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Table of Contents

 
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 March 31, 2020
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_logoa28.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
Georgia
30308
(Address of principal executive offices, including zip code)
(888)
792-5802
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
CDLX
NASDAQ
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 preceding12 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 April 30, 2020, there were 26,967,594 shares outstanding of the registrant’s common stock, par value $0.0001.
 


Table of Contents

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

Table of Contents

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, 2019
 
March 31, 2020
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
104,458

 
$
102,174

Restricted cash
129

 
121

Accounts receivable, net
81,452

 
57,668

Other receivables
3,908

 
4,066

Prepaid expenses and other assets
5,783

 
6,013

Total current assets
195,730

 
170,042

Long-term assets:
 
 
 
Property and equipment, net
14,290

 
13,085

Right-of-use assets under operating leases, net

 
9,421

Intangible assets, net
389

 
404

Capitalized software development costs, net
3,815

 
3,789

Deferred FI implementation costs, net
8,383

 
7,375

Other long-term assets, net
1,706

 
1,962

Total assets
$
224,313

 
$
206,078

Liabilities and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,229

 
$
1,146

Accrued liabilities:
 
 
 
Accrued compensation
8,186

 
5,023

Accrued expenses
6,018

 
3,003

FI Share liability
41,956

 
31,049

Consumer Incentive liability
19,861

 
14,223

Deferred revenue
1,127

 
603

Current operating lease liabilities

 
3,337

Current finance lease liabilities
24

 
24

Total current liabilities
78,401

 
58,408

Long-term liabilities:
 
 
 
Deferred liabilities
2,632

 

Long-term operating lease liabilities

 
9,305

Long-term finance lease liabilities
13

 
7

Total liabilities
81,046

 
67,720

Stockholders’ equity:
 
 
 
Common stock, $0.0001 par value—100,000 shares authorized and 26,547 and 26,824 shares issued and outstanding as of December 31, 2019 and March 31, 2020, respectively.
8

 
8

Additional paid-in capital
480,578

 
487,903

Accumulated other comprehensive income
1,312

 
2,609

Accumulated deficit
(338,631
)
 
(352,162
)
Total stockholders’ equity
143,267

 
138,358

Total liabilities and stockholders’ equity
$
224,313

 
$
206,078


See notes to the condensed consolidated financial statements

2

Table of Contents

CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2019
 
2020
Revenue
$
35,988

 
$
45,509

Costs and expenses:
 
 
 
FI Share and other third-party costs
19,004

 
26,138

Delivery costs
3,246

 
3,406

Sales and marketing expense
9,337

 
10,968

Research and development expense
2,941

 
3,851

General and administration expense
7,000

 
10,744

Depreciation and amortization expense
961

 
2,331

Total costs and expenses
42,489

 
57,438

Operating loss
(6,501
)
 
(11,929
)
Other income (expense):
 
 
 
Interest (expense) income, net
(304
)
 
284

Foreign currency gain (loss)
491

 
(1,886
)
Total other income (expense)
187

 
(1,602
)
Loss before income taxes
(6,314
)
 
(13,531
)
Net loss
(6,314
)
 
(13,531
)
Net loss attributable to common stockholders
$
(6,314
)
 
$
(13,531
)
Net loss per share attributable to common stockholders, basic and diluted
$
(0.28
)
 
$
(0.51
)
Weighted-average common shares outstanding, basic and diluted
22,503

 
26,725


See notes to the condensed consolidated financial statements

3

Table of Contents

CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2019
 
2020
Net loss
$
(6,314
)
 
$
(13,531
)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(372
)
 
1,297

Total comprehensive loss
$
(6,686
)
 
$
(12,234
)

See notes to the condensed consolidated financial statements

4

Table of Contents

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

Three Months Ended March 31, 2020:
 
 
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Total
 
Common Stock
 
 
Shares
 
Amount
 
Balance – December 31, 2019
26,547

 
$
8

 
$
480,578

 
$
1,312

 
$
(338,631
)
 
$
143,267

Exercise of common stock options
161

 

 
3,145

 

 

 
3,145

Exercise of common stock warrants
9

 

 

 

 

 

Stock-based compensation

 

 
4,180

 

 

 
4,180

Settlement of restricted stock
107

 

 

 

 

 

Other comprehensive income

 

 

 
1,297

 

 
1,297

Net loss

 

 

 

 
(13,531
)
 
(13,531
)
Balance – March 31, 2020
26,824

 
$
8

 
$
487,903

 
$
2,609

 
$
(352,162
)
 
$
138,358


Three Months Ended March 31, 2019:
 
 
 
 
 
 Additional Paid-In-Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance – December 31, 2018
22,466

 
$
7

 
$
371,463

 
$
1,992

 
(321,487
)
 
$
51,975

Exercise of common stock options
31

 

 
173

 

 

 
173

Stock-based compensation

 

 
1,715

 

 

 
1,715

Settlement of restricted stock
73

 

 

 

 

 

Other comprehensive loss

 

 

 
(372
)
 

 
(372
)
Net loss

 

 

 

 
(6,314
)
 
(6,314
)
Balance – March 31, 2019
22,570

 
$
7

 
$
373,351

 
$
1,620

 
$
(327,801
)
 
$
47,177





See notes to the condensed consolidated financial statements

5

Table of Contents

CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2019
 
2020
Operating activities
 
 
 
Net loss
$
(6,314
)
 
$
(13,531
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Bad debt expense
250

 
1,477

Depreciation and amortization
961

 
2,331

Amortization of financing costs charged to interest expense
27

 
24

Amortization of right-of-use assets

 
879

Stock-based compensation expense
1,708

 
4,125

Other non-cash (income) expense, net
(485
)
 
1,923

Amortization of deferred FI implementation costs
653

 
1,008

Change in operating assets and liabilities:
 
 
 
Accounts receivable
4,740

 
22,149

Prepaid expenses and other assets
(1,173
)
 
(509
)
Recovery of deferred FI implementation costs
1,157

 

Accounts payable
(691
)
 
252

Other accrued expenses
(1,770
)
 
(6,988
)
FI Share liability
(4,287
)
 
(10,908
)
Customer Incentive liability
3,741

 
(5,638
)
Net cash used in operating activities
(1,483
)
 
(3,406
)
Investing activities
 
 
 
Acquisition of property and equipment
(1,492
)
 
(492
)
Acquisition of patents

 
(23
)
Capitalized software development costs
(489
)
 
(922
)
Net cash used in investing activities
(1,981
)
 
(1,437
)
Financing activities
 
 
 
Principal payments of debt
(5
)
 
(6
)
Proceeds from issuance of common stock
173

 
3,145

Debt issuance costs
(6
)
 

Net cash from financing activities
162

 
3,139

Effect of exchange rates on cash, cash equivalents and restricted cash
120

 
(588
)
Net decrease in cash, cash equivalents and restricted cash
(3,182
)
 
(2,292
)
Cash, cash equivalents, and restricted cash — Beginning of period
59,870

 
104,587

Cash, cash equivalents, and restricted cash — End of period
$
56,688

 
$
102,295








See notes to the condensed consolidated financial statements

6

Table of Contents

CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2019
 
2020
Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheet:
 
 
 
Cash and cash equivalents
$
36,428

 
$
102,174

Restricted cash
20,260

 
121

Total cash, cash equivalents and restricted cash — End of period
$
56,688

 
$
102,295

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Cash paid for interest
$
463

