0001666071-18-000019.txt : 20181113 0001666071-18-000019.hdr.sgml : 20181113 20181113170420 ACCESSION NUMBER: 0001666071-18-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181113 DATE AS OF CHANGE: 20181113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Cardlytics, Inc. CENTRAL INDEX KEY: 0001666071 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 263039436 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38386 FILM NUMBER: 181178947 BUSINESS ADDRESS: STREET 1: 675 PONCE DE LEON AVENUE, NE STREET 2: SUITE 6000 CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 888-798-5802 MAIL ADDRESS: STREET 1: 675 PONCE DE LEON AVENUE, NE STREET 2: SUITE 6000 CITY: ATLANTA STATE: GA ZIP: 30308 10-Q 1 cdlxform10-q2018q3.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number: 001-38386
cardlytics_logoa09.jpg
CARDLYTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
26-3039436
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
675 Ponce de Leon Ave. NE, Ste 6000, Atlanta, GA 30308
(888) 798-5802
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
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 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of October 31, 2018, there were 21,411,500 shares outstanding of the registrant’s common stock, par value $0.0001.
 



CARDLYTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
Page
PART I.
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.



1


PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CARDLYTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except par value amounts)

 
December 31, 2017
 
September 30, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
21,262

 
$
47,812

Restricted cash

 
20,000

Accounts receivable, net
48,348

 
36,822

Other receivables
2,898

 
3,530

Prepaid expenses and other assets
2,121

 
3,686

Total current assets
$
74,629

 
$
111,850

Long-term assets:
 
 
 
Property and equipment, net
7,319

 
9,273

Intangible assets, net
528

 
365

Capitalized software development costs, net
433

 
1,278

Deferred FI implementation costs, net
13,625

 
14,203

Other long-term assets, net
4,224

 
1,104

Total assets
$
100,758

 
$
138,073

Liabilities and stockholders' (deficit) equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,554

 
$
2,437

Accrued liabilities:
 
 
 
Accrued compensation
4,638

 
5,487

Accrued expenses
4,615

 
3,537

FI Share liability
23,914

 
20,185

Consumer Incentive liability
7,242

 
4,830

Deferred billings
132

 
250

Current portion of long-term debt
44

 
21

Total current liabilities
$
42,139

 
$
36,747

Long-term liabilities:
 
 
 
Deferred liabilities
$
3,670

 
$
3,305

Long-term warrant liability
10,230

 

Long-term debt, net of current portion
56,968

 
46,794

Total liabilities
$
113,007

 
$
86,846


See notes to the condensed consolidated financial statements

2


CARDLYTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except par value amounts)

 
December 31, 2017
 
September 30, 2018
Liabilities and stockholders' (deficit) equity
 
 
 
Commitments and contingencies (Note 8)

 

Redeemable convertible preferred stock:
 
 
 
Series G’ preferred stock, $0.0001 par value—5,339 shares authorized and 1,296 shares issued and outstanding as of December 31, 2017, no shares authorized, issued or outstanding as of September 30, 2018
$
44,672

 
$

Series G preferred stock, $0.0001 par value—1,385 shares authorized and 346 shares issued and outstanding as of December 31, 2017, no shares authorized, issued or outstanding as of September 30, 2018
5,110

 

Series F-R preferred stock, $0.0001 par value—5,000 shares authorized and 1,199 shares issued and outstanding as of December 31, 2017, no shares authorized, issued or outstanding as of September 30, 2018
58,449

 

Series E-R preferred stock, $0.0001 par value— 7,400 shares authorized and 795 shares issued and outstanding as of December 31, 2017, no shares authorized, issued or outstanding as of September 30, 2018
29,972

 

Series D-R preferred stock, $0.0001 par value—5,787 shares authorized and 1,396 shares issued and outstanding as of December 31, 2017, no shares authorized, issued or outstanding as of September 30, 2018
32,728

 

Series C-R preferred stock, $0.0001 par value—6,032 shares authorized and 1,508 shares issued and outstanding as of December 31, 2017, no shares authorized, issued or outstanding as of September 30, 2018
18,366

 

Series B-R preferred stock, $0.0001 par value—9,596 shares authorized and 2,247 shares issued and outstanding as of December 31, 2017, no shares authorized, issued or outstanding as of September 30, 2018
5,288

 

Series A-R preferred stock, $0.0001 par value—7,528 shares authorized and 1,857 shares issued and outstanding as of December 31, 2017, no shares authorized, issued or outstanding as of September 30, 2018
1,852

 

Total redeemable convertible preferred stock
$
196,437

 
$

Stockholders’ (deficit) equity:
 
 
 
Common stock, $0.0001 par value—83,000 and 100,000 shares authorized and 3,439 and 21,411 shares issued and outstanding as of December 31, 2017 and September 30, 2018, respectively
$

