NE, Suite 6000, Atlanta, Georgia 30308. Our telephone number is (888) 798-5802. Our website address is www.cardlytics.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

“Cardlytics,” the Cardlytics logo and other trademarks or service marks of Cardlytics, Inc. appearing in this prospectus are the property of Cardlytics, Inc. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

    a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

    an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

    an exemption from new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;

 

    reduced disclosure about the emerging growth company’s executive compensation arrangements; and

 

    no requirement to seek nonbinding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of some or all these provisions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenues of at least $1.07 billion or (c) in which we are deemed to be a “large accelerated filer,” under the rules of the U.S. Securities and Exchange Commission, or SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 



 

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We have elected to take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult. We have also elected to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of these elections, which may result in a less active trading market for our common stock and higher volatility in our stock price.

 



 

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The Offering

 

Common stock offered by Cardlytics

                    shares
Total common stock to be outstanding after this offering                     shares

Over-allotment option offered by Cardlytics

                    shares

Use of proceeds

   We estimate that we will receive net proceeds of approximately $        million, assuming an initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriter discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock, and facilitate our future access to the capital markets. We expect to use the net proceeds of this offering for working capital and other general corporate purposes. We may use a portion of the proceeds from this offering for acquisitions or strategic investments in complementary businesses or technologies, although we do not currently have any plans for any such acquisitions or investments. These expectations are subject to change. See “Use of Proceeds” for additional information.

Risk factors

   See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Proposed Nasdaq Global Market Symbol

   “CDLX”

The number of shares of our common stock that will be outstanding after this offering is based on                        shares of common stock outstanding as of September 30, 2017, and excludes:

 

    10,130,793 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2017, at a weighted-average exercise price of $4.61 per share;

 

    440,616 shares of redeemable convertible preferred stock issuable upon the exercise of warrants outstanding as of September 30, 2017, at a weighted average exercise price of $3.04 per share, which warrants will become exercisable for shares of common stock upon the completion of this offering;

 

    2,401,945 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2017, at a weighted-average exercise price of $2.03 per share;

 

    2,577,465 shares of common stock issuable upon the exercise of performance-based warrants outstanding as of September 30, 2017, with milestones that will be deemed to be achieved upon completion of this offering and with an exercise price of $5.91 per share;

 

   

shares of common stock issuable upon exercise of warrants issued in connection with

 



 

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our Series G preferred stock financing outstanding as of September 30, 2017, at an exercise price of $0.0001 per share, with the actual number of shares issuable upon exercise of such warrants being equal to the product obtained by multiplying 1,385,358 by a fraction, the numerator of which is the difference between $17.2379 and the volume weighted average closing price of our common stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants become exercisable and the denominator of which is such volume weighted average closing price, which warrants are exercisable upon the earlier to occur of the date (i) 180 days following the date of this prospectus and (ii) 10 days prior to a sale of our company;

 

    1,188,092 shares of common stock reserved for issuance under our 2008 Stock Plan, which shares will cease to be available for issuance at the time our 2018 Equity Incentive Plan becomes effective;

 

                     shares of our common stock reserved for future issuance pursuant to our 2018 Equity Incentive Plan, which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year; and

 

                     shares of common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

    the conversion of all of our outstanding shares of our redeemable convertible preferred stock into an aggregate of 42,573,435 shares of our common stock immediately prior to the closing of this offering;

 

    the issuance of 149,679 shares of common stock to certain of our executive officers and key employees upon the automatic settlement of outstanding restricted securities units, which are referred to in this prospectus as the Management Conversion Shares;

 

    the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering;

 

    no exercise of outstanding options or warrants after September 30, 2017;

 

    no exercise by the underwriters of their over-allotment option to purchase additional shares of our common stock; and

 

    a one-for-              reverse stock split of our common stock effected on                 .

 



 

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Summary Consolidated Financial and Other Data

We derived the summary consolidated statements of operations data for the years ended December 31, 2015 and 2016 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the nine months ended September 30, 2016 and 2017 and the summary consolidated balance sheet as of September 30, 2017 from the unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements, and the unaudited financial data include, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of our consolidated financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results to be expected in the future and our operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2017.

 



 

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When you read this summary consolidated financial data, it is important that you read it together with the historical consolidated financial statements and related notes to those statements, as well as “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.

 

    Year Ended
December 31,
    Nine Months Ended
September 30,
 
       2015           2016           2016           2017     
    (in thousands, except per share data)  

Condensed Consolidated Statement of Operations:

       

Revenue

  $   77,634     $   112,821     $     76,400     $     91,099  

Costs and expenses:

       

FI Share and other third-party costs

    47,691       66,285       44,986       50,886  

Delivery costs(1)

    4,803       6,127       4,729       5,095  

Sales and marketing expense(1)

    32,784       31,261       22,850       23,454  

Research and development expense(1)

    11,604       13,902       11,101       9,527  

General and administrative expense(1)

    18,197       21,355       16,240       14,738  

Depreciation and amortization expense

    2,194       4,219       3,432       2,303  

Termination of U.K. agreement expense

          25,904       25,904        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    117,273       169,053       129,242       106,003  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (39,639     (56,232     (52,842     (14,904
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

    (1,484     (6,170     (3,623     (6,427

Change in fair value of warrant liability

    914       (32     639       (412

Change in fair value of convertible promissory notes

          (786     (819     (1,244

Change in fair value of convertible promissory notes—related parties

          (10,091     (10,280     6,213  

Other income (expense), net

    (432     (2,385     (1,726     1,189  
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (40,641     (75,696     (68,651     (15,585

Income tax benefit

    16                    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (40,625   $ (75,696   $ (68,651   $ (15,585
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to the carrying value of redeemable convertible preferred stock

    (1,001     (982     (741     (5,383
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (41,626   $ (76,678   $ (69,392   $ (20,968
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

  $ (4.98   $ (8.12   $ (7.58   $ (1.67
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding, basic and diluted

    8,363       9,446       9,150       12,559  
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma per share attributable to common stockholders, basic and diluted(3)

    $       $  
   

 

 

     

 

 

 

Pro forma weighted-average common shares outstanding, basic and diluted(3)

       
   

 

 

     

 

 

 

 

  (1)  Includes stock-based compensation expense as follows:

 

     Year Ended
December 31,
     Nine Months Ended
September 30,
 
         2015              2016              2016              2017      
     (in thousands)  

Stock-based compensation expense:

           

Delivery costs

   $ 97      $ 96      $ 68      $ 146  

Sales and marketing expense

     1,015        1,153        826        1,390  

Research and development expense

     386        574        419        691  

General and administrative expense

     955        1,624        928        1,480  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $           2,453      $           3,447      $              2,241      $              3,707  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (2)  See note (14) to our consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.

 



 

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  (3)  Pro forma basic and diluted net loss per share represents pro forma net loss divided by the pro forma weighted-average shares of common stock outstanding. The pro forma net loss per share for the year ended December 31, 2016 and the nine months ended September 30, 2017 assumes (1) the automatic conversion of all outstanding shares of redeemable convertible preferred stock outstanding as of December 31, 2016 and September 30, 2017, respectively, into common stock immediately prior to the closing of this offering and (2) the issuance of 149,679 Management Conversion Shares in full satisfaction of our obligations to certain of our executive officers and key employees pursuant to outstanding restricted securities units. See note (14) to our consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of pro forma net loss per share attributable to common stockholders.

 

     As of September 30, 2017  
         Actual             Pro forma(1)          Pro forma
as
  adjusted(2)(3)  
 
     (in thousands)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 28,186       $      $               

Accounts receivable, net

     38,060       

Working capital(4)

     37,963       

Total assets

     93,415       

Total debt

     55,513       

Total liabilities

     102,587       

Redeemable convertible preferred stock

     196,077           

Warrant liability

     10,061           

Additional paid-in capital

     57,979       

Accumulated deficit

     (264,389     

Total stockholders’ (deficit) equity

     (205,249     

 

 

(1) Pro forma consolidated balance sheet data reflects (1) the automatic conversion of all outstanding shares of redeemable convertible preferred stock outstanding as of September 30, 2017 into common stock immediately prior to the closing of this offering, (2) the reclassification to stockholders’ (deficit) equity of our redeemable convertible preferred stock warrant liability in connection with the conversion of our outstanding redeemable convertible preferred stock warrants into common stock warrants, (3) the issuance of 149,679 Management Conversion Shares in full satisfaction of our obligations to certain of our executive officers and key employees pursuant to outstanding restricted securities units and (4) the impact of the vesting, upon the completion of this offering, of outstanding performance-based warrants to purchase shares of our common stock held by certain of our FI partners.

(2) Pro forma as adjusted consolidated balance sheet data reflects (1) the pro forma items described immediately above and (2) our sale of              shares of common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

(3) Pro forma as adjusted consolidated balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, total assets and total stockholders’ (deficit) equity by approximately $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash and cash equivalents, total assets and total stockholders’ (deficit) equity by approximately $        million, assuming that the assumed initial price to public remains the same, and after deducting underwriting discounts and commissions payable by us.

(4) We define working capital as current assets less current liabilities. See our consolidated financial statements included elsewhere in this prospectus for further details regarding our current assets and current liabilities.

 



 

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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. For a description of how we calculate these financial and operating metrics as well as their uses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Metrics.”

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
           2015                  2016                 2016                 2017        
    

(in thousands, except ARPU)

(in dollars, except MAU)

 

FI monthly active users (FI MAU)(1)

     38,957        43,927       42,733       53,694  

Average revenue per user (ARPU)(2)

     1.65        2.23       1.54       1.56  

Adjusted contribution(3)

     29,943        46,536       31,414       40,213  

Adjusted EBITDA(4)

     (34,774)        (17,046     (16,884     (7,665

(1) We define FI monthly active users, or FI MAUs, as unique customers of our FI partners that logged in and visited the online or mobile banking applications of, or opened an email from, our FI partners during a monthly period. We then calculate a monthly average of FI MAUs for the periods presented above. 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.

(2) We define average revenue per user, or ARPU, as the total GAAP Cardlytics Direct revenue generated in the applicable period, 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.

(3) Adjusted contribution represents our revenue less our FI Share and other third-party costs. We review adjusted contribution for internal management purposes and believe that the elimination of our primary cost of revenue, FI Share and other third-party costs, can provide a useful measure for period-to-period comparisons of our core business. More specifically, we report our revenue gross of FI Share and other third-party costs, but net of any consumer incentives that we pay to our FIs’ customers. Adjusted contribution is not a measure calculated in accordance with GAAP. 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. Nevertheless, our use of adjusted contribution 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. See note (15) to our consolidated financial statements appearing elsewhere in this prospectus for further details on our use of adjusted contribution in our financial reporting and operating segments. Other companies, including companies in our industry that have similar business arrangements, may address the impact of FI Share and other third-party costs differently. You should consider adjusted contribution alongside our other GAAP financial results. The following table presents a reconciliation of adjusted contribution to revenue, the most directly comparable GAAP measure, for each of the periods indicated:

 

     Year Ended
December 31,
     Nine Months Ended
September 30,
 
           2015                  2016                  2016                  2017        
     (in thousands)  

Revenue

   $       77,634      $     112,821      $       76,400      $       91,099  

Minus: FI Share and other third-party costs

     47,691        66,285        44,986        50,886  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted contribution

   $ 29,943      $ 46,536      $ 31,414      $ 40,213  
  

 

 

    

 

 

    

 

 

    

 

 

 

(4) Adjusted EBITDA represents our net loss before income tax benefit; interest expense, net; depreciation and amortization; stock-based compensation expense; change in fair value of warrant liability; change in fair value of convertible promissory notes; foreign currency (gain) loss; loss on extinguishment of debt; costs associated with financing events; restructuring costs; amortization and impairment of deferred FI implementation costs; and termination of U.K. agreement expense. We do not consider these excluded items to be indicative of our core operating performance. The items that are non-cash include change in fair value of warrant liability, change in fair value of convertible promissory notes, foreign currency (gain) loss, amortization of FI implementation costs, depreciation and amortization expense and stock-based compensation expense. 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 solutions. 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

 



 

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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; (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, for each of the periods indicated:

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
           2015                 2016                 2016                 2017        
     (in thousands)  

Net loss

   $ (40,625   $ (75,696   $ (68,651   $ (15,585

Plus:

        

Income tax benefit

     (16                  

Interest expense, net

               1,484                 6,170                 3,623                 6,427  

Depreciation and amortization

     2,194       4,219       3,432       2,303  

Stock-based compensation expense

     2,453       3,447       2,241       3,707  

Change in fair value of warrant liability

     (914     32       (639     412  

Change in fair value of convertible promissory notes

           10,877       11,099       (4,969

Foreign currency (gain) loss

     440       1,926       1,270       (1,200

Loss on extinguishment of debt

           462       462        

Costs associated with financing events

           2,632       2,632       129  

Restructuring costs

           1,291       1,284        

Amortization and impairment of deferred FI implementation costs

     210       1,690       499       1,110  

Termination of U.K. agreement expense

           25,904       25,904        
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (34,774)     $ (17,046   $ (16,844   $ (7,665
  

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We may not be able to sustain our revenue growth rate in the future.

Our revenue increased by 45% from $77.6 million in 2015 to $112.8 million in 2016 and 19% from $76.4 million in the nine months ended September 30, 2016 to $91.1 million in the nine months ended September 30, 2017. We may not be able to sustain revenue growth consistent with our recent history or at all. You should not consider our revenue growth in recent periods as indicative of our future performance. As we grow our business, we expect our revenue growth rates to slow in future periods due to a number of factors, which may include slowing demand for our solutions, increasing competition, decreasing growth of our overall market, our inability to engage and retain a sufficient number of marketers or banks and credit unions, which we refer to as financial institutions or FIs, or our failure, for any reason, to capitalize on growth opportunities. If we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult for us to achieve and maintain profitability.

We are dependent upon our Cardlytics Direct solution.

We have historically derived substantially all of our revenue from our Cardlytics Direct solution, our proprietary native bank advertising channel, and expect to continue to derive substantially all of our future revenue from sales of Cardlytics Direct for the foreseeable future. Approximately 83%, 87% and 92% of our revenue in 2015, 2016 and the nine months ended September 30, 2017, respectively, was derived from sales of Cardlytics Direct. Revenue from our Other Platform Solutions, where we use purchase intelligence outside of the native bank advertising channel, was approximately $13.2 million, $15.0 million and $7.5 million in 2015, 2016 and the nine months ended September 30, 2017, respectively. Substantially all of our total Other Platform Solutions revenue in each of these periods was derived from sales of our Other Platform Solutions delivered as a managed service, which we discontinued as of July 31, 2017. Given that we are now focusing our efforts on more nascent Other Platform Solutions, we do not expect to generate substantial revenue from Other Platform Solutions for the foreseeable future. Accordingly, our total revenue may decline in future periods if we are unable to generate sufficient offsetting revenue from sales of Cardlytics Direct. Our operating results could also suffer due to:

 

    lack of continued participation by FI partners in our FI network or our failure to attract new FI partners;

 

    failure by our FI partners to increase engagement with our solutions within their customer bases, improve their customers’ user experience, increase customer awareness, leverage additional customer outreach channels like email or otherwise promote our incentive programs on their websites and mobile applications, including by making the programs difficult to access or otherwise diminishing their prominence;

 

    our failure to offer compelling incentives to our FIs’ customers;

 

    any decline in demand for our Cardlytics Direct solution by marketers or their agencies;

 

    the introduction by competitors of products and technologies that serve as a replacement or substitute for, or represent an improvement over, Cardlytics Direct;

 

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    FIs developing their own technology to support purchase intelligence marketing or other incentive programs;

 

    technological innovations or new standards that our Cardlytics Direct solution does not address; and

 

    sensitivity to current or future prices offered by us or competing solutions.

In addition, we are required to pay consumers incentives with respect to a majority of our Cardlytics Direct marketing campaigns regardless of whether the amount of such consumer incentives exceeds the amount of billings that we are paid by the applicable marketer. Further, we are often required to pay such consumers incentives before we receive payment from the applicable marketer. Accordingly, to the extent that the amount of consumer incentives that we are required to pay materially exceeds the billings that we receive or we encounter any significant failure to ultimately collect payment, our business, financial condition and operating results could be adversely affected.

If we are unable to grow our revenue from sales of our other solutions or if we fail to increase sales of our Cardlytics Direct solution, our business and operating results would be harmed.

We are substantially dependent on Bank of America, National Association, or Bank of America, and a limited number of other FI partners.

Our business is substantially dependent on Bank of America and a limited number of other FI partners. We require participation from our FI partners in Cardlytics Direct and access to their purchase data in order to offer our solutions to marketers and their agencies. We must have FI partners with a sufficient number of customers and levels of customer engagement to ensure that we have robust purchase data and marketing space to support a broad array of incentive programs for marketers. 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 monthly active users, or FI MAUs, of any FI partner is indicative of our level of dependence on such FI partner. During 2015, 2016 and the nine months ended September 30, 2017, our largest FI partner, Bank of America, contributed approximately 50%, 47% and 51% of our total FI MAUs, respectively. Lloyds TSB Bank plc, or Lloyds, our largest FI partner in the United Kingdom, contributed approximately 9%, 10% and 9% of our total FI MAUs in 2015, 2016 and the nine months ended September 30, 2017, respectively. Digital Insight Corporation, a subsidiary of NCR Corporation, or Digital Insight, contributed approximately 15%, 13% and 11% of our total FI MAUs in 2015, 2016 and the nine months ended September 30, 2017, respectively. We anticipate that Bank of America, Lloyds and Digital Insight will contribute a significant portion of our total FI MAUs for the foreseeable future.

In addition, we pay our FI partners an FI Share, which is 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. During 2015, 2016 and the nine months ended September 30, 2017, Bank of America accounted for 63%, 64% and 63% of the total FI Share we paid to all FIs, respectively. Lloyds accounted for 11%, 10% and 11% of the total FI Share we paid to all FIs in 2015, 2016 and the nine months ended September 30, 2017, respectively, and Digital Insight accounted for approximately 10%, 9% and 7% of the total FI Share we paid to all FIs in 2015, 2016 and the nine months ended September 30, 2017, respectively. We anticipate that Bank of America, Lloyds and Digital Insight will continue to receive a significant portion of our FI Share for the foreseeable future and the loss of Bank of America, Lloyds, Digital Insight or any other significant FI partner would significantly harm our business, results of operations and financial conditions.

Our agreements with a substantial majority of our FI partners, including Bank of America, Lloyds and Digital Insight have three to five year terms but are terminable by the FI partner on 90 days or less prior notice. If an FI partner terminates its agreement with us, we would lose that FI as a source of purchase data and online banking customers. In addition, even if our FI partners continued to work with us relating to Cardlytics Direct, our FI partners generally have the ability to cease providing us purchase data or limit the way in which we may

 

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potentially use their data outside of the Cardlytics Direct channel at any time since our contracts with our partners do not include any binding commitments to continue to provide purchase data to us for use outside their respective native bank advertising channel. Our FI partners may elect to withhold from us or limit the use of their purchase data for many reasons, including:

 

    a change in the business strategy;

 

    if there is a competitive reason to do so;

 

    if new technical requirements arise;

 

    consumer concern over use of purchase data;

 

    if they choose to develop and use in-house solutions or use a competitive solution in lieu of our solutions; and

 

    if legislation is passed restricting the dissemination, or our use, of the data that is currently provided to us or if judicial interpretations result in similar limitations.

To the extent that we breach or are alleged to have breached the terms of our agreement with any FI partner, or a disagreement arises with an FI partner regarding the interpretation of our contractual arrangements, which has occurred in the past with respect to Bank of America (although Bank of America granted us a waiver) and may occur again in the future, such FI partner may be more likely to cease providing us data or to terminate its agreement with us. The loss of Bank of America, Lloyds, Digital Insight or any other significant FI partner would significantly harm our business, results of operations and financial conditions.

We do not have direct contractual relationships with a substantial majority of our FI partners.

As of September 30, 2017, we had a network of 2,041 FI partners, but only had direct contractual relationships with 17 of these FI partners. Our other FI partners became part of our network through bank processors and digital banking providers, such as Digital Insight and Fidelity Information Services, LLC, or FIS. While FI partners that were part of our network through our relationships with Digital Insight and FIS contributed approximately 12% of our total number of FI MAUs for the nine months ended September 30, 2017, these indirect FI partners represented substantially all of our total FI partners as of September 30, 2017. These indirect FI partners may terminate their relationships with these bank processors or digital banking providers, thereby indirectly terminating their relationships with us, independent of the actual or perceived value of our solutions to them.

Wells Fargo is planning to test a pilot of Cardlytics Direct in certain cities and may not elect to fully implement Cardlytics Direct on a national basis or at all.

In the first quarter of 2018, we plan to launch a pilot of Cardlytics Direct with Wells Fargo & Company, or Wells Fargo, directed at Wells Fargo customers located only in Miami, Florida, Charlotte, North Carolina and San Francisco, California. The pilot will be a test of an implementation that is limited to emailing offers to Wells Fargo customers in these cities and making those offers available in the Wells Fargo Wallet application. Since this will only be a test, Wells Fargo may not elect to implement Cardlytics Direct throughout the entire United States or at all. If Wells Fargo does not elect to launch Cardlytics Direct on a national basis, our business, financial condition and operating results could be harmed. Further, if Wells Fargo decides on a full roll-out of Cardlytics Direct, the timing cannot be predicted.