 
$
16

Amounts accrued for property and equipment
$
1,146

 
$
13



See notes to the condensed consolidated financial statements

7

Table of Contents

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 operate an advertising platform within financial institutions’ (“FIs”) digital channels, which include online, mobile, email, and various real-time notifications. Our partnerships with FIs provide us with access to their anonymized purchase data and digital banking customers. By applying advanced analytics to this aggregation of purchase data, we make it actionable, helping marketers identify, reach and influence likely buyers at scale, and measure the true sales impact of their marketing spend. We have strong relationships with leading marketers across a variety of industries, including national and regional restaurant and retail chains, large providers of cable satellite television and wireless services, and increasingly, travel and hospitality, grocery, e-commerce and luxury brands. Using our purchase intelligence presents customers with offers to save money at a time when they are thinking of their finances.
We also 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, and in India through Cardlytics Services India Private Limited, a wholly-owned and operated subsidiary registered as a private limited company in India.
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 (“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 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, 2019.
Use of Estimates
The preparation of financial statements in conformity with 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, allowance for doubtful accounts, income tax valuation allowance and contingencies. We base our estimates on historical experience and 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.
Internal-Use Software Development Costs
During 2019, we began capitalizing costs related to the development of new technology for building and launching marketing campaigns. In March 2020, we redesigned certain elements of this project and wrote off development costs totaling $0.8 million recognized in depreciation and amortization expense on our condensed consolidated statement of operations.
Sales Force Restructuring
In March 2020, we executed a strategic shift within our sales organization to increase productivity and optimize performance. This plan resulted in $0.5 million of charges, consisting primarily of severance and medical benefits, recognized in the first quarter of 2020 when the extent of our action was determined and could be estimated. No severance and medical benefits were paid to former employees as of March 31, 2020. These charges are reflected in sales and marketing expense on our condensed consolidated statement of operations.
Impacts of COVID-19 Pandemic
The COVID–19 pandemic is expected to result in a global slowdown of economic activity that is likely to decrease demand for a broad variety of goods and services and consumer discretionary spending, including spending by consumers with our marketers. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. Actual results could differ from those estimates and any such differences may be material to our financial statements.


8

Table of Contents

Revenue growth for the three months ended March 31, 2020 was unfavorably affected by the COVID-19 pandemic and its impact on both consumer discretionary spending and marketers' ability to spend advertising budgets on our solution. During the three months ended March 31, 2020 we deferred $0.7 million of revenue and recorded bad debt expense of $1.5 million associated with billings to marketers that we believe are likely to be materially and adversely affected by the slowdown in economic activity resulting from the COVID-19 pandemic. We expect both a reduction in consumer spending and a reduction in marketing campaigns in the near term, which will result in a decline in our revenue and an increase in our net loss in future periods. The severity and duration of this decline is difficult to estimate given the uncertainty that the impacts of COVID-19 will continue to have on the global economy.
The following table summarizes changes in the allowance for doubtful accounts (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Beginning balance
$
169

 
$
255

Bad debt expense
250

 
1,477

Write-offs, net of recoveries
(22
)
 
(349
)
Ending balance
$
397

 
$
1,383


2.     RECENT ACCOUNTING STANDARDS
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842) to increase the transparency and comparability among organizations as it relates to lease assets and lease liabilities, by requiring lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months, with exceptions. Effective January 1, 2020, we early adopted this guidance using a modified retrospective approach, which was required for all leases that exist at or commence after the date of the initial application with an option to use certain practical expedients. We have elected to use these practical expedients, which allow us to treat all components of our leases as a single component, not to reassess lease classification or whether an arrangement is or contains a lease and not to reassess its initial accounting for direct lease costs. The adoption of the new lease standard at January 1, 2020 resulted in the recognition of right-of-use assets and lease liabilities of $10.3 million and $13.5 million, respectively, consisting primarily of operating leases related to the rental of office and data center space. The adoption of this guidance did not have a significant impact on our condensed consolidated statements of operations or cash flows.
On January 1, 2020, we adopted ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The adoption of this guidance did not have a material effect on our condensed consolidated financial statements.
Except for the adoption of ASU 2016-02 and ASU 2015-05, there have been no changes to our accounting policies, and these unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare our audited annual consolidated financial statements for the year ended December 31, 2019, and include, in the opinion of management, all adjustments, consisting of normal recurring items, necessary for the fair statement of the condensed consolidated financial statements.
3.     REVENUE
Cardlytics Direct is our proprietary native bank advertising channel that enables marketers to reach consumers through the FIs' trusted and frequently visited online and mobile banking channels. 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 ("Consumer Incentives"). Leveraging our powerful purchase intelligence platform, we are able to create compelling Consumer Incentives that have the potential to increase return on advertising spend for marketers and measure the effectiveness of the advertising. Consumer Incentives totaled $22.6 million and $22.3 million during the three months ended March 31, 2019 and 2020, respectively. We generally 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 FIs’ customers and certain third-party data costs.


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Cardlytics Direct is priced predominantly in two ways: (1) Cost per Served Sale (“CPS”), and (2) Cost per Redemption (“CPR”).
CPS. Our primary pricing model is CPS, which we created to meet the media buying preferences of marketers. We generate revenue by charging a percentage 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 becomes 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.
CPR. Under our CPR pricing model, marketers specify and fund the Consumer Incentive and pay us a separate negotiated, fixed marketing 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 following table summarizes revenue by pricing model (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Cost per Served Sale
$
21,009

 
$
30,846

Cost per Redemption
13,964

 
14,068

Other
1,015

 
595

Revenue
$
35,988

 
$
45,509


4.     LEASES
Effective January 1, 2020, we early adopted ASU 2016-02, Leases (Topic 842). This standard requires us to recognize a right-of-use asset and a lease liability for all leases with an initial term in excess of twelve months. The asset reflects the present value of unpaid fixed lease payments coupled with initial direct costs, prepaid lease payments, and lease incentives. The amount of the lease liability is calculated as the present value of unpaid fixed lease payments. We evaluate each of our lease and service arrangements at inception to determine if the arrangement is, or contains, a lease and the appropriate classification of each identified lease. A lease exists if we obtain substantially all of the economic benefits of and have the right to control the use of an asset for a period of time. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease agreement. Lease costs are recognized as expense on a straight-line basis over the lease term. We consider a termination or renewal option in the determination of the lease term when it is reasonably certain that we will exercise that option. We adopted ASU 2016-02 using a modified retrospective approach and did not restate comparative periods. We elected to take the package of practical expedients allowing us to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We have elected to account for all components in a contract as part of the single lease component to which they are related. Significant assumptions and judgments in calculating the right-of-use assets and lease liability include the determination of the applicable borrowing rate for each lease. Because our leases generally do not provide a readily determinable implicit interest rate, we use an incremental borrowing rate to measure the lease liability and associated right-of-use asset at the lease commencement date. The incremental borrowing rate used is a fully collateralized rate that considers our credit rating, market conditions and the term of the lease at the lease commencement date.
Upon the adoption of ASU 2016-02, we recorded right-of-use assets of $10.3 million, lease liabilities of $13.5 million and eliminated deferred rent liabilities of $3.2 million. As of the adoption date, our office and data center leases have remaining lease terms ranging from 1 to 6 years.
The following table summarizes activity related to our leases (in thousands):
 
Three Months Ended March 31, 2020
Operating lease expense
$
1,027

Variable lease expense
297

Short-term lease expense
112

Cash for amounts included in the measurement of operating liability
936



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The following table presents our weighted average borrowing rate and weighted average lease term:
 
March 31, 2020
Weighted average borrowing rate
3.4
%
Weighted average remaining lease term (years)
4.00


The following table summarizes future maturities of lease liabilities as of March 31, 2020 (in thousands):
 
Amount
2020 (remainder of year)
$
2,805

2021
3,291

2022
3,189

2023
1,880

2024
1,807

Thereafter
611

Total lease payments
13,583

Imputed interest
(941
)
Total operating lease liabilities
$
12,642


The following table summarizes future payments for operating leases as of December 31, 2019 prior to our adoption of ASU 2016-02 (in thousands):
 
Minimum Lease
Payments
2020
$
3,040

2021
2,759

2022
2,808

2023
1,847

2024
1,807

Thereafter
611

Total
$
12,872


5.     DEBT
2018 Loan Facility
On May 14, 2019, we amended our loan facility with Pacific Western Bank to increase the capacity of our asset-based revolving line of credit ("2018 Line of Credit") and decreased the capacity of our term loan ("2018 Term Loan"). This amendment also extended the maturity date of the term loan from May 21, 2020 to May 14, 2021. We repaid $10.0 million of the principal balance of the 2018 Term Loan upon the execution of the amendment in May 2019 and repaid the remaining $10.0 million principal balance in September 2019. As of March 31, 2020, we had $40.0 million of unused borrowings available under our 2018 Line of Credit and had no outstanding borrowings. Under the amended terms, we are able to borrow up to the lesser of $40.0 million or 85% of the amount of our eligible accounts receivable. Interest on advances bears an interest rate equal to the prime rate minus 0.50%, or 2.75% as of March 31, 2020. In addition, we are required to pay an unused line fee of 0.15% per annum on the average daily unused amount of the $40.0 million revolving commitment. Interest accrued on the 2018 Term Loan at an annual rate of interest equal to the prime rate minus 2.75%, or 2.00% at the date of repayment in September 2019. We believe that we were in compliance with all financial covenants as of March 31, 2020.
6.     STOCK-BASED COMPENSATION
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 initial public offering ("IPO") was declared effective. We do not expect to grant any additional awards under our 2008 Stock Plan ("2008 Plan"). Any awards granted under the 2008 Plan will remain subject to the terms of our 2008 Plan and applicable award agreements.