 
$
7

Additional paid-in capital
58,693

 
359,501

Accumulated other comprehensive income
1,066

 
1,640

Accumulated deficit
(268,445
)
 
(309,921
)
Total stockholders’ (deficit) equity
(208,686
)
 
51,227

Total liabilities and stockholders’ (deficit) equity
$
100,758

 
$
138,073



See notes to the condensed consolidated financial statements

3


CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share amounts)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2018
 
2017
 
2018
Revenue
$
31,406

 
$
34,582

 
$
91,099

 
$
102,865

Costs and expenses:
 
 
 
 
 
 
 
FI Share and other third-party costs
14,529

 
17,982

 
50,886

 
59,149

Delivery costs
1,646

 
3,007

 
5,095

 
7,509

Sales and marketing expense
8,302

 
9,452

 
23,454

 
27,915

Research and development expense
3,421

 
4,097

 
9,527

 
12,444

General and administration expense
5,276

 
7,925

 
14,738

 
23,486

Depreciation and amortization expense
771

 
777

 
2,303

 
2,471

Total costs and expenses
33,945

 
43,240

 
106,003

 
132,974

Operating loss
(2,539
)
 
(8,658
)
 
(14,904
)
 
(30,109
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(1,763
)
 
(254
)
 
(6,427
)
 
(2,995
)
Change in fair value of warrant liabilities, net
1,381

 
801

 
(412
)
 
(6,760
)
Change in fair value of convertible promissory notes

 

 
(1,244
)
 

Change in fair value of convertible promissory notes—related parties

 

 
6,213

 

Other income (expense), net
447

 
(257
)
 
1,189

 
(1,612
)
Total other income (expense)
65

 
290

 
(681
)
 
(11,367
)
Loss before income taxes
(2,474
)
 
(8,368
)
 
(15,585
)
 
(41,476
)
Income tax benefit

 

 

 

Net loss
$
(2,474
)
 
$
(8,368
)
 
$
(15,585
)
 
$
(41,476
)
Adjustments to the carrying value of redeemable convertible preferred stock
(350
)
 

 
(5,383
)
 
(157
)
Net loss attributable to common stockholders
$
(2,824
)
 
$
(8,368
)
 
$
(20,968
)
 
$
(41,633
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.80
)
 
$
(0.40
)
 
$
(6.68
)
 
$
(2.29
)
Weighted-average common shares outstanding, basic and diluted
3,542

 
20,970

 
3,140

 
18,150


See notes to the condensed consolidated financial statements

4


CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(Amounts in thousands)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2018
 
2017
 
2018
Net loss
$
(2,474
)
 
$
(8,368
)
 
$
(15,585
)
 
$
(41,476
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
  Foreign currency translation adjustments
(374
)
 
202

 
(942
)
 
574

Total comprehensive loss
$
(2,848
)
 
$
(8,166
)
 
$
(16,527
)
 
$
(40,902
)

See notes to the condensed consolidated financial statements

5


CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY (UNAUDITED)
(Amounts in thousands)

Nine Months Ended September 30, 2018:
 
 
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Total
 
Common Stock
 
 
Shares
 
Amount
 
Balance – December 31, 2017
3,439

 
$

 
$
58,693

 
$
1,066

 
$
(268,445
)
 
$
(208,686
)
Exercise of common stock options
329

 

 
1,799

 

 

 
1,799

Exercise of common stock warrants
1,142

 

 

 

 

 

Stock-based compensation

 

 
16,968

 

 

 
16,968

Settlement of restricted stock
37



 

 

 

 

Issuance of common stock in connection with our IPO
5,821

 
1

 
66,100

 

 

 
66,101

Vesting of common stock warrants

 

 
17,774

 

 

 
17,774

Conversion of preferred stock to common stock
10,643

 
6

 
196,588

 

 

 
196,594

Conversion of preferred stock warrants to common stock warrants

 

 
1,736

 

 

 
1,736

Accretion of redeemable convertible preferred stock to redemption value

 

 
(157
)
 

 

 
(157
)
Other comprehensive income

 

 

 
574

 

 
574

Net loss

 

 

 

 
(41,476
)
 
(41,476
)
Balance – September 30, 2018
21,411

 
$
7

 
$
359,501

 
$
1,640

 
$
(309,921
)
 
$
51,227


Three Months Ended September 30, 2018:
 
 
 
 Additional Paid-In-Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total
 
Common Stock
 
 
Shares
 
Amount
 
Balance – June 30, 2018
20,316

 
$
7

 
$
336,874

 
$
1,438

 
$
(301,553
)
 
$
36,766

Exercise of common stock options
265

 

 
1,655

 

 

 
1,655

Exercise of common stock warrants
793

 

 

 

 

 

Stock-based compensation

 

 
5,717

 

 

 
5,717

Settlement of restricted stock
37

 

 

 

 