 

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We have a significant amount of debt, which may affect our ability to operate our business and secure additional financing in the future.

As of September 30, 2017, our total indebtedness was approximately $55.5 million. In July 2016, we entered into a credit agreement, or the Term Loan, with National Electrical Benefit Fund as lender and Columbia Partners, L.L.C as investment manager. In September 2016, we entered into a loan and security agreement, or the Line of Credit, with Ally Bank and Pacific Western Bank. As of September 30, 2017 there was approximately $32.1 million and $24.5 million outstanding under the Term Loan and the Line of Credit, respectively.

Our Term Loan and our Line of Credit, or collectively, the Credit Facilities, are secured by substantially all of our assets. Our Credit Facilities require us, and any debt instruments we may enter into in the future may require us, to comply with various covenants that limit our ability to, among other things:

 

    dispose of assets;

 

    complete mergers or acquisitions;

 

    incur or guarantee indebtedness;

 

    sell or encumber certain assets;

 

    pay dividends or make other distributions to holders of our capital stock, including by way of certain stock buybacks;

 

    make specified investments;

 

    engage in different lines of business;

 

    change certain key management personnel; and

 

    engage in certain transactions with our affiliates.

We are also required under the Credit Facilities to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control and we may not meet those ratios and tests. These covenants may make it difficult to operate our business. A failure by us to comply with the covenants or financial ratios contained in our Credit Facilities could result in an event of default, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default, including the occurrence of a material adverse change, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in our Credit Facilities. If the indebtedness under our Credit Facilities were to be accelerated, our future financial condition could be materially adversely affected.

We may incur additional indebtedness in the future. The instruments governing such indebtedness could contain provisions that are as, or more, restrictive than our existing debt instruments. If we are unable to repay, refinance or restructure our indebtedness when payment is due, the lenders could proceed against any collateral granted to them to secure such indebtedness or force us into bankruptcy or liquidation.

If we fail to generate sufficient revenue to offset our contractual commitments to FIs, our business, results of operations and financial conditions could be harmed.

We have a minimum FI Share commitment with a certain FI partner totaling $10.0 million over a 12-month period following completion of certain milestones. In 2017, we paid certain of our FI partners an aggregate of

 

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approximately $2.6 million related to 2016 FI Share commitments in excess of the amount of FI Share otherwise payable to such FI partners in the absence of such commitments, and it is possible that we may be required to fund similar shortfalls in future periods. In certain cases, we are also responsible for funding certain development costs for user interface enhancements and implementation costs on behalf of FIs. Such development and implementation cost commitments total $12.1 million in 2017 and $9.3 million in 2018. These agreements allow for a total $4.4 million, $5.0 million and $5.0 million to be reimbursed to us through future reductions to FI Share over the course of 2017, 2018 and 2019, respectively. To the extent that we are unable to generate revenue from marketers sufficient to offset these FI Share commitments and other obligations, our business, results of operations and financial conditions could be harmed.

If we fail to attract new FI partners or maintain our relationships with bank processors and digital banking providers, we may not be able to sufficiently grow our revenue, which could significantly harm our business, results of operations and financial condition.

Our ability to grow our revenue depends on our ability to attract new FI partners. A significant percentage of consumer credit and debit card spending is concentrated with the 15 largest FIs in the United States, four of which are currently part of our FI network, while the balance of card spending is spread across thousands of smaller FIs. Accordingly, our ability to efficiently grow our revenue will specifically depend on our ability to establish relationships with the large FIs that are not currently part of our network and to maintain our relationships with the large FIs that are currently part of our network. In addition, we must continue to maintain our relationships with our existing bank processor and digital banking provider partners and attract new such partners because these partners aggregate smaller FIs into our network. We have in the past and may in the future be unsuccessful in attempts to establish and maintain relationships with large FIs, bank processors and digital banking providers. If we are unable to attract new FI partners, maintain our relationships with our existing bank processor and digital banking provider partners or attract new bank processor and digital provider partners, our business, results of operations and financial condition would be significantly harmed and we may fail to capture a material portion of the native bank advertising market opportunity.

Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.

Our operating results have historically fluctuated and our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. Period-to-period comparisons of our operating results should not be relied upon as an indication of our future performance. Given our relatively short operating history and the rapidly evolving purchase intelligence industry, our historical operating results may not be useful in predicting our future operating results.

Factors that may impact our quarterly operating results include the factors set forth in this “Risk Factors” section, as well as the following:

 

    our ability to attract and retain marketers, FI partners, bank processors and digital banking providers;

 

    the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business, particularly with respect to our efforts to attract new FI partners to our network;

 

    the revenue mix between Cardlytics Direct and Other Platform Solutions, as well as between revenue generated from our operations in the United States and United Kingdom;

 

    changes in the economic prospects of marketers, the industries or verticals that we primarily serve, or the economy generally, which could alter marketers’ spending priorities or budgets;

 

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    the termination or alteration of relationships with our FI partners in a manner that impacts ongoing or future marketing campaigns;

 

    the amount and timing of expenses required to grow our business, including the timing of our payments of FI Share and FI Share commitments as compared to the timing of our receipt of payments from our marketers;

 

    changes in demand for our solutions or similar solutions;

 

    seasonal trends in the marketing industry, including concentration of marketer spend in the fourth quarter of the calendar year and declines in marketer spend in the first quarter of the calendar year;

 

    competitive market position, including changes in the pricing policies of our competitors;

 

    exposure related to our international operations and foreign currency exchange rates;

 

    expenses associated with items such as litigation, regulatory changes, cyber-attacks or security breaches;

 

    the introduction of new technologies, products or solution offerings by competitors; and

 

    costs related to acquisitions of other businesses or technologies.

Each factor above or discussed elsewhere in this prospectus or the cumulative effect of some of these factors may result in fluctuations in our operating results. This variability and unpredictability could result in our failure to meet expectations with respect to operating results, or those of securities analysts or investors, for a particular period. If we fail to meet or exceed expectations for our operating results for these or any other reasons, the market price of our stock could fall and we could face costly lawsuits, including securities class action suits.

We have a short operating history, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We have a relatively short operating history, which limits our ability to forecast our future operating results and subjects us to a number of uncertainties, including with respect to our ability to plan for and model future growth. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in developing industries. If our assumptions regarding these uncertainties, which we use to manage our business, are incorrect or change in response to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, our business could suffer and our stock price could decline. Any success that we may experience in the future will depend in large part on our ability to, among other things:

 

    maintain and expand our network of FI partners, bank processors and digital banking providers;

 

    build and maintain long-term relationships with marketers and their agencies;

 

    develop and offer competitive solutions that meet the evolving needs of marketers;

 

    expand our relationships with FI partners to enable us to use their purchase data for new solutions;

 

    improve the performance and capabilities of our solutions;

 

    successfully expand our business;

 

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    successfully compete with other companies that are currently in, or may in the future enter, the markets for our solutions;

 

    increase market awareness of our solutions and enhance our brand;

 

    continue to develop, and increase market adoption of, our Other Platform Solutions;

 

    manage increased operating expenses as we continue to invest in our infrastructure to scale our business and operate as a public company; and

 

    attract, hire, train, integrate and retain qualified and motivated employees.

Any failure of our FI partners to effectively deliver and promote the online incentive programs that comprise our Cardlytics Direct solution could materially and adversely affect our business.

We have spent the last several years and significant resources building out technology integrations with our FI partners to facilitate the delivery of incentive programs to our FIs’ customers and measuring those customers subsequent in-store or online spending. We are also reliant on our network of FI partners to promote their online incentive programs, increase customer awareness and leverage additional customer outreach channels like email, all of which can increase customer engagement, as well as expand our network of FI partners. We believe that key factors in the success and effectiveness of an incentive program are the following: the level of accessibility and prominence of the program on the FI partners’ website and mobile applications, as well as the user interface through which a customer is presented with marketing content. In certain cases, we have little control over the prominence of the incentive program and design of the user interface that our FI partners choose to use. To the extent that our FI partners deemphasize incentive programs, make incentive programs difficult to locate on their website and/or mobile applications and/or fail to provide a user interface that is appealing to FI customers, FI customers may be less likely to purchase the products or solutions that are featured in incentive programs, which could negatively impact the amount of fees that we are able to charge our marketer customers in connection with marketing campaigns, and, therefore, our revenue. In addition, a failure by FIs to properly deliver or sufficiently promote marketing campaigns would reduce the efficacy of our solutions and impair our ability to attract and retain marketers and their agencies. As a result, the revenue we generate from our Cardlytics Direct solution may be adversely affected, which would materially and adversely affect our business, financial condition and results of operations.

We derive a material portion of our revenue from a limited number of marketers, and the loss of one or more of these marketers could adversely impact our business, results of operations and financial conditions.

Our marketer base is concentrated with our top five marketers representing 23% of revenue for both 2015 and 2016 and 24% of revenue for the nine months ended September 30, 2017. We do not have long-term commitments from most of these marketers. If we were to lose one or more of our significant marketers, our revenue may significantly decline. In addition, revenue from significant marketers may vary from period-to-period depending on the timing or volume of marketing spend. The loss of one or more of our significant marketers could adversely affect our business, results of operations and financial conditions.

Further, our top five marketers represented 27%, 21% and 25% of accounts receivable as of December 31, 2015 and 2016 and September 30, 2017, respectively. Accordingly, our credit risk is concentrated among a limited number of marketers and the failure of any significant marketer to satisfy its obligations to us, on a timely basis or at all, could adversely affect our business, results of operations and financial conditions.

Our future success may depend, in part, on our ability to expand demand for our Other Platform Solutions, which are dependent upon our FI partners allowing us to utilize their purchase data for such solutions.

We recently introduced our Other Platform Solutions that leverage our purchase intelligence platform. Revenue from our Other Platform Solutions was approximately $13.2 million, $15.0 million and $7.5 million in 2015,

 

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2016 and the nine months ended September 30, 2017, respectively. Substantially all of our total Other Platform Solutions revenue in each of these periods was derived from sales of our Other Platform Solutions delivered as a managed service, which we discontinued as of July 31, 2017. Given that we are now focusing our efforts on more nascent Other Platform Solutions, we do not expect to generate substantial revenue from Other Platform Solutions for the foreseeable future. In addition, it is uncertain whether our Other Platform Solutions will gain market acceptance in the near term or at all and, accordingly, whether we will ultimately realize any return on our investment. Any factor adversely affecting sales of our Other Platform Solutions, including market acceptance, competition, performance and reliability, reputation and economic and market conditions, could harm our business, results of operations and financial conditions.

Further, each of our Other Platform Solutions is dependent upon our FI partners allowing us to utilize their purchase data for these solutions. We currently have the right to sell analytics using purchase data from only four of our FI partners outside the banking channel, which four FIs do not include Bank of America. In addition, we have the right to use aggregated Bank of America purchase data combined with aggregated data from other FIs to create summary analytics. If we lose access to any such data for any such uses from these FI partners or do not gain similar access to purchase data from additional FI partners, our ability to sell our Other Platform Solutions would be adversely affected.

We have invested substantial resources in the development and marketing of these solutions. Further, our experience in providing analytics solutions is limited, and if we are unable to effectively gather, process,

analyze and disseminate relevant information, sales of our Other Platform Solutions may suffer. Any failure to grow sales of our Other Platform Solutions could harm our business, financial condition and operating results.

Our business could be adversely affected if marketers or their agencies are not satisfied with our solutions or our systems and infrastructure fail to meet their needs.

We derive nearly all of our revenue from marketers and their agencies. Accordingly, our business depends on our ability to satisfy marketers and their agencies with respect to their marketing needs. With respect to Cardlytics Direct, we rely on our Offer Management System, or OMS, to facilitate the creation of marketing campaigns and evaluate the results of campaigns, and our Offer Placement System, or OPS, to track impressions, engagement, activation and redemptions and to target consumers and present offers. Any failure of, or delays in the performance of, our systems, including without limitation our OMS or OPS, could cause service interruptions or impaired system performance. Such failures in our systems could also cause us to over-run on campaigns, thus committing us to a higher amount of consumer incentives than our marketers approved, which would negatively affect the profitability of the affected campaigns. If sustained or repeated, these performance issues could reduce the attractiveness of our solutions to new and existing marketers and cause existing marketers to reduce or cease using our solutions, which could adversely affect our business, financial condition or operating results. In addition, negative publicity resulting from issues related to our marketer relationships, regardless of accuracy, may damage our business by adversely affecting our ability to attract new marketers or marketing agencies and maintain and expand our relationships with existing marketers.

If the use of our solutions increases, or if marketers or FI partners demand more advanced features from our solutions, we will need to devote additional resources to improving our solutions, and we also may need to expand our technical infrastructure at a more rapid pace than we have in the past. This would involve purchasing or leasing data center capacity and equipment, upgrading our technology and infrastructure and introducing new or enhanced solutions. It may take a significant amount of time to plan, develop and test changes to our infrastructure, and we may not be able to accurately forecast demand or predict the results we will realize from such improvements. There are inherent risks associated with changing, upgrading, improving and expanding our technical infrastructure. Any failure of our solutions to operate effectively with future infrastructure and technologies could reduce the demand for our solutions, resulting in marketer or FI partner dissatisfaction and harm to our business. Also, any expansion of our infrastructure would likely require that we appropriately scale our internal business systems and services organization, including without limitation implementation and support services, to serve our growing marketer base.

 

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If we are unable to respond to these changes or fully and effectively implement them in a cost-effective and timely manner, our solutions may become ineffective, we may lose marketers and/or FI partners, and our business, financial condition and operating results may be negatively impacted.

We generally do not have long-term commitments from marketers, and if we are unable to retain and increase sales of our solutions to marketers and their agencies or attract new marketers and their agencies, our business, financial condition and operating results would be adversely affected.

Most marketers do business with us by placing insertion orders for particular marketing campaigns, either directly or through marketing agencies that act on their behalf. We generally do not have any commitment from a marketer beyond the campaign governed by a particular insertion order, and we frequently must compete to win further business from a marketer. Our insertion orders may also be cancelled by marketers or their marketing agencies prior to the completion of the campaign; provided that marketers or their agencies are required to pay us for services performed prior to cancellation. As a result, our success is dependent upon our ability to outperform our competitors and win repeat business from existing marketers, while continually expanding the number of marketers for which we provide services. To maintain and increase our revenue, we must encourage existing marketers and their agencies to increase their use of our solutions and add new marketers. Many marketers and marketing agencies, however, have only just begun using our solutions for a limited number of marketing campaigns, and our future revenue growth will depend heavily on these marketers and marketing agencies expanding their use of our solutions across campaigns and otherwise increasing their spending with us. Even if we are successful in convincing marketers and their agencies to use our solutions, it may take several months or years for them to meaningfully increase the amount that they spend with us. Further, larger marketers with multiple brands typically have individual marketing budgets and marketing decision makers for each of their brands, and we may not be able to leverage our success in securing a portion of the marketing budget of one or more of a marketer’s brands into additional business with other brands. Moreover, marketers may place internal limits on the allocation of their marketing budgets to digital marketing, to particular campaigns, to a particular provider or for other reasons. In addition, we are reliant on our FI network to have sufficient marketing inventory within Cardlytics Direct to place the full volume of advertisements contracted for by our marketers and their agencies. Any failure to meet these demands may hamper the growth of our business and the attractiveness of our solutions.

Our ability to retain and increase sales of our solutions and attract new marketers and their agencies may be adversely affected by competitive offerings or marketing methods that are lower priced or perceived as more effective than our solutions. Larger marketers may themselves have a substantial amount of purchase data and they may also seek to augment their own purchase data with additional purchase, impression and/or demographic data acquired from third-party data providers, which may allow them to develop, individually or with partners, internal targeting and measurement capabilities.

Because we do not have long-term agreements with our marketers or their agencies, we may not be able to accurately predict future revenue streams, and we cannot guarantee that our current marketers will continue to use our solutions, or that we will be able to replace departing marketers with new marketers that provide us with comparable revenue. If we are unable to retain and increase sales of our solutions to existing marketers and their agencies or attract new marketers and their agencies for any of the reasons above or for other reasons, our business, financial condition and operating results would be adversely affected.

We have a history of losses and may not achieve profitability in the future.

We have incurred net losses since inception and expect to incur net losses in the future. We incurred net losses of $38.9 million, $40.6 million, $75.7 million and $15.6 million in 2014, 2015, 2016 and the nine months ended September 30, 2017, respectively. As of September 30, 2017, we had an accumulated deficit of $264.4 million. We have never achieved profitability on an annual or quarterly basis and we do not know if we will be able to achieve or sustain profitability. Although our revenue has increased substantially in recent periods, we also do not expect to maintain this rate of revenue growth. We plan to continue to invest in our research and development

 

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and sales and marketing efforts, and we anticipate that our operating expenses will continue to increase as we scale our business and expand our operations. We also expect our general and administrative expense to increase as a result of our growth and our preparation to become, and operate as, a public company. Our ability to achieve and sustain profitability is based on numerous factors, many of which are beyond our control. We may never be able to generate sufficient revenue to achieve or sustain profitability.

Bringing new FI partners into our network can require considerable time and expense and can be long and unpredictable.

Our FI partners and FI partner prospects engage in highly regulated businesses, are often slow to adopt technological innovation and have rigorous standards with respect to providing third parties, like us, with access to their data. Our operating results depend in part on expanding our FI partner network to maintain and enhance the scale of our solutions. The length of time that it takes to add an FI partner to our network, from initial evaluation to integration into our network, varies substantially from FI to FI and may take several years. Our sales and integration cycle with respect to our FI partners is long and unpredictable, requires considerable time and expense and may not ultimately be successful. It is difficult to predict exactly when, or even if, a new FI partner will join our network and we may not generate revenue from a new FI partner in the same period as we incurred the costs associated with acquiring such FI partner, or at all. Once an FI partner has agreed to work with us, it may take a lengthy period of time for the implementation of our solutions to be prioritized and integrated into the FI partner’s infrastructure. Because a substantial portion of our expenses are relatively fixed in the short term, our operating results will suffer if revenue falls below our expectations in a particular quarter, which could cause the price of our stock to decline. Ultimately, if additions to our FI network are not realized in the time period expected or not realized at all, or if an FI partner terminates its agreement with us, our business, financial condition and operating results could be adversely affected.

We operate in an emerging industry and future demand and market acceptance for our solutions is uncertain.

We believe that our future success will depend in large part on the growth, if any, in the market for purchase intelligence. Utilization of consumer purchase data to inform marketing is an emerging industry and future demand and market acceptance for this type of marketing is uncertain. If the market for purchase intelligence does not continue to develop or develops more slowly than we expect, our business, financial condition and operating results could be harmed.

The market in which we participate is competitive and we may not be able to compete successfully with our current or future competitors.

The market for purchase intelligence is nascent and we believe that there is no one company with which we compete directly across our range of solutions. With respect to Cardlytics Direct, we believe that we are the only company that enables marketing through FI channels at scale. With respect to our Other Platform Solutions, we compete with a number of established companies, as well as numerous emerging market entrants. In the future, we may face competition from online retailers, credit card companies, established enterprise software companies, advertising and marketing agencies, digital publishers and mobile pay providers with access to a substantial amount of consumer purchase data. While we may successfully partner with a wide range of companies that are to some extent currently competitive to us, these companies may become more competitive to us in the future. As we introduce new solutions, as our existing solutions evolve and as other companies introduce new products and solutions, we are likely to face additional competition.

Some of our actual and potential competitors may have advantages over us, such as longer operating histories, significantly greater financial, technical, marketing or other resources, stronger brand and recognition, larger intellectual property portfolios and broader global distribution and presence. In addition, our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may focus on purchase intelligence marketing and could directly compete with us. Smaller companies could also launch new products and services that we do not offer and that could gain market acceptance quickly.

 

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Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Larger competitors are also often in a better position to withstand any significant reduction in capital spending, and will therefore not be as susceptible to economic downturns. In addition, current or potential competitors may be acquired by third parties with greater available resources. As a result of such relationships and acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors.

If we fail to identify and respond effectively to rapidly changing technology and industry needs, our solutions may become less competitive or obsolete.

Our future success depends on our ability to adapt and innovate. To attract, retain and increase new marketers and FI partners, we will need to expand and enhance our solutions to meet changing needs, add functionality and address technological advancements. If we are unable to adapt our solutions to evolving trends in the marketing industry, if we are unable to properly identify and prioritize appropriate solution development projects or if we fail to develop and effectively market new solutions, such as our nascent Other Platform Solutions, or enhance existing solutions to address the needs of existing and new marketers and FI partners, we may not be able to achieve or maintain adequate market acceptance and penetration of our solutions, and our solutions may become less competitive or obsolete.

In addition, new, more effective or less costly technologies may emerge that use data sources that we do not have access to, that use entirely different analytical methodologies than we do or that use other indicators of purchases by consumers. If existing and new marketers and their agencies perceive greater value in alternative technologies or data sources, our ability to compete for marketers and their agencies could be materially and adversely affected.

Our future success will depend, in part, on our ability to expand into new industry verticals.