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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). As of December 31, 2019, there were 1,345,631 shares of our common stock reserved for issuance under our 2018 Plan. 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. Accordingly, the number of shares of our common stock reserved for issuance under our 2018 Plan increased by 1,327,352 shares on January 1, 2020.
The following table summarizes the allocation of stock-based compensation in the consolidated statements of operations (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Delivery costs
$
164

 
$
175

Sales and marketing expense
707

 
1,269

Research and development expense
203

 
603

General and administration expense
634

 
2,078

Total stock-based compensation expense
$
1,708

 
$
4,125


During each of the three months ended March 31, 2019 and 2020, we capitalized less than $0.1 million of stock-based compensation expense for software development.
Common Stock Options
Options to purchase shares of common stock generally vest over four years and expire 10 years following the date of grant. The following table summarizes changes in common stock options:
 
Shares
(in thousands)
 
Weighted-Average Exercise Price
 
Weighted Average Contractual Life (in years)
 
Aggregate Intrinsic Value(1)
(in thousands)
Options outstanding — December 31, 2019
1,000

 
$
22.99

 
 
 
 
Granted

 

 
 
 
 
Exercised
(161
)
 
19.53

 
 
 
$
9,706

Forfeited
(1
)
 
21.62

 
 
 
 
Canceled
(1
)
 
28.96

 
 
 
 
Options outstanding — March 31, 2020
837

 
23.66

 
6.33
 
$
10,140

Exercisable — March 31, 2020
659

 
$
23.25

 
6.15
 
$
8,372


(1)
The aggregate intrinsic value represents the total pre-tax intrinsic value based on the $34.96 per share closing price of our common stock as reported on the Nasdaq Global Market on March 31, 2020, that would have been received by option holders had all in-the-money options been exercised on that date.
The total fair value of options vested during the three months ended March 31, 2020 was approximately $0.7 million. As of March 31, 2020, unamortized stock-based compensation expense related to unvested common stock options was $2.1 million, and the weighted-average period over which such stock-based compensation expense will be recognized was 0.9 years.


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Restricted Stock Units
We grant restricted stock units ("RSUs") to employees and our non-employee directors. The following table summarizes changes in RSUs, inclusive of performance-based RSUs:
 
Shares
(in thousands)
 
Weighted-Average Grant Date Fair Value
 
Weighted-Average Remaining Contractual Term (in years)
 
Unamortized Compensation Costs
(in thousands)
Unvested — December 31, 2019
1,741

 
$
18.55

 
 
 
 
Granted
188

 
70.26

 
 
 
 
Vested
(107
)
 
13.12

 
 
 
 
Forfeited
(92
)
 
15.58

 
 
 
 
Unvested — March 31, 2020
1,730

 
$
24.67

 
2.89
 
$
29,629


During the three months ended March 31, 2020, we granted 188,422 RSUs to employees and non-employee directors, which have annual vesting periods ranging from one to four years.
Subsequent to March 31, 2020, we granted 844,224 RSUs to employees and executives, which have an annual vesting period of four years. The unamortized stock-based compensation expense related to these RSUs is $28.0 million.
Performance-based RSUs
In April 2019, we granted 1,252,500 performance-based restricted stock units (“2019 PSUs”). The 2019 PSUs are composed of four equal tranches, each of which have an independent performance-based vesting condition. The vesting criteria for the four tranches are as follows:
a minimum growth rate in adjusted contribution over a trailing 12-month period,
a minimum number of advertisers that are billed above a specified amount over a trailing 12-month period,
a minimum cumulative adjusted EBITDA target over a trailing 12-month period, and
a minimum trailing 30-day average closing price of our common stock.
The vesting conditions of each of the four tranches must be achieved within four years of the grant date. Upon a vesting event, 50% of the related tranche vests immediately, 25% of the related tranche vests six months after achievement date and 25% of the related tranche vests 12 months after the achievement date. Adjusted EBITDA and adjusted contribution are performance metrics defined within Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations." In August and November 2019, the Compensation Committee of our Board of Directors certified that the target minimum trailing 30-day average closing price of our common stock and target minimum cumulative adjusted EBITDA target over a trailing 12-month period, respectively, were achieved resulting in the immediate vesting of 50% of the related PSU tranches. Additionally, in February 2020, 25% of the 30-day average closing price of our common stock PSU tranche vested, upon the six month anniversary of the tranche's achievement date.
In April 2020, we granted 476,608 performance-based restricted stock units ("2020 PSUs"), of which 443,276 units have a performance-based vesting condition based on a minimum average Cardlytics Direct revenue per user ("ARPU") target over a trailing 12-month period and 33,332 units have the same performance-based vesting conditions as those that remain unmet under the 2019 PSUs described above. ARPU is a performance metric defined within Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The ARPU vesting condition must be achieved within four years of the grant date. Upon the vesting event, 50% of the award vests immediately, 25% of the award vests six-months after achievement date and 25% of the award vests 12-months after the achievement date. The unamortized stock-based compensation expense related to the 2020 PSUs is $14.4 million.
Employee Stock Purchase Plan
Our 2018 Employee Stock Purchase Plan ("2018 ESPP") enables eligible employees to purchase shares of our common stock at a discount. Purchases are accomplished through participation in discrete offering periods. On each purchase date, participating employees purchase our common stock at a price per share equal to 85% of the lesser of the fair market value of our common stock on the first trading day of the offering period or the date of purchase.


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As of December 31, 2019, 267,823 shares of common stock were reserved for issuance pursuant to our 2018 ESPP. Additionally, the number of shares of our common stock reserved for issuance under our 2018 ESPP will automatically increase on January 1 of each year, which began on January 1, 2019 and will continue through and including January 1, 2026, by the lesser of (i) 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year, (ii) 500,000 shares of our common stock or (iii) such lesser number of shares of common stock as determined by our board of directors. Accordingly, the number of shares of our common stock reserved for issuance under our 2018 ESPP increased by 265,470 shares on January 1, 2020. Shares subject to purchase rights granted under our 2018 ESPP that terminate without having been issued in full will not reduce the number of shares available for issuance under our 2018 ESPP.
7.    COMMON STOCK WARRANTS
We have granted warrants to purchase shares of our common stock to a certain lender that include a time-based vesting condition. These warrants are accounted for under ASC Topic 505-50, Equity-Based Payments to Non-Employees.
The following table summarizes changes in our common stock warrants (in thousands, except per share amounts):
 
Shares
 
Weighted-average
exercise price
per share
Warrants outstanding — December 31, 2019
12

 
$
23.64

Exercised
(9
)
 
23.64

Forfeited/canceled
(3
)
 