 

Vesting of common stock warrants

 

 
15,255

 

 

 
15,255

Other comprehensive income

 

 

 
202

 

 
202

Net loss

 

 

 

 
(8,368
)
 
(8,368
)
Balance – September 30, 2018
21,411

 
$
7

 
$
359,501

 
$
1,640

 
$
(309,921
)
 
$
51,227










See notes to the condensed consolidated financial statements

6


CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY (UNAUDITED)
(Amounts in thousands)

Nine Months Ended September 30, 2017:
 
 
 
 
 
 Additional Paid-In-Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance – December 31, 2016
2,590

 
$

 
$
29,867

 
$
2,102

 
$
(248,804
)
 
$
(216,835
)
Exercise of common stock options
156

 

 
597

 

 

 
597

Stock-based compensation

 

 
3,707

 

 

 
3,707

Issuance of common stock warrants

 

 
312

 

 

 
312

Deemed dividend related to beneficial conversion feature

 

 
(4,488
)
 

 

 
(4,488
)
Beneficial conversion feature of Series G stock

 

 
4,488

 

 

 
4,488

Conversion of convertible notes
801

 

 
24,392

 

 

 
24,392

Accretion of redeemable stock

 

 
(895
)
 

 

 
(895
)
Other comprehensive loss

 

 

 
(942
)
 

 
(942
)
Net loss

 

 

 

 
(15,585
)
 
(15,585
)
Balance – September 30, 2017
3,547

 
$

 
$
57,980

 
$
1,160

 
$
(264,389
)
 
$
(205,249
)

Three Months Ended September 30, 2017:
 
 
 
 
 
 Additional Paid-In-Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance – June 30, 2017
3,540

 
$

 
$
56,815

 
$
1,534

 
$
(261,915
)
 
$
(203,566
)
Exercise of common stock options
7

 

 
33

 

 

 
33

Stock-based compensation

 

 
1,482

 

 

 
1,482

Accretion of redeemable stock

 

 
(350
)
 

 

 
(350
)
Other comprehensive loss

 

 

 
(374
)
 

 
(374
)
Net loss

 

 

 

 
(2,474
)
 
(2,474
)
Balance – September 30, 2017
3,547

 
$

 
$
57,980

 
$
1,160

 
$
(264,389
)
 
$
(205,249
)





See notes to the condensed consolidated financial statements

7


CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 
Nine Months Ended
September 30,
 
2017
 
2018
Operating activities
 
 
 
 Net loss
$
(15,585
)
 
$
(41,476
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,303

 
2,471

    Amortization of financing costs charged to interest expense
421

 
255

    Accretion of debt discount and non-cash interest expense
5,434

 
2,326

    Stock-based compensation
3,707

 
16,968

    Change in the fair value of warrant liabilities, net
412

 
6,760

    Change in the fair value of convertible promissory notes
1,244

 

    Change in the fair value of convertible promissory notes - related parties
(6,213
)
 

    Other non-cash (income) expense, net
(1,069
)
 
4,136

Amortization of deferred FI implementation costs
1,110

 
1,136

Settlement of paid-in-kind interest

 
(8,353
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
3,256

 
10,883

Prepaid expenses and other assets
(1,092
)
 
(1,797
)
Deferred FI implementation costs
(6,650
)
 
(5,750
)
Recovery of deferred FI implementation costs
3,137

 
4,036

Accounts payable
(991
)
 
221

Other accrued expenses
(333
)
 
24

FI Share liability
(5,153
)
 
(3,728
)
Customer Incentive liability
(509
)
 
(2,412
)
Net cash used in operating activities
$
(16,571
)
 
$
(14,300
)
Investing activities
 
 
 
  Acquisition of property and equipment
$
(971
)
 
$
(3,190
)
  Acquisition of patents
(52
)
 
(14
)
  Capitalized software development costs
(76
)
 
(981
)
Net cash used in investing activities
$
(1,099
)
 
$
(4,185
)
Financing activities
 
 
 
Proceeds from issuance of debt
$
12,500

 
$
47,435

Principal payments of debt
(74
)
 
(52,475
)
Proceeds from issuance of common stock
597

 
72,179

Proceeds from issuance of Series G preferred stock
11,940

 

Equity issuance costs
(2,190
)
 
(1,949
)
Debt issuance costs
(142
)
 
(48
)
Net cash from financing activities
$
22,631

 
$
65,142

Effect of exchange rates on cash, cash equivalents and restricted cash
257

 
(107
)
Net increase in cash, cash equivalents and restricted cash
5,218

 
46,550

Cash, cash equivalents, and restricted cash — Beginning of period
22,968

 
21,262

Cash, cash equivalents, and restricted cash — End of period
$
28,186

 
$
67,812

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Amounts accrued for property and equipment
$