We have historically generated a substantial majority of our revenue from marketers in the restaurant, brick and mortar retail, telecommunications and cable industries, and have recently entered new verticals such as hospitality and travel, and believe that our future success will depend, in part, on our ability to expand adoption of our solutions in new industry verticals. As we market to a wider group of potential marketers and their agencies, we will need to adapt our marketing strategies to meet the concerns and expectations of customers in these new industry verticals. Our success in expanding sales of our solutions to marketers in new industry verticals will depend on a variety of factors, including our ability to:

 

    tailor our solutions so that they that are attractive to businesses in such industries;

 

    hire personnel with relevant industry-vertical experience to lead sales and services teams; and

 

    develop sufficient expertise in such industries so that we can provide effective and meaningful marketing programs and analytics.

If we are unable to successfully market our solutions to appeal to marketers and their agencies in new industries, we may not be able to achieve our growth or business objectives.

A breach of the security of our systems could result in a third party’s entry into our FI partners’ systems, which would be detrimental to our business, financial condition and operating results.

We leverage our FI partners’ purchase data and infrastructures to deliver our solutions. We do not currently receive any personally identifiable information, or PII, from our FI partners, although we may obtain PII in the

 

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future as our business evolves. However, because of the interconnected nature of our infrastructure with that of our FI partners, there is a risk that third parties may attempt to gain access to our FI partners’ systems through our systems for the purpose of stealing data or disrupting our or their respective operations. In turn, we may be a more visible target for cyber-attacks and/or physical breaches of our databases or data centers, and we may in the future suffer from such attacks or breaches.

Current or future criminal capabilities, discovery of existing or new vulnerabilities in our systems and attempts to exploit those vulnerabilities or other developments may compromise or breach the technology protecting our systems. In the event that our protection efforts are unsuccessful and our systems are compromised such that a third party gains entry to our or any of our FI partners’ systems, we could suffer substantial harm. A security breach could result in operation disruptions that impair our ability to meet our marketers’ requirements, which could result in decreased revenue. Also, our reputation could suffer irreparable harm, causing our current and prospective marketers and FI partners to decline to use our solutions in the future. Further, we could be forced to expend significant financial and operational resources in response to a security breach, including repairing system damage, increasing cyber security protection costs by deploying additional personnel and protection technologies and litigating and resolving legal claims, all of which could divert resources and the attention of our management and key personnel away from our business operations. In any event, a breach of the security of our systems or data could materially harm our business, financial condition and operating results.

A number of factors could impair our ability to collect the significant amounts of data that we use to deliver our solutions.

Our ability to collect and use data may be restricted or prevented by a number of other factors, including:

 

    the failure of our network or software systems, or the network or software systems of our FI partners;

 

    decisions by our FI partners to restrict our ability to collect data from them (which decision they may make at their discretion) or to refuse to implement the mechanisms that we request to ensure compliance with our legal obligations or technical requirements;

 

    decisions by our FI partners to limit our ability to use their purchase data outside of the applicable banking channel;

 

    decisions by our FIs’ customers to opt out of the incentive program or to use technology, such as browser settings, that reduces our ability to deliver relevant advertisements;

 

    interruptions, failures or defects in our or our FI partners’ data collection, mining, analysis and storage systems;

 

    changes in regulations impacting the collection and use of data, including the use of cookies;

 

    changes in browser or device functionality and settings, and other new technologies, which impact our FI partners’ ability to collect and/or share data about their customers; and

 

    changes in international laws, rules, regulations and industry standards or increased enforcement of international laws, rules, regulations, and industry standards.

Any of the above-described limitations on our ability to successfully collect, utilize and leverage data could also materially impair the optimal performance of our solutions and severely limit our ability to target consumer, which would harm our business, financial condition and operating results.

 

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The efficacy of some of our solutions depends upon third-party data providers.

We rely on several third parties to assist us in matching our anonymized identifiers, which we call Cardlytics IDs, with third-party identifiers to recognize the digital presence of our FIs’ customers outside the FI channel. This matching process enables us to use purchase intelligence to measure in-store and online campaign sales impact or provide marketers with valuable visibility into the behaviors of current or prospective customers both within and outside the context of their marketing efforts. If any of these key data providers were to withdraw or withhold their identifiers from us, our ability to provide our Other Platform Solutions could be adversely affected. Replacements for these third-party identifiers may not be available in a timely manner or under economically beneficial terms, or at all.

Defects, errors or delays in our solutions could harm our reputation, which would harm our operating results.

The technology underlying our solutions may contain material defects or errors that can adversely affect our ability to operate our business and cause significant harm to our reputation. This risk is compounded by the complexity of the technology underlying our solutions and the large amounts of data that we leverage and process. In addition, with regard to our Cardlytics Direct solution, if we are unable to attribute incentives to our FIs’ customers in a timely manner, our FI partners may limit or discontinue their use of our solutions. Any such error, failure, malfunction, disruption or delay could result in damage to our reputation and could harm our business, financial condition and operating results.

Significant system disruptions or loss of data center capacity could adversely affect our business, financial condition and operating results.

Our business is heavily dependent upon highly complex data processing capabilities. We contract with our primary third-party data center, located in Atlanta, Georgia, and our redundancy data center, located in Suwanee, Georgia, pursuant to agreements that expire on December 31, 2020, subject to earlier termination upon material breach and a failure to cure. If for any reason our arrangements with our third-party data centers are terminated, or if we are unable to renew our agreements on commercially reasonable terms, we may be required to transfer that portion of our operations to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so. Further, protection of our third-party data centers against damage or interruption from fire, flood, tornadoes, power loss, telecommunications or equipment failure or other disasters and events beyond our control is important to our continued success. Any damage to, or failure of, the systems of the data centers that we utilize, or of our own equipment located within such data centers, could result in interruptions to the availability or functionality of our solutions. In addition, the failure of the data centers that we utilize to meet our capacity requirements could result in interruptions in the availability or functionality of our solutions or impede our ability to scale our operations. Any damage to the data centers that we utilize, or to our own equipment located within such data centers, that causes loss of capacity or otherwise causes interruptions in our operations could materially adversely affect our ability to quickly and effectively respond to our marketers’ or FI partners’ requirements, which could result in loss of their confidence, adversely impact our ability to attract new marketers and/or FI partners and force us to expend significant resources. The occurrence of any such events could adversely affect our business, financial condition and operating results.

Seasonal fluctuations in marketing activity could adversely affect our cash flows.

We expect our revenue, operating results, cash flows from operations and other key operating and performance metrics to vary from quarter to quarter in part due to the seasonal nature of our marketers’ spending on digital marketing campaigns. For example, many marketers tend to devote a significant portion of their budgets to the fourth quarter of the calendar year to coincide with consumer holiday spending and to reduce spend in the first quarter of the calendar year. Seasonality could have a material impact on our revenue, operating results, cash flow from operations and other key operating and performance metrics from period to period.

 

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Our international sales and operations subject us to additional risks that can adversely affect our business, operating results and financial condition.

In each of 2015 and 2016, we derived 11% of our revenue outside the United States. In the nine months ended September 30, 2017, 12% of our revenue was derived outside the United States. We may continue to expand our international operations as part of our growth strategy. While we have an office in the United Kingdom, substantially all of our operations are located in the United States. Our ability to convince marketers to expand their use of our solutions or renew their agreements with us is directly correlated to our direct engagement with such marketers or their agencies. To the extent that we are unable to engage with non-U.S. marketers and agencies effectively with our limited sales force capacity, we may be unable to grow sales to existing marketers to the same degree we have experienced in the United States.

Our international operations subject us to a variety of risks and challenges, including:

 

    localization of our solutions, including adaptation for local practices;

 

    increased management, travel, infrastructure and legal compliance costs associated with having international operations;

 

    fluctuations in currency exchange rates and related effect on our operating results;

 

    longer payment cycles and difficulties in collecting accounts receivable or satisfying revenue recognition criteria, especially in emerging markets;

 

    increased financial accounting and reporting burdens and complexities;

 

    general economic conditions in each country or region;

 

    economic uncertainty around the world;

 

    compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;

 

    compliance with U.S. laws and regulations for foreign operations, including the Foreign Corrupt Practices Act, the U.K. Bribery Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our software in certain foreign markets, and the risks and costs of non-compliance;

 

    heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of financial statements and irregularities in financial statements;

 

    difficulties in repatriating or transferring funds from or converting currencies in certain countries;

 

    cultural differences inhibiting foreign employees from adopting our corporate culture;

 

    reduced protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; and

 

    compliance with the laws of foreign taxing jurisdictions and overlapping of different tax regimes.

Any of these risks could adversely affect our international operations, reduce our international revenues or increase our operating costs, adversely affecting our business, financial condition and operating results.

 

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If we do not manage our growth effectively, the quality of our solutions may suffer, and our business, financial condition and operating results may be negatively affected.

The recent, rapid growth in our business has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational and financial resources, as well as our infrastructure. We rely heavily on information technology, or IT, systems to manage critical functions such as data storage, data processing, matching and retrieval, revenue recognition, budgeting, forecasting and financial reporting. To manage our growth effectively, we must continue to improve and expand our infrastructure, including our IT, financial and administrative systems and controls. In particular, we may need to significantly expand our IT infrastructure as the amount of data we store and transmit increases over time, which will require that we both utilize existing IT products and adopt new technologies. If we are not able to scale our IT infrastructure in a cost-effective and secure manner, our ability to offer competitive solutions will be harmed and our business, financial condition and operating results may suffer.

We must also continue to manage our employees, operations, finances, research and development and capital investments efficiently. Our productivity and the quality of our solutions may be adversely affected if we do not integrate and train our new employees quickly and effectively or if we fail to appropriately coordinate across our executive, research and development, technology, service development, analytics, finance, human resources, marketing, sales, operations and customer support teams. If we continue our rapid growth, we will incur additional expenses, and our growth may continue to place a strain on our resources, infrastructure and ability to maintain the quality of our solutions. If we do not adapt to meet these evolving challenges, or if the current and future members of our management team do not effectively manage our growth, the quality of our solutions may suffer and our corporate culture may be harmed. Failure to manage our future growth effectively could cause our business to suffer, which, in turn, could have an adverse impact on our business, financial condition and operating results.

Our corporate culture has contributed to our success, and if we cannot maintain it as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

We are undergoing rapid growth. As of September 30, 2017, we had 337 employees. We intend to further expand our overall headcount and operations, with no assurance that we will be able to do so while effectively maintaining our corporate culture. We believe our corporate culture is one of our fundamental strengths as it enables us to attract and retain top talent and deliver superior results for our customers. As we grow and change, we may find it difficult to preserve our corporate culture, which could reduce our ability to innovate and operate effectively. In turn, the failure to preserve our culture could negatively affect our ability to attract, recruit, integrate and retain employees, continue to perform at current levels and effectively execute our business strategy.

We are dependent on the continued services and performance of our senior management and other key personnel, the loss of any of whom could adversely affect our business.

Our future success depends in large part on the continued contributions of our senior management and other key personnel, including our two founders, Scott Grimes, our Chief Executive Officer, and Lynne Laube, our Chief Operating Officer. In particular, the leadership of key management personnel is critical to the successful management of our company, the development of our solutions and our strategic direction. We do not maintain “key person” insurance for any member of our senior management team or any of our other key employees. Our senior management and key personnel are all employed on an at-will basis, which means that they could terminate their employment with us at any time, for any reason and without notice. The loss of any of our key management personnel could significantly delay or prevent the achievement of our development and strategic objectives and adversely affect our business.

 

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If we are unable to attract, integrate and retain additional qualified personnel, including top technical talent, our business could be adversely affected.

Our future success depends in part on our ability to identify, attract, integrate and retain highly skilled technical, managerial, sales and other personnel, including top technical talent from the industry and top research institutions. We face intense competition for qualified individuals from numerous other companies, including other software and technology companies, many of whom have greater financial and other resources than we do. These companies also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than those we have to offer. In addition, new hires often require significant training and, in many cases, take significant time before they achieve full productivity. We may incur significant costs to attract and retain qualified personnel, including significant expenditures related to salaries and benefits and compensation expenses related to equity awards and we may lose new employees to our competitors or other companies before we realize the benefit of our investment in recruiting and training them. Moreover, new employees may not be or become as productive as we expect, as we may face challenges in adequately or appropriately integrating them into our workforce and culture. In addition, as we move into new geographies, we will need to attract and recruit skilled personnel in those areas. We have little experience with recruiting in geographies outside of the United States, and may face additional challenges in attracting, integrating and retaining international employees. If we are unable to attract, integrate and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, our business will be adversely affected.

If we do not effectively grow and train our sales team, we may be unable to add new marketers or increase sales to our existing marketers and our business will be adversely affected.

We continue to be substantially dependent on our sales team to obtain new marketers and to drive sales with respect to our existing marketers. We believe that the characteristics and skills of the best salespeople for our solutions are still being defined, as our market is relatively new. Further, we believe that there is, and will continue to be, significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, integrating and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and it may take significant time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow rapidly, a large percentage of our sales team will be new to our company and our solutions. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new marketers or increasing sales to our existing marketers, our business will be adversely affected.

The market data and forecasts included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you that our business will grow at similar rates, or at all.

The market data and forecasts included in this prospectus, including the data and forecasts published by eMarketer, Kantar Media, The Nilson Report, Frost & Sullivan, MAGNA Global and CMO Council, among others, and our internal estimates and research are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. If the forecasts of market growth or anticipated spending prove to be inaccurate, our business and growth prospects could be adversely affected. Even if the forecasted growth occurs, our business may not grow at a similar rate, or at all. Our future growth is subject to many factors, including our ability to successfully implement our business strategy, which itself is subject to many risks and uncertainties. The reports described in this prospectus speak as of their respective publication dates and the opinions expressed in such reports are subject to change. Accordingly, potential investors in our common stock are urged not to put undue reliance on such forecasts and market data.

 

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If currency exchange rates fluctuate substantially in the future, the results of our operations could be adversely affected.

Due to our international operations, we may be exposed to the effects of fluctuations in currency exchange rates. We generate revenue and incur expenses for employee compensation and other operating expenses at our U.K. office in the local currency. Fluctuations in the exchange rates between the U.S. dollar and the British pound could result in the dollar equivalent of such revenue and expenses being lower, which could have a negative net impact on our reported operating results. Although we may in the future decide to undertake foreign exchange hedging transactions to cover a portion of our foreign currency exchange exposure, we currently do not hedge our exposure to foreign currency exchange risks.

Our business may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales. Any successful action by state, local or other authorities to collect additional or past sales tax could adversely harm our business.

We are subject to federal, state and local taxes in the United States and similar taxes in foreign jurisdictions. Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. Although we believe that our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made.

We do not collect sales or other similar taxes in certain states and many of the states do not apply sales or similar taxes to certain of our solutions. State, local and foreign taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our solutions in various jurisdictions is unclear. We review these rules and regulations periodically and, when we believe we are subject to sales and use taxes in a particular state, we may voluntarily engage state tax authorities to determine how to comply with their rules and regulations. A successful assertion by one or more states, including states for which we have not accrued tax liability, requiring us to collect sales or other taxes with respect to sales of our solutions could result in substantial tax liabilities for past transactions, including interest and penalties, discourage customers from purchasing our solutions or otherwise harm our business, financial condition and operating results.

Determining our income tax rate is complex and subject to uncertainty.

The computation of provision for income tax is complex, as it is based on the laws of numerous taxing jurisdictions and requires significant judgment on the application of complicated rules governing accounting for tax provisions under GAAP. Provision for income tax for interim quarters is based on a forecast of our U.S. and non-U.S. effective tax rates for the year, which includes forward looking financial projections, including the expectations of profit and loss by jurisdiction, and contains numerous assumptions. Various items cannot be accurately forecasted and future events may be treated as discrete to the period in which they occur. Our provision for income tax can be materially impacted, for example, by the geographical mix of our profits and losses, changes in our business, such as internal restructuring and acquisitions, changes in tax laws and accounting guidance and other regulatory, legislative or judicial developments, tax audit determinations, changes in our uncertain tax positions, changes in our intent and capacity to permanently reinvest foreign earnings, changes to our transfer pricing practices, tax deductions attributed to equity compensation and changes in our need for a valuation allowance for deferred tax assets. For these reasons, our actual income taxes may be materially different than our provision for income tax.

 

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Our use of our net operating loss carryforwards may be limited and such carryforwards may expire unutilized or underutilized.

We may be limited in the portion of our net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. As of December 31, 2016, we had U.S. federal and state net operating loss carryforwards, or NOLs, of $198.4 million and $59.9 million, respectively, which expire in various years beginning in 2028. If we do not earn sufficient taxable income in the future, our NOLs may expire unutilized or underutilized. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its existing NOLs to offset future taxable income. We may have experienced “ownership changes” under Section 382 of the Code in the past, and subsequent changes in ownership of our stock, including by reason of this or future offerings, as well as other changes that may be outside of our control, could result in future ownership changes under Section 382 of the Code. If we are or become subject to limitations on our use of NOLs under Section 382 of the Code, our NOLs could expire unutilized or underutilized, even if we earn taxable income against which our NOLs could otherwise be offset. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs in our financial statements and other net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.

Comprehensive tax reform bills could adversely affect our business and financial condition.

The U.S. government recently enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base) and (iv) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with the latter taxed at a lower rate. Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial condition could be adversely affected. This prospectus does not discuss any such tax legislation or the manner in which it might affect purchasers of our common stock. We urge our stockholders to consult with their legal and tax advisors with respect to any such legislation and the potential tax consequences of investing in our common stock.

Unfavorable conditions in the global economy or the vertical markets we serve could limit our ability to grow our business and negatively affect our operating results.

General worldwide economic conditions have experienced significant instability in recent years. These conditions make it extremely difficult for marketers and us to accurately forecast and plan future business activities, and could cause marketers to reduce or delay their marketing spending. Historically, economic downturns have resulted in overall reductions in marketing spending. If macroeconomic conditions deteriorate or are characterized by uncertainty or volatility, marketers may curtail or freeze spending on marketing in general and for services such as ours specifically.

In addition, our business may be materially and adversely affected by weak economic conditions in the specific vertical markets that we serve. We have historically generated a substantial majority of our revenue from marketers in the restaurant, brick and mortar retail, telecommunications and cable industries. We cannot predict the timing, strength or duration of any economic slowdown or recovery. In addition, even if the overall economy is robust, we cannot assure you that the market for services such as ours will experience growth or that we will experience growth.

 

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Future acquisitions could disrupt our business and adversely affect our business, financial condition and operating results.

We may choose to expand by making acquisitions that could be material to our business, financial condition or operating results. Our ability as an organization to successfully acquire and integrate technologies or businesses is unproven. Acquisitions involve many risks, including the following:

 

    an acquisition may negatively affect our business, financial condition, operating results or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

    we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 

    an acquisition, whether or not consummated, may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

 

    an acquisition may result in a delay or reduction of purchases for both us and the company that we acquired due to uncertainty about continuity and effectiveness of solution from either company;

 

    we may encounter difficulties in, or may be unable to, successfully sell any acquired products or solutions;

 

    an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

 

    challenges inherent in effectively managing an increased number of employees in diverse locations;

 

    the potential strain on our financial and managerial controls and reporting systems and procedures;

 

    potential known and unknown liabilities associated with an acquired company;

 

    our use of cash to pay for acquisitions would limit other potential uses for our cash;

 

    if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants;

 

    the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions; and

 

    to the extent that we issue a significant amount of equity or convertible debt securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease.

We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to integrate successfully the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving integration, could have a material adverse effect on our business, financial condition and operating results.

 

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Natural or man-made disasters and other similar events may significantly disrupt our business, and negatively impact our business, financial condition and operating results.

A significant portion of our employee base, operating facilities and infrastructure are centralized in Atlanta, Georgia. Any of our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, tornadoes, hurricanes, wildfires, floods, nuclear disasters, acts of terrorism or other criminal activities, infectious disease outbreaks and power outages, which may render it difficult or impossible for us to operate our business for some period of time. Our facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our operations could negatively impact our business, financial condition and operating results, and harm our reputation. In addition, we may not carry business insurance or may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, financial condition and operating results. In addition, the facilities of significant marketers, FI partners or third-party data providers may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or material adverse effects on our business.

We may require additional capital to support growth, and such capital might not be available on terms acceptable to us, if at all, which may in turn hamper our growth and adversely affect our business.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our solutions, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity, equity-linked or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or equity-linked securities, including convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities that we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, including the ability to pay dividends or repurchase shares of our capital stock. This may make it more difficult for us to obtain additional capital, to pursue business opportunities, including potential acquisitions, or to return capital to our stockholders. We also may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth, service our indebtedness and respond to business challenges could be significantly impaired, and our business may be adversely affected.

If we are not able to maintain and enhance our brand, our business, financial condition and operating results may be adversely affected.

We believe that developing and maintaining awareness of the Cardlytics brand in a cost-effective manner is critical to achieving widespread acceptance of our existing solutions and future solutions and is an important element in attracting new marketers and FI partners. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to deliver valuable solutions for our marketers, their agencies and our FI partners. In the past, our efforts to build our brand have involved significant expense. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses that we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new marketers or FI partners or retain our existing marketer or FI partners and our business could suffer.