23.64

Warrants outstanding — March 31, 2020

 
$


8.     RELATED PARTIES
Agreements with Fidelity Information Services, LLC
We are party to a reseller agreement with Fidelity Information Services, LLC ("FIS"). Pursuant to the reseller agreement, FIS markets and sells our services to financial institutions that are current or potential customers of FIS in exchange for a revenue share percentage.
In 2013, FIS purchased shares of our redeemable convertible preferred stock and we also granted performance-based warrants to purchase preferred stock with accelerated vesting upon an IPO. Since FIS did not participate in a subsequent financing, their warrants to purchase preferred stock were converted to warrants to purchase common stock. The warrants vested upon the completion of our IPO in February 2018, resulting in a non-cash expense of $2.5 million based on the vesting-date fair value of our common stock underlying these warrants.
In September 2019, FIS exercised all of their warrants to purchase common stock, resulting in cash proceeds of $15.2 million and the issuance of 644,365 shares of our common stock. As of September 2019, FIS was no longer a related party.
9.     COMMITMENTS AND CONTINGENCIES
FI Implementation Costs
Agreements with certain FI partners require us to fund the development of user interface enhancements, pay for certain implementation fees, or make milestone payments upon the deployment of our solution. Amounts paid to FI partners are included in deferred FI implementation costs on our condensed consolidated balance sheets the earlier of when paid or earned and are amortized over the remaining term of the related contractual arrangements. Amortization is included in FI Share and other third-party costs on our condensed consolidated statements of operations and is presented in amortization of deferred FI implementation costs on our condensed consolidated statement of cash flows. Certain of these agreements provide for future reductions in FI Share due to the FI partner. These reductions in FI Share are recorded as a reduction to deferred FI implementation costs and also result in a cumulative adjustment to accumulated amortization. The scheduled FI Share payment reductions were completed in December 2019.


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Table of Contents

The following table summarizes changes in deferred FI implementation costs (in thousands):
 
Three Months Ended
March 31,
 
2019
 
2020
Beginning balance
$
15,877

 
$
8,383

Recoveries through FI Share
(1,157
)
 

Amortization
(653
)
 
(1,008
)
Ending balance
$
14,067

 
$
7,375


We have an FI Share commitment to a certain FI partner totaling $10.0 million over a 12-month period following the completion of certain milestones by the FI partner, which were not met as of March 31, 2020. Any expected shortfall will be accrued during the 12-month period following the completion of the milestones.
Litigation
From time to time, we may become involved in legal actions arising in the ordinary course of business including, but not limited to, intellectual property infringement and collection matters. We make assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. We record a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range. If no amount within the range is a better estimate than any other amount, we accrue the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, we disclose the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, we disclose the nature and estimate of the possible loss of the litigation. We do not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss would not be material. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on our liquidity, results of operations, business or financial condition.
10.     EARNINGS PER SHARE
Diluted net loss per share is the same as basic net loss per share for the three months ended March 31, 2019 and 2020 because the effects of potentially dilutive items were anti-dilutive, given our net loss during these periods. The following securities as of March 31, 2019 and March 31, 2020 have been excluded from the calculation of diluted weighted-average common shares outstanding because the effect is anti-dilutive (in thousands):
 
March 31,
 
2019
 
2020
Common stock options
1,730

 
837

Common stock warrants
868

 

Unvested restricted stock units
343

 
1,730

Common stock issuable pursuant to the ESPP
75

 
34


11.     SEGMENTS
As of March 31, 2020, we have two operating segments: Cardlytics Direct in the U.S. and U.K., as determined by the information that both our Chief Executive Officer and our President and Chief Operating Officer, who we consider our chief operating decision makers, use to make strategic goals and operating decisions. Our Cardlytics Direct operating segments in the U.S. and U.K. represent our proprietary native bank advertising channels and are aggregated into one reportable segment given their similar economic characteristics, nature of service, types of customers and method of distribution.
Our chief operating decision makers allocate resources to, and evaluate the performance of, our operating segment based on revenue and adjusted contribution.


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The following table provides information regarding our Cardlytics Direct reportable segment (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Adjusted contribution
$
17,637

 
$
20,379

Plus: Adjusted FI Share and other third-party costs(1)
18,351

 
25,130

Revenue
$
35,988

 
$
45,509


(1)
Adjusted FI Share and other third-party costs presented above represents GAAP FI Share and other third-party data costs less amortization of deferred FI implementation costs, which is detailed below in our reconciliation of GAAP loss before income taxes to adjusted contribution.
Adjusted Contribution
Adjusted contribution measures the degree by which revenue generated from our marketers exceeds the cost to obtain the purchase data and the digital advertising space from our FI partners. Adjusted contribution demonstrates how incremental marketing spend on our platform generates incremental amounts to support our sales and marketing, research and development, general and administration and other investments. Adjusted contribution is calculated by taking our total revenue less our FI Share and other third-party costs exclusive of amortization of deferred FI implementation costs, which is a non-cash cost. Adjusted contribution does not take into account all costs associated with generating revenue from advertising campaigns, including sales and marketing expenses, research and development expenses, general and administrative expenses and other expenses, which we do not take into consideration when making decisions on how to manage our advertising campaigns.
The following table presents a reconciliation of loss before income taxes presented in accordance with GAAP to adjusted contribution (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Adjusted contribution
$
17,637

 
$
20,379

Minus:
 
 
 
Amortization of deferred FI implementation costs(1)
653

 
1,008

Delivery costs
3,246

 
3,406

Sales and marketing expense
9,337

 
10,968

Research and development expense
2,941

 
3,851

General and administration expense
7,000

 
10,744

Depreciation and amortization expense
961

 
2,331

Total other (income) expense
(187
)
 
1,602

Loss before income taxes
$
(6,314
)
 
$
(13,531
)

(1)
Amortization of deferred FI implementation costs is excluded from adjusted FI Share and other third party costs, which is shown above in our reconciliation of GAAP revenue to adjusted contribution.
The following tables provide geographical information (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Revenue:
 
 
 
United States
$
31,348

 
$
40,028

United Kingdom
4,640

 
5,481

Total
$
35,988

 
$
45,509



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December 31, 2019
 
March 31, 2020
Property and equipment:
 
 
 
United States
$
12,052

 
$
11,022

United Kingdom
2,010

 
1,864

India
228

 
199

Total
$
14,290

 
$
13,085


Capital expenditures within the United Kingdom and India were less than $0.1 million during the three months ended March 31, 2019 and 2020, respectively.
Concentrations of Risk
Customers
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. Our accounts receivable are diversified among a large number of marketers segregated by both geography and industry. One marketer represented 11% of our accounts receivable as of March 31, 2020. Another marketer represented 11% or our accounts receivable as of March 31, 2020, and this marketer also represented 11% and 14% of our revenue during the three months ended March 31, 2019 and 2020, respectively. No other marketer accounted for over 10% of revenue or accounts receivable during the periods presented.
FI Partners
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 seven 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 three months ended March 31, 2019 and 2020, Bank of America, National Association accounted for 45% and 31% of the total FI Share we paid to all FIs, respectively. JPMorgan Chase Bank, National Association accounted for 27% and 43% of the total FI Share we paid to all FIs during the three months ended March 31, 2019 and 2020, respectively. No other FI partners accounted for over 10% of FI Share during the three months ended March 31, 2019 and 2020.