 
$
1,697

Amounts accrued for capitalized software development costs
$

 
$
9



See notes to the condensed consolidated financial statements

8


CARDLYTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.OVERVIEW OF BUSINESS AND BASIS OF PRESENTATION
Cardlytics, Inc. (“we,” “our,” “us,” the “Company,” or “Cardlytics”) is a Delaware corporation and was formed on June 26, 2008. We make marketing more relevant and measurable through our purchase intelligence platform. Using one of the largest aggregations of purchase data through our partnerships with banks and credit unions, we have a secure view into where and when consumers are spending their money. By applying advanced analytics to this massive aggregation of anonymized purchase data, we make it actionable, helping marketers identify, reach and influence likely buyers at scale, and measure the true sales impact of their marketing spend.
We operate in the United Kingdom through Cardlytics UK Limited, a wholly-owned and operated subsidiary registered as a private limited company in England and Wales.
Initial Public Offering
On February 13, 2018, we closed our initial public offering (“IPO”), in which we issued and sold 5,400,000 shares of common stock at a public offering price of $13.00 per share, resulting in gross proceeds of $70.2 million. On February 14, 2018, pursuant to the underwriters’ partial exercise of their over-allotment option to purchase up to an additional 810,000 shares from us, we issued and sold an additional 421,355 shares of our common stock, resulting in additional gross proceeds to us of $5.5 million. In total, we issued 5,821,355 shares of common stock and raised $75.7 million in gross proceeds, or $66.1 million in net proceeds after deducting underwriting discounts and commissions of $5.3 million and offering costs of $4.3 million. Upon the closing of the IPO, all of the outstanding shares of redeemable convertible preferred stock automatically converted into shares of common stock and all warrants to purchase shares of redeemable convertible preferred stock were automatically converted into warrants to purchase shares of common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock or warrants to purchase shares of redeemable convertible preferred stock outstanding. The consolidated financial statements as of December 31, 2017, including share and per share amounts, do not give effect to the IPO or conversion of the redeemable convertible preferred stock, as the IPO and such conversions were completed subsequent to December 31, 2017.
Upon the completion of our IPO, our amended and restated certificate of incorporation authorized us to issue up to 100,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, $0.0001 par value per share, all of which shares of preferred stock are undesignated. Our board of directors may establish the rights and preferences of the preferred stock from time to time.
Reverse Stock Split
On January 26, 2018, our board of directors approved an amended and restated certificate of incorporation to (1) effect a reverse split on outstanding shares of our common stock and redeemable convertible preferred stock on a one-for-four basis (the “Reverse Stock Split”), (2) modify the threshold for automatic conversion of our preferred stock into shares of our common stock in connection with an initial public offering to eliminate the requirement of gross proceeds to the Company of not less than $70.0 million and (3) authorize us to issue up to 100,000,000 shares of common stock, $0.0001 par value per share and 25,000,000 shares of redeemable convertible preferred stock, $0.0001 par value per share (collectively, the “Charter Amendment”). The authorized shares and par values of our common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. The Charter Amendment was approved by the Company’s stockholders on January 26, 2018 and became effective upon the filing of the Charter Amendment with the State of Delaware on January 26, 2018. All issued and outstanding common stock and preferred stock and related share and per share amounts contained in these financial statements have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.


9


Unaudited Interim Results
The accompanying unaudited interim condensed consolidated financial statements and information have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. The results for interim periods presented are not necessarily indicative of the results to be expected for the full year due to the seasonality of our business which has been historically impacted by higher consumer spending during the fourth quarter. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included on our Annual Report on Form 10-K ("Annual Report") for the fiscal year ended December 31, 2017.
There have been no material changes to our accounting policies from those disclosed in the audited consolidated financial statements and related notes thereto included in our Annual Report for year ended December 31, 2017.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Significant items subject to such estimates and assumptions include revenue recognition, internal-use software development costs, income taxes, stock-based compensation, derivative instruments, income tax valuation allowance, contingencies and changes in fair value of our convertible promissory notes. We base our estimates on historical experience and also on assumptions that we believe are reasonable. Changes in facts or circumstances may cause us to change our assumptions and estimates in future periods and it is possible that actual results could differ from our current or revised future estimates.
2.     SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING STANDARDS
Consumer Incentives
Our Cardlytics Direct solution is our proprietary native bank advertising channel that enables marketers to reach consumers via their trusted and frequently visited online and mobile banking channels as well as email. Working with the marketer, we design a campaign that targets customers based on their purchase history. The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that we collect from marketers to provide these consumer incentives to our FIs’ customers after they make qualifying purchases, which we refer to as Consumer Incentives.
We report our revenue on our condensed consolidated statements of operations net of Consumer Incentives. We generally pay Consumer Incentives only with respect to our Cardlytics Direct service. 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.
Accounts receivable is recorded at the amount of gross billings to marketers, net of allowances, for the fees and Consumer Incentives that we are responsible to collect. Our accrued liabilities also include the amount of Consumer Incentives due to FI partners. As a result, accounts receivable and accrued liabilities may appear large in relation to revenue, which is reported on a net basis. Consumer Incentives totaled $14.1 million and $14.0 million during the three months ended September 30, 2017 and 2018 and totaled $42.1 million and $45.9 million during the nine months ended September 30, 2017 and 2018, respectively.