 

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Risks Related to Regulatory and Intellectual Property Matters

Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.

We, our FI partners and our marketers are subject to a number of domestic and international laws and regulations that apply to online services and the internet generally. These laws, rules and regulations address a range of issues including data privacy and cyber security, and restrictions or technological requirements regarding the collection, use, storage, protection, retention or transfer of data.

In the United States, the rules and regulations to which we, directly or contractually through our FI partners, or our marketers may be subject include those promulgated under the authority of the Federal Trade Commission, the Electronic Communications Privacy Act, Computer Fraud and Abuse Act, Health Insurance Portability and Accountability Act, the Gramm-Leach-Bliley Act and state cyber security and breach notification laws, as well as regulator enforcement positions and expectations reflected in federal and state regulatory actions, settlements, consent decrees and guidance documents. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal frameworks with which we, directly or contractually through our FI partners, or our marketers may be required to comply, including the Data Protection Directive established in the European Union. Further, many federal, state and foreign government bodies and agencies have introduced, and are currently considering, additional laws and regulations. If passed, we will likely incur additional expenses and costs associated with complying with such laws. The costs of compliance with, and other burdens imposed by, the laws, rules, regulations and policies that are applicable to the businesses of our FI partners or marketers may limit the use and adoption of, and reduce the overall demand for, our solutions.

These existing and proposed laws, regulations and industry standards can be costly to comply with and can delay or impede the development of new solutions, result in negative publicity and reputational harm, increase our operating costs, require significant management time and attention, increase our risk of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices.

Legislation and regulation of online businesses, including privacy and data protection regimes, is expansive, not clearly defined and rapidly evolving. Such regulation could create unexpected costs, subject us to enforcement actions for compliance failures, or restrict portions of our business or cause us to change our business model.

Government regulation and industry standards may increase the costs of doing business online. Federal, state, municipal and foreign governments and agencies have adopted and could in the future adopt, modify, apply or enforce laws, policies, regulations and standards covering user privacy, data security, technologies such as cookies that are used to collect, store and/or process data, online marketing, the use of data to inform marketing, the taxation of products and services, unfair and deceptive practices, and the collection (including the collection of information), use, processing, transfer, storage and/or disclosure of data associated with unique individual internet users.

Although we have not collected or retained data that is traditionally considered PII under U.S. law, such as names, email addresses, addresses, phone numbers, social security numbers, credit card numbers, financial data or health data, we typically do collect and store IP addresses and other device identifiers, which are or may be considered personal data in some jurisdictions or otherwise may be the subject of legislation or regulation. Furthermore, we may elect to use PII in the future for our current solutions or solutions we may introduce. In addition, certain U.S. laws impose requirements on the collection and use of information from or about users or their devices. Other existing laws may in the future be revised, or new laws may be passed, to impose more stringent requirements on the use of identifiers to collect user information, including information of the type that we collect. Changes in regulations could affect the type of data that we may collect; restrict our ability to use

 

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identifiers to collect information, and, thus, affect our ability to actually collect that information; the costs of doing business online, and, therefore, the demand for our solutions; the ability to expand or operate our business; and harm our business.

In particular, there has been increasing public and regulatory concern and public scrutiny about the use of PII. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or our solutions or that the definition of “PII” is expanded in the future. If this is the case, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our solutions, which could have a material adverse effect on our business, financial condition or operating results. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations, policies or standards could result in additional cost and liability to us; damage our reputation; affect our ability to attract new marketers and FI partners and maintain relationships with our existing marketers and FI partners; and adversely affect our business, financial condition or operating results. Privacy and security concerns, whether valid or not, may inhibit market adoption of our solutions.

U.S. and non-U.S. regulators also may implement “Do-Not-Track” legislation, particularly if the industry does not implement a standard. Effective January 1, 2014, the California Governor signed into law an amendment to the California Online Privacy Protection Act of 2003. Such amendment requires operators of commercial websites and online service providers, under certain circumstances, to disclose in their privacy policies how such operators and providers respond to browser “do not track” signals.

Some of our activities may also be subject to the laws of foreign jurisdictions, whether or not we are established or based in such jurisdictions. Within the European Union, or EU, where we currently have an active presence in the United Kingdom, Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” directs EU member states to ensure that accessing information on an internet user’s computer, such as through a cookie, is allowed only if the internet user has given his or her consent. In response, some member states have implemented legislation requiring entities to obtain the user’s consent before placing cookies for targeted marketing purposes.

In the United Kingdom, for example, the Privacy and Electronic Communications Regulations 2011, or PECR, implement the requirements of Directive 2009/136/EC (which amended Directive 2002/58/EC), which is known as the ePrivacy Directive. The PECR regulates various types of electronic direct marketing that use cookies and similar technologies. The PECR also imposes sector-specific breach reporting requirements, but only as applicable to providers of particular public electronic communications services. Additional EU member state laws of this type may follow.

We may be required to, or otherwise may determine that it is advisable to, develop or obtain additional tools and technologies to compensate for a potential lack of cookie data. Even if we are able to do so, such additional tools may be subject to further regulation, time consuming to develop or costly to obtain, and less effective than our current use of cookies. In addition, certain information, such as IP addresses as collected and used by us may constitute “personal data” in certain non-U.S. jurisdictions, including in the United Kingdom, and therefore certain of our activities could be subject to EU laws applicable to the processing and use of personal data.

More generally, the regulatory framework for online services and data privacy and security issues worldwide can vary substantially from jurisdiction to jurisdiction, is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws, rules, regulations and standards regarding the collection, use, storage and disclosure of information, web browsing and geolocation data collection and data analytics. Interpretation of these laws, rules and regulations and their application to our solutions in the U.S. and foreign jurisdictions is ongoing and cannot be fully determined at this time.

 

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In addition, the regulatory environment for the collection and use of consumer data by marketers is evolving in the United States and internationally and is currently a self-regulatory framework, which relies on market participants to ensure self-compliance. The voluntary nature of this self-regulatory framework may change.

The United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants’ ability to collect, augment, analyze, use and share anonymous data, such as by regulating the level of consumer notice and consent required before a company can place cookies or other tracking technologies. A number of existing bills are pending in the U.S. Congress that contain provisions that would regulate how companies can use cookies and other tracking technologies to collect and utilize user information.

In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. We may also be subject to claims of liability or responsibility for the actions of third parties with whom we interact or upon whom we rely in relation to various solutions, including but not limited to our marketers and their agencies and our FI partners. If this were to occur, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our solutions, which could have an adverse effect on our business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business.

In addition, if we were to gain knowledge that we inadvertently received PII from our FI partners, our failure to comply with applicable laws and regulations, or to protect personal data, could result in enforcement action against us, including fines, imprisonment of our officers and public censure, claims for damages by consumers and other affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse impact on our operations, financial performance and business. Even the perception of privacy or security concerns, whether or not valid, may harm our reputation and inhibit adoption of our solution by current and future marketers and marketing agencies.

If the use of matching technologies, such as cookies, pixels and device identifiers, is rejected by internet users, restricted or otherwise subject to unfavorable terms, such as by non-governmental entities, our performance may decline and we may lose customers and revenue.

Our solutions may use matching technologies, such as cookies, pixels and device identifiers, to match the Cardlytics IDs we have assigned to our FIs’ customers with their digital presence outside of the FI partners’ websites and mobile applications. Our matching technologies may sometimes be “third-party cookies” because they are placed on individual browsers when internet users visit a website that is not part of the Cardlytics.com domain. These matching technologies are placed through an internet browser on an internet user’s computer and correspond with a data set that we retain on our servers. Our matching technologies only record anonymized information and the date that the matching technology was last refreshed. When our matching technologies are present and a user is exposed to marketing content targeted or deployed with our solutions, we are able to gain insight into that user’s interaction with the marketing content. If our access to matching technology data is reduced, our ability to conduct our business in the current manner may be affected and thus undermine the effectiveness of our solutions.

Internet users may easily block and/or delete cookies (e.g., through their browsers or “ad blocking” software). The most commonly used internet browsers allow internet users to modify their browser settings to prevent cookies from being accepted by their browsers, or are set to block third-party cookies by default. If more browser manufacturers and internet users adopt these settings or delete their cookies more frequently than they currently do, our business could be negatively affected. Some government regulators and privacy advocates have suggested creating a “Do Not Track” standard that would allow internet users to express a preference, independent of cookie settings in their browser, not to have website browsing recorded. If internet users adopt a

 

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“Do Not Track” browser setting and the standard either gets imposed by state or federal legislation or agreed upon by standard-setting groups, it may curtail or prohibit us from using non-personal data as we currently do. This could hinder growth of marketing on the internet generally, and cause us to change our business practices and adversely affect our business, financial condition and operating results.

In addition, browser manufacturers could replace cookies with their own product and require us to negotiate and pay them for use of such product to record information about internet users’ interactions with our marketers, which may not be available on commercially reasonable terms, or at all.

Failure to protect our proprietary technology and intellectual property rights could substantially harm our business, financial condition and operating results.

Our future success and competitive position depend in part on our ability to protect our intellectual property and proprietary technologies. To safeguard these rights, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual protections in the United States and other jurisdictions, all of which provide only limited protection and may not now or in the future provide us with a competitive advantage.

As of September 30, 2017, we had three issued patents and 10 patent applications pending relating to our software. We cannot assure you that any patents will issue from any patent applications, that patents that issue from such applications will give us the protection that we seek or that any such patents will not be challenged, invalidated, or circumvented. Any patents that may issue in the future from our pending or future patent applications may not provide sufficiently broad protection and may not be enforceable in actions against alleged infringers. We have registered the “Cardlytics” name and logo in the United States and certain other countries. We have registrations and/or pending applications for additional marks in the United States and other countries; however, we cannot assure you that any future trademark registrations will be issued for pending or future applications or that any registered trademarks will be enforceable or provide adequate protection of our proprietary rights. We also license software from third parties for integration into our products, including open source software and other software available on commercially reasonable terms. We cannot assure you that such third parties will maintain such software or continue to make it available.

In order to protect our unpatented proprietary technologies and processes, we rely on trade secret laws and confidentiality agreements with our employees, consultants, vendors and others. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. Bank of America also has the right to purchase a license to the source code underlying Cardlytics Direct upon the occurrence of specified events and for a specified fee, which could compromise the proprietary nature of our platform, allow Bank of America to develop in-house solutions and discontinue their use of our solutions and/or allow Bank of America to develop and sell a solution similar to Cardlytics Direct.

In addition, others may independently discover our trade secrets, in which case we would not be able to assert trade secret rights, or develop similar technologies and processes. Further, the contractual provisions that we enter into may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, trade secrets and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or infringement of our solutions, technologies or intellectual property rights.

From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such legal action could result in substantial costs and diversion of resources and could negatively affect our business, financial condition and operating results.

 

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Assertions by third parties of infringement or other violations by us of their intellectual property rights, whether or not correct, could result in significant costs and harm our business, financial condition and operating results.

Patent and other intellectual property disputes are common in our industry. We have in the past and may in the future be subject to claims alleging that we have misappropriated, misused, or infringed other parties’ intellectual property rights. Some companies, including certain of our competitors, own larger numbers of patents, copyrights and trademarks than we do, which they may use to assert claims against us. Third parties may also assert claims of intellectual property rights infringement against our FI partners, whom we are typically required to indemnify. As the numbers of solutions and competitors in our market increases and overlap occurs, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business.

The patent portfolios of our most significant competitors are larger than ours. This disparity may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our own patents may therefore provide little or no deterrence or protection. There can be no assurance that we will not be found to infringe or otherwise violate any third-party intellectual property rights or to have done so in the past.

An adverse outcome of a dispute may require us to:

 

    pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights;

 

    cease developing or selling solutions that rely on technology that is alleged to infringe or misappropriate the intellectual property of others;

 

    expend additional development resources to attempt to redesign our solutions or otherwise develop non-infringing technology, which may not be successful;

 

    enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and

 

    indemnify our FI partners and other third parties.

In addition, royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Some licenses may also be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of the foregoing events could seriously harm our business, financial condition and operating results.

Our use of open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.

We use open source software to deliver our solutions and expect to continue to use open source software in the future. Some of these open source licenses may require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. This may require that we make certain proprietary code available under an open source license. We may face claims from others claiming ownership of, or seeking to enforce the license terms applicable to such open source software, including by demanding release of the open source software, derivative works or our proprietary source code that was developed using such software. Few of the licenses applicable to

 

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open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. These claims could also result in litigation, require us to purchase costly licenses or require us to devote additional research and development resources to change the software underlying our solutions, any of which would have a negative effect on our business, financial condition and operating results and may not be possible in a timely manner. We and our customers may also be subject to suits by parties claiming infringement due to the reliance by our solutions on certain open source software, and such litigation could be costly for us to defend or subject us to an injunction. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs. Finally, we cannot assure you that we have not incorporated open source software into the software underlying our solutions in a manner that may subject our proprietary software to an open source license that requires disclosure, to customers or the public, of the source code to such proprietary software. In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our solutions and technologies and materially and adversely affect our ability to sustain and grow our business. Many open source licenses also limit our ability to bring patent infringement lawsuits against open source software that we use without losing our right to use such open source software. Therefore, the use of open source software may limit our ability to bring patent infringement lawsuits, to the extent we ever have any patents that cover open source software that we use.

We are subject to government regulation, including import, export, economic sanctions and anti-corruption laws and regulations that may expose us to liability and increase our costs.

Various of our products are subject to U.S. export controls, including the U.S. Department of Commerce’s Export Administration Regulations and economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. These regulations may limit the export of our products and provision of our solutions outside of the United States, or may require export authorizations, including by license, a license exception or other appropriate government authorizations, including annual or semi-annual reporting and the filing of an encryption registration. Export control and economic sanctions laws may also include prohibitions on the sale or supply of certain of our products to embargoed or sanctioned countries, regions, governments, persons and entities. In addition, various countries regulate the importation of certain products, through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products. The exportation, reexportation, and importation of our products and the provision of solutions, including by our partners, must comply with these laws or else we may be adversely affected, through reputational harm, government investigations, penalties and a denial or curtailment of our ability to export our products or provide solutions. Complying with export control and sanctions laws may be time consuming and may result in the delay or loss of sales opportunities. Although we take precautions to prevent our products from being provided in violation of such laws, our products may have previously been, and could in the future be, provided inadvertently in violation of such laws, despite the precautions we take. If we are found to be in violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties for us and for the individuals working for us. Changes in export or import laws or corresponding sanctions, may delay the introduction and sale of our products in international markets, or, in some cases, prevent the export or import of our products to certain countries, regions, governments, persons or entities altogether, which could adversely affect our business, financial condition and results of operations.

We are also subject to various domestic and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, as well as other similar anti-bribery and anti-kickback laws and regulations. These laws and regulations generally prohibit companies and their employees and intermediaries from authorizing, offering or providing improper payments or benefits to officials and other recipients for improper purposes. We rely on certain third parties to support our sales and regulatory compliance efforts and can be held liable for their corrupt or other illegal activities, even if we do not explicitly authorize or have actual

 

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knowledge of such activities. Although we take precautions to prevent violations of these laws, our exposure for violating these laws increases as our international presence expands and as we increase sales and operations in foreign jurisdictions.

Risks Related to Our Common Stock and this Offering

Our stock price may be volatile, and you may lose some or all of your investment.

The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock following this offering. The market price of our common stock may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are related in complex ways, including:

 

    actual or anticipated fluctuations in our financial condition and operating results;

 

    variance in our financial performance from expectations of securities analysts or investors;

 

    changes in the prices of our solutions;

 

    changes in laws or regulations applicable to our solutions;

 

    announcements by us or our competitors of significant business developments, acquisitions or new offerings;

 

    our involvement in litigation;

 

    our sale of our common stock or other securities in the future;

 

    changes in senior management or key personnel;

 

    trading volume of our common stock;

 

    changes in the anticipated future size and growth rate of our market; and

 

    general economic, regulatory and market conditions.

Recently, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.

No public market for our common stock currently exists and an active public trading market may not develop or be sustained following this offering.

No public market for our common stock currently exists. We intend to apply to list our common stock on the Nasdaq Global Market, or Nasdaq, but an active public trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise

 

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capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our common stock, as of September 30, 2017, immediately after this offering. Therefore, if you purchase shares of our common stock in this offering, you will suffer immediate dilution of $        per share, or $        per share if the underwriters exercise their over-allotment option in full, in net tangible book value after giving effect to the sale of common stock in this offering at the initial public offering price of $        per share. See “Dilution.” If outstanding options or warrants to purchase our common stock are exercised in the future, you will experience additional dilution.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

We anticipate that the net proceeds from this offering will be used for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire complementary businesses, products or technologies. However, we do not have any agreements or commitments for any acquisitions at this time. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used effectively. The net proceeds may be invested with a view towards long-term benefits for our stockholders and this may not increase our operating results or market value. The failure by our management to apply these funds effectively may adversely affect the return on your investment.

We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Concentration of ownership among our existing directors, executive officers and holders of 5% or more of our outstanding common stock may prevent new investors from influencing significant corporate decisions.

Following this offering, our directors, executive officers and holders of more than 5% of our common stock, some of whom are represented on our board of directors, together with their affiliates will beneficially own     % of the voting power of our outstanding capital stock. As a result, these stockholders will, immediately following this offering, be able to determine the outcome of matters submitted to our stockholders for approval. Some of these persons or entities may have interests that are different from yours, and this ownership could affect the value of your shares of common stock if, for example, these stockholders elect to delay, defer or prevent a change in corporate control, merger, consolidation, takeover or other business combination. This concentration of ownership may also adversely affect the market price of our common stock.

Future sales of our common stock in the public market could cause our share price to decline.

After this offering, there will be              shares of our common stock outstanding, assuming no exercise of the underwriters’ over-allotment option. Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our

 

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common stock and could impair our ability to raise capital through the sale of additional equity securities. Of our issued and outstanding shares of our common stock, all of the shares sold in this offering will be freely transferable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares acquired by our affiliates, as defined in Rule 144 under the Securities Act. The remaining              shares outstanding after this offering will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for 180 days after the date of this prospectus.

Additionally, following the completion of this offering, stockholders holding approximately     % of our common stock outstanding, will, after the expiration of the lock-up periods specified above, have the right, subject to various conditions and limitations, to include their shares of our common stock in registration statements relating to our securities. If the offer and sale of these shares are registered, they will be freely tradable without restriction under the Securities Act. Shares of common stock sold under such registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock. See “Description of Capital Stock—Registration Rights” and “Shares Eligible for Future Sale—Lock-Up Agreements” for a more detailed description of these registration rights and the lock-up period.

We intend to file a registration statement on Form S-8 under the Securities Act to register the total number of shares of our common stock that may be issued under our equity incentive plans. See “Shares Eligible for Future Sale—Form S-8 Registration Statements” for a more detailed description of the shares of common stock that will be available for future sale upon the registration and issuance of such shares, subject to any applicable vesting or lock-up period or other restrictions provided under the terms of the applicable plan and/or the option agreements entered into with the option holders. In addition, in the future we may issue common stock or other securities if we need to raise additional capital. The number of new shares of our common stock issued in connection with raising additional capital could constitute a material portion of the then outstanding shares of our common stock.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our stock or change their opinion of our business or market value, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States, or U.S. GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the U.S. Securities and Exchange Commission, or SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

In particular, in May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As an “emerging growth company,” the Jumpstart our Business Startups Act of 2012, or JOBS Act, allows us to delay adoption of new or revised accounting pronouncements applicable

 

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to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act with respect to ASU 2014-09, which will result in ASU 2014-09 becoming applicable to us on January 1, 2019. We are evaluating ASU 2014-09 and have not determined the impact it may have on our financial reporting.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, or Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

As an “emerging growth company,” the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel will need to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company,” as defined in the JOBS Act. We will be required to disclose significant changes made in our internal control procedures on a quarterly basis.

 

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We have commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.

During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition and operating results. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as will be in effect upon the completion of this offering, may have the effect of delaying or preventing a change in control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:

 

    authorize our board of directors to issue preferred stock without further stockholder action and with voting liquidation, dividend and other rights superior to our common stock;

 

    require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent, and limit the ability of our stockholders to call special meetings;

 

    establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for director nominees;

 

    establish that our board of directors is divided into three classes, with directors in each class serving three-year staggered terms;

 

    require the approval of holders of two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our amended and restated bylaws or amend or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action by written consent or call a special meeting;

 

    prohibit cumulative voting in the election of directors; and

 

    provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum.

 

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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your shares of our common stock in an acquisition.

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our amended and restated certificate of incorporation, as will be in effect upon the completion of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (4) any action asserting a claim governed by the internal affairs doctrine. Our amended and restated certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the foregoing provision. The forum selection clause in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections of this prospectus entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. The forward-looking statements and opinions contained in this prospectus are based upon information available to us as of the date of this prospectus and, while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Forward-looking statements include statements about:

 

    our ability to continue to add new financial institutions, or FIs, partners and marketers and maintain existing FI partners and marketers;

 

    with respect to Cardlytics Direct, our ability to increase FI partner customer engagement from new and existing FI partners;

 

    our ability to maintain and expand our relationships with FI partners to broaden the use of purchase data to our Other Platform Solutions and our ability to sell Other Platform Solutions;

 

    the effects of increased competition as well as innovations by new and existing competitors in our market;

 

    our ability to adapt to technological change and effectively enhance, innovate and scale our solutions;

 

    our ability to effectively manage or sustain our growth and to sustain profitability;

 

    potential acquisitions and integration of complementary business and technologies;

 

    our expected use of proceeds;

 

    our ability to maintain, or strengthen awareness of, our brand;

 

    perceived or actual integrity, reliability, quality or compatibility problems with our solutions, including related to unscheduled downtime or outages;

 

    future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;

 

    our ability to attract and retain qualified employees and key personnel and further expand our overall headcount;

 

    our ability to grow our business;

 

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    our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

    our ability to maintain, protect and enhance our intellectual property;

 

    costs associated with defending intellectual property infringement and other claims; and

 

    the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should refer to the “Risk Factors” section of this prospectus for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, or the Securities Act, do not protect any forward-looking statements that we make in connection with this offering.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size is based on information from various sources, including independent industry publications. In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and in our experience to date in, the markets for our solutions. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although neither we nor the underwriters have independently verified the accuracy or completeness of any third-party information, we believe the market position, market opportunity and market size information included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Certain information in the text of this prospectus is contained in industry publications or data provided by third parties. The sources of these industry publications and data are provided below:

 

    eMarketer: Digital Ad Benchmarks Worldwide: CTR and Conversion Rates, by Format and Device, Q3 2016

 

    MAGNA Global: Global Advertising Forecast, released December 2017

 

    The CMO Council: The CMO Survey Highlights and Insights Report, released August 2017

 

    Board of Governors of the Federal Reserve System: Consumers and Mobile Financial Services 2016

 

    Frost & Sullivan: TAM Analysis – Native Bank Advertising

 

    The Nilson Report: U.S. Payment Cards, Purchase Volume 2010-2020, issued October 2016

 

    The Nilson Report: Purchase Transactions on U.S. Consumer Payment Systems, issued December 2016

 

    The Nilson Report: Top U.S. Credit Card Issuers, issued February 2017

 

    The Nilson Report: Top 50 U.S. Debit Card Issuers, issued February 2017

 

    2016 U.S. Census

 

    Kantar Media: Database of 200 Leading National Advertisers, released June 2015

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of              shares of our common stock in this offering will be approximately $        million, or approximately $        million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $        million, assuming that the assumed initial price to the public remains the same, and after deducting underwriting discounts and commissions payable by us. We do not expect that a change in the initial price to the public or the number of shares by these amounts would have a material effect on uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. Although we have not yet determined with certainty the manner in which we will allocate the net proceeds of this offering, we expect to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the proceeds from this offering for acquisitions or strategic investments in complementary businesses or technologies. We do not currently have any plans for any such acquisitions or investments. We have not allocated specific amounts of net proceeds for any of these purposes.

The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending their use, we intend to invest the net proceeds of this offering in a variety of capital-preservation investments, including short- and intermediate-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our capital stock. We currently intend to retain all available funds and any future earnings for the operation and expansion of our business and, therefore, we do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of dividends present in our current and future debt agreements, and other factors that our board of directors may deem relevant. We are subject to covenants under our debt arrangements that place restrictions on our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2017:

 

    on an actual basis;

 

    on a pro forma basis to reflect (1) the automatic conversion of all shares of redeemable convertible preferred stock outstanding as of September 30, 2017 into shares of common stock immediately prior to the closing of this offering, (2) the reclassification to stockholders’ (deficit) equity of our redeemable convertible preferred stock warrant liability in connection with the conversion of our outstanding redeemable convertible preferred stock warrants into common stock warrants, (3) the issuance of 149,679 Management Conversion Shares in full satisfaction of our obligations to certain of our executive officers and key employees pursuant to outstanding restricted securities units, (4) the impact of the vesting, upon the completion of this offering, of outstanding performance-based warrants to purchase shares of our common stock held by certain of our FI partners and (5) the filing of our amended and restated certificate of incorporation, which will become effective immediately prior to the closing of this offering; and

 

    on a pro forma as adjusted basis to reflect (1) the pro forma items described immediately above and (2) the sale of          shares of common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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You should read this table together with “Selected Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of September 30, 2017  
     Actual     Pro Forma      Pro Forma As
Adjusted(1)
 
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $         28,186     $                           $                       
  

 

 

   

 

 

    

 

 

 

Debt and capital lease obligations—net of current portion

     55,450       

Redeemable convertible preferred stock, $0.0001 par value per share; 96,131,002 shares authorized, 42,573,435 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     196,077           

Warrant liability

     10,061           

Stockholders’ (deficit) equity:

       

Preferred stock, $0.0001 par value per share; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

               

Common stock, $0.0001 par value per share; 83,000,000 shares authorized, 14,188,698 shares issued and outstanding, actual;          shares authorized,          shares issued and outstanding, pro forma;          shares authorized,          shares issued and outstanding, pro forma as adjusted

     1       

Additional paid-in capital

     57,979       

Accumulated other comprehensive income

     1,160       
  

 

 

   

 

 

    

 

 

 

Accumulated deficit

     (264,389     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ (deficit) equity

     (205,249     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 56,402     $      $  
  

 

 

   

 

 

    

 

 

 

 

  (1)  The pro forma as adjusted information set forth above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $        million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $        million, assuming that the assumed initial price to public remains the same, and after deducting underwriting discounts and commissions payable by us.

The number of shares of our common stock shown as issued and outstanding on a pro forma as adjusted basis in the table above excludes:

 

    10,130,793 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2017, at a weighted-average exercise price of $4.61 per share;

 

    440,616 shares of redeemable convertible preferred stock issuable upon the exercise of warrants outstanding as of September 30, 2017, at a weighted average exercise price of $3.04 per share, which warrants will become exercisable for shares of common stock upon the completion of this offering;

 

    2,401,945 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2017, at a weighted-average exercise price of $2.03 per share;

 

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    2,577,465 shares of common stock issuable upon the exercise of performance-based warrants outstanding as of September 30, 2017, with milestones that will be deemed to be achieved upon completion of this offering and with an exercise price of $5.91 per share;

 

    shares of common stock issuable upon exercise of warrants issued in connection with our Series G preferred stock financing outstanding as of September 30, 2017, at an exercise price of $0.0001 per share, with the actual number of shares issuable upon exercise of such warrants being equal to the product obtained by multiplying 1,385,358 by a fraction, the numerator of which is the difference between $17.2379 and the volume weighted average closing price of our common stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants become exercisable and the denominator of which is such volume weighted average closing price, which warrants are exercisable upon the earlier to occur of the date (i) 180 days following the date of this prospectus and (ii) 10 days prior to a sale of our company;

 

    1,188,092 shares of common stock reserved for issuance under our 2008 Stock Plan, which shares will cease to be available for issuance at the time our 2018 Equity Incentive Plan becomes effective;

 

             shares of our common stock reserved for future issuance pursuant to our 2018 Equity Incentive Plan, which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year; and

 

             shares of common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the completion of this offering.

Our historical net tangible book value as of September 30, 2017 was $(216.6) million, or $(15.27) per share of common stock. Our historical net tangible book value per share represents our total tangible assets less our total liabilities and redeemable convertible preferred stock (which is not included within stockholders’ deficit), divided by the number of shares of common stock outstanding as of September 30, 2017.

Our pro forma net tangible book value as of September 30, 2017 was $        million, or $        per share of common stock. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of September 30, 2017, after giving effect to (1) the automatic conversion of all shares of redeemable convertible preferred stock outstanding as of September 30, 2017 into shares of common stock immediately prior to the closing of this offering, (2) the reclassification to stockholders’ (deficit) equity of our redeemable convertible preferred stock warrant liability in connection with the conversion of our outstanding redeemable convertible preferred stock warrants into common stock warrants, (3) the issuance of 149,679 Management Conversion Shares in full satisfaction of our obligations to certain of our executive officers and key employees pursuant to outstanding restricted securities units and (4) the impact of the vesting, upon the completion of this offering, of outstanding performance-based warrants to purchase shares of our common stock held by certain of our FI partners.

Our pro forma as adjusted net tangible book value represents our pro forma net tangible book value, plus the effect of the sale of          shares of common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Our pro forma as adjusted net tangible book value as of September 30, 2017 was $        million, or $        per share of common stock. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $        per share to our existing stockholders and an immediate dilution of $        per share to investors participating in this offering. We determine dilution per share to investors participating in this offering by subtracting pro forma as adjusted net tangible book value per share after this offering from the assumed initial public offering price per share paid by investors participating in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

    $                     

Historical net tangible book value per share as of September 30, 2017

  $ (15.27)    

Increase per share attributable to the pro forma transactions described above

   

Pro forma net tangible book value per share as of September 30, 2017

   

Increase in pro forma net tangible book value per share attributed to new investors purchasing shares from us in this offering

   
 

 

 

   

Pro forma as adjusted net tangible book value per share after giving effect to this offering

   
   

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

    $  
   

 

 

 

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover

 

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page of this prospectus, would increase or decrease the pro forma as adjusted net tangible book value per share by $        per share and the dilution per share to investors participating in this offering by $        per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. A 1,000,000 share increase in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value per share by $        and decrease the dilution per share to investors participating in this offering by $        , assuming the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions payable by us. A 1,000,000 share decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro forma as adjusted net tangible book value per share after this offering by $        and increase the dilution per share to new investors participating in this offering by $        , assuming the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial price to public and other terms of this offering determined at pricing.

If the underwriters exercise their over-allotment option in full to purchase an additional          shares of our common stock in this offering, the pro forma as adjusted net tangible book value of our common stock would increase to $        per share, representing an immediate increase to existing stockholders of $        per share and an immediate dilution of $        per share to investors participating in this offering.

The following table summarizes as of September 30, 2017, on the pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by our existing stockholders, including with respect to the issuance of the Management Conversion Shares and (2) to be paid by investors purchasing our common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

    Shares Purchased     Total Consideration     Weighted-
Average Price
Per Share
 
    Number     Percent     Amount     Percent    

Existing stockholders

                 $                               $                         

New investors

         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

              100.0   $                                100.0   $  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table and calculations above exclude:

 

    10,130,793 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2017, at a weighted-average exercise price of $4.61 per share;

 

    440,616 shares of redeemable convertible preferred stock issuable upon the exercise of warrants outstanding as of September 30, 2017, at a weighted average exercise price of $3.04 per share, which warrants will become exercisable for shares of common stock upon the completion of this offering;

 

    2,401,945 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2017, at a weighted-average exercise price of $2.03 per share;

 

    2,577,465 shares of common stock issuable upon the exercise of performance-based warrants outstanding as of September 30, 2017, with milestones that will be deemed to be achieved upon completion of this offering and with an exercise price of $5.91 per share;

 

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    shares of common stock issuable upon exercise of warrants issued in connection with our Series G preferred stock financing outstanding as of September 30, 2017, at an exercise price of $0.0001 per share, with the actual number of shares issuable upon exercise of such warrants being equal to the product obtained by multiplying 1,385,358 by a fraction, the numerator of which is the difference between $17.2379 and the volume weighted average closing price of our common stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants become exercisable and the denominator of which is such volume weighted average closing price, which warrants are exercisable upon the earlier to occur of the date (i) 180 days following the date of this prospectus and (ii) 10 days prior to a sale of our company;

 

    1,188,092 shares of common stock reserved for issuance under our 2008 Stock Plan, which shares will cease to be available for issuance at the time our 2018 Equity Incentive Plan becomes effective;

 

             shares of our common stock reserved for future issuance pursuant to our 2018 Equity Incentive Plan, which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year; and

 

             shares of common stock reserved for future issuance under our 2018 Employee Stock Purchase Plan, which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year.

To the extent that options or warrants are exercised, new options or other securities are issued under our equity incentive plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We derived the selected consolidated statements of operations data for the years ended December 31, 2015 and 2016 and the selected consolidated balance sheet data as of December 31, 2015 and 2016 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated statements of operations data for the nine months ended September 30, 2016 and 2017 and the selected consolidated balance sheet data as of September 30, 2017 from unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements, and the unaudited financial data include, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of our consolidated financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results to be expected in the future and our operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2017.

When you read this selected consolidated financial data, it is important that you read it together with the historical consolidated financial statements and related notes to those statements, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
     2015     2016     2016     2017  
     (in thousands, except per share data)  

Condensed Consolidated Statement of Operations:

        

Revenue

   $       77,634     $     112,821     $       76,400     $       91,099  

Costs and expenses:

        

FI Share and other third-party costs

     47,691       66,285       44,986       50,886  

Delivery costs(1)

     4,803       6,127       4,729       5,095  

Sales and marketing expense(1)

     32,784       31,261       22,850       23,454  

Research and development expense(1)

     11,604       13,902       11,101       9,527  

General and administrative expense(1)

     18,197       21,355       16,240       14,738  

Depreciation and amortization expense

     2,194       4,219       3,432       2,303  

Termination of U.K. agreement expense

           25,904       25,904        
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     117,273       169,053       129,242       106,003  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (39,639     (56,232     (52,842     (14,904
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     (1,484     (6,170     (3,623     (6,427

Change in fair value of warrant liability

     914       (32     639       (412

Change in fair value of convertible promissory notes

           (786     (819     (1,244

Change in fair value of convertible promissory notes—related parties

           (10,091     (10,280     6,213  

Other income (expense), net

     (432     (2,385     (1,726     1,189  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (40,641     (75,696     (68,651     (15,585

Income tax benefit

     16                    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (40,625   $ (75,696   $ (68,651   $ (15,585
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to the carrying value of redeemable convertible preferred stock

     (1,001     (982     (741     (5,383
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $     (41,626   $ (76,678   $ (69,392   $ (20,968
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

   $ (4.98   $ (8.12   $ (7.58   $ (1.67
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2015      2016      2016      2017  
     (in thousands, except per share data)  

Weighted-average common shares outstanding, basic and diluted

     8,363        9,446        9,150        12,559  
  

 

 

    

 

 

    

 

 

    

 

 

 

Pro forma per share attributable to common stockholders, basic and diluted(3)

      $         $  
     

 

 

       

 

 

 

Pro forma weighted-average common shares outstanding, basic and diluted(3)

           
     

 

 

       

 

 

 

 

  (1)  Includes stock-based compensation expense as follows:

 

     Year Ended
December 31,
     Nine Months Ended
September 30,
 
         2015              2016              2016              2017      
     (in thousands)  

Stock-based compensation expense:

           

Delivery costs

   $ 97      $ 96      $ 68      $ 146  

Sales and marketing expense

     1,015        1,153        826        1,390  

Research and development expense

     386        574        419        691  

General and administrative expense

     955        1,624        928        1,480  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $         2,453      $         3,447      $         2,241      $         3,707  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (2)  See note (14) to our consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.

 

  (3)  Pro forma basic and diluted net loss per share represents pro forma net loss divided by the pro forma weighted-average shares of common stock outstanding. The pro forma net loss per share for the year ended December 31, 2016 and the nine months ended September 30, 2017 assumes (1) the automatic conversion of all outstanding shares of redeemable convertible preferred stock outstanding as of December 31, 2016 and September 30, 2017, respectively, into common stock immediately prior to the closing of this offering and (2) the issuance of 149,679 Management Conversion Shares in full satisfaction of our obligations to certain of our executive officers and key employees pursuant to outstanding restricted securities units. See note (14) to our consolidated financial statements appearing elsewhere in this prospectus for further details on the calculation of pro forma net loss per share attributable to common stockholders.

 

     As of December 31,     As of September 30,  
     2015     2016     2017  
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $         27,323     $         22,838     $         28,186  

Accounts receivable, net

     37,410       42,042       38,060  

Working capital(1)

     817       28,720       37,963  

Total assets

     82,290       86,859       93,415  

Total debt

     32,262       111,899       55,513  

Total liabilities

     84,390       157,672       102,587  

Redeemable convertible preferred stock

     160,061       146,022       196,077  

Warrant liability

     2,942       2,197       10,061  

Additional paid-in capital

     10,363       29,866       57,979  

Accumulated deficit

     (173,108     (248,804     (264,389

Total stockholders’ deficit

     (162,161     (216,835     (205,249

 

  (1) We define working capital as current assets less current liabilities. See our consolidated financial statements included elsewhere in this prospectus for further details regarding our current assets and current liabilities.

 

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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 prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Cardlytics makes marketing more relevant and measurable through our purchase intelligence platform. With purchase data from more than 2,000 financial institutions, we have a secure view into where and when consumers are spending their money. By applying advanced analytics to this massive 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. This collection of debit, credit, ACH, and bill pay data represented approximately $1.3 trillion in U.S. consumer spend in 2016. In 2016, our platform analyzed over 18.0 billion online and in-store transactions across more than 94.0 million accounts in the United States, representing one in five debit and credit card swipes in the United States.

We were founded in 2008 with the vision to transform commerce with purchase intelligence. Our first solution was Cardlytics Direct, our proprietary native bank advertising channel. Cardlytics Direct enables marketers to reach consumers through their trusted and frequently visited online and mobile banking channels. We have historically derived substantially all of our revenue from sales of Cardlytics Direct. For 2015, 2016 and the nine months ended September 30, 2017, our Cardlytics Direct revenue was $64.4 million, $97.8 million and $83.6 million, respectively. We designed our Other Platform Solutions to further leverage our intelligence platform and the massive, growing and actionable foundational data asset that we amassed with Cardlytics Direct. For 2015, 2016 and the nine months ended September 30, 2017, our Other Platform Solutions revenue was $13.2 million, $15.0 million and $7.5 million, respectively. Substantially all of our total Other Platform Solutions revenue in each of these periods was derived from sales of our Other Platform Solutions delivered as a managed service, which we discontinued as of July 31, 2017. Given that we are now focusing our efforts on more nascent Other Platform Solutions, we do not expect to generate substantial revenue from Other Platform Solutions for the foreseeable future.

Our partnerships with FIs provide us with access to their purchase data and online banking customers, which we leverage to deliver our solutions to marketers. From our inception through 2012, we focused our efforts on relationships with a few trusted FIs as we developed Cardlytics Direct. As our platform became more robust, we increased our FIs partnerships from 349 as of December 31, 2012 to 2,041 as of September 30, 2017 and grew key FI relationships, including with Bank of America, National Association, or Bank of America, PNC Bank, National Association, or PNC, and Lloyds TSB Bank plc, or Lloyds. Additionally, in the first quarter of 2018, we plan to launch a pilot implementation of Cardlytics Direct with Wells Fargo & Company, or Wells Fargo, directed at Wells Fargo customers located in Miami, Florida, Charlotte, North Carolina and San Francisco, California. We pay our FI partners an FI Share, which is 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. We have a minimum FI Share commitment with a certain FI partner totaling $10.0 million over a 12-month period following completion of certain milestones. 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 monthly active users, or FI MAUs, contributed by any FI partner is indicative of our level of dependence on such FI partner. During 2015, 2016 and the nine months ended

 

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September 30, 2017, our largest FI partner, Bank of America, contributed approximately 50%, 47% and 51% of our total FI MAUs, respectively. Lloyds, our largest FI partner in the United Kingdom, contributed approximately 9%, 10% and 9% of our total FI MAUs in 2015, 2016 and the nine months ended September 30, 2017, respectively. Digital Insight Corporation, a subsidiary of NCR Corporation, or Digital Insight, contributed approximately 15%, 13% and 11% of our total FI MAUs in 2015, 2016 and the nine months ended September 30, 2017, respectively.

We sell our solutions pursuant to agreements that state the terms of the arrangement, the agreed-upon fee and, with respect to Cardlytics Direct, the fixed period of time the offers will be available to FI customers. Since we began selling Cardlytics Direct in 2012, our marketers’ spending with us has grown significantly. For example, marketers who first worked with us in 2012 spent 8.1 times their initial calendar year spend on Cardlytics Direct in 2016, marketers who first worked with us in 2013 spent 3.2 times their initial calendar year spend on Cardlytics Direct in 2016, marketers who first worked with us in 2014 spent 2.4 times their initial calendar year spend on Cardlytics Direct in 2016, and marketers who first worked with us in 2015 spent 1.8 times their initial calendar year spend on Cardlytics Direct in 2016. We work with leading marketers across a variety of industries, including 20 of the top 25 U.S. restaurant chains based on the Nation’s Restaurant News 2016 ranking, 23 of the top 50 U.S. retailers based on the National Retail Federation 2016 ranking, as well as three of the five largest U.S. cable and satellite television providers and three of the four largest U.S. wireless carriers based on 2016 U.S. subscriber counts.

We have experienced rapid growth in our revenue since inception. Our revenue, which excludes consumer incentives, was $53.8 million, $77.6 million and $112.8 million, for 2014, 2015 and 2016, respectively, representing a compound annual growth rate of 44.8%. Our revenue for the nine months ended September 30, 2017 was $91.1 million. For 2014, 2015, 2016 and the nine months ended September 30, 2017, our net loss was $38.9 million, $40.6 million, $75.7 million and $15.6 million, respectively. Our historical losses have been driven by our substantial investments in our platform and infrastructure, which we believe will enable us to expand the use of our platform by both FIs and marketers. In 2016, our net loss included a $25.9 million one-time non-cash charge related to the termination of our U.K. agreement with Aimia EMEA Limited and a $10.9 million non-cash charge related to the issuance and change in fair value of convertible promissory notes. In both 2015 and 2016, we derived 11% of our revenue outside the United States. In the nine months ended September 30, 2017, 12% of our revenue was derived outside the United States.