17

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10–Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2019 included in our Annual Report on Form 10-K, filed with the SEC on March 3, 2020.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations, and such forward-looking statements include, but are not limited to, statements with respect to our business strategy, plans and objectives for future operations, including our expectations regarding our expenses; continued enhancements of our platform and new product offerings; our future financial and business performance; the continued phased launch of the Cardlytics Direct program by Wells Fargo; the anticipated continued decline in ARPU as a result of significant FI MAU growth due to Chase and Wells Fargo launching the Cardlytics Direct program; anticipated FI Share commitment shortfalls; and the uncertain negative impacts that COVID–19 may have on our business, financial condition, results of operations and changes in overall level of spending and volatility in the global economy. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
Cardlytics operates an advertising platform within financial institutions’ (“FIs”) digital channels, which include online, mobile, email, and various real-time notifications. Our partnerships with FIs provide us with access to their anonymized purchase data and digital banking customers. By applying advanced analytics to this aggregation of purchase data, we make it actionable, helping marketers identify, reach and influence likely buyers at scale, and measure the true sales impact of their marketing spend. We have strong relationships with leading marketers across a variety of industries, including national and regional restaurant and retail chains, large providers of cable satellite television and wireless services, and increasingly, travel and hospitality, grocery, e-commerce, and luxury brands. Using our purchase intelligence, we present customers with offers to save money at a time when they are thinking of their finances.
We have historically derived substantially all of our revenue from sales of Cardlytics Direct. Cardlytics Direct is our proprietary native bank advertising channel that enables marketers to reach consumers through the FIs' trusted and frequently visited digital banking channels. Working with a marketer, we design a campaign that targets consumers based on their purchase history. The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that we collect from marketers to provide these consumer incentives to our FIs’ customers after they make qualifying purchases ("Consumer Incentives"). We report our revenue on our condensed consolidated statements of operations net of Consumer Incentives since we do not provide the goods or services that are purchased by our FIs’ customers from the marketers to which the Consumer Incentives relate.
We generally pay our FI partners a negotiated and fixed percentage of our billings to marketers less any Consumer Incentives that we pay to the FIs’ customers and certain third-party data costs ("FI Share"). We report our revenue gross of FI Share. FI Share costs are included in FI Share and other third-party costs in our consolidated statements of operations, rather than as a reduction of revenue, because we and not our FI partners act as the principal in our arrangements with marketers.
We run campaigns offering compelling Consumer Incentives to drive an expected rate of return on advertising spend for marketers. At times, we may collaborate with an FI partner to enhance the level of Consumer Incentives to their respective FIs' customers funded by their FI Share. We believe that these investments by our FI partners positively impact our platform by making FIs' customers more highly engaged with our platform. However, these investments negatively impact our GAAP revenue, which is reported net of Consumer Incentives.



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Revenue, which is reported net of Consumer Incentives and gross of FI Share and other third-party costs, was $36.0 million and $45.5 million during the three months ended March 31, 2019 and 2020, respectively, representing a growth rate of 26%. Billings, a non-GAAP measure that represents the gross amount billed to marketers and is reported gross of both Consumer Incentives and FI Share, was $58.6 million and $67.8 million during the three months ended March 31, 2019 and 2020, respectively, representing a growth rate of 16%. Gross profit, which represents revenue less FI Share and other third-party costs and less delivery costs, was $13.7 million and $16.0 million during the three months ended March 31, 2019 and 2020, respectively, representing a growth rate of 16%. Adjusted contribution, a non GAAP measure that represents our revenue less our adjusted FI Share and other third-party costs, was $17.6 million and $20.4 million during the three months ended March 31, 2019 and 2020, respectively, representing a growth rate of 16%.
Billings and adjusted contribution are further defined under the heading "Non-GAAP Measures and Other Performance Metrics" below. We believe these non-GAAP measures, alongside our GAAP revenue and GAAP gross profit, provide useful information to investors for period-to-period comparisons of our core business and in understanding and evaluating our results of operations in the same manner as our management and board of directors.
The following table summarizes our results (dollars in thousands):
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$

%
Billings(1)
$
58,550

 
$
67,776

 
$
9,226

 
16%
Consumer Incentives
22,562

 
22,267

 
(295
)
 
(1)
Revenue
35,988

 
45,509

 
9,521

 
26
Adjusted FI Share and other third-party costs(1)
18,351

 
25,130

 
6,779

 
37
Adjusted contribution(1)
17,637

 
20,379

 
2,742

 
16
Delivery costs
3,246

 
3,406

 
160

 
5
Amortization of deferred FI implementation costs
653

 
1,008

 
355

 
54
Gross profit
$
13,738

 
$
15,965

 
$
2,227

 
16%
(1)
Billings, adjusted FI Share and other third-party costs and adjusted contribution are non-GAAP measures, as detailed below in our reconciliations of GAAP revenue to billings and GAAP gross profit to adjusted contribution.
During the three months ended March 31, 2019 and 2020, our net loss was $6.3 million and $13.5 million, respectively. Our historical losses have been driven by our substantial investments in our purchase intelligence platform and infrastructure, which we believe will enable us to expand the use of our platform by both FIs and marketers. During the three months ended March 31, 2019 and 2020, our net loss included stock-based compensation expense of $1.7 million and $4.1 million, respectively.
FI Partners
Our FI partners include Bank of America, National Association ("Bank of America"), JPMorgan Chase Bank, National Association (“Chase”) and Wells Fargo Bank, National Association (“Wells Fargo”) in the U.S. and Lloyds Bank plc (“Lloyds”) and Santander UK plc (“Santander”) in the U.K., as well as many other national and regional financial institutions, including several of the largest bank processors and digital banking providers to reach customers of small and mid-sized FIs. Wells Fargo began a phased launch of our platform in the fourth quarter of 2019 that will continue into the second quarter of 2020. In March 2020, we entered into a five-year agreement with U.S. Bank, National Association to begin a phased launch of the Cardlytics Direct program.
For the three months ended March 31, 2019 and 2020, our average FI monthly active users ("FI MAUs") were approximately 108.5 million and 140.8 million and our average Cardlytics Direct revenue per user ("ARPU"), was $0.33 and $0.32, respectively. FI MAU and ARPU are performance metrics defined under the heading "Non-GAAP Measures and Other Performance Metrics" below. The increase in FI MAUs is largely due to Chase launching our Cardlytics Direct program for its online banking channel in May 2019 and Wells Fargo beginning their phased launch in November 2019. We expect a continued increase in FI MAUs year over year as a result of the launch of Wells Fargo. We expect a continued decline in ARPU year over year as a result of significant FI MAU growth.


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As the amount of revenue that we can generate from marketers with respect to Cardlytics Direct is primarily a function of the number of active users on our FI partners’ digital banking platforms, we believe that the number of FI MAUs contributed by any FI partner is indicative of our level of dependence on such FI partner. During the three months ended March 31, 2019 and 2020, Chase contributed 42% and 48% of our average FI MAUs, respectively. Bank of America contributed 29% and 24% of our average FI MAUs during the three months ended March 31, 2019 and 2020, respectively. We anticipate that Chase, Bank of America and, once the phased launch is complete, Wells Fargo will contribute a significant portion of our average FI MAUs for the foreseeable future.
FI Partner Commitments
Agreements with certain FI partners require us to fund the development of specific enhancements, pay for certain implementation fees, or make milestone payments upon the deployment of our solution. Certain of these agreements provide for future reductions in FI Share due to the FI partner. During 2019, we recovered $4.6 million through FI Share payment reductions, $1.2 million of which had been recovered through March 31, 2019. The scheduled FI Share payment reductions were completed in December 2019.
We have a minimum FI Share commitment with a certain FI partner totaling $10.0 million over a 12-month period following the completion of certain milestones by the FI partner, which were not met as of March 31, 2020. The timing of the completion of the milestones is uncertain; however we do not currently believe the FI partner will complete the milestones in 2020. Any expected shortfall will be accrued during the 12-month period following the completion of the milestones.
Impacts of COVID-19 Pandemic
We remain focused on supporting our marketers, FIs partners, employees and communities during the COVID–19 pandemic. The impact of COVID-19 on the global economy and on our business continues to be a fluid situation. We responded quickly to adopt a virtual corporate strategy to enable all of our employees to work productively from home, guard the health and safety of our team, support our marketers and FI partners, mitigate risk and maximize our financial performance. We are focused on ensuring continuity for our marketers and FI partners.
The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on industry events, and its effect on consumer spending, our marketers, FI partners, suppliers and vendors and other parties with whom we do business, all of which are uncertain and cannot be predicted at this time. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel, employee work locations, and cancellation of marketing events. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, marketers, FI partners, suppliers, vendors and stockholders. At this point, the extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain. See “Risk Factors” for further discussion of the adverse impacts of the COVID-19 pandemic on our business.
Revenue growth for the three months ended March 31, 2020 was unfavorably affected by the COVID-19 pandemic and its impact on both consumer discretionary spending and marketers' ability to spend advertising budgets on our solution. During the three months ended March 31, 2020 we deferred $0.7 million of revenue and recorded bad debt expense of $1.5 million associated with billings to marketers that we believe are likely to be materially and adversely affected by the slowdown in economic activity resulting from the COVID-19 pandemic. We expect both a reduction in consumer spending and a reduction in marketing campaigns in the near term, which will result in a decline in our revenue and an increase in our net loss in future periods. The severity and duration of this decline is difficult to estimate given the uncertainty that the impacts of COVID-19 will continue to have on the global economy.