10


Concentrations of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Our cash and cash equivalents are held with three financial institutions, which we believe are of high credit quality. We believe that our accounts receivable credit risk exposure is limited as a result of being diversified among a large number of marketers segregated by both geography and industry. Historically, we have not experienced significant write-downs of our accounts receivable. No marketer represented a significant concentration of our accounts receivable as of December 31, 2017 or September 30, 2018. During the nine months ended September 30, 2017 and 2018, a marketer in the U.S. accounted for 7% and 10% of our revenue, respectively. No other marketer accounted for over 10% of revenue during the nine months ended September 30, 2017 and 2018.
Our business is substantially dependent on a limited number of 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. Our agreements with a substantial majority of our FI partners have terms of three to five years but are generally terminable by the FI partner on 90 days or less prior notice. If an FI partner terminates its agreement with us, we would lose that FI as a source of purchase data and online banking customers.
During the nine months ended September 30, 2017 and 2018, our largest FI partner in the U.S. accounted for approximately 63% and 68% of FI Share, respectively. During the nine months ended September 30, 2017 and 2018, an FI partner in the U.K. accounted for 11% and 9% of FI Share, respectively. No other FI partners accounted for over 10% of FI Share during the nine months ended September 30, 2017 and 2018.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash held in checking accounts, upon which we earn up to a 1.0% annual rate of interest as of September 30, 2018. Restricted cash represents deposits held in a blocked account in favor of the lender as additional security for our payment obligations under our 2018 Term Loan, upon which we earn a 0.9% annual rate of interest as of September 30, 2018. See Note 3—Debt, for additional information regarding our 2018 Term Loan.
Cash, cash equivalents and restricted cash as presented on our condensed consolidated statements of cash flows consists of the following (in thousands):
 
December 31,
 
September 30,
 
2016
 
2017
 
2017
 
2018
Cash and cash equivalents
$
22,838

 
$
21,262

 
$
28,186

 
$
47,812

Restricted cash
130

 

 

 
20,000

Cash, cash equivalents and restricted cash
$
22,968

 
$
21,262

 
$
28,186

 
$
67,812


Deferred Offering Costs
Deferred offering costs consist of incremental costs directly attributable to equity offerings. Deferred offering costs are included in other long-term assets on our condensed consolidated balance sheets. Upon completion of an offering, these amounts are offset against the proceeds of the offering.
 
Nine Months Ended
September 30,
 
2017
 
2018
Beginning balance
$

 
$
3,144

Deferred costs
$
2,449

 
$
1,135

Recognized against offering proceeds

 
(4,279
)
Ending balance
$
2,449

 
$




11


Fair Value of Financial Instruments
When required by U.S. GAAP, assets and liabilities are reported at fair value on our condensed consolidated financial statements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Valuation inputs are arranged in a hierarchy that consists of the following levels:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 inputs are inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 inputs are unobservable inputs for the asset or liability.
Our nonfinancial assets that we recognize or disclose at fair value on our condensed consolidated financial statements on a nonrecurring basis include property and equipment, intangible assets, capitalized software development costs and deferred FI implementation costs. The fair values for these assets are evaluated when events or changes in circumstances indicate the carrying value may not be recoverable.
Preferred Stock Warrants
Outstanding warrants to purchase shares of our redeemable convertible preferred stock are accounted for as derivative liabilities in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”) due to the terms of the warrants and related agreements. We have determined that these warrants do not meet the scope exception of a contract indexed to our stock because of fair value protections contained in agreements governing our redeemable convertible preferred stock. We record preferred stock warrant liabilities on our condensed consolidated balance sheets at their fair value. We record the changes in fair value of such instruments as non-cash gains or losses on our condensed consolidated statements of operations. Upon our IPO, all warrants to purchase shares of our redeemable convertible preferred stock were converted to warrants to purchase shares of our common stock. See Note 6—Fair Value Measurements, for additional information regarding the valuation of warrants to purchase shares of our redeemable convertible preferred stock.
Common Stock Warrants Issued in Connection with the Series G Stock Financing
In connection with the Series G Stock financing, we issued warrants to purchase shares of our common stock that are accounted for as liabilities in accordance with ASC Topic 480, Distinguishing Liabilities From Equity due to the terms of the warrants and related agreements. We record these common stock warrant liabilities in our consolidated balance sheets at their fair value. We record the changes in fair value of such instruments as non-cash gains or losses in our statements of operations. In August 2018 we issued warrants to purchase 792,434 shares of common stock at an exercise price of $0.0004 per share to the cash investors of our Series G financing, pursuant to our Series G stock purchase agreement. The warrants had a valuation of $15.3 million upon issuance and were subsequently exercised, resulting in the issuance of 792,434 shares of our common stock. See Note 6—Fair Value Measurements, for additional information regarding the valuation of the warrants issued in connection with the Series G Stock financing.
Convertible Promissory Notes
The redemption features included in the terms of the convertible promissory notes were determined to be derivative liabilities as a result of a significant discount within the redemption features for the note holders. Embedded derivatives that are not clearly and closely related to the host contract are required to be bifurcated and recorded at fair value unless the fair value option is elected on the host contract. Under the fair value option, bifurcation of the embedded derivative is not necessary as all related gains (losses) on the host contract and derivative will be reflected in the consolidated statements of operations. We elected the fair value option for the convertible promissory notes upon their issuance. The convertible promissory notes are measured using unobservable inputs that required a high level of judgment to determine fair value, and are therefore classified as Level 3. See Note 6—Fair Value Measurements for additional information regarding the valuation of the convertible promissory notes.