Our Business Model

Substantially all of our revenue is derived from our proprietary native banking channel, Cardlytics Direct. We also generate revenue from the sale of our Other Platform Solutions.

Cardlytics Direct

Our Cardlytics Direct solution is our proprietary native bank advertising channel that enables marketers to reach consumers through their trusted and frequently visited online and mobile banking channels. Working with a marketer, we design a campaign that targets customers based on their purchase history. The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that we collect from marketers to provide these consumer incentives to our FIs’ customers after they make qualifying purchases, which we refer to as Consumer Incentives. Leveraging our powerful predictive analytics, we are able to create compelling Consumer Incentives that have the potential to increase return on advertising spend for marketers. We also pay our FI partners an FI Share. We have generated substantially all of our revenue from sales of Cardlytics Direct since inception.

We price Cardlytics Direct marketing in two primary ways: (1) Cost per Served Sale, or CPS, and (2) Cost per Redemption, or CPR. In both 2015 and 2016, CPS represented 67% of our revenue from Cardlytics Direct.

We developed our pricing models with the needs of marketers in mind. Given our ability to measure the actual performance of Cardlytics Direct in driving sales, we are able to offer marketers performance-based pricing

 

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models where they only pay us based on actual sales influenced by marketing through our native bank channel. These pricing models are designed to ensure that marketers realize an actual return on their advertising spend with us.

 

    CPS.  Our primary and fastest growing pricing model is CPS, which we created to meet the media buying preferences of marketers. We generate revenue by charging a percentage, which we refer to as the CPS Rate, of all purchases from the marketer by consumers (1) who are served marketing and (2) subsequently make a purchase from the marketer during the campaign period, regardless of whether consumers select the marketing and thereby become eligible to earn the applicable Consumer Incentive. We set CPS Rates for marketers based on our expectation of the marketer’s return on spend for the relevant campaign. Additionally, we set the amount of the Consumer Incentives payable for each campaign based on our estimation of our ability to drive incremental sales for the marketer. We seek to optimize the level of Consumer Incentives to retain a greater portion of billings. However, if the amount of Consumer Incentives exceeds the amount of billings that we are paid by the applicable marketer we are still responsible for paying the total Consumer Incentive. This has occurred infrequently and has been immaterial in amount for each of the periods presented.

 

    CPR.  Our initial pricing model is CPR, where marketers specify and fund the Consumer Incentive and pay us a separate negotiated, fixed marketing fee, or the CPR Fee, for each purchase that we generate. We generate revenue if the consumer (1) is served marketing, (2) selects the marketing and thereby becomes eligible to earn the applicable Consumer Incentive and (3) makes a qualifying purchase from the marketer during the campaign period. We set the CPR Fee for marketers based on our estimation of the marketers’ return on spend for the relevant campaign. The CPR Fee is either a percentage of qualifying purchases or a flat amount.

Other Platform Solutions

We also generate revenue from our Other Platform Solutions offerings. Our Other Platform Solutions enable marketers and marketing service providers to leverage the power of purchase intelligence outside the bank channel. For example, we use purchase intelligence to help marketers measure the impact of marketing campaigns outside of the Cardlytics Direct channel on in-store and online sales. To the extent that we use purchase intelligence derived from a specific FI customer’s anonymized purchase data in the delivery of our Other Platform Solutions, we pay the applicable FI an FI Share calculated based on the relative contribution of the data provided by the FI to the overall delivery of the solutions. Revenue from our Other Platform Solutions was $13.2 million, $15.0 million and $7.5 million in 2015, 2016 and the nine months ended September 30, 2017, respectively. In order to test the efficacy of our Other Platform Solutions, we historically used programmatic vendors to run marketing campaigns outside of the Cardlytics Direct channel, and thereby delivered our Other Platform Solutions primarily as a managed service. This allowed us to gain valuable expertise in leveraging our purchase intelligence outside the banking channel. With regard to delivery of our Other Platform Solutions as a managed service, we charged marketers a fee based on the number of impressions that we delivered for their marketing campaign, calculated on a cost per thousand impressions, or CPM, basis. Substantially all of our total Other Platform Solutions revenue in each of 2015, 2016 and the nine months ended September 30, 2017 was derived from sales of our Other Platform Solutions delivered as a managed service, which we discontinued as of July 31, 2017. Given that we are now focusing our efforts on more nascent Other Platform Solutions, we do not expect to generate substantial revenue from Other Platform Solutions for the foreseeable future, and we expect our overall Other Platforms Solutions revenue to decline in future periods compared to prior periods. Accordingly, our total revenue may decline in future periods if we are unable to generate sufficient offsetting revenue from sales of Cardlytics Direct.

Our revenue recognition policies for Cardlytics Direct and Other Platform Solutions are discussed in more detail under “Critical Accounting Policies.”

 

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Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future will be, primarily driven by the following factors:

 

    Ability to Drive Additional Revenue from Cardlytics Direct.  The revenue that we generate through our proprietary native bank advertising channels from each of our FI partners varies. This variance is typically a result of how long the program has been active, the user interface for the program and the FI’s efforts to promote the program. We continually work with FIs to improve their customers’ user experience, increase customer awareness, and leverage additional customer outreach channels like email. However, in certain cases, we may have little control over the design of the user interface that our FI partners choose to use or the extent to which they promote our solution to their customers. To the extent that our FI partners fail to increase engagement with our solutions within their customer bases, we may be unable to attract and retain marketers or their agencies and our revenue would suffer.

 

    Ability to Increase Spend from Existing Marketers and Acquire New Marketers.  Our performance depends on our ability to continue to increase adoption of our solutions within our existing marketer base and attract new marketers that invest meaningfully in marketing through our solutions. Our ability to increase adoption among existing marketers is particularly important in light of our land-and-expand business model. We believe that we have the opportunity to expand our marketer base with a focus on attracting new brands, retailers, service providers and new categories of marketers that will invest significantly in the use of purchase intelligence. We believe that we also have the opportunity to increase adoption of our solutions across our existing marketers. In order to expand and further penetrate our marketer base, we have made, and plan to continue to make, investments in expanding our direct sales teams and indirect sales channels, and increasing our brand awareness. However, our ability to continue to grow our marketer base is dependent upon our ability to compete within the evolving markets in which we participate.

 

    Ability to Expand our FI Partner Network.  Our ability to maintain and grow our revenue is contingent upon maintaining and expanding our relationships with our FI partners. Given our substantial investments to date in our intelligence platform and infrastructure, we believe that we will be able to add FIs to our network with modest incremental investment. Each new FI partner increases the size of our data asset, increasing the value of our solutions to both marketers and FIs that are already part of our network. Accordingly, we are focused on the continued expansion of our FI network to ensure that we have robust purchase data to support a broad array of incentive programs with respect to our Cardlytics Direct solution and to enrich our Other Platform Solutions. However, our sales and integration cycle with respect to our FI partners can be costly and long, and it is difficult to predict if or when we will be successful in generating revenue from a new FI relationship.

 

    Ability to Integrate our Platform with Partners.   We believe that we can improve the value proposition for marketers through the use of purchase intelligence. We intend to continue to partner with other media platforms, marketing technology providers, and marketing agencies that can utilize our platform to serve a broad array of customers. To facilitate these partnerships, we intend to focus on continued technological integration of our platform with those of complementary market participants. To the extent that we are unable to significantly expand our relationships with key market participants that can drive adoption of our Other Platform Solutions, we may be unable to grow our revenue from our Other Platform Solutions.

 

   

Ability to Innovate and Evolve Our Platform.  As we continue to grow our data asset and enhance our platform, we are developing new solutions and increasingly sophisticated analytical capabilities. Our future performance is significantly dependent on the investments that we make in our research and development efforts and in our ability to continue to innovate, improve functionality, and introduce new

 

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features and solutions that are compelling to our marketers and FIs. We intend to continue to invest in our platform, including by hiring top technical talent and focusing on core technology innovation.

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 business metrics may be calculated in a manner different than similar business metrics used by other companies.

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
             2015                     2016                     2016                     2017        
    

(in thousands, except ARPU)

(in dollars, except MAU)

           

FI monthly active users (FI MAU)

     38,957       43,927       42,733     53,694

Average revenue per user (ARPU)

     1.65       2.23       1.54     1.56

Adjusted contribution

     29,943       46,536       31,414     40,213

Adjusted EBITDA

     (34,774     (17,046     (16,844   (7,665)

Monthly Active Users

We define FI monthly active users, or FI MAUs, as unique customers of our FI partners that logged in and visited the online or mobile banking applications of, or opened an email 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 average revenue per user, or ARPU, as the total GAAP Cardlytics Direct revenue generated in the applicable period, 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.

Adjusted Contribution

Adjusted contribution represents our revenue less our FI Share and other third-party costs. We review adjusted contribution for internal management purposes and believe that the elimination of our primary cost of revenue, FI Share and other third-party costs, can provide a useful measure for period-to-period comparisons of our core business. More specifically, we report our revenue gross of FI Share and other third-party costs, but net of any consumer incentives that we pay to our FIs’ customers. Adjusted contribution is not a measure calculated in accordance with GAAP. 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. Nevertheless, our use of adjusted contribution 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 FI Share and other third-party costs differently. See note (15) to our consolidated financial statements appearing elsewhere in this prospectus for further details on our adjusted contribution by segment. See note (3) to the table contained in “Summary Consolidated Financial and Other Data—Non-GAAP Measures and Other Performance Metrics” for a reconciliation of adjusted contribution to revenue, the most directly comparable financial measure calculated and presented in accordance with GAAP for 2015 and 2016 and the nine months ended September 30, 2016 and 2017, and a discussion of the limitations of adjusted contribution.

 

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Adjusted EBITDA

Adjusted EBITDA represents our net loss before income tax benefit; interest expense, net; depreciation and amortization; stock-based compensation expense; change in fair value of warrant liability; change in fair value of convertible promissory notes; foreign currency (gain) loss; loss on extinguishment of debt; costs associated with financing events; restructuring costs; amortization and impairment of deferred FI implementation costs; and termination of U.K. agreement expense. We do not consider these excluded items to be indicative of our core operating performance. The items that are non-cash include change in fair value of warrant liability, change in fair value of convertible promissory notes, foreign currency (gain) loss, amortization of FI implementation costs, depreciation and amortization expense and stock-based compensation expense. 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. See note (4) to the table contained in “Summary Consolidated Financial and Other Data—Non-GAAP Measures and Other Performance Metrics” for a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP for 2015 and 2016 and the nine months ended September 30, 2016 and 2017, and a discussion of the limitations of adjusted EBITDA.

Segment Information

We have two reportable segments: Cardlytics Direct and Other Platform Solutions, as determined by the information that both our Chief Executive Officer and President and Chief Operating Officer, who we consider our chief operating decision makers, use to make strategic goals and operating decisions. Our Cardlytics Direct segment represents our proprietary native bank advertising channel. Our Other Platform Solutions segments represents solutions that enable marketers and marketing service providers to leverage the power of purchase intelligence outside the banking channel.

Seasonality

Our cash flows from operations vary from quarter to quarter, largely 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 to reduce spend in the first quarter of the calendar year.

 

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Marketer Cohort Analysis

We have historically driven growth primarily by both increasing adoption of Cardlytics Direct within our existing marketer base and attracting new marketers that invest in marketing through Cardlytics Direct. With marketers spanning retail, restaurant, grocery, travel and subscription services industries, we believe that we have the opportunity to capture a greater proportion of our existing marketers’ overall marketing spend. Our growth strategy is dependent upon our ability to both increase spend from existing marketers and acquire new marketers. The chart below illustrates the aggregate amount that marketers in each cohort spent with us on Cardlytics Direct, inclusive of Consumer Incentives and FI Share payable, during each of the periods presented. Each cohort represents customers who made their initial purchase from us in a given fiscal year. The pre-2012 cohort represents all marketers who made their initial purchase from us between our inception and December 31, 2011; the 2012 cohort represents all marketers who made their initial purchase from us between January 1, 2012 and December 31, 2012; the 2013 cohort represents all marketers who made their initial purchase from us between January 1, 2013 and December 31, 2013; the 2014 cohort represents all marketers who made their initial purchase from us between January 1, 2014 and December 31, 2014; the 2015 cohort represents all marketers who made their initial purchase from us between January 1, 2015 and December 31, 2015; and the 2016 cohort represents all marketers who made their initial purchase from us between January 1, 2016 and December 31, 2016.

 

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Components of Results of Operations

Revenue

We generate revenue from the sale of our Cardlytics Direct solution and our Other Platform Solutions. We sell our solutions by entering into agreements directly with marketers or their marketing agencies. These agreements state the terms of the arrangement, the agreed-upon fee and, with respect to Cardlytics Direct, the fixed period of time the offers will be available to FI customers. We generally bill for our solutions on a monthly basis following delivery of our solutions. We report revenue net of Consumer Incentives. See “Our Business Model” for additional information.

 

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Cost and Expense

We classify our expenses into the following categories: FI Share and other third-party costs; delivery costs; sales and marketing expense; research and development expense; general and administrative expense; and depreciation and amortization expense.

FI Share and Other Third-Party Costs

FI Share and other third-party costs consist primarily of the FI Share that we pay our FI partners, media and data costs and, through June 30, 2016, allocation of revenue in the United Kingdom to Aimia EMEA Limited, or Aimia. In June 2016, we acquired full control of, and the right to retain all revenue with respect to, our business in the United Kingdom from Aimia. FI Share and other third-party costs also include the amortization or impairment of deferred implementation costs incurred pursuant to our agreements with certain FI partners and any incremental costs due to FIs as part of revenue commitment arrangements, as well as non-cash expense that we may incur from time to time upon the vesting of outstanding performance-based warrants to purchase shares of our common stock that we issued to certain FI partners, or the Performance Warrants. As of September 30, 2017, we have not recorded an expense associated with these Performance Warrants, as none of the performance conditions have been deemed to have been achieved. In connection with the consummation of this offering, we expect to incur $        million in a non-cash expense, based on an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, in the quarter in which this offering is completed as the vesting conditions on the Performance Warrants will be deemed to have been achieved upon completion of this offering. The actual non-cash expense that we will incur may be higher or lower than this estimate as it is a function of the actual initial public offering price.

Delivery Costs

Delivery costs consist primarily of personnel-related costs of our campaign, data operations and production support teams, including salaries, benefits, bonuses and payroll taxes, as well as stock-based compensation expense. Delivery costs also include hosting facility costs, internally developed and purchased or licensed software costs, outsourcing costs and professional services costs. As we add data center capacity and support personnel in advance of anticipated growth, our delivery costs will increase in absolute dollars and if such anticipated revenue growth does not occur, our delivery costs as a percentage of revenue will be adversely affected.

Sales and Marketing Expense

Sales and marketing expense consists primarily of personnel costs of our sales and marketing employees, including salaries, benefits, bonuses, commissions, incentive compensation and payroll taxes. Sales and marketing expense also includes stock-based compensation expense, 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 research and development employees, including salaries, benefits and bonuses. Research and development expense also includes stock-based compensation expense, 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.

 

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General and Administrative Expense

General and administrative expense consist of personnel costs and related expenses for executive, finance, legal, compliance, information technology and human resources personnel, including salaries, benefits, bonuses and incentive compensation. General and administrative expense also includes stock-based compensation expense, professional fees for external legal, accounting and other consulting, financing transaction costs, facilities costs such as rent and utilities, royalties, bad debt expense, travel expense and property and franchise taxes. We expect that general and administrative expenses will increase on an absolute dollar basis but decrease as a percentage of revenue as we focus on processes, systems and controls to enable the our internal support functions to scale with the growth of our business. We also anticipate increases to general and administrative expenses as we incur the costs of compliance associated with being a publicly traded company, including audit and consulting fees, as well as increased costs for directors’ and officers’ liability insurance.

Depreciation and Amortization Expense

Depreciation and amortization expense includes depreciation of property and equipment over the estimated useful life of the applicable asset as well as amortization of deferred patent and capitalized internal-use software development costs.

Termination of U.K. agreement expense

Termination of U.K. agreement expense reflects the value of the convertible promissory notes issued to Aimia in connection with the termination of our historical cooperation agreement in the United Kingdom. In June 2016, we acquired full control of, and the right to retain all revenue with respect to, our business in the United Kingdom from Aimia.

Interest Expense, Net

Interest expense, net consists of interest incurred on our outstanding debt instruments, as well as related discount amortization and financing costs, partially offset by interest income on our cash balances.

Change in Fair Value of Warrant Liability

Change in fair value of warrant liability represents adjustments to the fair value of warrants based upon changes in the fair value of the underlying stock.

Change in Fair Value of Convertible Promissory Notes Including Related Parties

In April, May, June and July 2016, we issued unsecured convertible promissory notes to certain of our directors, executive officers and existing stockholders in an aggregate principal amount of $27.0 million, at an interest rate of 10% per year, compounded annually. Change in fair value of convertible promissory notes represents adjustments to the fair value of our convertible promissory notes as a result of our election of the fair value option. In May 2017, these convertible promissory notes converted into shares of our redeemable convertible preferred stock.

Other Income (Expense), Net

Other income (expense), net consists primarily of gains and losses on foreign currency transactions and expenses recorded in connection with the termination of our historical term loan and line of credit.

Income Taxes

We have generated losses before income taxes in the United States, United Kingdom and most U.S. state income tax jurisdictions. We have generated historical net losses and recorded a full valuation allowance against our

 

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deferred tax assets. We expect to maintain a full valuation allowance in the near term. Due to our history of losses and our expectation of maintaining a full valuation allowance, we have not recorded an income tax provision or benefit during the periods presented. Realization of any of our deferred tax assets depends upon future earnings, the timing and amount of which are uncertain.

Results of Operations

The following table sets forth our condensed consolidated statements of operations:

 

     Year Ended
December 31,
     Nine Months Ended
September 30,
 
     2015      2016      2016      2017  
     (in thousands)  

Revenue

   $ 77,634      $ 112,821      $ 76,400      $ 91,099  
  

 

 

    

 

 

    

 

 

    

 

 

 

Costs and expenses:

           

FI Share and other third-party costs

     47,691        66,285        44,986        50,886  

Delivery costs(1)

     4,803        6,127        4,729        5,095  

Sales and marketing expense(1)

     32,784        31,261        22,850        23,454  

Research and development expense(1)

     11,604        13,902        11,101        9,527  

General and administrative expense(1)

     18,197        21,355        16,240        14,738  

Depreciation and amortization expense

     2,194        4,219        3,432        2,303  

Termination of U.K. agreement expense

            25,904        25,904         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total costs and expenses

    
117,273
 
     169,053        129,242        106,003  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating loss

    
(39,639

     (56,232      (52,842      (14,904
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense, net

     (1,484      (6,170      (3,623      (6,427
Change in fair value of warrant liability      914        (32      639        (412
Change in fair value of convertible promissory notes             (786      (819      (1,244

Change in fair value of convertible promissory notes—related parties

            (10,091      (10,280      6,213  

Other income (expense), net

     (432      (2,385      (1,726      1,189  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

     (40,641      (75,696      (68,651      (15,585

Income tax benefit

     16                       
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

   $ (40,625    $ (75,696    $ (68,651    $ (15,585
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1)  Includes stock-based compensation expense as follows:

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
         2015             2016             2016             2017      
     (in thousands)  

Stock-based compensation expense:

        

Delivery costs

   $ 97      $ 96      $ 68      $ 146   

Sales and marketing expense

     1,015        1,153        826        1,390   

Research and development expense

     386        574        419        691   

General and administrative expense

     955        1,624        928        1,480   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

   $         2,453      $         3,447      $         2,241      $         3,707   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth our condensed consolidated statements of operations expressed as a percentage of revenue:

 

     Year Ended
December 31,*
    Nine Months Ended
September 30,*
 
         2015             2016             2016             2017      

Revenue

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

FI share and other third-party costs

     61       59       59       56  

Delivery costs

     6       5       6       6  

Sales and marketing expense

     42       28       30       26  

Research and development expense

     15       12       15       10  

General and administrative expense

     23       19       21       16  

Depreciation and amortization expense

     3       4       4       3  

Termination of U.K. agreement expense

           23       34        
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

         151           150           169           116  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (51     (50     (69     (16

Interest expense, net

     (2     (5     (5     (7
Change in fair value of warrant liability      1             1        
Change in fair value of convertible promissory notes            (1     (1     (1
Change in fair value of convertible promissory notes—related parties            (9     (13     7  

Other income (expense), net

     (1     (2     (2     1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (52     (67     (90     (17

Income tax benefit

                        
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (52 )%      (67 )%      (90 )%      (17 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Certain figures may not sum due to rounding.