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Non-GAAP Measures and Other Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our metrics may be calculated in a manner different than similar metrics used by other companies.
 
Three Months Ended March 31,
 
2019
 
2020
 
(in thousands, except ARPU)
FI MAUs
108,468

 
140,779

ARPU
$
0.33

 
$
0.32

Billings
$
58,550

 
$
67,776

Adjusted contribution
$
17,637

 
$
20,379

Adjusted EBITDA
$
(3,179
)
 
$
(3,982
)
FI Monthly Active Users
We define FI MAUs as targetable customers or accounts of our FI partners that logged in and visited the online or mobile banking applications of, or opened an email containing our offers from, our FI partners during a monthly period. We then calculate a monthly average of these FI MAUs for the periods presented. We believe that FI MAUs is an indicator of our and our FI partners’ ability to drive engagement with Cardlytics Direct and is reflective of the marketing base that we offer to marketers through Cardlytics Direct.
Average Revenue per User
We define ARPU as the total Cardlytics Direct revenue generated in the applicable period calculated in accordance with generally accepted accounting principles in the United States ("GAAP"), divided by the average number of FI MAUs in the applicable period. We believe that ARPU is an indicator of the value of our relationships with our FI partners with respect to Cardlytics Direct.
Billings
Billings represents the gross amount billed to marketers for advertising campaigns in order to generate revenue. Billings is reported gross of both Consumer Incentives and FI Share. Our GAAP revenue is recognized net of Consumer Incentives and gross of FI Share.
We review billings for internal management purposes. We believe that billings provides useful information to investors for period-to-period comparisons of our core business and in understanding and evaluating our results of operations in the same manner as our management and board of directors. Nevertheless, our use of billings has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Other companies, including companies in our industry that have similar business arrangements, may address the impact of Consumer Incentives differently. You should consider billings alongside our other GAAP financial results.
The following table presents a reconciliation of billings to revenue, the most directly comparable GAAP measure (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Revenue
$
35,988

 
$
45,509

Plus:
 
 
 
Consumer Incentives
22,562

 
22,267

Billings
$
58,550

 
$
67,776



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Adjusted Contribution
Adjusted contribution measures the degree by which revenue generated from our marketers exceeds the cost to obtain the purchase data and the digital advertising space from our FI partners. Adjusted contribution demonstrates how incremental marketing spend on our platform generates incremental amounts to support our sales and marketing, research and development, general and administration and other investments. Adjusted contribution is calculated by taking our total revenue less our FI Share and other third-party costs exclusive of amortization of deferred FI implementation costs, which is a non-cash cost. Adjusted contribution does not take into account all costs associated with generating revenue from advertising campaigns, including sales and marketing expenses, research and development expenses, general and administrative expenses and other expenses, which we do not take into consideration when making decisions on how to manage our advertising campaigns.
We use adjusted contribution extensively to measure the efficiency of our advertising platform, make decisions to manage advertising campaigns and evaluate our operational performance. Adjusted contribution is also used to determine the vesting of performance-based equity awards and is used to determine the achievement of quarterly and annual bonuses across our entire global employee base, including executives. We view adjusted contribution as an important operating measure of our financial results. We believe that adjusted contribution provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Adjusted contribution should not be considered in isolation from, or as an alternative to, measures prepared in accordance with GAAP. Adjusted contribution should be considered together with other operating and financial performance measures presented in accordance with GAAP. Also, adjusted contribution may not necessarily be comparable to similarly titled measures presented by other companies. Refer to Note 11—Segments to our condensed consolidated financial statements for further details on our adjusted contribution.
The following table presents a reconciliation of adjusted contribution to gross profit, the most directly comparable GAAP measure, for each of the periods indicated (in thousands):
 
Three Months Ended March 31,
 
2019

2020
Revenue
$
35,988

 
$
45,509

Minus:
 
 
 
FI Share and other third-party costs
19,004

 
26,138

Delivery costs(1)
3,246

 
3,406

Gross profit
13,738

 
15,965

Plus:
 
 
 
Delivery costs(1)
3,246

 
3,406

Amortization of deferred FI implementation costs(2)
653

 
1,008

Adjusted contribution
$
17,637

 
$
20,379

(1)
Stock-based compensation expense recognized in delivery costs totaled $0.2 million and $0.2 million for the three months ended March 31, 2019 and 2020, respectively.
(2)
Amortization of deferred FI implementation costs is excluded from adjusted FI Share and other third party costs as follows (in thousands):
 
Three Months Ended March 31,
 
2019

2020
FI Share and other third-party costs
$
19,004


$
26,138

Minus:



Amortization of deferred FI implementation costs
653


1,008

Adjusted FI Share and other third-party costs
$
18,351


$
25,130



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Adjusted EBITDA
Adjusted EBITDA represents our net loss before income tax benefit; interest (expense) income, net; depreciation and amortization expense; stock-based compensation expense; foreign currency (gain) loss; amortization of deferred FI implementation costs; and restructuring costs. We do not consider these excluded items to be indicative of our core operating performance. The items that are non-cash include foreign currency (gain) loss, amortization of deferred FI implementation costs, depreciation and amortization expense and stock-based compensation expense. Notably, any impacts related to minimum FI Share commitments in connection with agreements with certain FI partners are not added back to net loss in order to calculate adjusted EBITDA. Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends and to generate future operating plans, make strategic decisions regarding the allocation of capital and invest in initiatives that are focused on cultivating new markets for our solution. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Adjusted EBITDA is not a measure calculated in accordance with GAAP.
We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Nevertheless, use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (1) adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (2) adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation and equity instruments issued to our FI partners; (3) adjusted EBITDA does not reflect tax payments or receipts that may represent a reduction or increase in cash available to us; and (4) other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of the metric as a comparative measure. Because of these and other limitations, you should consider adjusted EBITDA alongside our net loss and other GAAP financial results.
The following table presents a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP measure (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Net loss
$
(6,314
)
 
$
(13,531
)
Plus:

 

Interest expense (income), net
304

 
(284
)
Depreciation and amortization expense
961

 
2,331

Stock-based compensation expense
1,708

 
4,126

Foreign currency (gain) loss
(491
)
 
1,886

Amortization of deferred FI implementation costs
653

 
1,008

Restructuring costs

 
482

Adjusted EBITDA
$
(3,179
)
 
$
(3,982
)


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Results of Operations
The following table presents our condensed consolidated statements of operations (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Revenue
$
35,988

 
$
45,509

Costs and expenses:
 
 
 
FI Share and other third-party costs
19,004

 
26,138

Delivery costs
3,246

 
3,406

Sales and marketing expense
9,337

 
10,968

Research and development expense
2,941

 
3,851

General and administrative expense
7,000

 
10,744

Depreciation and amortization expense
961

 
2,331

Total costs and expenses
42,489

 
57,438

Operating loss
(6,501
)
 
(11,929
)
Other income (expense):
 
 
 
Interest (expense) income, net
(304
)
 
284

Foreign currency gain (loss)
491

 
(1,886
)
Total other income (expense)
187

 
(1,602
)
Loss before income taxes
(6,314
)
 
(13,531
)
Net loss
$
(6,314
)
 
$
(13,531
)
Comparison of Three Months Ended March 31, 2019 and 2020
Revenue
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$
 