12


Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease to 21% effective for tax years beginning after December 31, 2017. This change in tax rate resulted in a reduction in our net U.S. deferred tax assets, which was fully offset by a reduction in our valuation allowance. The other provisions of the Tax Act, including the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, did not have a material impact on our financial statements as of December 31, 2017.
As of December 31, 2017, pursuant to guidance provided in Staff Account Bulletin No. 118, we had not completed our accounting for the effects of the Tax Act; however, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax, including a provisional reduction in U.S. deferred tax assets, which was fully offset by a reduction in our valuation allowance.  We have completed our accounting for the Tax Act and no changes were made to the provisional adjustments recorded as of December 31, 2017.
Recently Adopted Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC Topic 718, Compensation—Stock Compensation. For all entities, the ASU is effective prospectively for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this ASU on January 1, 2018 and it did not have an impact on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the recognition guidance in ASC Topic 605 and most industry specific revenue guidance and requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. In addition, this ASU requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU supersedes most existing GAAP revenue recognition principles, and it permits the use of either the retrospective or modified retrospective transition method. For public entities, this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods. For non-public entities, this ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We have made the election to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"), therefore we will be required to apply this ASU for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Retrospective application will be required for each period presented through either the recasting of the prior periods for the effects of the adoption of this ASU or retrospectively through a cumulative catch up recognized at the date of adoption. During the first quarter of 2018, we began assessing the impacts, if any, that this ASU may have on our results of operations, current accounting policies, processes, controls, systems and financial statement disclosures. Based on our initial assessment, we expect to adopt this new standard using the modified retrospective transition method, which would result in a cumulative adjustment as of the date of the adoption. We also expect to continue to report our revenue on our condensed consolidated statements of operations net of Consumer Incentives and gross of FI Share. We are continuing to assess the impact of this standard on our financial position, results of operations and related disclosures and have not yet determined whether the effect will be material.


13


In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU requires equity investments to be measured at fair value with changes in fair values recognized in net earnings, (public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes), simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and eliminates the requirement to disclose fair values, the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. This ASU also clarifies that management should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with other deferred tax assets. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods. For non-public business entities, this ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. We have made the election to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act, therefore we will be required to apply this ASU for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. We are currently evaluating the potential impact of this recently issued guidance on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes ASC Topic 840, Leases. The ASU does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. The ASU’s primary change is the requirement for lessee entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting under the ASU is largely unchanged from the previous accounting standard. In addition, the ASU expands the disclosure requirements of lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which provides the option of applying the requirements of the new lease standard in the period of adoption with no restatement to comparative periods. For public entities, this ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For non-public entities, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We have made the election to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act, therefore we will be required to adopt this ASU for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Although we are currently evaluating the impact of this guidance on our condensed consolidated financial statements, we expect that most of our operating lease commitments will be recognized as operating lease liabilities and right-of-use assets upon adoption of the new guidance.
In August 2018, the SEC issued Release No. 33-10532, Disclosure Update and Simplification, that extends to interim periods the annual disclosure requirement in SEC Regulation S-X, Rule 3-04 of presenting changes in stockholders’ equity. An analysis of changes in stockholders’ equity (deficit) will now be required for the current and comparative quarter-to-date and year-to-date interim periods. In response to this ruling, we have presented consolidated statements of stockholders' equity (deficit) for the three and nine months ended September 30, 2017 and 2018.
3.     DEBT
Our debt consists of the following (in thousands):
 
December 31, 2017
 
September 30, 2018
Lines of credit
$
25,081

 
$
26,777

Term loans, net of unamortized discount and debt issuance costs of $1,058 and $25 at December 31, 2017 and September 30, 2018, respectively
31,830

 
19,975

Capital leases
101

 
63

Convertible promissory notes (converted into Series G' Stock in May 2017)

 

Total debt
$
57,012

 
$
46,815

Less current portion of long-term debt
(44
)
 
(21
)
Long-term debt, net of current portion
$
56,968

 
$
46,794




14


Accrued interest included in debt totaled $6.2 million and zero as of December 31, 2017 and September 30, 2018, respectively. Interest payments during the during the nine months ended September 30, 2017 and 2018 totaled $0.6 million and $9.2 million, respectively.
New Loan Facility
On May 21, 2018, we entered into a New Loan Facility consisting of a $30.0 million asset-based revolving line of credit ("2018 Line of Credit") and a $20.0 million term loan ("2018 Term Loan") maturing on May 21, 2020. We used the entire $20.0 million in proceeds from the 2018 Term Loan and an advance of $27.4 million under the 2018 Line of Credit to repay all outstanding obligations under our 2016 Line of Credit and 2016 Term Loan. Upon repayment, both the 2016 Line of Credit and the 2016 Term Loan were terminated. We deferred $0.1 million of debt issuance costs associated with obtaining the New Loan Facility and deferred $0.1 million of unamortized debt issuance costs attributed to our 2016 Line of Credit and 2016 Term Loan.
Under the terms of the New Loan Facility relating to the 2018 Line of Credit, we are able to borrow up to the lesser of $30.0 million or 85% of the amount of our eligible accounts receivable. Interest on advances under the 2018 Line of Credit varies depending on the amount of unrestricted cash deposits we maintain with the lender on the last day of the month. The interest rate is equal to the prime rate minus 0.75% if our unrestricted deposits exceed $40.0 million, the prime rate minus 0.50% if our unrestricted deposits are between $40.0 million and $20.0 million, and the prime rate if our unrestricted deposits are below $20.0 million. As of September 30, 2018, the indicative rate for advances on the 2018 Line of Credit was the prime rate minus 0.75%, or 4.50%. In addition, we are required to pay an unused line fee of 0.15% per annum on the average daily unused amount of the $30.0 million revolving commitment. We are also required to pay the lender a one-time success fee of $75,000 in the event that we achieve trailing twelve month revenue of $200.0 million or more at the end of any month after the closing date of the New Loan Facility. Interest accrues on the 2018 Term Loan at an annual rate of interest equal to the prime rate minus 2.75%, or 2.50% as of September 30, 2018.
All of our obligations under the New Loan Facility are also secured by a first priority lien on substantially all of our assets. Under the terms of the New Loan Facility, we are required to maintain a deposit of $20.0 million in a blocked account in favor of the lender as additional security for our payment obligations. The New Loan Facility contains a moving minimum trailing twelve month revenue covenant, which was $130.8 million for the period ended September 30, 2018 . The New Loan Facility also requires us to maintain a total cash balance plus liquidity under the 2018 Line of Credit of not less than $5.0 million.
The New Loan Facility includes customary representations, warranties and covenants (affirmative and negative), including restrictive covenants that include restrictions on mergers, acquisitions and dispositions of assets, incurrence of indebtedness and encumbrances on our assets and a prohibition from the payment or declaration of dividends; in each case subject to specified exceptions.
The New Loan Facility also includes standard events of default, including in the event of a material adverse change. Upon the occurrence of an event of default, the lender may declare all outstanding obligations immediately due and payable and take such other actions as are set forth in the New Loan Facility and increase the interest rate otherwise applicable to the 2018 Term Loan or advances under the 2018 Line of Credit by an additional 3.00%.
In August 2018, we repaid $0.7 million of the outstanding balance under our 2018 Line of Credit. As of September 30, 2018, we had $3.1 million of unused available borrowings under our 2018 Line of Credit. We were in compliance with all financial covenants as of September 30, 2018.
2016 Line of Credit
In September 2016, we entered into a $50.0 million loan and security agreement ("2016 Line of Credit") maturing on March 14, 2019. The 2016 Line of Credit facility was repaid and terminated in May 2018 in connection with obtaining our New Loan Facility. We recognized a $0.1 million loss on extinguishment of debt related to the unamortized debt issuance costs. This expense is included within other income, net in our condensed consolidated statements of operations and is presented in other non-cash expenses on our condensed consolidated statement of statement of cash flows.
2016 Term Loan
In July 2016, we entered into a $24.0 million credit agreement ("2016 Term Loan") maturing on July 21, 2019. The 2016 Term Loan was repaid and terminated in May 2018 in connection with obtaining our New Loan Facility. We recognized a $0.8 million loss on extinguishment of debt related to the unamortized discount and unamortized debt issuance costs. This expense is included within other income, net in our condensed consolidated statements of operations and is presented in other non-cash expenses on our condensed consolidated statement of statement of cash flows.


15


Convertible Promissory Notes
During 2016, we issued unsecured convertible promissory notes with an aggregate principal amount of $50.7 million. In May 2017, we issued and sold shares of Series G redeemable convertible preferred stock, which resulted in the conversion of the convertible promissory notes into either shares of our common stock or shares of our Series G’ Stock. See Note 5—Redeemable Convertible Preferred Stock for a description of the Series G Stock financing that resulted in the conversion of the convertible promissory notes.
The redemption features included in the terms of the convertible promissory notes were determined to be derivative liabilities as a result of a significant discount within the redemption features for the note holders. Embedded derivatives that are not clearly and closely related to the host contract are required to be bifurcated and recorded at fair value unless the fair value option is elected on the host contract. Under the fair value option, bifurcation of the embedded derivative is not necessary as all related gains (losses) on the host contract and derivative will be reflected in the consolidated statements of operations. We elected the fair value option for the convertible promissory notes and recognized losses from their initial measurement during the second and third quarters of 2016. Subsequent changes in fair value of the convertible promissory notes are included in change in fair value of convertible promissory notes on our condensed consolidated statements of operations. See Note 6—Fair Value Measurements for additional information regarding the valuation of the convertible promissory notes.
Paid-in-kind interest related to the convertible promissory notes is recognized in interest expense, net on our condensed consolidated statements of operations and totaled $1.7 million during the nine months ended September 30, 2017.
Future Payments
Aggregate future payments of principal and interest due upon maturity are as follows (in thousands):
Years Ending December 31,
Debt            
 
Capital leases    
 
Total debt        
2018 (remainder of year)
$

 
$
6

 
$
6

2019

 
20

 
20

2020
46,777

 
24

 
46,801

2021

 
13

 
13

Total principal payments
$
46,777

 
$
63

 
$
46,840

Less unamortized debt issuance costs
(25
)
 

 
(25
)
Less unamortized debt discount

 

 

Total debt
$
46,752

 
$
63

 
$
46,815

 
4.     STOCK-BASED COMPENSATION
In May 2017, our board of directors and stockholders approved an increase in the total number of shares of common stock issuable under our 2008 Stock Plan ("2008 Plan") from 3,120,000 to 3,495,000 shares. In January 2018, our board of directors and stockholders approved an increase in the total number of shares of common stock issuable under our 2008 Plan to 4,020,000 shares.
Our board of directors has adopted and our stockholders have approved our 2018 Equity Incentive Plan ("2018 Plan"). Our 2018 Plan became effective on February 8, 2018, the date our registration statement in connection with our IPO was declared effective. We do not expect to grant any additional awards under the 2008 Stock Plan. Any awards granted under the 2008 Plan will remain subject to the terms of our 2008 Plan and applicable award agreements.
Initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under the 2018 Plan is the sum of (i) 1,875,000 shares plus (ii) 61,247 shares reserved, and remaining available for issuance, under our 2008 Plan at the time our 2018 Plan became effective and (iii) the number of shares subject to stock options or other stock awards granted under our 2008 Plan that would have otherwise returned to our 2008 Plan (such as upon the expiration or termination of a stock award prior to vesting). The number of shares of our common stock reserved for issuance under our 2018 Plan will automatically increase on January 1 of each year, beginning on January 1, 2019 and continuing through and including January 1, 2028, by 5% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our board of directors.


16


The 2018 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards and other forms of equity compensation, which are collectively referred to as stock awards. Additionally, the 2018 Plan provides for the grant of performance cash awards.
The following table summarizes the allocation of stock-based compensation in the consolidated statements of operations (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2018
 
2017
 
2018
Delivery costs
$
62

 
$
203

 
$
146

 
$
471

Sales and marketing expense
524

 
1,939

 
1,390

 
5,550

Research and development expense
281

 
915

 
691

 
3,141

General and administration expense
615

 
2,666

 
1,480

 
7,806

Total stock-based compensation expense
$
1,482

 
$
5,723

 
$
3,707

 
$
16,968


Common Stock Options
Options to purchase shares of common stock generally vest over four years and expire 10 years following the date of grant. A summary of common stock option activity is as follows (in thousands, except per share amounts):
 
Shares
 
Weighted-Average Exercise Price     
Options outstanding — December 31, 2016
2,137

 
$
15.00

Granted
799

 
23.80

Exercised
(154
)
 
3.84

Forfeited
(145
)
 
17.68

Cancelled
(104
)
 
11.29

Options outstanding — September 30, 2017
2,533

 
$
18.44

 
Shares
 
Weighted-Average Exercise Price     
Options outstanding — December 31, 2017
2,514

 
$
18.42

Granted
29

 
24.24

Exercised
(329
)
 
6.27

Forfeited
(154
)
 
24.99

Canceled
(