Nine Months Ended September 30, 2016 and 2017

Revenue

 

     Nine Months Ended
September 30,
    

 

    2016 v. 2017 Change  
         2016              2017                      $                   %          
     (dollars in thousands)  

Revenue by solution:

            

Cardlytics Direct

   $       65,953      $       83,615        $             17,662                     27

Other Platform Solutions

     10,447        7,484          (2,963     (28
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

   $ 76,400      $ 91,099        $ 14,699       19

Revenue increased by $14.7 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, primarily due to an $17.7 million increase in revenue generated from sales of our Cardlytics Direct solution, partially offset by a $3.0 million decrease in revenue generated from sales of our Other Platform Solutions. Of this increase, $4.7 million related to sales of Cardlytics Direct to new marketers, while $13.0 million related to increased sales of Cardlytics Direct to existing marketers. Consumer Incentives increased from $41.7 million in the nine months ended September 30, 2016 to $42.1 million in the nine months ended September 30, 2017, which reflects our efforts to optimize the level of Consumer Incentives needed to drive incremental sales for marketers, and resulted in an increase in our revenue. Revenue from Other Platform Solutions consisted substantially of revenue from sales of our Other Platform Solutions delivered as a managed

 

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service. We expect revenue from Other Platform Solutions to decline in future periods compared to prior periods as we discontinued sales of Other Platform Solutions delivered as a managed service as of July 31, 2017.

Costs and Expenses

FI Share and Other Third-Party Costs

 

     Nine Months Ended
September 30,
   

 

    2016 v. 2017 Change  
         2016             2017                     $                 %        
     (dollars in thousands)  

FI Share and other third-party costs by solution:

          

Cardlytics Direct

   $         39,228     $       47,052       $             7,824                      20

Other Platform Solutions

     5,758       3,834         (1,924     (33
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total FI Share and other third-party costs

   $ 44,986     $ 50,886       $ 5,900       13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of revenue

     59     56      

FI Share and other third-party costs increased by $5.9 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, primarily due to an increase in revenue from sales of Cardlytics Direct, partially offset by a $1.8 million decrease in FI Share revenue commitments in excess of the FI Share otherwise earned by the applicable FI partners and a $1.2 million decrease as a result of us no longer allocating revenue and FI Share and other third-party costs to Aimia following termination of our cooperation agreement in June 2016. Other Platform Solutions FI Share and other third-party costs decreased $1.9 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, primarily due to a decline in media and data costs as we began to shift our focus away from delivering Other Platform Solutions as a managed service.

Delivery Costs

 

     Nine Months Ended
September 30,
   

 

    2016 v. 2017 Change  
         2016             2017                     $                  %        
     (dollars in thousands)  

Delivery costs

   $         4,729     $         5,095       $                366                         8

% of revenue

     6     6       

Delivery costs increased by $0.4 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, primarily due to a $0.3 million increase in personnel costs and a $0.1 million increase in software license costs.

Sales and Marketing Expense

 

     Nine Months Ended
September 30,
   

 

    2016 v. 2017 Change  
         2016             2017                     $                  %        
     (dollars in thousands)  

Sales and marketing expense

   $         22,850     $         23,454       $             604                         3

% of revenue

     30     26       

Sales and marketing expense increased by $0.6 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, primarily due to a $1.5 million increase in commissions and personnel costs as a result of incremental sales, partially offset by a $0.4 million decrease in travel and entertainment costs and a $0.3 million decrease in professional fees.

 

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Research and Development Expense

 

     Nine Months Ended
September 30,
   

 

    2016 v. 2017 Change  
         2016             2017                     $                 %        
     (dollars in thousands)  

Research and development expense

   $         11,101     $         9,527       $           (1,574           (14 )% 

% of revenue

     15     10      

Research and development expense decreased by $1.6 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, primarily due to a $1.2 million decrease in personnel costs associated with lower research and development headcount and a $0.5 million decrease in outsourcing and professional fee, partially offset by a $0.1 million increase in software licensing costs.

General and Administrative Expense

 

     Nine Months Ended
September 30,
   

 

    2016 v. 2017 Change  
         2016             2017                     $                 %        
     (dollars in thousands)  

General and administrative expense

   $       16,240     $         14,738       $       (1,502                     (9 )% 

% of revenue

     21     16      

General and administrative expense decreased by $1.5 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, primarily due to a $2.6 million decrease in financing transaction costs, a $0.7 million decrease in bad debt expense, partially offset by a $1.3 million increase in incentive compensation and a $0.2 million increase in professional fees.

Depreciation and Amortization Expense

 

     Nine Months Ended
September 30,
   

 

    2016 v. 2017 Change  
         2016             2017                     $                 %        
     (dollars in thousands)  

Depreciation and amortization expense

   $        3,432     $        2,303       $           (1,129               (33)% 

% of revenue

     4     3      

Depreciation and amortization expense decreased by $1.1 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, due to the suspension of certain development efforts that resulted in the write off of capitalized internal-use software development costs during the nine months ended September 30, 2016.

Termination of U.K. Agreement Expense

 

     Nine Months Ended
September 30,
   

 

    2016 v. 2017 Change  
         2016             2017                     $                  %        
     (dollars in thousands)  

Termination of U.K. agreement expense

   $        25,904     $        —       $        (25,904)            N/M  

% of revenue

     34           

Termination of U.K. agreement expense was $25.9 million expense in the nine months ended September 30, 2016 and reflects the value of convertible promissory notes issued to Aimia in connection with the termination of our historical cooperation agreement in the United Kingdom.

 

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Interest Expense, Net

 

     Nine Months Ended
September 30,
   

 

    2016 v. 2017 Change  
         2016             2017                     $                 %        
     (dollars in thousands)  

Interest expense, net

   $ (3,623   $ (6,427     $ (2,804     77

% of revenue

     (5 )%      (7 )%       

Interest expense, net increased by $2.8 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, primarily due to interest payable on our new debt facilities entered into in 2016.

Change in Fair Value of Warrant Liability

 

     Nine Months Ended
September 30,
        2016 v. 2017 Change  
         2016             2017                   $                 %        
     (dollars in thousands)  

Change in fair value of warrant liability

   $ 639     $ (412     $ (1,051     (164 )% 

% of revenue

     1          

Change in fair value of warrant liability decreased $1.1 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, due to a decrease in the value of our redeemable convertible preferred stock and common stock.

Change in Fair Value of Convertible Promissory Notes

 

     Nine Months Ended
September 30,
        2016 v. 2017 Change  
         2016             2017                   $                 %        
     (dollars in thousands)  

Change in fair value of convertible promissory notes

   $ (819   $ (1,244     $ (425     52

% of revenue

     (1 )%      (1 )%       

Change in fair value of convertible promissory notes reflects an increase in the value of our convertible promissory notes, which was driven by periodic valuations. In May 2017, these convertible promissory notes converted into shares of our redeemable convertible preferred stock.

Change in Fair Value of Convertible Promissory Notes—Related Parties

 

     Nine Months Ended
September 30,
        2016 v. 2017 Change  
         2016             2017                   $                  %        
     (dollars in thousands)  

Change in fair value of convertible promissory notes—related parties

   $ (10,280   $ 6,213       $ 16,493        (160 )% 

% of revenue

     (13 )%      7       

Change in fair value of convertible promissory notes reflects a decrease in the value of our convertible promissory notes, which was driven by periodic valuations. In May 2017, these convertible promissory notes converted into shares of our redeemable convertible preferred stock.

 

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Other Income (Expense), Net

 

     Nine Months Ended
September 30,
        2016 v. 2017 Change  
         2016             2017                   $                  %        
     (dollars in thousands)  

Other income (expense), net

   $ (1,726   $ 1,190       $ 2,916        (169 )% 

% of revenue

     (2 )%      1       

Other income (expense), net increased by $2.9 million in the nine months ended September 30, 2017 compared to the corresponding period in 2016, primarily due to an increase in the value of the British pound relative to the U.S. dollar.

Years Ended December 31, 2015 and 2016

Revenue

 

     Year Ended
December 31,
         2015 v. 2016 Change  
         2015              2016                    $                  %        
     (dollars in thousands)  

Revenue by solution:

             

Cardlytics Direct

   $ 64,447      $ 97,789        $ 33,342        52

Other Platform Solutions

     13,187        15,032          1,845        14  
  

 

 

    

 

 

    

 

 

 

 

    

 

 

 

Total revenue

   $ 77,634      $ 112,821        $ 35,187        45

Revenue increased by $35.2 million in 2016 compared to 2015, primarily due to a $33.3 million increase in revenue generated from sales of our Cardlytics Direct solution. Of this increase, $12.1 million related to sales of Cardlytics Direct to new marketers, while $21.2 million related to increased sales of Cardlytics Direct to existing marketers. Consumer Incentives remained relatively consistent at $56.3 million in 2015 compared to $57.0 million in 2016, which reflects our efforts to optimize the level of Consumer Incentives needed to drive incremental sales for marketers, and resulted in an increase in our revenue. Revenue from Other Platform Solutions consisted substantially of revenue from sales of our Other Platform Solutions delivered as a managed service and increased by $1.8 million in 2016 compared to 2015, with such increase primarily driven by increased adoption of Other Platform Solutions delivered other than as a managed service. We do not expect to generate substantial revenue from Other Platform Solutions delivered as a managed service in future periods as we discontinued sales of Other Platform Solutions delivered as a managed service as of July 31, 2017.

Costs and Expenses

FI Share and Other Third-Party Costs

 

    Year Ended
December 31,
   

 

    2015 v. 2016 Change  
            2015                     2016            

 

              $                         %            
    (dollars in thousands)  

  FI Share and other third-party costs by solution:

         

Cardlytics Direct

  $ 38,664     $ 58,105       $ 19,441       50

Other Platform Solutions

    9,027       8,180         (847     (9

  Total FI Share and other third-party costs

  $ 47,691     $ 66,285       $ 18,594       39
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  % of revenue

    61     59      

 

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FI Share and other third-party costs increased by $18.6 million in 2016 compared to 2015, primary due to an increase in revenue from sales of Cardlytics Direct. In addition to an increase driven by the increase in revenue, the $18.6 million increase in FI Share and other third-party costs included a $2.6 million increase in FI share revenue commitments in excess of the FI Share otherwise earned by the applicable FI partners, partially offset by a $1.2 million decrease as a result of us no longer allocating revenue and FI Share and other third-party costs to Aimia following termination of our cooperation agreement in June 2016. Other Platform Solutions FI Share and other third-party costs decreased $0.8 million in 2016 compared to 2015, primarily due to a decline in media and data costs as we began to shift our focus away from delivering Other Platform Solutions as a managed service.

Delivery Costs

 

     Year Ended
December 31,
   

 

    2015 v. 2016 Change  
             2015                     2016            

 

              $                          %            
     (dollars in thousands)  

  Delivery costs

   $             4,803     $             6,127       $               1,324                            28

  % of revenue

     6     5       

Delivery costs increased by $1.3 million in 2016 compared to 2015, primarily to support enhancements for existing FI partners and implementation for new FI partners. These costs include a $0.7 million increase in personnel-related costs for our campaign, data operations and production support teams and a $0.3 million increase in personnel costs and stock-based compensation expense.

Sales and Marketing Expense

 

     Year Ended
December 31,
   

 

    2015 v. 2016 Change  
             2015                     2016            

 

              $                         %            
     (dollars in thousands)  

  Sales and marketing expense

   $           32,784     $           31,261       $           (1,523                         (5 )% 

  % of revenue

     42     28      

Sales and marketing expense decreased by $1.5 million in 2016 compared to 2015, primarily due to a $3.5 million decrease in marketing costs related to reductions in advertising and public relations expenses, reduced sponsorships and consumer testing expenses, and a $0.7 million decrease in outsourcing costs, offset by a $1.7 million increase in personnel cost associated with our additional sales and marketing headcount and a $1.4 million increase in incentive compensation as a result of incremental sales.

Research and Development Expense

 

     Year Ended
December 31,
   

 

    2015 v. 2016 Change  
             2015                     2016            

 

              $                          %            
     (dollars in thousands)  

  Research and development expense

   $ 11,604     $ 13,902       $ 2,298                            20

  % of revenue

     15     12       

Research and development expense increased by $2.3 million in 2016 compared to 2015, primarily due to a $0.8 million increase in personnel costs associated with our increased research and development headcount, a $1.1 million increase in incentive compensation and a $0.5 million increase in outsourcing costs.

 

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General and Administrative Expense

 

     Year Ended
December 31,
   

 

    2015 v. 2016 Change  
             2015                     2016            

 

              $                          %            
     (dollars in thousands)  

  General and administrative expense

   $ 18,197     $ 21,355       $ 3,158                            17

  % of revenue

     23     19       

General and administrative expense increased by $3.2 million in 2016 compared to 2015, primarily due to a $2.7 million increase in financing-related costs, offset by a $0.5 million decrease in professional services. Incentive compensation also increased by $1.1 million over the same period.

Depreciation and Amortization Expense

 

     Year Ended
December 31,
   

 

    2015 v. 2016 Change  
             2015                     2016            

 

              $                          %            
     (dollars in thousands)  

  Depreciation and amortization expense

   $ 2,194     $ 4,219       $ 2,025                            92

  % of revenue

     3     4       

Depreciation and amortization expense increased by $2.0 million in 2016 compared to 2015, primarily due to $1.2 million of accelerated amortization of internal-use software development costs and a $0.8 million increase in depreciation related to technology equipment.

Termination of U.K. Agreement Expense

 

     Year Ended
December 31,
   

 

    2015 v. 2016 Change  
             2015                     2016            

 

              $                          %            
     (dollars in thousands)  

  Termination of U.K. agreement expense

   $     $ 25,904       $ 25,904        N/A  

  % of revenue

         23       

Termination of U.K. agreement expense was $25.9 million expense in 2016 and reflects the value of convertible promissory notes issued to Aimia in connection with the termination of our historical cooperation agreement in the United Kingdom.

Interest Expense, Net

 

     Year Ended
December 31,
   

 

    2015 v. 2016 Change  
             2015                     2016            

 

              $                         %            
     (dollars in thousands)  

  Interest expense, net

   $ (1,484   $ (6,170     $ (4,686                 316

  % of revenue

     (2 )%      (5 )%       

Interest expense, net increased by $4.7 million in 2016 compared to 2015, primarily due to interest payable on our new debt facilities entered into in 2016.

 

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Change in Fair Value of Warrant Liability

 

     Year Ended
December 31,
    2015 v. 2016 Change  
             2015                     2016                       $                         %            
     (dollars in thousands)  

  Change in fair value of warrant liability

   $ 914     $ (32   $ (946          (104)% 

  % of revenue

     1        

Change in fair value of warrant liability decreased in 2016 due to decreases in the value of our redeemable convertible preferred stock.

Change in Fair Value of Convertible Promissory Notes

 

     Year Ended
December 31,
    2015 v. 2016 Change  
             2015                     2016                       $                         %            
     (dollars in thousands)  

  Change in fair value of convertible promissory notes

   $     $ (786   $ (786     N/A  

  % of revenue

         (1 )%     

Change in fair value of convertible promissory notes reflects an increase in the value of our convertible promissory notes, which was driven by periodic valuations.

Change in Fair Value of Convertible Promissory Notes—Related Parties

 

     Year Ended
December 31,
    2015 v. 2016 Change  
             2015                     2016                       $                         %            
     (dollars in thousands)  

  Change in fair value of convertible promissory notes—related parties

   $     $ (10,091   $ (10,091     N/A  

  % of revenue

         (9 )%     

Change in fair value of convertible promissory notes reflects an increase in the value of our convertible promissory notes, which was driven by periodic valuations.

Other Income (Expense), Net

 

     Year Ended
December 31,
    2015 v. 2016 Change  
             2015                     2016                       $                         %            
     (dollars in thousands)  

  Other income (expense), net

   $ (432   $ (2,385   $ (1,953                 452

  % of revenue

     (1 )%      (2 )%     

Other income (expense), net decreased by $2.0 million in 2016 compared to 2015, primarily due to the decrease in the value of the British pound relative to the U.S. dollar and $0.5 million debt extinguishment costs in 2016.

 

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Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the nine quarters in the period ended September 30, 2017. We have prepared the quarterly financial data on the same basis as the audited consolidated financial statements included in this prospectus. In our opinion, the quarterly financial data reflects all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of this data. This quarterly financial data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.

 

    Three Months Ended  
    September 30,
2015
    December 31,
2015
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
    September 30,
2017
 

Revenue by solution:

                 

Cardlytics Direct

  $ 15,051     $ 22,116     $ 16,257     $ 22,703     $ 26,993     $ 31,836     $ 24,454     $ 28,947     $ 30,214  

Other Platform Solutions

    3,712       4,734       3,085       3,186       4,176       4,585       2,427       3,865       1,192  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    18,763       26,850       19,342       25,889       31,169       36,421       26,881       32,812       31,406  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

                 

FI Share and other third-party costs

    11,821       16,532       11,467       15,737       17,782       21,299       16,677       19,680       14,529  

Delivery costs

    1,359       1,191       1,596       1,568       1,565       1,398       1,553       1,896       1,646  

Sales and marketing expense

    8,732       8,985       7,576       7,752       7,522       8,411       7,232       7,920       8,302  

Research and development expense

    3,246       2,636       4,099       3,792       3,210       2,801       3,013       3,093       3,421  

General and administration expense

    4,422       5,476       5,171       6,470       4,599       5,115       4,689       4,773       5,276  

Depreciation and amortization expense

    578       703       709       805       1,918       787       765       767       771  

Termination of U.K. agreement expense

                      13,637       12,267                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    30,158       35,523       30,618       49,761       48,863       39,811       33,929       38,129       33,945  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (11,395     (8,673     (11,276     (23,872     (17,694     (3,390     (7,048     (5,317     (2,539)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

                 

Interest expense, net

    (331     (488     (534     (934     (2,155     (2,547     (2,644     (2,020     (1,763

Change in fair value of warrant liability

    56       1,090       148       421       71       (671     (327     (1,466     1,381  

Change in fair value of convertible promissory notes

                      (28     (791     32       (383     (861      

Change in fair value of convertible promissory notes—related parties

                      (6,636     (3,644     190       (2,223     8,436        

Other income (expense), net

    (327     (209     (258     (581     (888     (659     162       580       447  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

    (602     393       (644     (7,758     (7,407     (3,655     (5,415     4,669       65  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (11,997     (8,280     (11,920     (31,630     (25,101     (7,045     (12,463     (648     (2,474)  

Income tax benefit

          16                                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (11,997   $ (8,264   $ (11,920   $ (31,630   $ (25,101   $ (7,045   $ (12,463   $ (648   $ (2,474)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Trends

Revenue

Our revenue has generally increased over the past nine quarters, driven primarily by increased sales to new marketers and increased sales to existing marketers. Our revenue is tied to our marketers’ advertising spending, which is traditionally strongest in the fourth quarter of each year and weakest in the first quarter of each year.

Cost of Revenue, Operating Expenses and Other Expenses

Cost of revenue generally increased during every quarter, primarily driven by increases in revenue. FI Share and other third-party costs are directly related to the amount of revenue that we generate, and therefore increased as

 

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our revenue increased. Our increased operating expenses reflect increases in headcount, investments made to continue growing our business and expenses related to the termination of our U.K. agreement. Total other expense increased over the periods presented, driven primarily by convertible promissory notes issued over the course of 2016.

Liquidity and Capital Resources

Through September 30, 2017, we have incurred accumulated net losses of $264.4 million since inception, including losses of $40.6 million and $75.7 million for the years ended December 31, 2015 and 2016 and net losses of $68.7 million and $15.6 million for the nine months ended September 30, 2016 and 2017, 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 and private placements of our redeemable convertible preferred stock, as well as lines of credit and term loans. We have received net proceeds of $196.2 million from the issuance of preferred stock and convertible promissory notes through September 30, 2017. Our historical uses of cash have primarily consisted of cash used in operating activities to fund our operating losses and working capital needs.

As of September 30, 2017, we had $28.2 million in cash and cash equivalents and $5.9 million of available borrowings under our line of credit. As of September 30, 2017, we had $1.1 million in cash and cash equivalents in the United Kingdom. While our investment in Cardlytics UK Limited is not considered indefinitely invested, we do not plan to repatriate these funds. As of September 30, 2017, we had $24.5 million outstanding under our line of credit and $32.1 million outstanding under our term loan. In connection with our line of credit, we are subject to financial covenants that include a requirement of a total cash balance plus availability under the line of credit of not less than $5 million and a moving minimum trailing twelve month revenue covenant.

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 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. 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.

The following table shows a summary of our cash flows for the periods presented:

 

     Year Ended
December 31,
    Nine Months Ended
September 30,
 
     2015     2016     2016     2017  
     (in thousands)  

  Cash and cash equivalents at beginning of period

   $ 51,198     $ 27,609     $ 27,609     $ 22,968  

  Net cash used in operating activities

     (29,158     (32,498     (29,719     (16,571

  Net cash used in investing activities

     (6,301     (2,545     (2,114     (1,099

  Net cash from financing activities

     11,927       30,809       26,087       22,631  

  Effect of exchange rates on cash and cash equivalents

     (57     (407     (178     257  
  

 

 

   

 

 

   

 

 

   

 

 

 

  Cash and cash equivalents at end of period

   $         27,609     $         22,968     $         21,685     $         28,186  
  

 

 

   

 

 

   

 

 

   

 

 

 

Sources of Funds

Series G Preferred Stock Financing

In May 2017, we sold an aggregate of 1,385,358 shares of our Series G redeemable convertible preferred stock, including to certain of our existing stockholders, at a price of $8.61895 per share for aggregate gross proceeds of approximately $11.9

 

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million. In connection with the issuance of our Series G redeemable convertible preferred stock, we issued warrants to purchase an aggregate number of shares of our common stock equal to the product obtained by multiplying 1,385,358 by a fraction, the numerator of which is the difference between $17.2379 and the volume weighted average closing price of our common stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants become exercisable and the denominator of which is such volume weighted average closing price, which warrants are exercisable upon the earlier to occur of the date (i) 180 days following the date of this prospectus and (ii) 10 days prior to a sale of our company.