%
Revenue
$
35,988

 
$
45,509

 
$
9,521

 
26
%
The $9.5 million increase in revenue during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 comprised of a $8.9 million increase in sales to existing marketers and a $0.6 million increase in sales to new marketers. Revenue growth for the three months ended March 31, 2020 was unfavorably affected by the COVID-19 pandemic and its negative impact on both consumer spending and marketers' ability to spend advertising budgets on our solution. During the three months ended March 31, 2020 we deferred $0.7 million of revenue associated with billings to marketers that we believe are likely to be most affected by the slowdown in economic activity resulting from the COVID-19 pandemic. We expect both a reduction in consumer spending and a reduction in marketing campaigns in the near term, which we believe will result in a decline in our revenue in future periods. The severity and duration of this decline is difficult to estimate given the uncertainty that the impacts of COVID-19 will continue to have on the global economy.
Costs and Expenses
FI Share and Other Third-Party Costs
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$

%
 
(dollars in thousands)
FI Share and other third-party costs:
 
 
 
 
 
 
 
Adjusted FI Share and other third-party costs
$
18,351

 
$
25,130

 
$
6,779

 
37
%
Amortization of deferred FI implementation costs
653

 
1,008

 
355

 
54

FI Share and other third-party costs
$
19,004

 
$
26,138

 
$
7,134

 
38
%
% of revenue
53
%
 
57
%
 
 
 
 


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FI Share and other third-party costs increased by $6.8 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to increased revenue from sales of Cardlytics Direct. Amortization of deferred FI implementation costs increased by $0.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to an increase in the value of enhancements placed in service by our FI partners.
We believe the expected near-term decline in revenue caused by the economic impact of COVID-19 would also result in a similar percentage decline in FI Share and other third-party costs in future periods.
Delivery Costs
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$
 
%
 
(dollars in thousands)
Delivery costs
$
3,246

 
$
3,406

 
$
160

 
5
%
% of revenue
9
%
 
7
%
 
 
 
 
Delivery costs increased by $0.2 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to a $0.2 million increase in costs associated with hosting Cardlytics Direct for certain FI partners.
Sales and Marketing Expense
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$
 
%
 
(dollars in thousands)
Sales and marketing expense
$
9,337

 
$
10,968

 
$
1,631

 
17
%
% of revenue
26
%
 
24
%
 
 
 
 
Sales and marketing expense increased by $1.6 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to a $0.6 million increase in stock-based compensation expense, a $0.5 million restructuring cost, a $0.3 million increase in personnel costs associated with additional headcount and a $0.2 million increase in marketing costs.
Research and Development Expense
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$
 
%
 
(dollars in thousands)
Research and development expense
$
2,941

 
$
3,851

 
$
910

 
31
%
% of revenue
8
%
 
8
%
 
 
 
 
Research and development expense increased by $0.9 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to a $0.5 million increase in personnel costs associated with additional headcount, a $0.4 million increase in stock-based compensation expense, a $0.3 million increase in professional fees and a $0.3 million increase in capitalized software development costs.
General and Administrative Expense
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$
 
%
 
(dollars in thousands)
General and administration expense
$
7,000

 
$
10,744

 
$
3,744

 
53
%
% of revenue
19
%
 
24
%
 
 
 
 


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General and administrative expense increased by $3.7 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to a $1.4 million increase in stock-based compensation expense, a $1.2 million increase in bad debt expense, a $0.4 million increase in software licensing costs, a $0.4 million increase in personnel costs associated with additional headcount and a $0.3 million increase in other costs, such as facility costs and non-income based taxes.
During the three months ended March 31, 2020 we also recorded bad debt expense of $1.5 million. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may further adjust these reserves in the future.
Stock-based Compensation Expense
The following table summarizes the allocation of stock-based compensation in the consolidated statements of operations (in thousands):
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$

%
Delivery costs
$
164

 
$
175

 
$
11

 
7
%
Sales and marketing expense
707

 
1,269

 
562

 
79
%
Research and development expense
203

 
603

 
400

 
197
%
General and administrative expense
634

 
2,078

 
1,444

 
228
%
Total stock-based compensation expense
$
1,708

 
$
4,125

 
$
2,417

 
142
%
% of revenue
5
%
 
9
%
 
 
 
 
Stock-based compensation expense increased by $2.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to an increase in expense relating to the 2019 PSUs, which were granted in April 2019 and adjustments to the expected timing of the achievement of certain other performance-based vesting conditions.
Depreciation and Amortization Expense
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$

%
 
(dollars in thousands)
Depreciation and amortization expense
$
961

 
$
2,331

 
$
1,370

 
143
%
% of revenue
3
%
 
5
%
 
 
 
 
Depreciation and amortization expense increased by $1.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to the suspension of certain development efforts that resulted in a $0.8 million write off of capitalized internal-use software development costs.
Interest (Expense) Income, Net
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$
 
%
 
(dollars in thousands)
Interest expense
$
(489
)
 
$
(40
)
 
$
449

 
(92
)%
Interest income
185

 
324

 
139

 
75

Interest (expense) income, net
$
(304
)
 
$
284

 
$
588

 
(193
)%
% of revenue
(1
)%
 
1
%
 
 
 
 
Interest expense, net decreased $0.6 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to higher cash balances and a decline in the amount of debt outstanding.


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Table of Contents

Foreign Currency Gain (Loss)
 
Three Months Ended March 31,
 
Change
 
2019
 
2020
 
$

%
 
(dollars in thousands)
Foreign currency gain (loss)
$
491

 
$
(1,886
)
 
$
(2,377
)
 
(484
)%
% of revenue
1
%
 
(4
)%
 
 
 
 
Foreign currency gain (loss) decreased by $2.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to a decrease in the value of the British pound relative to the U.S. dollar.
Liquidity and Capital Resources
The following table summarizes our cash and cash equivalents, restricted cash, accounts receivable and working capital (in thousands):
 
December 31, 2019
 
March 31, 2020
Cash and cash equivalents
$
104,458

 
$
102,174

Accounts receivable, net
81,452

 
57,668

Working capital (1)
117,329

 
111,634

Unused available borrowings
40,000

 
40,000

(1)
We define working capital as current assets less current liabilities. See our consolidated financial statements for further details regarding our current assets and current liabilities.
Our cash and cash equivalents are available for working capital purposes. We do not enter into investments for trading purposes, and our investment policy is to invest any excess cash in short-term, highly liquid investments that limit the risk of principal loss. Currently, our cash and cash equivalents are held in fully FDIC-insured demand deposit accounts. As of March 31, 2020, our demand deposit accounts earned up to a 1.50% annual rate of interest. As of March 31, 2020, $5.0 million of our cash and cash equivalents were in the United Kingdom. While our investment in Cardlytics UK Limited is not considered indefinitely invested, we do not plan to repatriate these funds.
Through March 31, 2020, we have incurred accumulated net losses of $352.2 million since inception, including net losses of $6.3 million and $13.5 million for the three months ended March 31, 2019 and 2020, respectively. We expect to incur additional operating losses as we continue our efforts to grow our business. We have historically financed our operations and capital expenditures through convertible note financings, private placements of preferred stock, public offerings of our common stock as well as lines of credit and term loans. Through March 31, 2020, we have received net proceeds of $196.2 million from the issuance of preferred stock and convertible promissory notes and net proceeds of $127.1 million from public equity offerings. Our historical uses of cash have primarily consisted of cash used in operating activities to fund our operating losses and working capital needs.
Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities, the enhancement of our platform, the introduction of new solutions, the continued market acceptance of our solutions and the extent of the impact of COVID-19 on our operational and financial performance. We expect to continue to incur operating losses for the foreseeable future and may require additional capital resources to continue to grow our business. Despite the economic impacts of COVID-19, we believe that current cash and cash equivalents will be sufficient to fund our operations and capital requirements for at least the next 12 months following the date our consolidated financial statements were issued. However, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be materially and adversely impacted. In the event that additional financing is required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all.