Issuance of Convertible Notes

In April, May, June and July 2016, we raised capital through the issuance of unsecured convertible promissory notes, or collectively, the Existing Stockholder Notes, to certain of our existing stockholders in an aggregate principal amount of $27.0 million, at an interest rate of 10% per year, compounded annually. The maturity date of the Existing Stockholder Notes, or the Maturity Date, was the earliest to occur of: (1) a date after April 26, 2018, as specified by the holders of a majority of the aggregate unpaid principal amount outstanding under the Existing Stockholder Notes, (2) our liquidation, dissolution or wind up, including a sale of all or substantially all of our assets or a majority of our voting power or (3) an event of default under the Existing Stockholder Notes. The Existing Stockholder Notes were subordinate to our existing credit facilities with National Electrical Benefit Funds, Ally Bank and Pacific Western Bank described below. In February 2017, we extended the Maturity Date of the Existing Stockholder Notes to the earliest to occur upon the earliest of April 26, 2019 or the occurrence of the events specified in clauses (2) or (3) above. The Existing Stockholder Notes were convertible into shares of our capital stock, depending on certain triggering events. In May 2017, upon the closing of the Series G preferred stock financing described above, the convertible promissory notes converted into an aggregate of 5,183,015 shares of Series G’ redeemable convertible preferred stock.

Loan and Security Agreements and Term Loans

Current Credit Agreements

In July 2016, we entered into a credit agreement, or the Term Loan, for a term loan with National Electrical Benefit Fund as lender, or the Lender, and Columbia Partners, L.L.C as investment manager. As of September 30, 2017, there was approximately $32.1 million outstanding under the Term Loan. The Term Loan is secured by substantially all of our assets and carries a fixed interest rate equal to (1) 13.25%, of which 3% is payable in cash and the remaining 10.25% is payable in-kind or (2) 11.25%, if our adjusted EBITDA for the four most recent trailing fiscal quarters then-ended is greater than $1.0 million and we are not in an event of default, of which 3% is payable in cash and the remaining 8.25% is payable in-kind. The Term Loan expires in July 2019.

The Term Loan contains customary affirmative and negative covenants, including restrictions on mergers, acquisitions and dispositions of assets, incurrence of indebtedness and encumbrances on our assets and restrictions on payments of dividends. The Term Loan also requires us to maintain a total cash balance and unrestricted availability under our senior line of credit of not less than $3.0 million. Once we have achieved an adjusted EBITDA of at least $1.0 million for two consecutive fiscal quarters, this cash balance requirement will be permanently waived. The Term Loan contains customary event of default provisions, including in the event of a change of control, the occurrence of which could lead to an acceleration of our obligations under the Term Loan.

Pursuant to the Term Loan, we granted National Electrical Benefit Fund a warrant to purchase 388,500 shares of our common stock at a price per share of $5.00. We also issued to National Electrical Benefit Fund an unsecured convertible promissory note in an aggregate principal amount of $6.0 million, at an interest rate of 10% per year, compounded annually. This unsecured convertible promissory note was issued under the same terms as the Existing Stockholder Notes.

 

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In April 2017, we amended our Term Loan to remove the acceleration of our repayment upon an initial public offering and reduce the interest rate by 0.5% subsequent to an initial public offering. In June 2017, we amended and restated our Term Loan to permit us to borrow an additional $5.0 million. In connection with this amendment, we issued National Electrical Benefit Fund warrants to purchase up to an aggregate of 70,000 shares of common stock at a price per share of $6.92.

In September 2016, we entered into a loan and security agreement, or the Line of Credit, with Ally Bank and Pacific Western Bank. Under the Line of Credit, we are able to borrow up to the lesser of $50.0 million or 85% of the amount of our eligible accounts receivable. The line of credit is secured by substantially all of our assets and carries a floating interest rate equal to the prime rate in effect from time to time plus 3.5%, not to be less than 7.0% per year, provided that in no event will the accrued interest payable be less than $87,500 per month. All other amounts borrowed are to be paid in full on the maturity date in March 2019. As of September 30, 2017, there was $24.5 million outstanding under the line of credit.

The Line of Credit contains customary affirmative and negative covenants, including restrictions on mergers, acquisitions and dispositions of assets, incurrence of indebtedness and encumbrances on our assets and restrictions on payments of dividends. The Line of Credit also requires us to maintain a total cash balance plus liquidity under the line of credit of not less than $5.0 million.

The Line of Credit also contains a moving minimum trailing twelve month revenue covenant, which was $115.0 million for the period ended September 30, 2017. The Line of Credit contains customary event of default provisions, including in the event of a material adverse change, the occurrence of which would allow the lenders to cease making advances and accelerate repayment of all the then outstanding amounts.

Terminated Loan Agreements

We were party to an Amended and Restated Loan and Security Agreement, or the Repaid Line of Credit, for a line of credit with Silicon Valley Bank, as lender. Under the line of credit, we were able to borrow up to the lesser of $25.0 million or 80% of eligible accounts receivable. The Repaid Line of Credit also required us to maintain a minimum adjusted quick ratio of at least 1.00:1.00. We were not in compliance with the financial covenant related to our quick ratio during September and October 2015. On October 14, 2015, we entered into a First Loan Modification Agreement, providing a waiver for these defaults as well as updating the financial covenant and springing lockbox feature. Under the amended terms, the financial covenants include a $10.0 million minimum cash balance and minimum quarterly profitability thresholds, and the springing lockbox feature was based on maintaining a $15.0 million minimum cash balance. We were not in compliance with our minimum quarterly profitability threshold during the fourth quarter of 2015. In February 2016, we obtained a waiver from the lender of this default. On June 16, 2016, we entered into a Second Loan Modification Agreement, providing for changes to the interest rate and additional terms. On July 21, 2016, we entered into a Third Loan Modification Agreement, approving a subordinated credit agreement and changing requirements regarding additional financing. On July 29, 2016, we entered into a Fourth Loan Modification Agreement, altering various financial covenants. We paid off this loan in full on September 12, 2016.

We were also party to an Amended and Restated Loan and Security Agreement, or the Repaid Term Loan, for growth capital advances with Gold Hill Capital 2008, L.P. and Silicon Valley Bank, as lenders, pursuant to which we received loans of $2.0 million in 2010, $10.0 million in 2012 and approximately $1.2 million in 2015. We paid off this loan in full in July 2016.

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 typically obligated to pay Consumer Incentives with respect to our Cardlytics Direct solution by the end of the month following redemption, regardless of whether we have collected payment from a marketer

 

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or its agency. We are generally obligated to pay our FI partners’ FI Share by the end of the month following our collection of payment from the applicable marketer or its agency. As a result, timing of cash receipts from our marketers can significantly impact our cash provided by (used in) operating activities for any period. Further, the timing of payment of commitments and implementation fees to our FI partners may also result in variability of our cash provided by (used in) operating activities for any period. During the first quarter of the calendar year, our working capital needs increase due to the seasonality of our business, which may exacerbate any lag between the timing of our payment of Consumer Incentives and our receipt of payment from marketers and their agencies. These cash flow dynamics may change over time as we continue to grow sales of our Other Platform Solutions as a percentage of revenue.

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 2017 as we invest in our business.

Operating activities used $16.6 million of cash in the nine months ended September 30, 2017, which reflected growth in revenue from new customers, offset by continued investment in our operations. Cash used in operating activities reflected our net loss of $15.6 million, including a $8.3 million change in our net operating assets and liabilities, partially offset by non-cash charges of $7.3 million. The non-cash charges primarily related to depreciation and amortization expense and stock-based compensation expense. The change in our net operating assets and liabilities was primarily due to a $5.2 million increase in FI Share liability, a $3.3 million decrease in accounts receivable resulting from seasonally lower sales during the third quarter of 2017 compared to the fourth quarter of 2016 and a $1.3 million increase in accounts payable and accrued expenses.

Operating activities used $29.7 million of cash in the nine months ended September 30, 2016, which reflected growth in revenue, offset by continued investment in our operations. Cash used in operating activities reflected our net loss of $68.7 million, a $11.1 million change in our operating assets and liabilities and non-cash charges of $50.0 million, primarily related to the termination of our U.K. agreement, the change in fair value of our convertible promissory notes, expenses associated with obtaining financing, stock-based compensation expense and depreciation and amortization expense. The change in our net operating assets and liabilities was primarily due to a $5.5 million increase in deferred FI implementation costs, a $4.0 million decrease in accrued consumer incentives resulting from seasonally higher sales during the fourth quarter of 2015 and a $5.3 million decrease in accounts payable and accrued expenses, partially offset by a $1.1 million decrease in accounts receivable resulting from seasonally lower sales during the third quarter of 2016 compared to the fourth quarter of 2015.

Operating activities used $32.5 million of cash in 2016, which reflected growth in revenue from new customers and changes to our pricing model, offset by continued investment in our operations. Cash used in operating activities reflected our net loss of $75.7 million and a $13.9 million change in our net operating assets and liabilities, partially offset by non-cash charges of $57.1 million. The non-cash charges primarily related to the termination of the U.K. cooperation agreement, depreciation and amortization expense, and stock-based compensation expense. The change in our net operating assets and liabilities was primarily due to an $8.2 million increase in deferred FI implementation costs, a $5.8 million increase in accounts receivable resulting from additional sales, and a $5.2 million increase in accounts payable and accrued expenses.

Operating activities used $29.2 million of cash in 2015, which reflected growth in revenue, offset by continued investment in our operations. Cash used in operating activities reflected our net loss of $40.6 million, partially offset by a change in our operating assets and liabilities of $6.1 million and non-cash charges of $5.3 million primarily related stock-based compensation expense and depreciation and amortization expense. The change in our net operating assets and liabilities was primarily due to a $13.2 million increase in operating liabilities, partially offset by a $7.5 million increase in accounts receivable and deferred FI implementation costs.

 

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Investing Activities

Our cash flows from investing activities are primarily driven by our investments in, and purchases of, property and equipment. We expect that we will continue to use cash for investing activities in 2017 as we continue to invest in and grow our business.

Investing activities used $1.1 million in cash in the nine months ended September 30, 2017. Our investing cash flows during this period primarily consisted of purchases of technology hardware.

Investing activities used $2.1 million in cash in the nine months ended September 30, 2016. Our investing cash flows during this period primarily consisted of purchases of technology hardware and software.

Investing activities used $2.5 million in cash in 2016. Our investing cash flows during 2016 primarily consisted of purchases of technology hardware and software.

Investing activities used $6.3 million in cash in 2015. Our investing cash flows during 2015 primarily consisted of purchases for leasehold improvements to our new corporate headquarters, purchases of our new transaction data storage and analysis systems and purchases of software to support our growth.

Financing Activities

Our cash flows from financing activities have primarily been comprised of net proceeds from our borrowings under our debt facilities.

Financing activities provided $22.6 million in cash during the nine months ended September 30, 2017. Our financing activities during this period consisted primarily of the issuance of $11.9 million of redeemable convertible preferred stock, $5.0 million of borrowings under our Term Loan and $7.5 million of borrowings under our Line of Credit, partially offset by equity issuance costs of $2.2 million.

Financing activities provided $26.1 million in cash during the nine months ended September 30, 2016. Our financing activities during this period primarily consisted of $27.0 million of proceeds from the sale of convertible promissory notes, $19.0 million of borrowings under our Term Loan and $15.3 million of borrowings under our Line of Credit, partially offset by a $32.0 million extinguishment of our Repaid Line of Credit and Repaid Term Loan.

Financing activities provided $30.8 million in cash in 2016. Our financing activities during 2016 primarily consisted of $24.0 million of borrowings under our Term Loan, $27.0 million from the issuance of our Existing Stockholder Notes, $15.3 million of borrowing under our Line of Credit, offset by a $32.0 million extinguishment of our Repaid Term Loan and our Repaid Line of Credit.

Financing activities provided $11.9 million in cash in 2015. Our financing activities during 2015 primarily consisted of $12.1 million of borrowings under our Repaid Line of Credit.

 

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Contractual Obligations & Commitments

The following table summarizes our commitments to settle contractual obligations as of December 31, 2016:

 

     Less than 1 Year      1 to 3 Years      3 to 5 Years      More than
5 Years
     Total  
     (in thousands)  

Debt(1)

   $      $ 40,601      $      $      $ 40,601  

Capital leases(2)

     99        64        37               200  

Operating leases(3)

     2,290        4,837        3,631        5,877        16,635  

FI implementation costs(4)

     11,150                             11,150  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $           13,539      $           45,502                      3,668      $             5,877      $           68,586  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amount represents $15.7 million of our Line of Credit and $24.9 million of our Term Loan. Also included in this balance are principal and interest payments due under our Line of Credit and our Term Loan. Accrued interest included in this amount is $1.3 million. Amount excludes $53.6 million principal and interest payments due under our convertible promissory notes, which converted into shares of our redeemable convertible preferred stock and common stock in May 2017.

(2) Capital leases represent principal 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) FI implementation costs represent gross amounts due to FIs for implementation of certain of our solutions. These agreements allow for $4.4 million and $5.0 million to be reimbursed to us through future reductions to FI Share in 2017 and 2018, respectively.

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.

As a result of not meeting a minimum FI Share commitment in 2016, we were required to pay an FI partner $2.6 million in March 2017, which we had accrued as of December 31, 2016. We also have a minimum FI Share commitment to a certain FI partner totaling $10.0 million over a 12-month period upon completion of milestones which have not yet been met. Also, unrecognized tax benefits totaled $0.6 million as of December 31, 2016. The table above does not include these obligations.

In 2017, we entered into agreements with certain FI partners to fund implementation and development costs of $0.9 million and $9.3 million in 2017 and 2018, respectively, of which $5.0 million will be reimbursed to us through reductions in FI Share in 2019.

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

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. See note (2) to our consolidated financial statements beginning on page F-1 of this prospectus for a description of our other significant accounting policies.

 

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Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition, on a transaction when all of the following conditions have been satisfied:

 

    persuasive evidence of an agreement exists;

 

    the solution has been provided to the customer;

 

    fees are fixed or determinable; and

 

    the collection of the fees is reasonably assured.

If any of these criteria are not met, revenue recognition is deferred until such time that all of the criteria are met. Our deferred revenue is primarily comprised of payments received in advance for Cardlytics Direct marketing campaigns.

We sell our solutions by entering into agreements directly with marketers or their marketing agencies. Persuasive evidence of an arrangement is considered to exist and the fee is considered fixed and determinable upon the execution of an agreement. With respect to our Cardlytics Direct solution, the solution is deemed to have been provided to the marketer as FIs’ customers make qualifying purchases during the marketing campaign term. With respect to Other Platform Solutions, the solution is deemed to have been provided (1) for non-managed service campaigns, when we deliver the purchase intelligence to the marketer and (2) for managed service campaigns, when the digital advertising impressions contemplated by the campaign have been served to targeted consumers. We determine collectability upfront and on an on-going basis by performing credit evaluations and monitoring our marketers’ accounts receivable balances.

Gross/Net Consideration

We evaluate the appropriateness of revenue recognition on a gross or net basis by considering the indicators outlined within ASC Topic 605-45, Revenue Recognition—Principal Agent Considerations and ASC Topic 605-50, Customer Payments and Incentives. We consider the nature of the costs and risks associated with the indicators present in evaluating the substance of an arrangement. We consider the relative strength of each indicator and certain factors may be assessed to carry more weight in the evaluation.

Consumer Incentives

We report our revenue on our consolidated statement of operations net of Consumer Incentives. We generally pay Consumer Incentives only with respect to our Cardlytics Direct solution. We do not provide the goods or services that are purchased by our FIs’ customers from the marketers to which the Consumer Incentives relate. Accordingly, the marketer is deemed to be the principal in the relationship with the customer and, therefore, the Consumer Incentive is deemed to be a reduction in the purchase price paid by the customer for the marketer’s goods or services. While we are responsible for remitting Consumer Incentives to our FI partners for further payment to their customers, we function solely as an agent of marketers in these arrangements. We paid $56.3 million and $57.0 million in Consumer Incentives in 2015 and 2016, respectively.

Accounts receivable is recorded at the amount of gross billings to marketers, net of allowances, for the fees and Consumer Incentives that we are responsible to collect. Our accrued liabilities also include the amount of Consumer Incentives due to FI partners. As a result, accounts receivable and accounts payable may appear large in relation to revenue, which is reported on a net basis.

 

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FI Share and Other Third-Party Costs

We report our revenue on our consolidated statement of operations gross of FI Share. FI Share is included in FI share and other third-party costs in our consolidated statements of operations, rather than as a reduction of revenue, because we and not our FI partners act as the principal in our arrangements with marketers. We are responsible for fulfillment and acceptability of the solutions purchased by marketers. We also have latitude in establishing the price of our solutions, have discretion in supplier selection and earn variable amounts. FIs only supply consumer purchase data and digital marketing space and have no involvement in the marketing campaigns or relationship (contractual or otherwise) with marketers.

We report our revenue on our consolidated statement of operations gross of media costs. We incur media costs in connection with the delivery of managed services with respect to our Other Platform Solutions. Media 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 exchanges or digital publishers act as the principal in our arrangements with marketers.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. Valuation allowances are provided when we determine that it is more likely than not that all of, or a portion of, deferred tax assets will not be utilized in the future.

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

Estimates of future taxable income are based on assumptions that are consistent with our plans. Assumptions represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. If actual amounts differ from our estimates, the amount of our tax expense and liabilities could be materially impacted.

We have recorded a full valuation allowance related to our deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.

We recognize the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date, and then, only in an amount more likely than not to be sustained upon review by the tax authorities. 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.

Stock-Based Compensation

We measure and recognize compensation expense for all stock options based on the estimated fair value of the award on the grant date. We use the Black-Scholes option pricing model to estimate the fair value of stock option awards. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis when the only condition to vesting is continued service. Forfeitures are accounted for when they occur. We recognize the fair value of stock options which contain performance conditions based upon the probability of the performance conditions being met. We have not issued

 

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awards where vesting is subject to a market condition; however, if we were to grant such awards in the future, recognition would be based on the derived service period. Expense for awards with performance conditions are estimated and adjusted on a quarterly basis based upon our assessment of the probability that the performance condition will be met.

The determination of the grant date fair value of options using an option pricing model is affected principally by our estimated common stock fair value and requires management to make a number of other assumptions, including the expected life of the option, the volatility of the underlying stock, the risk-free interest rate and expected dividends. The assumptions used in our Black-Scholes option-pricing model represent management’s best estimates at the time of grant. These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future. For more information refer to notes (2) and (6) to the consolidated financial statements.

These assumptions are estimated as follows:

 

    Fair Value of Common Stock. As our common stock has not historically been publicly traded, we estimated the fair value of common stock. See “—Fair Value of Common and Preferred Stock.”
    Expected Term. The expected term represents the period that our stock options are expected to be outstanding. We calculated the expected term using the simplified method based on the average of each option’s vesting term and the contractual period during which the option can be exercised, which is typically 10 years following the date of grant.
    Expected Volatility. The expected volatility was based on the historical stock volatility of several of our comparable publicly traded companies over a period of time equal to the expected term of the options, as we do not have any trading history to use the volatility of our own common stock.
    Risk-Free Interest Rate. The risk-free interest rate was based on the yields of U.S. Treasury securities with maturities appropriate for the term of the award.
    Expected Dividend Yield. We have not paid dividends on our common stock nor do we expect to pay dividends in the foreseeable future.

The following table reflects the weighted average assumptions used to estimate the fair value of options granted during the periods presented:

 

     Year Ended December 31,     Nine Months Ended
September 30,
 
             2015                     2016                     2017          

  Expected term (years)

     7.0       7.0       7.0  

  Expected volatility

     51-55     51-56     49-50

  Risk-free interest rate

     1.6-1.9     0.5-2.1     2.0-2.2

  Expected dividend yield

     0     0     0

Fair Value of Common and Preferred Stock

Historically, for all periods prior to this offering, the fair values of the shares of common stock underlying our stock options and shares of preferred stock underlying warrants were estimated on each grant date by our board of directors. In order to determine the fair value of our common and preferred stock, our board of directors considered, among other things, contemporaneous valuations of our common and preferred stock prepared by unrelated third-party valuation firms in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. Given the absence of a public trading market of our capital stock, our

 

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board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common and preferred stock, including:

 

    contemporaneous third-party valuations of our common and preferred stock;
    the prices, rights, preferences and privileges of our preferred stock relative to the common stock;
    our business, financial condition and results of operations, including related industry trends affecting our operations;
    the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company;
    the lack of marketability of our common and preferred stock;