27

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The following table summarizes our cash flows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2020
Cash, cash equivalents and restricted cash — Beginning of period
$
59,870

 
$
104,587

Net cash used in operating activities
(1,483
)
 
(3,406
)
Net cash used in investing activities
(1,981
)
 
(1,437
)
Net cash from financing activities
162

 
3,139

Effect of exchange rates on cash, cash equivalents and restricted cash
120

 
(588
)
Cash, cash equivalents and restricted cash — End of period
$
56,688

 
$
102,295

Sources of Funds
Proceeds from Issuance of Common Stock
On September 13, 2019, we closed a public equity offering in which we sold 1,904,154 shares of common stock, which included 404,154 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $34.00 per share. We received total net proceeds of $61.3 million after deducting underwriting discounts and commissions of $3.2 million and offering costs of $0.2 million. Selling stockholders, including certain of our executive officers and entities affiliated with certain of our directors, sold 1,194,365 shares of common stock in the offering at a public offering price of $34.00. We did not receive any proceeds from the sale of common stock by the selling stockholders.
2018 Loan Facility
On May 14, 2019, we amended our loan facility with Pacific Western Bank to increase the capacity of our asset-based revolving line of credit ("2018 Line of Credit") and decreased the capacity of our term loan ("2018 Term Loan"). This amendment also extended the maturity date of the term loan from May 21, 2020 to May 14, 2021. We repaid $10.0 million of the principal balance of the 2018 Term Loan upon the execution of the amendment in May 2019 and repaid the remaining $10.0 million principal balance in September 2019. As of March 31, 2020, we had $40.0 million of unused borrowings available under our 2018 Line of Credit and had no outstanding borrowings. Under the amended terms, we are able to borrow up to the lesser of $40.0 million or 85% of the amount of our eligible accounts receivable. Interest on advances bears an interest rate equal to the prime rate minus 0.50%, or 2.75% as of March 31, 2020. In addition, we are required to pay an unused line fee of 0.15% per annum on the average daily unused amount of the $40.0 million revolving commitment. Interest accrued on the 2018 Term Loan at an annual rate of interest equal to the prime rate minus 2.75%, or 2.00% at the date of repayment in September 2019. We believe that we were in compliance with all financial covenants as of March 31, 2020.
Uses of Funds
Our collection cycles can vary from period to period based on the payment practices of our marketers and their agencies. We are generally obligated to pay Consumer Incentives with respect to our Cardlytics Direct solution between one and three months following redemption, regardless of whether we have collected payment from a marketer or its agency. We are generally obligated to pay our FI partners’ FI Share either three months following marketer billings, regardless of whether we have collected payment from a marketer or its agency, or by the end of the month following our collection of payment from the applicable marketer or its agency. As a result, timing of cash receipts from our marketers can significantly impact our operating cash flows for any period. Further, the timing of payment of commitments and implementation fees to our FI partners may also result in variability of our operating cash flows for any period.
Our operating cash flows also vary from quarter to quarter due to the seasonal nature of our marketers’ advertising spending. Many marketers tend to devote a significant portion of their marketing budgets to the fourth quarter of the calendar year to coincide with consumer holiday spending and reduce marketing spend in the first quarter of the calendar year. Any lag between the timing of our payment of Consumer Incentives and our receipt of payment from marketers and their agencies can exacerbate our need for working capital during the first quarter of the calendar year.


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Operating Activities
Cash used in operating activities is primarily driven by our operating losses. We expect that we will continue to use cash from operating activities in 2020 as we invest in our business.
Operating activities used $3.4 million of cash during the three months ended March 31, 2020, which reflected our net loss of $13.5 million and a $1.6 million change in our net operating assets and liabilities, partially offset by $11.7 million of non–cash charges. The non-cash charges primarily related to stock-based compensation expense and depreciation and amortization expense, which included $0.9 million amortization of right-of-use assets and a $0.8 million charge related to the write off of certain development costs previously capitalized related to the development of new technology for building and launching marketing campaigns. The change in our net operating assets and liabilities was primarily due to a $22.1 million decrease in accounts receivable, offset by a $10.9 million decrease in FI Share liability and a $5.6 million decrease in our Consumer Incentive liability as a result of seasonally lower sales during the first quarter of 2020 compared to the fourth quarter of 2019.
Operating activities used $1.5 million of cash during the three months ended March 31, 2019, which reflected growth in revenue, offset by continued investment in our operations. Cash used in operating activities reflected our net loss of $6.3 million, partially offset by $3.1 million of non-cash charges and a $1.7 million change in our net operating assets and liabilities. The non-cash charges primarily related to stock-based compensation expense, depreciation and amortization expense, and amortization of deferred FI implementation costs. The change in our net operating assets and liabilities was primarily due to a $4.7 million decrease in accounts receivable and a $4.3 million decrease in FI Share liability resulting from seasonally lower sales during the first quarter of 2019 compared to the fourth quarter of 2018 and a $2.5 million increase in accounts payable and accrued expenses, as well as a $1.2 million increase in prepaid expenses and other assets. Consumer Incentive liability increased $3.7 million as a result of longer payment terms negotiated within more recent contracts with our FI partners.
Investing Activities
Our cash flows from investing activities are primarily driven by our investments in, and purchases of, property and equipment and costs to develop internal-use software. We expect that we will continue to use cash for investing activities in 2020 as we continue to invest in and grow our business.
Investing activities used $1.4 million in cash in the three months ended March 31, 2020. Our investing cash flows during this period primarily consisted of purchases of technology hardware and the capitalization of costs to develop internal-use software.
Investing activities used $2.0 million in cash in the three months ended March 31, 2019. Our investing cash flows during this period primarily consisted of purchases of technology hardware and the capitalization of costs to develop internal-use software.
Financing Activities
Our cash flows from financing activities have primarily been composed of net proceeds from our borrowings under our debt facilities and the issuance of common and preferred stock.
Financing activities provided $3.1 million in cash during the three months ended March 31, 2020. Our financing activities during this period primarily consisted of proceeds from the exercise of options to purchase shares of common stock.
Financing activities provided $0.2 million in cash during the three months ended March 31, 2019. Our financing activities during this period primarily consisted of proceeds from the exercise of options to purchase shares of common stock.
Contractual Obligations & Commitments
There have been no material changes in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 3, 2020.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. The future effects of the COVID-19 pandemic on our results of operations, cash flows, and financial position are unclear, however we believe we have used reasonable estimates and assumptions in preparing our condensed consolidated financial statements. Our actual results could differ from these estimates.


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We believe that the assumptions and estimates associated with the evaluation of revenue recognition criteria, including the determination of revenue recognition as net versus gross in our revenue arrangements, the assumptions used in the valuation models to determine the fair value of equity awards and stock-based compensation expense, and the assumptions required in determining any valuation allowance recorded against deferred tax assets have the greatest potential impact on our condensed consolidated financial statements.
Therefore, we consider these to be our critical accounting policies and estimates. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates. Except for the adoption of ASU 2016-02, Leases (Topic 842) described in Note 2—Recent Accounting Standards to our condensed consolidated financial statements, which resulted in the recognition of right-of-use assets and lease liabilities of $9.0 million and $12.1 million, respectively, there have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.
Recent Accounting Pronouncements
Refer to Note 2—Recent Accounting Standards to our condensed consolidated financial statements for a description of recent accounting pronouncements.
Emerging Growth Company Status
In April 2012, the Jumpstart Our Business Startups Act of 2012 ("JOBS Act") was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period and, as a result, we may not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.


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ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign exchange rates.
Interest Rate Risk
The interest rates under the 2018 Line of Credit are variable. Interest on advances under the 2018 Line of Credit bears an interest rate of the prime rate minus 0.50%, or 2.75%. As of March 31, 2020 the prime rate was 3.25% and a 10% increase in the current prime rate would, for example, result in a $0.3 million annual increase in interest expense if the maximum borrowable amount under the 2018 Line of Credit were outstanding for an entire year.
Foreign Currency Exchange Risk
Both revenue and operating expense of Cardlytics UK Limited are denominated in British pounds, and we bear foreign currency risks related to these amounts. For example, if the average value of the British pound had been 10% higher relative to the U.S. dollar during the three months ended March 31, 2019 and 2020, our operating expense would have increased by $0.3 million and $0.4 million, respectively.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of March 31, 2020. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting