Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
State or Other Jurisdiction of
Incorporation or Organization
675 Ponce de Leon Avenue NE, Suite 6000
Atlanta, Georgia
Address of Principal Executive Offices
26-3039436
I.R.S. Employer
Identification No.
30308
Zip Code
Registrant’s telephone number, including area code: (888) 798-5802
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value per share
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
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 and posted on its corporate web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes ☐ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the
Form 10-K or any amendment to the Form 10-K. ☒
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
☐
Non-accelerated filer
☒ (Do not check if a smaller reporting company)
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 Act). Yes ☐ No ☒
As of June 30, 2017, the last business day of the registrant’s most recently completed second quarter, there was no established public market for the
registrant’s common stock. The registrant’s common stock began trading on The Nasdaq Global Market on February 9, 2018.
As of February 28, 2018, there were 19,995,657 shares outstanding of the registrant’s common stock, par value $0.0001.
Table of Contents
CARDLYTICS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
PART I.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Signatures
1
Page
3
14
38
38
38
38
39
40
42
70
71
118
118
118
119
122
133
135
140
140
142
143
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, or this Annual Report, 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, that reflect our
current expectations regarding future events, our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and
objectives of management. Forward-looking statements include any statement that does not directly relate to a current or historical fact. In some cases, you
can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,”
“objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” or the negative of these terms, or other comparable
terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these
forward-looking statements. The forward-looking statements and opinions contained in this Annual Report are based upon information available to us as of
the date of this Annual Report and, while we believe such information forms a reasonable basis for such statements, such information may be limited or
incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available
relevant information. Forward- looking statements include statements about:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to continue to add new financial institutions, or FIs, partners and marketers and maintain existing FI partners and marketers;
with respect to Cardlytics Direct, our ability to increase FI partner customer engagement from new and existing FI partners;
our ability to expand our relationship with Wells Fargo beyond the initial pilot program;
our ability to maintain and expand our relationships with FI partners to broaden the use of purchase data to our Other Platform Solutions and our
ability to sell Other Platform Solutions;
the effects of increased competition as well as innovations by new and existing competitors in our market;
our ability to adapt to technological change and effectively enhance, innovate and scale our solutions;
our ability to effectively manage or sustain our growth and to sustain profitability;
potential acquisitions and integration of complementary business and technologies;
our ability to maintain, or strengthen awareness of, our brand;
perceived or actual integrity, reliability, quality or compatibility problems with our solutions, including related to unscheduled downtime or
outages;
future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;
our ability to attract and retain qualified employees and key personnel and further expand our overall headcount;
our ability to grow our business;
our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United
States and internationally;
our ability to maintain, protect and enhance our intellectual property;
costs associated with defending intellectual property infringement and other claims;
the future trading prices of our common stock and the impact of securities analysts’ reports on these prices; and
other risks detailed below in Item 1A. “Risk Factors.”
You should refer to Item 1A. “Risk Factors” section of this Annual Report for a discussion of important factors that may cause our actual results to
differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-
looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may
be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or
warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly
update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore,
not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report.
Except as otherwise indicated herein or as the context otherwise requires, references in this Annual Report to “Cardlytics,” the “company,” “we,” “us,”
“our” and similar references refer to Cardlytics, Inc. and, unless the context otherwise requires, its consolidated subsidiaries.
2
Table of Contents
ITEM 1. BUSINESS
Overview
PART I.
Cardlytics makes marketing more relevant and measurable through our purchase intelligence platform. With purchase data from more than 2,000 financial
institutions, we have a secure view into where and when consumers are spending their money. By applying advanced analytics to this massive aggregation of
purchase data, we make it actionable, helping marketers identify, reach and influence likely buyers at scale, and measure the true sales impact of their
marketing spend. This collection of debit, credit, ACH, and bill pay data represented approximately $1.5 trillion in 2017 consumer spend in the United States,
or U.S. In 2017, our platform analyzed over 20.0 billion online and in-store transactions across more than 100.0 million accounts in the U.S., including one in
five debit and credit card swipes in the U.S.
Our founders understood the value of purchase data and have devoted nearly a decade to engineering a purchase intelligence platform. As former bankers,
they recognized that banks and credit unions, which we refer to as financial institutions, or FIs, enable and collect the different types of electronic payments
(e.g., debit, credit, bill pay) consumers and businesses use. This was especially crucial as electronic payments were becoming an increasing portion of all
consumer spending. With this data distributed across approximately 10,000 FIs in the U.S. alone, it would need to be aggregated and standardized to provide
effective foundational data for marketing technology and analytics. Given their deep insight into FIs’ rigorous security, privacy and regulatory concerns, our
founders were well positioned to partner with FIs and architected our platform with their requirements in mind. Today, our platform leverages machine
learning and a robust set of algorithms to ingest, process, and analyze trillions of dollars of raw purchase data from tens of millions of accounts.
As of December 31, 2016 and 2017, we were a partner to 1,659 and 2,035 FIs, respectively, including Bank of America, National Association, or Bank of
America; PNC Bank National Association, or PNC; Branch Banking and Trust Company, or BB&T; SunTrust Banks, Inc., or SunTrust; Lloyds TSB Bank
plc, or Lloyds; Santander UK plc., or Santander; and several of the largest bank processors and digital banking providers to reach customers of small and
mid-sized FIs. Additionally, in the first quarter of 2018, we launched a pilot implementation of Cardlytics Direct with Wells Fargo & Company, or Wells
Fargo, directed at Wells Fargo customers located in Miami, Florida; Charlotte, North Carolina and San Francisco, California. As the amount of revenue that
we can generate from marketers with respect to Cardlytics Direct is primarily a function of the number of active users on our FI partners’ digital banking
platforms, we believe that the number of monthly active users, or FI MAUs, contributed by any FI partner is indicative of our level of dependence on such FI
partner.
Our platform helps solve fundamental problems for marketers. Marketers increasingly have access to data on the purchase behavior of their customers in their
own stores and websites. However, they lack insight into their customers’ purchase behavior outside of their stores and websites, as well as the purchase
behavior of individuals who are not yet customers. The reality is, no matter how robust their own customer data, marketers only see a small portion of their
customers’ overall spend—both within and across categories. As a result, it is very difficult for businesses to focus their marketing investments on the most
valuable customers. Marketers are also challenged to measure the performance of their marketing. This issue is particularly acute with respect to measuring
the impact of marketing on in-store sales, where approximately 92% of consumer spending occurs, according to 2016 U.S. Census data. We believe purchase
intelligence is the next disruptive opportunity in marketing and can comprehensively address these challenges. Our purchase intelligence platform is designed
to enable marketers to identify, reach and influence likely buyers at scale, and precisely measure how marketing drives sales by “closing the loop”—both
online and in-store. We have strong relationships with leading marketers across a variety of industries, including national and regional restaurant and retail
chains as well as large providers of cable, satellite television and wireless services.
We have proven the power of purchase intelligence with our proprietary native advertising channel, Cardlytics Direct. We have created a powerful, highly
captive native advertising channel that reaches customers when they are thinking about their finances. By consolidating the largely untapped, high growth
digital banking channels of more than 2,000 FIs, Cardlytics Direct enables marketers to reach consumers across these FIs through their online and mobile
banking accounts, and increasingly through email and various real-time notifications. Using our purchase intelligence, our platform predicts where FI
customers are likely to shop next and then presents them with offers to save money in these categories at a time when they are thinking of their finances.
3
Table of Contents
We are extending the power of our platform beyond Cardlytics Direct. As we built scale, we recognized a significant opportunity to extend the impact of our
purchase intelligence platform, which we refer to as our Other Platform Solutions. For example, we use purchase intelligence to help marketers measure the
impact of marketing campaigns outside of the Cardlytics Direct channel on in-store and online sales. As we have in the past, we plan to continue to work in
close collaboration with our FI partners to develop new purchase-intelligence based analytic solutions.
We have experienced rapid growth in our revenue since inception. Our revenue, which excludes consumer incentives, was $53.8 million, $77.6 million,
$112.8 million and $130.4 million for 2014, 2015, 2016 and 2017, respectively, representing a compound annual growth rate of 34.3%. For 2014, 2015, 2016
and 2017, our FI MAUs were approximately 34.8 million, 39.0 million, 43.9 million and 54.9 million, respectively, and our average Cardlytics Direct revenue
per user was $1.41, $1.65, $2.23 and $2.23, respectively. For 2014, 2015, 2016 and 2017, our net loss was $38.9 million, $40.6 million, $75.7 million and
$19.6 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. In 2016, our net loss included a $25.9 million one-time
non-cash charge related to the termination of our U.K. agreement with Aimia EMEA Limited, and a $10.9 million non-cash charge related to the issuance and
change in fair value of convertible promissory notes. Our net loss in 2017 includes a $5.0 million non-cash gain related to the change in fair value of
convertible promissory notes.
Industry Background
Recent Disruptions in the Marketing Industry
The fundamental imperative for marketers is to determine how, when, and where to spend marketing dollars effectively and to measure the efficacy of, and
return on, their marketing investments. In the past 20 years, there have been a series of disruptive innovations impacting how marketers reach and influence
likely buyers. The rise of internet-enabled online advertising drastically accelerated the pace of innovation across the marketing landscape. As the internet
became mainstream, search-driven advertising brought the ability to more precisely connect marketing to consumer intent. The advent of social media
provided marketers with a greater opportunity for consumer engagement and a wealth of additional data about consumer preferences. Each of these
innovations has made digital marketing increasingly more effective and efficient than traditional media. However, like television and other traditional forms
of advertising, these new forms of digital advertising still fail to provide marketers with visibility into whether an advertisement ultimately resulted in an
in-store purchase. This information gap is particularly acute since approximately 92% of consumer spending continues to occur in-store. Marketers remain
unable to close the last mile and comprehensively understand how marketing impacts actual in-store and online consumer purchases.
Challenges to Efficient and Effective Marketing
The fundamental challenges faced by marketers include:
•
•
Imprecise Targeting Across Media Channels. Although marketing through digital channels is perceived to provide marketers with a greater
ability to target and measure efficacy, online targeting typically relies on online behavior, demographic, and other behavioral data to find an
audience, which are imprecise proxies for future purchasing behavior. Offline advertising relies on similar data to determine how to allocate
advertising spending. Regardless of channel, targeting based only on these types of information fails to capture important differences among
consumers who may appear to be similar on the surface, but actually have drastically different interests and purchasing patterns.
Inability to Measure Efficacy and Ensure ROAS. Many organizations lack the ability to measure return on marketing investments. Marketers
are under immense pressure to show that their investments are creating value for their organizations. However, due to the fact that substantially
all retail purchasing continues to occur in-store, it is difficult to calculate ROAS accurately because marketers cannot comprehensively connect
online or offline marketing campaigns to in-store purchases.
•
Narrow View of Existing and Potential Customers. Marketers today increasingly have access to data on the purchase behavior of their customers
in their stores and on their websites. However, they lack insight into these customers’ overall purchasing patterns outside of their stores and
websites and the purchasing behavior of other likely buyers who are not yet customers. As a result, marketers struggle to answer fundamental
questions such as: Who are my best customers? Are my best customers loyal to me or do they actually spend more with my competitors? Who
are the potential customers spending with my competitors, but not with me?
4
Table of Contents
Purchase Intelligence: The Next Disruptive Opportunity
We believe that purchase intelligence is the next disruptive opportunity in marketing. Aggregated consumer spending data analyzed with advanced analytics
has the potential to make all marketing more relevant and measurable if it can be effectively analyzed and leveraged to help predict and measure future
buying behavior, both in-store and online.
Massive and Fragmented Source of Purchase Data and Consumer Connectivity
We believe that FIs are a crucial source of purchase data and have a valuable, direct touchpoint with consumers. Over the past decade, the volume of
consumer purchase data held by FIs has significantly increased. These electronic transactions produce an immense amount of consumer purchase data, which
can provide valuable insights on where and when consumers choose to shop, how frequently they shop at a particular store, and how much they spend within
and across retail categories. Further, non-credit electronic spending is widely dispersed over thousands of FIs, with no party providing an aggregated view at
scale.
For purchase intelligence to be actionable, purchase data must be connected to the consumer through electronic touchpoints. The digital marketing ecosystem
consistently struggles with this challenge. Consumers interact across thousands of online touchpoints. It is often difficult to identify the consumer across these
multiple touchpoints. FIs have uniquely reliable consumer touchpoints. FIs’ touchpoints do not face the same issues as other digital channels. Consumers
interact with FIs via authenticated online or mobile applications that are protected with state-of-the-art security. FI touchpoints allow for purchase data to be
connected to consumers across the media landscape and thereby become actionable.
Market Forces in the Banking Industry
While FIs play an important role in securely maintaining purchase data, market forces have only recently aligned to create incentives for FIs to leverage this
data for the benefit of marketers. FIs operate in an increasingly regulated and competitive environment. Further, the rising popularity of alternative banking
solutions and the emergence of non-banking players in the areas of lending and electronic payments increasingly threaten to disintermediate traditional FIs
from their customers. These trends have keenly focused FIs on finding ways to engage customers and strengthen customer loyalty. Despite these incentives,
FIs typically lack the specialized technological expertise, scale and visibility outside of their own customer bases to analyze and effectively leverage purchase
data. As such, although purchase data from any single FI and access to that institution’s customer base may be very useful to marketers, aggregated purchase
data across a meaningful portion of the fragmented banking landscape from a variety of electronic payment channels holds significantly greater value.
Challenges to Effective Purchase Data Aggregation
The challenges to effective aggregation of purchase data include:
•
Lack of Scale. Purchase data resides with approximately 10,000 FIs in the U.S. alone. Although payment processors and payment networks have
access to data across multiple FIs, each lacks access to data from all different forms of electronic payments and the ability to electronically
connect this disparate payment data to consumers. To understand a consumer’s spending, marketers require an expansive view across the
payment landscape, including debit card, credit card, bill pay and ACH, that no single FI is able to provide.
•
•
•
Fragmented Touchpoints. As with purchase data, FI digital touchpoints are spread across thousands of disparate institutions. Further, FIs
generally lack the technology to connect purchase data to their customers’ online, mobile and television presences.
Privacy and Regulatory Concerns. FIs are highly regulated and are under strict obligations to safeguard their customers’ personal data. To be
viable, any data aggregation strategy must navigate the complex privacy and regulatory compliance concerns and obligations of FIs.
Need to Create Uniformity Across Complex and Varied Data Sets. Each FI captures and retains data differently and the underlying data is itself
dynamic. For example, payments made at a single retailer for the same transaction are often identified in different ways at different FIs and
retailers are continuously evolving the way in which they capture, process and remit purchase data to FIs. As a result, sophisticated algorithms
and analytics are required to make the complex web of purchase data meaningful and actionable for marketers.
To unlock the value of the FIs’ purchase data, we believe that there is a significant need for a trusted third party to serve as the nexus for purchase data
aggregation and analytics.
5
Table of Contents
Key Benefits of Our Platform
We make marketing more relevant and measurable through our purchase intelligence platform, while simultaneously driving customer engagement and
loyalty for FIs.
Key benefits to marketers:
•
Comprehensive View of Consumer Behavior. We leverage the power of our platform to provide Cardlytics Direct marketers with valuable
insights into the preferences of their actual or potential customers both within and outside the context of a marketing campaign. We build on the
insight marketers have today—how their customers are spending in their own stores and websites—with our insight into how their customers are
spending elsewhere. With a broad view of purchase behavior at scale, we can also help identify likely buyers who are not yet customers.
•
•
Precise Targeting in a Captive Channel. With access to consumers’ aggregate purchase data at particular FIs, not just their spending with a
single marketer, we enable marketers to identify, reach and influence likely buyers in the highly captive native bank advertising channel. By
analyzing billions of purchases across tens of millions of consumers, we believe that we are able to predict future consumer intent based on prior
purchase behavior. Cardlytics Direct enables marketers to deliver highly relevant offers to customers inside of trusted and private banking
channels. With our purchase intelligence, marketers can reach the right consumer, at the right time, in this channel with a relevant message.
Accurate Measurement of Marketing’s Impact on Sales. We measure the impact of marketing efforts by analyzing actual purchase data—both
online and in-store. This enables us to determine the actual return on advertising spend from marketing campaigns within and outside Cardlytics
Direct and helps marketers optimize ongoing and future campaigns. Unlike other measurement solutions on which the marketing industry has
historically relied, our measurement of return on advertising spend is not probabilistic or based on models, but based on actual purchases by
consumers.
•
Compelling Return on Advertising Spend. Because we typically price our solutions based on actual purchases from the applicable marketer,
rather than based on impressions served or clicks, we are able to ensure that marketers realize a return on their marketing spend with us.
Key benefits to FIs:
•
Cash Back Incentives to FI Customers. Cardlytics Direct allows customers of our FI partners to receive personalized offers and cash back
rewards which we refer to as Consumer Incentives. Our FIs’ customers have earned more than $251 million in aggregate cash back incentives to
date, and we believe that these savings drive increased customer engagement with our FI partners’ online and mobile banking applications and
increased loyalty in the form of reduced account attrition rates.
•
New Economics to FIs. Because we share a portion of the revenue that we generate from marketers with FIs, we also provide FIs with an
attractive incremental revenue opportunity. From inception through December 31, 2017, we have paid approximately $174 million in aggregate
FI Share, which is a negotiated and fixed percentage of our billings to marketers less any Consumer Incentives that we pay to the FIs’ customers
and certain third-party data costs.
•
Support for FI Marketing and Business Initiatives. We believe that we enable our FI partners to create competitively differentiated offerings
that reinforce their broader strategic goals, including marketing their own products—such as mortgages, car loans, or 529 plans—directly to
customers with the same precision targeting available to marketers.
Competitive Strengths
We make marketing more relevant and measurable through our purchase intelligence platform. We believe that the following strengths provide us with
competitive advantages:
•
Deeply Embedded with FIs. Our founders were bankers who understood the power of historical purchase data and the needs of marketers. Our
platform was architected with our FI partners in mind and is designed to ensure that no personally identifiable information, or PII, ever leaves the
FI. We have partnered with over 2,000 FIs and no FI partner with which we contract directly has unilaterally terminated its use of our platform.
We are generally the exclusive provider of native bank channel advertising to our FI partners as online and mobile banking portals are not
conducive to supporting marketing content from different vendors. Further, native bank channel advertising requires deep technological
integrations, which we believe increases the cost of switching vendors and therefore increases FI partner loyalty to us.
•
Our Proprietary Consumer Touchpoints. With all of our FI partners, we enable marketers to reach consumers in a captive, largely untapped, and
digitally engaging environment, when they are thinking about their finances. We have access to consumers both on the web and mobile, and are
increasingly reaching them through various other channels, including emails and real-time notifications.
6
Table of Contents
•
Massive Reach Informed by Purchase Intelligence. Our platform aggregated and analyzed approximately $1.5 trillion in U.S. purchase data in
2017 across stores, retail categories, and geographies, both online and in-store, representing over 20.0 billion transactions across more than
100.0 million accounts in the U.S. While we also have access to credit card consumer purchase data, a substantial majority of the purchase data
on our platform is in the form of debit, ACH and bill pay transactions. We provide marketers with the opportunity to leverage this aggregated and
unique data set to precisely reach millions of consumers.
•
Significant Scale with Marketers and Compelling ROAS. We work with companies across a variety of industries, including national and
regional restaurant and retail chains as well as large providers of cable, satellite television and wireless services. By serving these marketers at
scale, we have developed deep insight into consumer behavior, which has allowed us to optimize how we reach and influence likely buyers.
•
Powerful, Self-Reinforcing Network Effects. We see significant network effects within Cardlytics Direct. By adding new marketers and
increasing the potential incentives provided to our FIs’ customers, we are able to increase engagement within our FIs’ digital banking channels.
This, in turn, attracts more FIs to our platform, adding to our scale, and making our platform more valuable to marketers.
•
•
Ability to Improve Marketing. Consumers spend 92% of their purchase dollars in physical stores and digital marketers have long sought efficient
and effective ways to understand online-to-offline attribution. Likewise, although marketers may have access to data on the purchase behavior of
their customers in their stores and on their websites, they lack visibility about these customers’ overall purchasing patterns and the purchasing
behavior of other likely buyers. In addition to reaching consumers through our proprietary Cardlytics Direct channel, we use purchase
intelligence to help marketers measure the impact of marketing campaigns outside of the Cardlytics Direct channel on in-store and online sales.
Proprietary Technology Architecture and Advanced Analytics Capabilities. We have designed our purchase intelligence platform to protect
highly sensitive first-party data. Our proprietary, distributed architecture helps facilitate both the effective delivery of our solution and the
protection of our FI customers’ PII. No PII is shared by the FIs with Cardlytics. Key aspects of our technology are hosted at the FI partners’ data
center. Other aspects of our technology, including those responsible for facilitating the creation of advertising campaigns, evaluating results of
campaigns and controlling and providing software updates, are hosted at our data centers, behind our firewalls. These technological components
work together, leveraging proprietary algorithms, to process raw purchase data into normalized purchase history useful for marketing and
analytics. Our platform also supports integration of data from our FI partners and from third-party sources to enrich the intelligence that we are
able to provide. Further, we apply advanced analytics and use machine learning to continuously increase our intelligence capabilities and identify
actionable behavior patterns for our marketers. Our advanced analytics capabilities are what transforms our unique purchase dataset into valuable
purchase intelligence. We use sophisticated quantitative methods to quickly access our massive volumes of data and make sense of what has
happened—and, importantly, what is likely to happen. Our analytics makes our data actionable, enabling us to develop insights that marketers
and FIs rely on to make smarter business decisions and more meaningful customer connections.
•
World-Class Management Team with Unique Combination of Backgrounds and Experiences. Our team’s extensive experience across banking,
technology and marketing is invaluable in our ability to forge relationships with financial and marketing partners, and understand the technical
complexities inherent in building a platform that is transforming and disrupting the marketing industry.
Our Growth Strategies
The principal components of our strategy include the following:
•
Grow Our Cardlytics Direct Business with Marketers. While we already work with many large marketers, our purchase intelligence currently
captures only a small portion of their overall marketing spend. We are continually adding new marketers to our platform, and consistently
growing spend with previous cohorts of marketers. We intend to continue to expand our sales and marketing efforts to grow our Cardlytics Direct
business with existing marketers and attract new brands, retailers and service providers.
•
Drive Growth through Existing FI Partners. We intend to drive revenue growth by continuing to increase customer adoption and improve the
effectiveness of FIs’ digital channels. The revenue that we generate from the incentive programs of each of our FI partners varies. This variance
is typically a result of how long the program has been active, the user interface for the program and the FI’s efforts to promote the program. We
continually work with FIs to improve their customers’ user experience, increase customer awareness, and leverage additional customer outreach
channels like email.
7
Table of Contents
•
•
Expand our Network of FI Partners. We will continue to focus on growing our network of FI partners by integrating directly with large regional
and national banks and by reselling our solution through financial processors and payment networks. Given our substantial investments to date in
our purchase intelligence platform and infrastructure, we believe that we will be able to add FIs to our platform with modest incremental
investment. Each new FI partner increases the size of our data asset, increasing the value of our platform to both marketers and FIs that are
already part of our FI network.
Grow Our Platform Through Integrations with Partners. We believe that we can improve the value proposition for marketers through the use of
purchase intelligence. We intend to continue to partner with other media platforms, marketing technology providers and agencies that can utilize
our platform to serve a broad array of customers. To facilitate these partnerships, we intend to focus on continued technological integration of our
platform with those of complementary market participants.
•
Continue to Innovate and Evolve Our Platform. As we continue to grow our data asset and enhance our platform, we are developing new
solutions and increasingly sophisticated analytical capabilities. As we have in the past, we plan to continue to work in close collaboration with
our FI partners to develop new purchase intelligence based analytic solutions for marketing and other industries that satisfy the demanding
requirements of financial services.
Our Purchase Intelligence Platform
Data Asset
With purchase data from more than 2,000 financial institutions, we have a secure view into where and when consumers are spending their money. Our technology
aggregates and analyzes purchase data without any PII leaving the FI. In 2017, our platform analyzed over 20.0 billion online and in-store transactions across more
than 100.0 million accounts in the U.S., including one in five debit and credit card swipes in the U.S. We believe that access to this purchase data can only be obtained
on an aggregated basis by partnering directly with FIs. This data allows us to serve relevant advertisements to our FIs’ customers through our Cardlytics Direct native
bank advertising channel. We also leverage the power of purchase intelligence to provide marketers with valuable insights into the preferences of their actual or
potential customers outside the context of a marketing campaign. For example, we have securely connected our platform to numerous other data sources and analytics
platforms. Through these connections, we can help marketers measure the impact of their marketing investments outside of the Cardlytics Direct channel.
Importantly, the information that we collect does not enable us to identify any particular individual. Although we have access to large volumes of granular data from
our FI partners and others, without PII, we do not use this information to decipher individual identity. Further, to the extent that we receive proprietary data from an
individual marketer, we only use such information for the benefit of that marketer. We only provide aggregated, anonymized information to marketers.
Advanced Analytics Capabilities
The advanced analytics and machine learning we apply to our unique purchase dataset are what transforms it into valuable purchase intelligence. We use sophisticated
quantitative methods to quickly access our massive volumes of data and make sense of what has happened—and, importantly, what is likely to happen. Our analytics
makes our data actionable, enabling us to develop insights that marketers and FIs rely on to make smarter business decisions and more meaningful customer
connections.
We analyze the impact marketing campaigns have on in-store and online sales. Since we are able to measure sales impact, marketers can use our purchase intelligence
to optimize future campaigns and further inform their marketing across a variety of channels. Given our granular view into consumer spending across all categories,
we can also help marketers identify share shift among key competitors, and learn more about where else their customers spend their money.
For FIs, we use our analytics to optimize the offers we display to FI customers within our Cardlytics Direct channel. By assigning relevancy scores to each offer based
on what customers are most likely to buy, our platform then presents the most relevant offers earlier in customers’ online and mobile banking sessions. This increases
the likelihood that customers activate, redeem, and earn more cash back on the things they care about most. At the same time, marketers gain more opportunities to
get valuable content in front of the right audience.
In addition to using our analytics to drive our partners’ businesses, we use it to drive our own as well. We use advanced analytics to accurately predict the impact FI
changes will have on our network. As we on-board new FI partners, make Cardlytics Direct UI improvements, or reach FI customers through new channels (e.g.,
email, real-time notifications), we are able to accurately predict how these changes will affect our network performance, and we can plan accordingly.
8
Table of Contents
Distributed Architecture
A crucial aspect of our platform is our patented distributed architecture, which helps to facilitate both the effective delivery of our solutions and the protection of
customer PII. Our Offer Placement System, or OPS, and Offer Management System, or OMS, form the core of our Cardlytics Direct solution and are the foundation
for our other solutions.
The OPS is often hosted at the FI partner’s data center, behind the FI partner’s firewall, but we may also host the OPS on behalf of FI partners. The OPS tracks
impressions, engagement, activation and redemptions and is responsible for targeting and presenting offers, which are developed and designed with the OMS, to the
FI’s customers. Each of our FI partners has its own instance of the OPS, regardless of where hosted, which consists primarily of a web application and database that
interact with the FI’s web servers to deliver marketing into the FI’s online banking portal. The OPS interfaces with FI systems to receive anonymized purchase data,
assigns a unique consumer ID to each FI customer, which we call a Cardlytics ID, and aggregates this purchase data. The Cardlytics ID is then used to assign offers as
well as to anonymously link a consumer’s media presences, including online and mobile, to the consumer’s purchase data.
The OMS is hosted in our data centers behind our firewall and is responsible for facilitating the creation of marketing campaigns, evaluating the results of campaigns,
and controlling and providing regular software updates to the deployed OPS.
Our Technology Infrastructure
We rely on our highly sophisticated software and hardware infrastructure to deliver our solutions. We currently manage our infrastructure through outsourced data
centers. We receive and integrate into our data, on average, hundreds of millions of purchase transactions per week from our FI partners. Our system cleans and
transforms this data and matches it to a retail category, spend amount and type metrics, geography and merchant, as well as time horizon. Our systems are designed to
handle hundreds of varied formats in which we receive data and transform them into a common standard for use in our solutions.
We have implemented a number of security controls. Our security controls have been audited and certified by third parties using standards which include SOC
1, SOC 2 and OWASP. Sensitive data is subject to encryption, anonymization, or de-identification depending on the use case and risk profile. We enhance
network security through measures such as network segmentation, firewalls and network and host based intrusion detection at critical network aggregation
and ingress/egress points.
Our Solutions
Segment Information
We have two reportable segments: Cardlytics Direct and Other Platform Solutions. Our Cardlytics Direct segment represents our proprietary native bank
advertising channel. Our Other Platform Solutions segments represents solutions that enable marketers and marketing service providers to leverage the power
of purchase intelligence outside the banking channel. Information about segment revenue is set forth in Note 15 of our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.
Cardlytics Direct
Our first solution, Cardlytics Direct, is focused on unlocking the power of purchase intelligence in our own native advertising channel. We designed and
created Cardlytics Direct by embedding our proprietary technology into our FI partners’ online and mobile banking platforms. Through Cardlytics Direct,
marketers can deliver advertising content to FI customers in the form of an opportunity to earn rewards, which are funded with a portion of the fees we collect
from marketers. Additionally, Cardlytics Direct benefits FI customers by enhancing their experiences by showing them relevant advertisements tailored to
their specific needs based on their specific purchase history.
We analyze customers’ purchase history to help predict where they are most likely to shop next. This enables us to help marketers find high potential new
customers that are active in their category, but not currently shopping with them, or to grow their business with existing customers. Our marketing is targeted
and measured with each individual customer’s actual spending information. However, all targeting and reporting is aggregated across consumers in our FI
network. Unlike other measurement solutions on which the marketing industry has historically relied, our measurements are not probabilistic or based on
models, but are based on actual purchases.
The breadth of our FI partner network means that we are able to offer marketers the ability to optimize their marketing efforts to reach a large number of
consumers through a single point of contact. Our Cardlytics Direct solution also offers our FI partners a scalable solution for driving customer loyalty and
engagement with little effort on their part, as we handle everything from contracting with marketers, building, running and reporting performance of the
marking campaigns to allocating incentives to our FIs’ customers.
9
Table of Contents
We currently sell Cardlytics Direct in the U.S. and United Kingdom, or U.K.
We believe all types of marketing can be more effectively directed and measured with purchase intelligence. We designed our purchase intelligence platform
to leverage the massive, growing and actionable foundational data asset that we amassed with Cardlytics Direct. We seek to connect our purchase data with
other datasets to provide deeper visibility into the overall, online and in-store, purchasing patterns of their actual and potential customers. Our purchase
intelligence platform enables marketers and marketing service providers to leverage the power of purchase intelligence outside the bank channel.
Other Platform Solutions
We have expanded our platform to use purchase intelligence to provide solutions outside the bank channel. These Other Platform Solutions include the
measurement of campaigns and business insights. We currently have the right to use purchase intelligence from four FI partners, who collectively represented
approximately $750 billion in 2016 annual consumer purchase transaction data or 14% of total U.S. consumer purchase transaction data in 2016, according to
a 2017 study from The Nilson Report, outside the banking channel. We are continually working with our FI partners and marketers to expand the scope of our
solutions to meet market demands.
Our FI Partners
We partner with FIs to offer incentive programs through their digital banking channels. We define an FI partner as either a separate contracting entity from
which we generate revenue directly or from which we generate revenue through a third-party intermediary, such as a bank processor, digital banking provider
or payment network operator. As of December 31, 2016 and 2017, we were a partner to 1,659 and 2,035 FIs, respectively, including Bank of America, PNC,
BB&T, SunTrust, Lloyds, Santander, and several of the largest bank processors and digital banking providers, such as Digital Insight Corporation, a
subsidiary of NCR Corporation, or Digital Insight; Fidelity Information Services, LLC, or FIS, and Fiserv Solutions, Inc., or Fiserv, to reach customers of
small and mid-sized FIs. We are actively working with FIS and Fiserv to increase awareness of our solutions among small and mid-sized FIs in order to drive
increased adoption. Additionally, in the first quarter of 2018, we launched a pilot implementation of Cardlytics Direct with Wells Fargo directed at Wells
Fargo customers located in Miami, Florida; Charlotte, North Carolina and San Francisco, California.
During 2015, 2016 and 2017, our largest FI partner, Bank of America contributed approximately 50%, 47% and 51% of our total FI MAUs, respectively.
Lloyds, our largest FI partner in the U.K., contributed approximately 9%, 10% and 9% of our total FI MAUs in 2015, 2016 and 2017, respectively. As of
December 31, 2017, we had direct contractual relationships with 17 of our FI partners, while our other FI partners became part of our network through bank
processors and digital banking providers, such as Digital Insight. Digital Insight contributed approximately 15%, 13% and 11% of our total FI MAUs in 2015,
2016 and 2017, respectively. Further, while FI partners that were part of our network through our relationships with Digital Insight contributed approximately
11% of our total FI MAUs for the year ended December 31, 2017, these indirect FI partners represented substantially all of our total FI partners as of
December 31, 2017.
From inception to date, no FI partner with which we contract directly has unilaterally terminated its use of our solution. FIs that become part of our network
through bank processors and digital banking providers may terminate their relationships with these bank processors and digital banking providers and thereby
indirectly terminate their relationships with us. Any such terminations would not be captured in the calculation of our retention rate.
Our Agreements with Bank of America
Since November 2010, our relationship with Bank of America has been governed by a General Services Agreement, or GSA, pursuant to which we provide
Bank of America with access to Cardlytics Direct and certain other related services, and a related Software License, Customization and Maintenance
Agreement, which grants Bank of America the right to use the software underlying Cardlytics Direct. The GSA terminates on November 4, 2021 and may be
extended by Bank of America for additional one year periods.
The services we provide to Bank of America under the GSA include forming relationships with participating marketers; obtaining and publishing marketer
offers to customers after screening both the marketer and specific advertising content; and monitoring redemption rates with respect to Consumer Incentives
offered in Cardlytics Direct campaigns. Although we are primarily responsible for securing marketers to advertise on Cardlytics Direct, Bank of America may
likewise secure marketers and has the right to approve all marketer offers to be presented to Bank of America customers on Cardlytics Direct.
10
Table of Contents
Under the GSA, we share the revenue that we generate from the sale of advertising within the Bank of America Cardlytics Direct channel with Bank of
America, subject to certain exceptions. The amounts that we pay to Bank of America are reflected as FI Share. During 2015, 2016 and 2017, Bank of America
accounted for 63%, 64% and 63% of our aggregate FI Share, respectively. The specific FI Share percentage that we pay is based on whether we or Bank of
America have secured the relevant marketer account and other marketer- and transaction-specific factors, provided that we are entitled to retain a minimum
percentage of the monthly revenue subject to the GSA. As one of the first major FIs to join our network, the FI Share rate payable to Bank of America is
higher than the FI Share rate payable to FIs that joined our network more recently.
In connection with entering into certain supplements to the GSA and the related license agreement, in March 2011 we granted to an affiliate of Bank of
America a 10-year warrant to purchase up to (i) 78,101 shares of our common stock at an exercise prices of $2.52 per share and (ii) 312,402 shares of our
common stock at an exercise price of $6.52 per share.
Our Marketers
We enable marketers and their agencies to efficiently and effectively market to our FIs’ customers through Cardlytics Direct. We work with companies across
a variety of industries, including national and regional restaurant and retail chains as well as large providers of cable, satellite television and wireless services.
Our top five marketers represented 23% of revenue for each of the years 2015, 2016 and 2017. For the years 2015, 2016 and 2017, we did not have any
marketer that individually represented 10% or more of our revenue.
Sales and Marketing
Our sales teams are focused on expanding our FI network as well as our marketer and agency customers. Our marketing team is centralized and focuses on
increasing market awareness for Cardlytics through partnerships, public relations, industry events and publications. For 2015, 2016 and 2017, our total sales
and marketing expenses were $32.8 million, $31.3 million and $31.9 million, respectively, representing approximately 42%, 28% and 24% of revenue,
respectively.
Marketers
We have dedicated sales teams responsible for establishing relationships with marketers and their agencies. Our go-to-market efforts are organized by industry
vertical, which include restaurants, retail, cable and satellite television providers and wireless carriers. Each vertical team is led by an experienced general
manager and staffed with sales, sales support and service specialists who have deep domain knowledge and industry operating experience. We also have
account managers that manage our customer relationships within each vertical.
Financial Institution Partners
Our go-to-market efforts for expanding our FI network are focused on nurturing our existing banking relationships and cultivating new relationships. From
inception to date, no FI partner with which we contract directly has unilaterally terminated its use of our solution. Our FI partner sales team is focused on
driving FIs to enhance their user interface for our white label program, otherwise drive increased consumer engagement and encourage adoption of our
solution offerings.
Research and Development
Our culture is centered on innovation. We pioneered purchase intelligence and continue to focus on enhancing and broadening our platform’s capabilities. Our
development efforts extend beyond our core technology as we look to help our FI partners enhance overall user experience both on the web and in mobile
apps. As a result of our investment in research and development, we were able to expand our solutions offerings beyond Cardlytics Direct. For 2015, 2016
and 2017, our total research and development expenses were $11.6 million, $13.9 million and $12.2 million, respectively, representing approximately 15%,
12% and 9% of revenue, respectively.
Our Competition
The market for the utilization of purchase intelligence is nascent and we believe that there is no company that can provide purchase intelligence with the scale
and the level of granularity that is equivalent to ours. With respect to Cardlytics Direct, we believe that we are the only company that enables marketing
through FI channels at scale. As we expand our solutions, we expect to compete with a number of established companies, as well as numerous emerging
market entrants. In the future, we may face competition from online retailers, credit card companies, digital publishers and mobile pay providers with access
to a substantial amount of consumer purchase data. While we may successfully partner with a wide range of companies that are to some extent currently
competitive to us, these companies may become more competitive to us in the future. As we introduce new solutions, as our existing solutions evolve and as
other companies introduce new products and services, we are likely to face additional competition.
11
Table of Contents
We believe the principal competitive factors in our industry include the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
ability to leverage purchase data to inform marketing;
depth and breadth of relationships with financial institution partners, marketers and their agencies;
demonstrating the need for purchase intelligence to inform marketing spend;
depth and breadth of, and access to, purchase data;
effectiveness in increasing return on advertising spend for marketers;
effectiveness in increasing marketing campaign performance for marketers and their agencies;
ability to maintain confidentiality and security of consumer data;
transparency into and measurement of marketing performance;
multi-channel capabilities;
pricing;
brand awareness and reputation;
ability to continue to innovate; and
ability to attract, retain and develop leading-edge analytical and technical talent.
We believe that we compete favorably with respect to these factors and that we are well positioned as a leading provider and innovator of purchase intelligence.
Intellectual Property
Our future success and competitive position depend in part on our ability to protect our intellectual property and proprietary technologies. To safeguard these rights,
we rely on a combination of patent, trademark, copyright and trade secret laws and contractual protections in the U.S. and other jurisdictions.
As of December 31, 2017, we had three issued patents and 10 patent applications pending relating to our software. Our issued patents relate to a distributed system for
inserting offers into online banking and expire on October 24, 2028. We cannot assure you that any patents will issue from any patent applications, that patents that
issue from such applications will give us the protection that we seek or that any such patents will not be challenged, invalidated, or circumvented. Any patents that
may issue in the future from our pending or future patent applications may not provide sufficiently broad protection and may not be enforceable in actions against
alleged infringers.
We have registered the “Cardlytics” name and logo in the U.S. and certain other countries. We have registrations and/or pending applications for additional marks in
the U.S. and other countries; however, we cannot assure you that any future trademark registrations will be issued for pending or future applications or that any
registered trademarks will be enforceable or provide adequate protection of our proprietary rights.
We also license software from third parties for integration into our offerings, including open source software and other software available on commercially reasonable
terms. We cannot assure you that such third parties will maintain such software or continue to make it available.
We are the registered holder of a variety of domestic and international domain names that include cardlytics.com and similar variations on that name.
In order to protect our unpatented proprietary technologies and processes, we rely on trade secret laws and confidentiality agreements with our employees,
consultants, financial institution partners, marketers, vendors and others. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized
parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. In addition, others may independently discover our trade secrets, in which
case we would not be able to assert trade secret rights, or develop similar technologies and processes. Further, the contractual provisions that we enter into may not
prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of
unauthorized use or disclosure of our proprietary technology or intellectual property rights. If we become more successful, we believe that competitors will be more
likely to try to develop solutions and services that are similar to ours and that may infringe our proprietary rights. It may also be more likely that competitors or other
third parties will claim that our platform infringes their proprietary rights.
12
Table of Contents
Patent and other intellectual property disputes are common in our industry and we have been involved in such disputes from time to time in the ordinary
course of our business. Some companies, including some of our competitors, own large numbers of patents, copyrights and trademarks, which they may use
to assert claims against us. Third parties may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights
against us. They may also assert such claims against our FI partners, which we typically indemnify against such claims. As the numbers of products and
competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may
increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause
us to incur substantial costs defending against the claim and could distract our management from our business.
Privacy and Security
We have architected privacy and security into our systems and practices. A critical part of our strategy involves not collecting, maintaining or using sensitive
information, such as social security numbers, credit card numbers, financial account information or medical records. We currently do not receive any PII in
connection with the delivery of any of our solutions. We only receive data in aggregate and target marketing against anonymized data. This approach to
privacy is intended to protect consumers. Our privacy and security standards have also been designed and implemented to meet the requirements and
safeguard the reputations of our FI partners and marketers, many of which are large, multinational corporations. These customers frequently audit our
practices and engage in detailed assessments of our infrastructure.
Despite the fact that we do not receive any PII from FIs, privacy and security are among our highest priorities and we commit significant resources to
protecting the data that we receive. We have implemented, assess on an ongoing basis, and, when necessary, upgrade our physical, procedural and technical
controls. We also take steps to impose compliance with these controls on our service providers via contract.
A cornerstone of our practices is transparency in data use and consumer choice. Our privacy policy outlines the types of data we collect and how we use it.
Additionally, we maintain an “opt-out” alternative on our website for any consumer to utilize if they wish to be excluded from our targeting. Additionally, our
FI partners maintain ‘opt-out” alternatives for any consumer wishing to opt out of Cardlytics Direct.
Outside of the U.S., our privacy and data handling practices are subject to regulation by data protection authorities and other regulators in the countries in
which we do business, which may be more restrictive than the requirements that we are subject to in the U.S.
Financial Information About Geographic Areas
For information regarding our revenue by geographic area and long-lived assets by geographic area, please refer to Note 15 in the notes to our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K. For information regarding risks associated with our international operations,
please refer to the section entitled “Risk Factors” in Item 1A of Part I in this Annual Report on Form 10-K.
Seasonality
Our cash flows from operations vary from quarter to quarter, largely due to the seasonal nature of our marketers’ advertising spending. Many marketers tend
to devote a significant portion of their marketing budgets to the fourth quarter of the calendar year to coincide with consumer holiday spending and to reduce
spend in the first quarter of the calendar year.
Employees
As of December 31, 2017, we had 342 full-time employees, including 63 in delivery, 166 in sales and marketing, 64 in research and development and 49 in
general and administrative. None of our U.S. employees are covered by collective bargaining agreements. We believe our employee relations are good and we
have not experienced any work stoppages.
Corporate Information
Cardlytics, Inc. was initially incorporated under the laws of the State of Delaware in June 2008. Our principal executive offices are located at 675 Ponce de
Leon Avenue NE, Suite 6000, Atlanta, Georgia 30308. Our telephone number is (888) 798-5802. Our website address is www.cardlytics.com. We completed
our initial public offering in February 2018 and our common stock is listed on the Nasdaq Global Market under the symbol “CDLX.”
13
Table of Contents
“Cardlytics,” the Cardlytics logo and other trademarks or service marks of Cardlytics, Inc. appearing in this Annual Report on Form 10-K are the property of
Cardlytics, Inc. This Annual Report on Form 10-K contains additional trade names, trademarks and service marks of others, which are the property of their
respective owners. Solely for convenience, trademarks and trade names referred to in this Annual Report may appear without the ® or TM symbols.
Available Information
Our website address is www.cardlytics.com and our investor relations website is located at http://ir.cardlytics.com/. Our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended, or the Exchange Act, are available free of charge on our investor relations website as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. The public may read and
copy the materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that contains reports,
proxy and information statements and other information. The address of the SEC’s website is www.sec.gov.
The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we
file with the SEC, and any references to our websites are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
Our business is subject to numerous risks. You should consider carefully the risks and uncertainties described below, in addition to other information
contained in this Annual Report on Form 10-K as well as our other public filings with the Securities and Exchange Commission, or SEC. Any of the following
risks could have a material adverse effect on our business, financial condition, results of operations and prospects and cause the trading price of our common
stock to decline.
Our Business and Industry
We may not be able to sustain our revenue growth rate in the future.
Our revenue increased by 45% from $77.6 million in 2015 to $112.8 million in 2016 and 16% from $112.8 million in 2016 to $130.4 million in 2017. We
may not be able to sustain revenue growth consistent with our recent history or at all. You should not consider our revenue growth in recent periods as
indicative of our future performance. As we grow our business, we expect our revenue growth rates to slow in future periods due to a number of factors,
which may include slowing demand for our solutions, increasing competition, decreasing growth of our overall market, our inability to engage and retain a
sufficient number of marketers or banks and credit unions, which we refer to as financial institutions or FIs, or our failure, for any reason, to capitalize on
growth opportunities. If we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult for us to
achieve and maintain profitability.
We are dependent upon our Cardlytics Direct solution.
We have historically derived substantially all of our revenue from our Cardlytics Direct solution, our proprietary native bank advertising channel, and expect
to continue to derive substantially all of our future revenue from sales of Cardlytics Direct for the foreseeable future. Approximately 83%, 87% and 94% of
our revenue in 2015, 2016 and 2017, respectively, was derived from sales of Cardlytics Direct. Revenue from our Other Platform Solutions, where we use
purchase intelligence outside of the native bank advertising channel, was approximately $13.2 million, $15.0 million and $8.0 million in 2015, 2016 and
2017, respectively. Substantially all of our total Other Platform Solutions revenue in each of these periods was derived from sales of our Other Platform
Solutions delivered as a managed service until it was discontinued on July 31, 2017. Given that we are now focusing our efforts on more nascent Other
Platform Solutions, we do not expect to generate substantial revenue from Other Platform Solutions for the foreseeable future. Accordingly, our total revenue
may decline in future periods if we are unable to generate sufficient offsetting revenue from sales of Cardlytics Direct. Our operating results could also suffer
due to:
•
•
lack of continued participation by FI partners in our FI network or our failure to attract new FI partners;
failure by our FI partners to increase engagement with our solutions within their customer bases, improve their customers’ user experience,
increase customer awareness, leverage additional customer outreach channels like email or otherwise promote our incentive programs on their
websites and mobile applications, including by making the programs difficult to access or otherwise diminishing their prominence;
14
Table of Contents
•
•
•
•
•
•
our failure to offer compelling incentives to our FIs’ customers;
any decline in demand for our Cardlytics Direct solution by marketers or their agencies;
the introduction by competitors of products and technologies that serve as a replacement or substitute for, or represent an improvement over,
Cardlytics Direct;
FIs developing their own technology to support purchase intelligence marketing or other incentive programs;
technological innovations or new standards that our Cardlytics Direct solution does not address; and
sensitivity to current or future prices offered by us or competing solutions.
In addition, we are required to pay consumers incentives with respect to a majority of our Cardlytics Direct marketing campaigns regardless of whether the
amount of such Consumer Incentives exceeds the amount of billings that we are paid by the applicable marketer. Further, we are often required to pay such
Consumers Incentives before we receive payment from the applicable marketer. Accordingly, to the extent that the amount of Consumer Incentives that we
are required to pay materially exceeds the billings that we receive or we encounter any significant failure to ultimately collect payment, our business, financial
condition and operating results could be adversely affected.
If we are unable to grow our revenue from sales of our other solutions or if we fail to increase sales of our Cardlytics Direct solution, our business and
operating results would be harmed.
We are substantially dependent on Bank of America, National Association, or Bank of America, and a limited number of other FI partners.
Our business is substantially dependent on Bank of America and a limited number of other FI partners. We require participation from our FI partners in
Cardlytics Direct and access to their purchase data in order to offer our solutions to marketers and their agencies. We must have FI partners with a sufficient
number of customers and levels of customer engagement to ensure that we have robust purchase data and marketing space to support a broad array of
incentive programs for marketers. As the amount of revenue that we can generate from marketers with respect to Cardlytics Direct is primarily a function of
the number of active users on our FI partners’ digital banking platforms, we believe that the number of FI MAUs of any FI partner is indicative of our level of
dependence on such FI partner. During 2015, 2016 and 2017, our largest FI partner, Bank of America, contributed approximately 50%, 47% and 51% of our
total FI MAUs, respectively. Lloyds TSB Bank plc, or Lloyds, our largest FI partner in the U.K., contributed approximately 9%, 10% and 9% of our total FI
MAUs in 2015, 2016 and 2017, respectively. Digital Insight Corporation, a subsidiary of NCR Corporation, or Digital Insight, contributed approximately
15%, 13% and 11% of our total FI MAUs in 2015, 2016 and 2017, respectively. We anticipate that Bank of America, Lloyds and Digital Insight will
contribute a significant portion of our total FI MAUs for the foreseeable future.
In addition, we pay our FI partners an FI Share, which is a negotiated and fixed percentage of our billings to marketers less any Consumer Incentives that we
pay to the FIs’ customers and certain third-party data costs. During 2015, 2016 and 2017, Bank of America accounted for 63%, 64% and 63% of the total FI
Share we paid to all FIs, respectively. Lloyds accounted for 11%, 10% and 12% of the total FI Share we paid to all FIs in 2015, 2016 and 2017, respectively,
and Digital Insight accounted for approximately 10%, 9% and 7% of the total FI Share we paid to all FIs in 2015, 2016 and 2017, respectively. We anticipate
that Bank of America, Lloyds and Digital Insight will continue to receive a significant portion of our FI Share for the foreseeable future and the loss of Bank
of America, Lloyds, Digital Insight or any other significant FI partner would significantly harm our business, results of operations and financial conditions.
Our agreements with a substantial majority of our FI partners, including Bank of America, Lloyds and Digital Insight have three to five year terms but are
terminable by the FI partner on 90 days or less prior notice. If an FI partner terminates its agreement with us, we would lose that FI as a source of purchase
data and online banking customers. In addition, even if our FI partners continued to work with us relating to Cardlytics Direct, our FI partners generally have
the ability to cease providing us purchase data or limit the way in which we may potentially use their data outside of the Cardlytics Direct channel at any time
since our contracts with our partners do not include any binding commitments to continue to provide purchase data to us for use outside their respective native
bank advertising channel. Our FI partners may elect to withhold from us or limit the use of their purchase data for many reasons, including:
•
•
•
a change in the business strategy;
if there is a competitive reason to do so;
if new technical requirements arise;
15
Table of Contents
•
•
•
consumer concern over use of purchase data;
if they choose to develop and use in-house solutions or use a competitive solution in lieu of our solutions; and
if legislation is passed restricting the dissemination, or our use, of the data that is currently provided to us or if judicial interpretations result in
similar limitations.
To the extent that we breach or are alleged to have breached the terms of our agreement with any FI partner, or a disagreement arises with an FI partner
regarding the interpretation of our contractual arrangements, which has occurred in the past with respect to Bank of America (although Bank of America
granted us a waiver) and may occur again in the future, such FI partner may be more likely to cease providing us data or to terminate its agreement with us.
The loss of Bank of America, Lloyds, Digital Insight or any other significant FI partner would significantly harm our business, results of operations and
financial conditions.
We do not have direct contractual relationships with a substantial majority of our FI partners.
As of December 31, 2017, we had a network of 2,035 FI partners, but only had direct contractual relationships with 17 of these FI partners. Our other FI
partners became part of our network through bank processors and digital banking providers, such as Digital Insight and FIS. While FI partners that were part
of our network through our relationships with Digital Insight and FIS contributed approximately 12% of our total number of FI MAUs for the year ended
December 31, 2017, these indirect FI partners represented substantially all of our total FI partners as of December 31, 2017. These indirect FI partners may
terminate their relationships with these bank processors or digital banking providers, thereby indirectly terminating their relationships with us, independent of
the actual or perceived value of our solutions to them.
Wells Fargo is testing a pilot of Cardlytics Direct in certain cities and may not elect to fully implement Cardlytics Direct on a national basis or at all.
In the first quarter of 2018, we launched a pilot of Cardlytics Direct with Wells Fargo & Company, or Wells Fargo, directed at Wells Fargo customers located
only in Miami, Florida, Charlotte, North Carolina and San Francisco, California. The pilot is a test of an implementation that is limited to emailing offers to
Wells Fargo customers in these cities and making those offers available in the Wells Fargo Wallet application. Since this is only a test, Wells Fargo may not
elect to implement Cardlytics Direct throughout the entire U.S. If Wells Fargo does not elect to launch Cardlytics Direct on a national basis, our business,
financial condition and operating results could be harmed. Further, if Wells Fargo decides on a full roll-out of Cardlytics Direct, the timing cannot be
predicted.
We have a significant amount of debt, which may affect our ability to operate our business and secure additional financing in the future.
As of December 31, 2017, our total indebtedness was approximately $57.0 million. In July 2016, we entered into a credit agreement, or the Term Loan, with
National Electrical Benefit Fund as lender and Columbia Partners, L.L.C as investment manager. In September 2016, we entered into a loan and security
agreement, or the Line of Credit, with Ally Bank and Pacific Western Bank. As of December 31, 2017 there was approximately $32.9 million and
$25.1 million outstanding under the Term Loan and the Line of Credit, respectively.
Our Term Loan and our Line of Credit, or collectively, the Credit Facilities, are secured by substantially all of our assets. Our Credit Facilities require us, and
any debt instruments we may enter into in the future may require us, to comply with various covenants that limit our ability to, among other things:
•
•
•
•
•
•
•
dispose of assets;
complete mergers or acquisitions;
incur or guarantee indebtedness;
sell or encumber certain assets;
pay dividends or make other distributions to holders of our capital stock, including by way of certain stock buybacks;
make specified investments;
engage in different lines of business;
16
Table of Contents
•
•
change certain key management personnel; and
engage in certain transactions with our affiliates.
We are also required under the Credit Facilities to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those
financial ratios and tests can be affected by events beyond our control and we may not meet those ratios and tests. These covenants may make it difficult to
operate our business. A failure by us to comply with the covenants or financial ratios contained in our Credit Facilities could result in an event of default,
which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default,
including the occurrence of a material adverse change, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other
remedies as set forth in our Credit Facilities. If the indebtedness under our Credit Facilities were to be accelerated, our future financial condition could be
materially adversely affected.
We may incur additional indebtedness in the future. The instruments governing such indebtedness could contain provisions that are as, or more, restrictive
than our existing debt instruments. If we are unable to repay, refinance or restructure our indebtedness when payment is due, the lenders could proceed against
any collateral granted to them to secure such indebtedness or force us into bankruptcy or liquidation.
If we fail to generate sufficient revenue to offset our contractual commitments to FIs, our business, results of operations and financial conditions could
be harmed.
We have a minimum FI Share commitment with a certain FI partner totaling $10.0 million over a 12-month period following completion of certain
milestones. In 2017, we paid certain of our FI partners an aggregate of approximately $2.6 million related to 2016 FI Share commitments in excess of the
amount of FI Share otherwise payable to such FI partners in the absence of such commitments, and it is possible that we may be required to fund similar
shortfalls in future periods. In certain cases, we are also responsible for funding certain development costs for user interface enhancements and
implementation costs on behalf of FIs. We paid $11.2 million in 2017 relating to such development and implementation cost commitments and have
additional commitments of $9.3 million in 2018. These agreements allow for a total of $5.4 million and $4.6 million to be reimbursed to us through future
reductions to FI Share over the course of 2018 and 2019, respectively. To the extent that we are unable to generate revenue from marketers sufficient to offset
these FI Share commitments and other obligations, our business, results of operations and financial conditions could be harmed.
If we fail to attract new FI partners or maintain our relationships with bank processors and digital banking providers, we may not be able to sufficiently
grow our revenue, which could significantly harm our business, results of operations and financial condition.
Our ability to grow our revenue depends on our ability to attract new FI partners. A significant percentage of consumer credit and debit card spending is
concentrated with the 15 largest FIs in the U.S., four of which are currently part of our FI network, while the balance of card spending is spread across
thousands of smaller FIs. Accordingly, our ability to efficiently grow our revenue will specifically depend on our ability to establish relationships with the
large FIs that are not currently part of our network and to maintain our relationships with the large FIs that are currently part of our network. In addition, we
must continue to maintain our relationships with our existing bank processor and digital banking provider partners and attract new such partners because these
partners aggregate smaller FIs into our network. We have in the past and may in the future be unsuccessful in attempts to establish and maintain relationships
with large FIs, bank processors and digital banking providers. If we are unable to attract new FI partners, maintain our relationships with our existing bank
processor and digital banking provider partners or attract new bank processor and digital provider partners, our business, results of operations and financial
condition would be significantly harmed and we may fail to capture a material portion of the native bank advertising market opportunity.
Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results
and cause the trading price of our stock to decline.
Our operating results have historically fluctuated and our future operating results may vary significantly from quarter to quarter due to a variety of factors,
many of which are beyond our control. Period-to-period comparisons of our operating results should not be relied upon as an indication of our future
performance. Given our relatively short operating history and the rapidly evolving purchase intelligence industry, our historical operating results may not be
useful in predicting our future operating results.
17
Table of Contents
Factors that may impact our quarterly operating results include the factors set forth in this “Risk Factors” section, as well as the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to attract and retain marketers, FI partners, bank processors and digital banking providers;
the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business, particularly with
respect to our efforts to attract new FI partners to our network;
the revenue mix between Cardlytics Direct and Other Platform Solutions, as well as between revenue generated from our operations in the U.S.
and U.K.;
changes in the economic prospects of marketers, the industries or verticals that we primarily serve, or the economy generally, which could alter
marketers’ spending priorities or budgets;
the termination or alteration of relationships with our FI partners in a manner that impacts ongoing or future marketing campaigns;
the amount and timing of expenses required to grow our business, including the timing of our payments of FI Share and FI Share commitments as
compared to the timing of our receipt of payments from our marketers;
changes in demand for our solutions or similar solutions;
seasonal trends in the marketing industry, including concentration of marketer spend in the fourth quarter of the calendar year and declines in
marketer spend in the first quarter of the calendar year;
competitive market position, including changes in the pricing policies of our competitors;
exposure related to our international operations and foreign currency exchange rates;
expenses associated with items such as litigation, regulatory changes, cyber-attacks or security breaches;
the introduction of new technologies, products or solution offerings by competitors; and
costs related to acquisitions of other businesses or technologies.
Each factor above or discussed elsewhere in this Annual Report on Form 10-K or the cumulative effect of some of these factors may result in fluctuations in
our operating results. This variability and unpredictability could result in our failure to meet expectations with respect to operating results, or those of
securities analysts or investors, for a particular period. If we fail to meet or exceed expectations for our operating results for these or any other reasons, the
market price of our stock could fall and we could face costly lawsuits, including securities class action suits.
We have a short operating history, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
We have a relatively short operating history, which limits our ability to forecast our future operating results and subjects us to a number of uncertainties,
including with respect to our ability to plan for and model future growth. We have encountered and will continue to encounter risks and uncertainties
frequently experienced by growing companies in developing industries. If our assumptions regarding these uncertainties, which we use to manage our
business, are incorrect or change in response to changes in our markets, or if we do not address these risks successfully, our operating and financial results
could differ materially from our expectations, our business could suffer and our stock price could decline. Any success that we may experience in the future
will depend in large part on our ability to, among other things:
•
•
•
•
•
•
•
•
maintain and expand our network of FI partners, bank processors and digital banking providers;
build and maintain long-term relationships with marketers and their agencies;
develop and offer competitive solutions that meet the evolving needs of marketers;
expand our relationships with FI partners to enable us to use their purchase data for new solutions;
improve the performance and capabilities of our solutions;
successfully expand our business;
successfully compete with other companies that are currently in, or may in the future enter, the markets for our solutions;
increase market awareness of our solutions and enhance our brand;
18
Table of Contents
•
•
•
continue to develop, and increase market adoption of, our Other Platform Solutions;
manage increased operating expenses as we continue to invest in our infrastructure to scale our business and operate as a public company; and
attract, hire, train, integrate and retain qualified and motivated employees.
Any failure of our FI partners to effectively deliver and promote the online incentive programs that comprise our Cardlytics Direct solution could
materially and adversely affect our business.
We have spent the last several years and significant resources building out technology integrations with our FI partners to facilitate the delivery of incentive
programs to our FIs’ customers and measuring those customers subsequent in-store or online spending. We are also reliant on our network of FI partners to
promote their online incentive programs, increase customer awareness and leverage additional customer outreach channels like email, all of which can
increase customer engagement, as well as expand our network of FI partners. We believe that key factors in the success and effectiveness of an incentive
program are the following: the level of accessibility and prominence of the program on the FI partners’ website and mobile applications, as well as the user
interface through which a customer is presented with marketing content. In certain cases, we have little control over the prominence of the incentive program
and design of the user interface that our FI partners choose to use. To the extent that our FI partners deemphasize incentive programs, make incentive
programs difficult to locate on their website and/or mobile applications and/or fail to provide a user interface that is appealing to FI customers, FI customers
may be less likely to purchase the products or solutions that are featured in incentive programs, which could negatively impact the amount of fees that we are
able to charge our marketer customers in connection with marketing campaigns, and, therefore, our revenue. In addition, a failure by FIs to properly deliver or
sufficiently promote marketing campaigns would reduce the efficacy of our solutions and impair our ability to attract and retain marketers and their agencies.
As a result, the revenue we generate from our Cardlytics Direct solution may be adversely affected, which would materially and adversely affect our business,
financial condition and results of operations.
We derive a material portion of our revenue from a limited number of marketers, and the loss of one or more of these marketers could adversely impact
our business, results of operations and financial conditions.
Our marketer base is concentrated with our top five marketers representing 23% of revenue for each of the years 2015, 2016 and 2017. We do not have long-
term commitments from most of these marketers. If we were to lose one or more of our significant marketers, our revenue may significantly decline. In
addition, revenue from significant marketers may vary from period-to-period depending on the timing or volume of marketing spend. The loss of one or more
of our significant marketers could adversely affect our business, results of operations and financial conditions.
Further, our top five marketers represented 27%, 21% and 24% of accounts receivable as of December 31, 2015, 2016 and 2017, respectively. Accordingly,
our credit risk is concentrated among a limited number of marketers and the failure of any significant marketer to satisfy its obligations to us, on a timely
basis or at all, could adversely affect our business, results of operations and financial conditions.
Our future success may depend, in part, on our ability to expand demand for our Other Platform Solutions, which are dependent upon our FI partners
allowing us to utilize their purchase data for such solutions.
We recently introduced our Other Platform Solutions that leverage our purchase intelligence platform. Revenue from our Other Platform Solutions was
approximately $13.2 million, $15.0 million and $8.0 million in 2015, 2016 and 2017, respectively. Substantially all of our total Other Platform Solutions
revenue in each of these periods was derived from sales of our Other Platform Solutions delivered as a managed service until our managed services program
was discontinued on July 31, 2017. Given that we are now focusing our efforts on more nascent Other Platform Solutions, we do not expect to generate
substantial revenue from Other Platform Solutions for the foreseeable future. In addition, it is uncertain whether our Other Platform Solutions will gain
market acceptance in the near term or at all and, accordingly, whether we will ultimately realize any return on our investment. Any factor adversely affecting
sales of our Other Platform Solutions, including market acceptance, competition, performance and reliability, reputation and economic and market conditions,
could harm our business, results of operations and financial conditions.
Further, each of our Other Platform Solutions is dependent upon our FI partners allowing us to utilize their purchase data for these solutions. We currently
have the right to sell analytics using purchase data from only four of our FI partners outside the banking channel, which four FIs do not include Bank of
America. In addition, we have the right to use aggregated Bank of America purchase data combined with aggregated data from other FIs to create summary
analytics. If we lose access to any such data for any such uses from these FI partners or do not gain similar access to purchase data from additional FI
partners, our ability to sell our Other Platform Solutions would be adversely affected.
19
Table of Contents
We have invested substantial resources in the development and marketing of these solutions. Further, our experience in providing analytics solutions is
limited, and if we are unable to effectively gather, process, analyze and disseminate relevant information, sales of our Other Platform Solutions may suffer.
Any failure to grow sales of our Other Platform Solutions could harm our business, financial condition and operating results.
Our business could be adversely affected if marketers or their agencies are not satisfied with our solutions or our systems and infrastructure fail to meet
their needs.
We derive nearly all of our revenue from marketers and their agencies. Accordingly, our business depends on our ability to satisfy marketers and their
agencies with respect to their marketing needs. With respect to Cardlytics Direct, we rely on our Offer Management System, or OMS, to facilitate the creation
of marketing campaigns and evaluate the results of campaigns, and our Offer Placement System, or OPS, to track impressions, engagement, activation and
redemptions and to target consumers and present offers. Any failure of, or delays in the performance of, our systems, including without limitation our OMS or
OPS, could cause service interruptions or impaired system performance. Such failures in our systems could also cause us to over-run on campaigns, thus
committing us to a higher amount of Consumer Incentives than our marketers approved, which would negatively affect the profitability of the affected
campaigns. If sustained or repeated, these performance issues could reduce the attractiveness of our solutions to new and existing marketers and cause
existing marketers to reduce or cease using our solutions, which could adversely affect our business, financial condition or operating results. In addition,
negative publicity resulting from issues related to our marketer relationships, regardless of accuracy, may damage our business by adversely affecting our
ability to attract new marketers or marketing agencies and maintain and expand our relationships with existing marketers.
If the use of our solutions increases, or if marketers or FI partners demand more advanced features from our solutions, we will need to devote additional
resources to improving our solutions, and we also may need to expand our technical infrastructure at a more rapid pace than we have in the past. This would
involve purchasing or leasing data center capacity and equipment, upgrading our technology and infrastructure and introducing new or enhanced solutions. It
may take a significant amount of time to plan, develop and test changes to our infrastructure, and we may not be able to accurately forecast demand or predict
the results we will realize from such improvements. There are inherent risks associated with changing, upgrading, improving and expanding our technical
infrastructure. Any failure of our solutions to operate effectively with future infrastructure and technologies could reduce the demand for our solutions,
resulting in marketer or FI partner dissatisfaction and harm to our business. Also, any expansion of our infrastructure would likely require that we
appropriately scale our internal business systems and services organization, including without limitation implementation and support services, to serve our
growing marketer base. If we are unable to respond to these changes or fully and effectively implement them in a cost-effective and timely manner, our
solutions may become ineffective, we may lose marketers and/or FI partners, and our business, financial condition and operating results may be negatively
impacted.
We generally do not have long-term commitments from marketers, and if we are unable to retain and increase sales of our solutions to marketers and
their agencies or attract new marketers and their agencies, our business, financial condition and operating results would be adversely affected.
Most marketers do business with us by placing insertion orders for particular marketing campaigns, either directly or through marketing agencies that act on
their behalf. We generally do not have any commitment from a marketer beyond the campaign governed by a particular insertion order, and we frequently
must compete to win further business from a marketer. Our insertion orders may also be cancelled by marketers or their marketing agencies prior to the
completion of the campaign; provided that marketers or their agencies are required to pay us for services performed prior to cancellation. As a result, our
success is dependent upon our ability to outperform our competitors and win repeat business from existing marketers, while continually expanding the
number of marketers for which we provide services. To maintain and increase our revenue, we must encourage existing marketers and their agencies to
increase their use of our solutions and add new marketers. Many marketers and marketing agencies, however, have only just begun using our solutions for a
limited number of marketing campaigns, and our future revenue growth will depend heavily on these marketers and marketing agencies expanding their use
of our solutions across campaigns and otherwise increasing their spending with us. Even if we are successful in convincing marketers and their agencies to
use our solutions, it may take several months or years for them to meaningfully increase the amount that they spend with us. Further, larger marketers with
multiple brands typically have individual marketing budgets and marketing decision makers for each of their brands, and we may not be able to leverage our
success in securing a portion of the marketing budget of one or more of a marketer’s brands into additional business with other brands. Moreover, marketers
may place internal limits on the allocation of their marketing budgets to digital marketing, to particular campaigns, to a particular provider or for other
reasons. In addition, we are reliant on our FI network to have sufficient marketing inventory within Cardlytics Direct to place the full volume of
advertisements contracted for by our marketers and their agencies. Any failure to meet these demands may hamper the growth of our business and the
attractiveness of our solutions.
20
Table of Contents
Our ability to retain and increase sales of our solutions and attract new marketers and their agencies may be adversely affected by competitive offerings or
marketing methods that are lower priced or perceived as more effective than our solutions. Larger marketers may themselves have a substantial amount of
purchase data and they may also seek to augment their own purchase data with additional purchase, impression and/or demographic data acquired from third-
party data providers, which may allow them to develop, individually or with partners, internal targeting and measurement capabilities.
Because we do not have long-term agreements with our marketers or their agencies, we may not be able to accurately predict future revenue streams, and we
cannot guarantee that our current marketers will continue to use our solutions, or that we will be able to replace departing marketers with new marketers that
provide us with comparable revenue. If we are unable to retain and increase sales of our solutions to existing marketers and their agencies or attract new
marketers and their agencies for any of the reasons above or for other reasons, our business, financial condition and operating results would be adversely
affected.
We have a history of losses and may not achieve profitability in the future.
We have incurred net losses since inception and expect to incur net losses in the future. We incurred net losses of $40.6 million, $75.7 million and
$19.6 million in 2015, 2016 and 2017, respectively. As of December 31, 2017, we had an accumulated deficit of $268.4 million. We have never achieved
profitability on an annual or quarterly basis and we do not know if we will be able to achieve or sustain profitability. Although our revenue has increased
substantially in recent periods, we also do not expect to maintain this rate of revenue growth. We plan to continue to invest in our research and development
and sales and marketing efforts, and we anticipate that our operating expenses will continue to increase as we scale our business and expand our operations.
We also expect our general and administrative expense to increase as a result of our growth and our preparation to become, and operate as, a public company.
Our ability to achieve and sustain profitability is based on numerous factors, many of which are beyond our control. We may never be able to generate
sufficient revenue to achieve or sustain profitability.
Bringing new FI partners into our network can require considerable time and expense and can be long and unpredictable.
Our FI partners and FI partner prospects engage in highly regulated businesses, are often slow to adopt technological innovation and have rigorous standards
with respect to providing third parties, like us, with access to their data. Our operating results depend in part on expanding our FI partner network to maintain
and enhance the scale of our solutions. The length of time that it takes to add an FI partner to our network, from initial evaluation to integration into our
network, varies substantially from FI to FI and may take several years. Our sales and integration cycle with respect to our FI partners is long and
unpredictable, requires considerable time and expense and may not ultimately be successful. It is difficult to predict exactly when, or even if, a new FI partner
will join our network and we may not generate revenue from a new FI partner in the same period as we incurred the costs associated with acquiring such FI
partner, or at all. Once an FI partner has agreed to work with us, it may take a lengthy period of time for the implementation of our solutions to be prioritized
and integrated into the FI partner’s infrastructure. Because a substantial portion of our expenses are relatively fixed in the short term, our operating results
will suffer if revenue falls below our expectations in a particular quarter, which could cause the price of our stock to decline. Ultimately, if additions to our FI
network are not realized in the time period expected or not realized at all, or if an FI partner terminates its agreement with us, our business, financial condition
and operating results could be adversely affected.
We operate in an emerging industry and future demand and market acceptance for our solutions is uncertain.
We believe that our future success will depend in large part on the growth, if any, in the market for purchase intelligence. Utilization of consumer purchase
data to inform marketing is an emerging industry and future demand and market acceptance for this type of marketing is uncertain. If the market for purchase
intelligence does not continue to develop or develops more slowly than we expect, our business, financial condition and operating results could be harmed.
The market in which we participate is competitive and we may not be able to compete successfully with our current or future competitors.
The market for purchase intelligence is nascent and we believe that there is no one company with which we compete directly across our range of solutions.
With respect to Cardlytics Direct, we believe that we are the only company that enables marketing through FI channels at scale. With respect to our Other
Platform Solutions, we compete with a number of established companies, as well as numerous emerging market entrants. In the future, we may face
competition from online retailers, credit card companies, established enterprise software companies, advertising and marketing agencies, digital publishers
and mobile pay providers with access to a substantial amount of consumer purchase data. While we may successfully partner with a wide range of companies
that are to some extent currently competitive to us, these companies may become more competitive to us in the future. As we introduce new solutions, as our
existing solutions evolve and as other companies introduce new products and solutions, we are likely to face additional competition.
21
Table of Contents
Some of our actual and potential competitors may have advantages over us, such as longer operating histories, significantly greater financial, technical,
marketing or other resources, stronger brand and recognition, larger intellectual property portfolios and broader global distribution and presence. In addition,
our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may focus on purchase intelligence
marketing and could directly compete with us. Smaller companies could also launch new products and services that we do not offer and that could gain
market acceptance quickly.
Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer
requirements. Larger competitors are also often in a better position to withstand any significant reduction in capital spending, and will therefore not be as
susceptible to economic downturns. In addition, current or potential competitors may be acquired by third parties with greater available resources. As a result
of such relationships and acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs,
devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other
opportunities more readily or develop and expand their product and service offerings more quickly than we do. For all of these reasons, we may not be able to
compete successfully against our current or future competitors.
If we fail to identify and respond effectively to rapidly changing technology and industry needs, our solutions may become less competitive or obsolete.
Our future success depends on our ability to adapt and innovate. To attract, retain and increase new marketers and FI partners, we will need to expand and
enhance our solutions to meet changing needs, add functionality and address technological advancements. If we are unable to adapt our solutions to evolving
trends in the marketing industry, if we are unable to properly identify and prioritize appropriate solution development projects or if we fail to develop and
effectively market new solutions, such as our nascent Other Platform Solutions, or enhance existing solutions to address the needs of existing and new
marketers and FI partners, we may not be able to achieve or maintain adequate market acceptance and penetration of our solutions, and our solutions may
become less competitive or obsolete.
In addition, new, more effective or less costly technologies may emerge that use data sources that we do not have access to, that use entirely different
analytical methodologies than we do or that use other indicators of purchases by consumers. If existing and new marketers and their agencies perceive greater
value in alternative technologies or data sources, our ability to compete for marketers and their agencies could be materially and adversely affected.
Our future success will depend, in part, on our ability to expand into new industry verticals.
We have historically generated a substantial majority of our revenue from marketers in the restaurant, brick and mortar retail, telecommunications and cable
industries, and have recently entered new verticals such as hospitality and travel, and believe that our future success will depend, in part, on our ability to
expand adoption of our solutions in new industry verticals. As we market to a wider group of potential marketers and their agencies, we will need to adapt our
marketing strategies to meet the concerns and expectations of customers in these new industry verticals. Our success in expanding sales of our solutions to
marketers in new industry verticals will depend on a variety of factors, including our ability to:
•
•
•
tailor our solutions so that they that are attractive to businesses in such industries;
hire personnel with relevant industry-vertical experience to lead sales and services teams; and
develop sufficient expertise in such industries so that we can provide effective and meaningful marketing programs and analytics.
If we are unable to successfully market our solutions to appeal to marketers and their agencies in new industries, we may not be able to achieve our growth or
business objectives.
A breach of the security of our systems could result in a third party’s entry into our FI partners’ systems, which would be detrimental to our business,
financial condition and operating results.
We leverage our FI partners’ purchase data and infrastructures to deliver our solutions. We do not currently receive any personally identifiable information, or
PII, from our FI partners, although we may obtain PII in the future as our business evolves. However, because of the interconnected nature of our
infrastructure with that of our FI partners, there is a risk that third parties may attempt to gain access to our FI partners’ systems through our systems for the
purpose of stealing data or disrupting our or their respective operations. In turn, we may be a more visible target for cyber-attacks and/or physical breaches of
our databases or data centers, and we may in the future suffer from such attacks or breaches.
22
Table of Contents
Current or future criminal capabilities, discovery of existing or new vulnerabilities in our systems and attempts to exploit those vulnerabilities or other
developments may compromise or breach the technology protecting our systems. In the event that our protection efforts are unsuccessful and our systems are
compromised such that a third party gains entry to our or any of our FI partners’ systems, we could suffer substantial harm. A security breach could result in
operation disruptions that impair our ability to meet our marketers’ requirements, which could result in decreased revenue. Also, our reputation could suffer
irreparable harm, causing our current and prospective marketers and FI partners to decline to use our solutions in the future. Further, we could be forced to
expend significant financial and operational resources in response to a security breach, including repairing system damage, increasing cyber security
protection costs by deploying additional personnel and protection technologies and litigating and resolving legal claims, all of which could divert resources
and the attention of our management and key personnel away from our business operations. In any event, a breach of the security of our systems or data could
materially harm our business, financial condition and operating results.
A number of factors could impair our ability to collect the significant amounts of data that we use to deliver our solutions.
Our ability to collect and use data may be restricted or prevented by a number of other factors, including:
•
•
•
•
•
•
•
•
the failure of our network or software systems, or the network or software systems of our FI partners;
decisions by our FI partners to restrict our ability to collect data from them (which decision they may make at their discretion) or to refuse to
implement the mechanisms that we request to ensure compliance with our legal obligations or technical requirements;
decisions by our FI partners to limit our ability to use their purchase data outside of the applicable banking channel;
decisions by our FIs’ customers to opt out of the incentive program or to use technology, such as browser settings, that reduces our ability to
deliver relevant advertisements;
interruptions, failures or defects in our or our FI partners’ data collection, mining, analysis and storage systems;
changes in regulations impacting the collection and use of data, including the use of cookies;
changes in browser or device functionality and settings, and other new technologies, which impact our FI partners’ ability to collect and/or share
data about their customers; and
changes in international laws, rules, regulations and industry standards or increased enforcement of international laws, rules, regulations, and
industry standards.
Any of the above-described limitations on our ability to successfully collect, utilize and leverage data could also materially impair the optimal performance of
our solutions and severely limit our ability to target consumer, which would harm our business, financial condition and operating results.
The efficacy of some of our solutions depends upon third-party data providers.
We rely on several third parties to assist us in matching our anonymized identifiers, which we call Cardlytics IDs, with third-party identifiers to recognize the
digital presence of our FIs’ customers outside the FI channel. This matching process enables us to use purchase intelligence to measure in-store and online
campaign sales impact or provide marketers with valuable visibility into the behaviors of current or prospective customers both within and outside the context
of their marketing efforts. If any of these key data providers were to withdraw or withhold their identifiers from us, our ability to provide our Other Platform
Solutions could be adversely affected. Replacements for these third-party identifiers may not be available in a timely manner or under economically
beneficial terms, or at all.
Defects, errors or delays in our solutions could harm our reputation, which would harm our operating results.
The technology underlying our solutions may contain material defects or errors that can adversely affect our ability to operate our business and cause
significant harm to our reputation. This risk is compounded by the complexity of the technology underlying our solutions and the large amounts of data that
we leverage and process. In addition, with regard to our Cardlytics Direct solution, if we are unable to attribute incentives to our FIs’ customers in a timely
manner, our FI partners may limit or discontinue their use of our solutions. Any such error, failure, malfunction, disruption or delay could result in damage to
our reputation and could harm our business, financial condition and operating results.
23
Table of Contents
Significant system disruptions or loss of data center capacity could adversely affect our business, financial condition and operating results.
Our business is heavily dependent upon highly complex data processing capabilities. We contract with our primary third-party data center, located in Atlanta,
Georgia, and our redundancy data center, located in Suwanee, Georgia, pursuant to agreements that expire on December 31, 2020, subject to earlier
termination upon material breach and a failure to cure. If for any reason our arrangements with our third-party data centers are terminated, or if we are unable
to renew our agreements on commercially reasonable terms, we may be required to transfer that portion of our operations to new data center facilities, and we
may incur significant costs and possible service interruption in connection with doing so. Further, protection of our third-party data centers against damage or
interruption from fire, flood, tornadoes, power loss, telecommunications or equipment failure or other disasters and events beyond our control is important to
our continued success. Any damage to, or failure of, the systems of the data centers that we utilize, or of our own equipment located within such data centers,
could result in interruptions to the availability or functionality of our solutions. In addition, the failure of the data centers that we utilize to meet our capacity
requirements could result in interruptions in the availability or functionality of our solutions or impede our ability to scale our operations. Any damage to the
data centers that we utilize, or to our own equipment located within such data centers, that causes loss of capacity or otherwise causes interruptions in our
operations could materially adversely affect our ability to quickly and effectively respond to our marketers’ or FI partners’ requirements, which could result in
loss of their confidence, adversely impact our ability to attract new marketers and/or FI partners and force us to expend significant resources. The occurrence
of any such events could adversely affect our business, financial condition and operating results.
Seasonal fluctuations in marketing activity could adversely affect our cash flows.
We expect our revenue, operating results, cash flows from operations and other key operating and performance metrics to vary from quarter to quarter in part
due to the seasonal nature of our marketers’ spending on digital marketing campaigns. For example, many marketers tend to devote a significant portion of
their budgets to the fourth quarter of the calendar year to coincide with consumer holiday spending and to reduce spend in the first quarter of the calendar
year. Seasonality could have a material impact on our revenue, operating results, cash flow from operations and other key operating and performance metrics
from period to period.
Our international sales and operations subject us to additional risks that can adversely affect our business, operating results and financial condition.
In the years 2015, 2016 and 2017, we derived 11%, 11% and 13%, respectively, of our revenue outside the U.S. We may continue to expand our international
operations as part of our growth strategy. While we have an office in the U.K., substantially all of our operations are located in the U.S. Our ability to
convince marketers to expand their use of our solutions or renew their agreements with us is directly correlated to our direct engagement with such marketers
or their agencies. To the extent that we are unable to engage with non-U.S. marketers and agencies effectively with our limited sales force capacity, we may
be unable to grow sales to existing marketers to the same degree we have experienced in the U.S.
Our international operations subject us to a variety of risks and challenges, including:
•
•
•
•
•
•
•
•
•
localization of our solutions, including adaptation for local practices;
increased management, travel, infrastructure and legal compliance costs associated with having international operations;
fluctuations in currency exchange rates and related effect on our operating results;
longer payment cycles and difficulties in collecting accounts receivable or satisfying revenue recognition criteria, especially in emerging markets;
increased financial accounting and reporting burdens and complexities;
general economic conditions in each country or region;
economic uncertainty around the world;
compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations;
compliance with U.S. laws and regulations for foreign operations, including the Foreign Corrupt Practices Act, the U.K. Bribery Act, import and
export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our software in
certain foreign markets, and the risks and costs of non-compliance;
24
Table of Contents
•
•
•
•
•
heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact
financial results and result in restatements of financial statements and irregularities in financial statements;
difficulties in repatriating or transferring funds from or converting currencies in certain countries;
cultural differences inhibiting foreign employees from adopting our corporate culture;
reduced protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; and
compliance with the laws of foreign taxing jurisdictions and overlapping of different tax regimes.
Any of these risks could adversely affect our international operations, reduce our international revenues or increase our operating costs, adversely affecting
our business, financial condition and operating results.
If we do not manage our growth effectively, the quality of our solutions may suffer, and our business, financial condition and operating results may be
negatively affected.
The recent, rapid growth in our business has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational
and financial resources, as well as our infrastructure. We rely heavily on information technology, or IT, systems to manage critical functions such as data
storage, data processing, matching and retrieval, revenue recognition, budgeting, forecasting and financial reporting. To manage our growth effectively, we
must continue to improve and expand our infrastructure, including our IT, financial and administrative systems and controls. In particular, we may need to
significantly expand our IT infrastructure as the amount of data we store and transmit increases over time, which will require that we both utilize existing IT
products and adopt new technologies. If we are not able to scale our IT infrastructure in a cost-effective and secure manner, our ability to offer competitive
solutions will be harmed and our business, financial condition and operating results may suffer.
We must also continue to manage our employees, operations, finances, research and development and capital investments efficiently. Our productivity and the
quality of our solutions may be adversely affected if we do not integrate and train our new employees quickly and effectively or if we fail to appropriately
coordinate across our executive, research and development, technology, service development, analytics, finance, human resources, marketing, sales,
operations and customer support teams. If we continue our rapid growth, we will incur additional expenses, and our growth may continue to place a strain on
our resources, infrastructure and ability to maintain the quality of our solutions. If we do not adapt to meet these evolving challenges, or if the current and
future members of our management team do not effectively manage our growth, the quality of our solutions may suffer and our corporate culture may be
harmed. Failure to manage our future growth effectively could cause our business to suffer, which, in turn, could have an adverse impact on our business,
financial condition and operating results.
Our corporate culture has contributed to our success, and if we cannot maintain it as we grow, we could lose the innovation, creativity and teamwork
fostered by our culture, and our business may be harmed.
We are undergoing rapid growth. As of December 31, 2017, we had 342 employees. We intend to further expand our overall headcount and operations, with
no assurance that we will be able to do so while effectively maintaining our corporate culture. We believe our corporate culture is one of our fundamental
strengths as it enables us to attract and retain top talent and deliver superior results for our customers. As we grow and change, we may find it difficult to
preserve our corporate culture, which could reduce our ability to innovate and operate effectively. In turn, the failure to preserve our culture could negatively
affect our ability to attract, recruit, integrate and retain employees, continue to perform at current levels and effectively execute our business strategy.
We are dependent on the continued services and performance of our senior management and other key personnel, the loss of any of whom could
adversely affect our business.
Our future success depends in large part on the continued contributions of our senior management and other key personnel, including our two founders, Scott
Grimes, our Chief Executive Officer, and Lynne Laube, our Chief Operating Officer. In particular, the leadership of key management personnel is critical to
the successful management of our company, the development of our solutions and our strategic direction. We do not maintain “key person” insurance for any
member of our senior management team or any of our other key employees. Our senior management and key personnel are all employed on an at-will basis,
which means that they could terminate their employment with us at any time, for any reason and without notice. The loss of any of our key management
personnel could significantly delay or prevent the achievement of our development and strategic objectives and adversely affect our business.
25
Table of Contents
If we are unable to attract, integrate and retain additional qualified personnel, including top technical talent, our business could be adversely affected.
Our future success depends in part on our ability to identify, attract, integrate and retain highly skilled technical, managerial, sales and other personnel,
including top technical talent from the industry and top research institutions. We face intense competition for qualified individuals from numerous other
companies, including other software and technology companies, many of whom have greater financial and other resources than we do. These companies also
may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality
candidates than those we have to offer. In addition, new hires often require significant training and, in many cases, take significant time before they achieve
full productivity. We may incur significant costs to attract and retain qualified personnel, including significant expenditures related to salaries and benefits and
compensation expenses related to equity awards and we may lose new employees to our competitors or other companies before we realize the benefit of our
investment in recruiting and training them. Moreover, new employees may not be or become as productive as we expect, as we may face challenges in
adequately or appropriately integrating them into our workforce and culture. In addition, as we move into new geographies, we will need to attract and recruit
skilled personnel in those areas. We have little experience with recruiting in geographies outside of the U.S., and may face additional challenges in attracting,
integrating and retaining international employees. If we are unable to attract, integrate and retain suitably qualified individuals who are capable of meeting
our growing technical, operational and managerial requirements, on a timely basis or at all, our business will be adversely affected.
If we do not effectively grow and train our sales team, we may be unable to add new marketers or increase sales to our existing marketers and our
business will be adversely affected.
We continue to be substantially dependent on our sales team to obtain new marketers and to drive sales with respect to our existing marketers. We believe that
the characteristics and skills of the best salespeople for our solutions are still being defined, as our market is relatively new. Further, we believe that there is,
and will continue to be, significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant
revenue growth will depend, in large part, on our success in recruiting, training, integrating and retaining sufficient numbers of sales personnel to support our
growth. New hires require significant training and it may take significant time before they achieve full productivity. Our recent hires and planned hires may
not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do
business or plan to do business. In addition, as we continue to grow rapidly, a large percentage of our sales team will be new to our company and our
solutions. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new
marketers or increasing sales to our existing marketers, our business will be adversely affected.
The market data and forecasts included in this Annual Report on Form 10-K may prove to be inaccurate, and even if the markets in which we compete
achieve the forecasted growth, we cannot assure you that our business will grow at similar rates, or at all.
The market data and forecasts included in this Annual Report on Form 10-K, including the data and forecasts published by The Nilson Report, among others,
and our internal estimates and research are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. If
the forecasts of market growth or anticipated spending prove to be inaccurate, our business and growth prospects could be adversely affected. Even if the
forecasted growth occurs, our business may not grow at a similar rate, or at all. Our future growth is subject to many factors, including our ability to
successfully implement our business strategy, which itself is subject to many risks and uncertainties. The reports described in this Annual Report on Form
10-K speak as of their respective publication dates and the opinions expressed in such reports are subject to change. Accordingly, potential investors in our
common stock are urged not to put undue reliance on such forecasts and market data.
If currency exchange rates fluctuate substantially in the future, the results of our operations could be adversely affected.
Due to our international operations, we may be exposed to the effects of fluctuations in currency exchange rates. We generate revenue and incur expenses for
employee compensation and other operating expenses at our U.K. office in the local currency. Fluctuations in the exchange rates between the U.S. dollar and
the British pound could result in the dollar equivalent of such revenue and expenses being lower, which could have a negative net impact on our reported
operating results. Although we may in the future decide to undertake foreign exchange hedging transactions to cover a portion of our foreign currency
exchange exposure, we currently do not hedge our exposure to foreign currency exchange risks.
26
Table of Contents
Our business may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales. Any
successful action by state, local or other authorities to collect additional or past sales tax could adversely harm our business.
We are subject to federal, state and local taxes in the U.S. and similar taxes in foreign jurisdictions. Significant judgment is required in evaluating our tax positions
and our worldwide provision for taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is
uncertain. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes against us. Although we believe that our tax estimates are
reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a
material adverse effect on our operating results or cash flows in the period or periods for which a determination is made.
We do not collect sales or other similar taxes in certain states and many of the states do not apply sales or similar taxes to certain of our solutions. State, local and
foreign taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations
that may change over time. In particular, the applicability of sales taxes to our solutions in various jurisdictions is unclear. We review these rules and regulations
periodically and, when we believe we are subject to sales and use taxes in a particular state, we may voluntarily engage state tax authorities to determine how to
comply with their rules and regulations. A successful assertion by one or more states, including states for which we have not accrued tax liability, requiring us to
collect sales or other taxes with respect to sales of our solutions could result in substantial tax liabilities for past transactions, including interest and penalties,
discourage customers from purchasing our solutions or otherwise harm our business, financial condition and operating results.
Determining our income tax rate is complex and subject to uncertainty.
The computation of provision for income tax is complex, as it is based on the laws of numerous taxing jurisdictions and requires significant judgment on the
application of complicated rules governing accounting for tax provisions under generally accepted accounting principles in the U.S., or GAAP. Provision for income
tax for interim quarters is based on a forecast of our U.S. and non-U.S. effective tax rates for the year, which includes forward looking financial projections, including
the expectations of profit and loss by jurisdiction, and contains numerous assumptions. Various items cannot be accurately forecasted and future events may be treated
as discrete to the period in which they occur. Our provision for income tax can be materially impacted, for example, by the geographical mix of our profits and losses,
changes in our business, such as internal restructuring and acquisitions, changes in tax laws and accounting guidance and other regulatory, legislative or judicial
developments, tax audit determinations, changes in our uncertain tax positions, changes in our intent and capacity to permanently reinvest foreign earnings, changes to
our transfer pricing practices, tax deductions attributed to equity compensation and changes in our need for a valuation allowance for deferred tax assets. For these
reasons, our actual income taxes may be materially different than our provision for income tax.
Our use of our net operating loss carryforwards may be limited and such carryforwards may expire unutilized or underutilized.
We may be limited in the portion of our net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state
income tax purposes. As of December 31, 2017, we had U.S. federal and state net operating loss carryforwards, or NOLs, of $220.5 million and
$76.3 million, respectively, which expire in various years beginning in 2028. If we do not earn sufficient taxable income in the future, our NOLs may expire
unutilized or underutilized. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an
“ownership change” is subject to limitations on its ability to utilize its existing NOLs to offset future taxable income. We may have experienced “ownership
changes” under Section 382 of the Code in the past, and subsequent changes in ownership of our stock, including by reason of future offerings, as well as
other changes that may be outside of our control, could result in future ownership changes under Section 382 of the Code. If we are or become subject to
limitations on our use of NOLs under Section 382 of the Code, our NOLs could expire unutilized or underutilized, even if we earn taxable income against
which our NOLs could otherwise be offset. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation
allowance related to our NOLs in our financial statements and other net deferred tax assets due to the uncertainty of the ultimate realization of the future
benefits of those assets.
Comprehensive tax reform bills could adversely affect our business and financial condition.
The U.S. government recently enacted comprehensive tax legislation that includes significant changes to the taxation of business entities. These changes
include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense,
(iii) a shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to
prevent erosion of the U.S. income tax base) and (iv) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with the latter taxed at
a lower rate. Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our business and financial
condition could be adversely affected. This Annual Report on Form 10-K does not discuss any such tax legislation or the manner in which it might affect
purchasers of our common stock. We urge our stockholders to consult with their legal and tax advisors with respect to any such legislation and the potential
tax consequences of investing in our common stock.
27
Table of Contents
Unfavorable conditions in the global economy or the vertical markets we serve could limit our ability to grow our business and negatively affect our
operating results.
General worldwide economic conditions have experienced significant instability in recent years. These conditions make it extremely difficult for marketers
and us to accurately forecast and plan future business activities, and could cause marketers to reduce or delay their marketing spending. Historically,
economic downturns have resulted in overall reductions in marketing spending. If macroeconomic conditions deteriorate or are characterized by uncertainty
or volatility, marketers may curtail or freeze spending on marketing in general and for services such as ours specifically.
In addition, our business may be materially and adversely affected by weak economic conditions in the specific vertical markets that we serve. We have
historically generated a substantial majority of our revenue from marketers in the restaurant, brick and mortar retail, telecommunications and cable industries.
We cannot predict the timing, strength or duration of any economic slowdown or recovery. In addition, even if the overall economy is robust, we cannot
assure you that the market for services such as ours will experience growth or that we will experience growth.
Future acquisitions could disrupt our business and adversely affect our business, financial condition and operating results.
We may choose to expand by making acquisitions that could be material to our business, financial condition or operating results. Our ability as an
organization to successfully acquire and integrate technologies or businesses is unproven. Acquisitions involve many risks, including the following:
•
an acquisition may negatively affect our business, financial condition, operating results or cash flows because it may require us to incur charges
or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims
and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset
additional costs and expenses related to the acquisition;
•
•
•
•
•
•
•
•
•
•
•
•
we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any
company that we acquire, particularly if key personnel of the acquired company decide not to work for us;
an acquisition, whether or not consummated, may disrupt our ongoing business, divert resources, increase our expenses and distract our
management;
an acquisition may result in a delay or reduction of purchases for both us and the company that we acquired due to uncertainty about continuity
and effectiveness of solution from either company;
we may encounter difficulties in, or may be unable to, successfully sell any acquired products or solutions;
an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors
have stronger market positions;
challenges inherent in effectively managing an increased number of employees in diverse locations;
the potential strain on our financial and managerial controls and reporting systems and procedures;
potential known and unknown liabilities associated with an acquired company;
our use of cash to pay for acquisitions would limit other potential uses for our cash;
if we incur debt to fund such acquisitions, such debt may subject us to material restrictions on our ability to conduct our business as well as
financial maintenance covenants;
the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions; and
to the extent that we issue a significant amount of equity or convertible debt securities in connection with future acquisitions, existing
stockholders may be diluted and earnings per share may decrease.
We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The
inability to integrate successfully the business, technologies, products, personnel or operations of any acquired business, or any significant delay in achieving
integration, could have a material adverse effect on our business, financial condition and operating results.
28
Table of Contents
Natural or man-made disasters and other similar events may significantly disrupt our business, and negatively impact our business, financial condition
and operating results.
A significant portion of our employee base, operating facilities and infrastructure are centralized in Atlanta, Georgia. Any of our facilities may be harmed or
rendered inoperable by natural or man-made disasters, including earthquakes, tornadoes, hurricanes, wildfires, floods, nuclear disasters, acts of terrorism or
other criminal activities, infectious disease outbreaks and power outages, which may render it difficult or impossible for us to operate our business for some
period of time. Our facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our
operations could negatively impact our business, financial condition and operating results, and harm our reputation. In addition, we may not carry business
insurance or may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse
effect on our business, financial condition and operating results. In addition, the facilities of significant marketers, FI partners or third-party data providers
may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or material adverse effects on our
business.
We may require additional capital to support growth, and such capital might not be available on terms acceptable to us, if at all, which may in turn
hamper our growth and adversely affect our business.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the
need to develop new solutions or enhance our solutions, improve our operating infrastructure or acquire complementary businesses and technologies.
Accordingly, we may need to engage in equity, equity-linked or debt financings to secure additional funds. If we raise additional funds through future
issuances of equity or equity-linked securities, including convertible debt securities, our existing stockholders could suffer significant dilution, and any new
equity securities that we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we
secure in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, including the
ability to pay dividends or repurchase shares of our capital stock. This may make it more difficult for us to obtain additional capital, to pursue business
opportunities, including potential acquisitions, or to return capital to our stockholders. We also may not be able to obtain additional financing on terms
favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to
support our business growth, service our indebtedness and respond to business challenges could be significantly impaired, and our business may be adversely
affected.
If we are not able to maintain and enhance our brand, our business, financial condition and operating results may be adversely affected.
We believe that developing and maintaining awareness of the Cardlytics brand in a cost-effective manner is critical to achieving widespread acceptance of our
existing solutions and future solutions and is an important element in attracting new marketers and FI partners. Furthermore, we believe that the importance of
brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our
marketing efforts and on our ability to deliver valuable solutions for our marketers, their agencies and our FI partners. In the past, our efforts to build our
brand have involved significant expense. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not
offset the expenses that we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an
unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new marketers or FI partners or retain our existing marketer or FI
partners and our business could suffer.
Risks Related to Regulatory and Intellectual Property Matters
Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.
We, our FI partners and our marketers are subject to a number of domestic and international laws and regulations that apply to online services and the internet
generally. These laws, rules and regulations address a range of issues including data privacy and cyber security, and restrictions or technological requirements
regarding the collection, use, storage, protection, retention or transfer of data.
29
Table of Contents
In the U.S., the rules and regulations to which we, directly or contractually through our FI partners, or our marketers may be subject include those
promulgated under the authority of the Federal Trade Commission, the Electronic Communications Privacy Act, Computer Fraud and Abuse Act, Health
Insurance Portability and Accountability Act, the Gramm-Leach-Bliley Act and state cyber security and breach notification laws, as well as regulator
enforcement positions and expectations reflected in federal and state regulatory actions, settlements, consent decrees and guidance documents. Internationally,
virtually every jurisdiction in which we operate has established its own data security and privacy legal frameworks with which we, directly or contractually
through our FI partners, or our marketers may be required to comply, including the Data Protection Directive established in the European Union. Further,
many federal, state and foreign government bodies and agencies have introduced, and are currently considering, additional laws and regulations. If passed, we
will likely incur additional expenses and costs associated with complying with such laws. The costs of compliance with, and other burdens imposed by, the
laws, rules, regulations and policies that are applicable to the businesses of our FI partners or marketers may limit the use and adoption of, and reduce the
overall demand for, our solutions.
These existing and proposed laws, regulations and industry standards can be costly to comply with and can delay or impede the development of new
solutions, result in negative publicity and reputational harm, increase our operating costs, require significant management time and attention, increase our risk
of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices.
Legislation and regulation of online businesses, including privacy and data protection regimes, is expansive, not clearly defined and rapidly evolving.
Such regulation could create unexpected costs, subject us to enforcement actions for compliance failures, or restrict portions of our business or cause us
to change our business model.
Government regulation and industry standards may increase the costs of doing business online. Federal, state, municipal and foreign governments and
agencies have adopted and could in the future adopt, modify, apply or enforce laws, policies, regulations and standards covering user privacy, data security,
technologies such as cookies that are used to collect, store and/or process data, online marketing, the use of data to inform marketing, the taxation of products
and services, unfair and deceptive practices, and the collection (including the collection of information), use, processing, transfer, storage and/or disclosure of
data associated with unique individual internet users.
Although we have not collected or retained data that is traditionally considered PII under U.S. law, such as names, email addresses, addresses, phone
numbers, social security numbers, credit card numbers, financial data or health data, we typically do collect and store IP addresses and other device
identifiers, which are or may be considered personal data in some jurisdictions or otherwise may be the subject of legislation or regulation. Furthermore, we
may elect to use PII in the future for our current solutions or solutions we may introduce. In addition, certain U.S. laws impose requirements on the collection
and use of information from or about users or their devices. Other existing laws may in the future be revised, or new laws may be passed, to impose more
stringent requirements on the use of identifiers to collect user information, including information of the type that we collect. Changes in regulations could
affect the type of data that we may collect; restrict our ability to use identifiers to collect information, and, thus, affect our ability to actually collect that
information; the costs of doing business online, and, therefore, the demand for our solutions; the ability to expand or operate our business; and harm our
business.
In particular, there has been increasing public and regulatory concern and public scrutiny about the use of PII. Because the interpretation and application of
privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our
existing data management practices or our solutions or that the definition of “PII” is expanded in the future. If this is the case, in addition to the possibility of
fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our solutions, which could
have a material adverse effect on our business, financial condition or operating results. Any inability to adequately address privacy concerns, even if
unfounded, or comply with applicable privacy or data protection laws, regulations, policies or standards could result in additional cost and liability to us;
damage our reputation; affect our ability to attract new marketers and FI partners and maintain relationships with our existing marketers and FI partners; and
adversely affect our business, financial condition or operating results. Privacy and security concerns, whether valid or not, may inhibit market adoption of our
solutions.
U.S. and non-U.S. regulators also may implement “Do-Not-Track” legislation, particularly if the industry does not implement a standard. Effective January 1,
2014, the California Governor signed into law an amendment to the California Online Privacy Protection Act of 2003. Such amendment requires operators of
commercial websites and online service providers, under certain circumstances, to disclose in their privacy policies how such operators and providers respond
to browser “do not track” signals.
30
Table of Contents
Some of our activities may also be subject to the laws of foreign jurisdictions, whether or not we are established or based in such jurisdictions. Within the
European Union, or EU, where we currently have an active presence in the U.K., Directive 2009/136/EC, commonly referred to as the “Cookie Directive,”
directs EU member states to ensure that accessing information on an internet user’s computer, such as through a cookie, is allowed only if the internet user
has given his or her consent. In response, some member states have implemented legislation requiring entities to obtain the user’s consent before placing
cookies for targeted marketing purposes.
In the U.K., for example, the Privacy and Electronic Communications Regulations 2011, or PECR, implement the requirements of Directive 2009/136/EC
(which amended Directive 2002/58/EC), which is known as the ePrivacy Directive. The PECR regulates various types of electronic direct marketing that use
cookies and similar technologies. The PECR also imposes sector-specific breach reporting requirements, but only as applicable to providers of particular
public electronic communications services. Additional EU member state laws of this type may follow.
We may be required to, or otherwise may determine that it is advisable to, develop or obtain additional tools and technologies to compensate for a potential
lack of cookie data. Even if we are able to do so, such additional tools may be subject to further regulation, time consuming to develop or costly to obtain, and
less effective than our current use of cookies. In addition, certain information, such as IP addresses as collected and used by us may constitute “personal data”
in certain non-U.S. jurisdictions, including in the U.K., and therefore certain of our activities could be subject to EU laws applicable to the processing and use
of personal data.
More generally, the regulatory framework for online services and data privacy and security issues worldwide can vary substantially from jurisdiction to
jurisdiction, is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies
have adopted or are considering adopting laws, rules, regulations and standards regarding the collection, use, storage and disclosure of information, web
browsing and geolocation data collection and data analytics. Interpretation of these laws, rules and regulations and their application to our solutions in the
U.S. and foreign jurisdictions is ongoing and cannot be fully determined at this time.
In addition, the regulatory environment for the collection and use of consumer data by marketers is evolving in the U.S. and internationally and is currently a
self-regulatory framework, which relies on market participants to ensure self-compliance. The voluntary nature of this self-regulatory framework may change.
The U.S. and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants’
ability to collect, augment, analyze, use and share anonymous data, such as by regulating the level of consumer notice and consent required before a company
can place cookies or other tracking technologies. A number of existing bills are pending in the U.S. Congress that contain provisions that would regulate how
companies can use cookies and other tracking technologies to collect and utilize user information.
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or
contractually apply to us. We may also be subject to claims of liability or responsibility for the actions of third parties with whom we interact or upon whom
we rely in relation to various solutions, including but not limited to our marketers and their agencies and our FI partners. If this were to occur, in addition to
the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our solutions,
which could have an adverse effect on our business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with
applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and
adversely affect our business.
In addition, if we were to gain knowledge that we inadvertently received PII from our FI partners, our failure to comply with applicable laws and regulations,
or to protect personal data, could result in enforcement action against us, including fines, imprisonment of our officers and public censure, claims for damages
by consumers and other affected individuals, damage to our reputation and loss of goodwill, any of which could have a material adverse impact on our
operations, financial performance and business. Even the perception of privacy or security concerns, whether or not valid, may harm our reputation and
inhibit adoption of our solution by current and future marketers and marketing agencies.
31
Table of Contents
If the use of matching technologies, such as cookies, pixels and device identifiers, is rejected by internet users, restricted or otherwise subject to
unfavorable terms, such as by non-governmental entities, our performance may decline and we may lose customers and revenue.
Our solutions may use matching technologies, such as cookies, pixels and device identifiers, to match the Cardlytics IDs we have assigned to our FIs’
customers with their digital presence outside of the FI partners’ websites and mobile applications. Our matching technologies may sometimes be “third-party
cookies” because they are placed on individual browsers when internet users visit a website that is not part of the Cardlytics.com domain. These matching
technologies are placed through an internet browser on an internet user’s computer and correspond with a data set that we retain on our servers. Our matching
technologies only record anonymized information and the date that the matching technology was last refreshed. When our matching technologies are present
and a user is exposed to marketing content targeted or deployed with our solutions, we are able to gain insight into that user’s interaction with the marketing
content. If our access to matching technology data is reduced, our ability to conduct our business in the current manner may be affected and thus undermine
the effectiveness of our solutions.
Internet users may easily block and/or delete cookies (e.g., through their browsers or “ad blocking” software). The most commonly used internet browsers
allow internet users to modify their browser settings to prevent cookies from being accepted by their browsers, or are set to block third-party cookies by
default. If more browser manufacturers and internet users adopt these settings or delete their cookies more frequently than they currently do, our business
could be negatively affected. Some government regulators and privacy advocates have suggested creating a “Do Not Track” standard that would allow
internet users to express a preference, independent of cookie settings in their browser, not to have website browsing recorded. If internet users adopt a “Do
Not Track” browser setting and the standard either gets imposed by state or federal legislation or agreed upon by standard-setting groups, it may curtail or
prohibit us from using non-personal data as we currently do. This could hinder growth of marketing on the internet generally, and cause us to change our
business practices and adversely affect our business, financial condition and operating results.
In addition, browser manufacturers could replace cookies with their own product and require us to negotiate and pay them for use of such product to record
information about internet users’ interactions with our marketers, which may not be available on commercially reasonable terms, or at all.
Failure to protect our proprietary technology and intellectual property rights could substantially harm our business, financial condition and operating
results.
Our future success and competitive position depend in part on our ability to protect our intellectual property and proprietary technologies. To safeguard these
rights, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual protections in the U.S. and other jurisdictions, all of
which provide only limited protection and may not now or in the future provide us with a competitive advantage.
As of December 31, 2017, we had three issued patents and 10 patent applications pending relating to our software. We cannot assure you that any patents will
issue from any patent applications, that patents that issue from such applications will give us the protection that we seek or that any such patents will not be
challenged, invalidated, or circumvented. Any patents that may issue in the future from our pending or future patent applications may not provide sufficiently
broad protection and may not be enforceable in actions against alleged infringers. We have registered the “Cardlytics” name and logo in the U.S. and certain
other countries. We have registrations and/or pending applications for additional marks in the U.S. and other countries; however, we cannot assure you that
any future trademark registrations will be issued for pending or future applications or that any registered trademarks will be enforceable or provide adequate
protection of our proprietary rights. We also license software from third parties for integration into our products, including open source software and other
software available on commercially reasonable terms. We cannot assure you that such third parties will maintain such software or continue to make it
available.
In order to protect our unpatented proprietary technologies and processes, we rely on trade secret laws and confidentiality agreements with our employees,
consultants, vendors and others. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to
misappropriate, reverse engineer or otherwise obtain and use them. Bank of America also has the right to purchase a license to the source code underlying
Cardlytics Direct upon the occurrence of specified events and for a specified fee, which could compromise the proprietary nature of our platform, allow Bank
of America to develop in-house solutions and discontinue their use of our solutions and/or allow Bank of America to develop and sell a solution similar to
Cardlytics Direct.
32
Table of Contents
In addition, others may independently discover our trade secrets, in which case we would not be able to assert trade secret rights, or develop similar
technologies and processes. Further, the contractual provisions that we enter into may not prevent unauthorized use or disclosure of our proprietary
technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary
technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, trade secrets and intellectual property is difficult,
expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the U.S.
and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or
infringement of our solutions, technologies or intellectual property rights.
From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine
the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such legal action could result in
substantial costs and diversion of resources and could negatively affect our business, financial condition and operating results.
Assertions by third parties of infringement or other violations by us of their intellectual property rights, whether or not correct, could result in significant
costs and harm our business, financial condition and operating results.
Patent and other intellectual property disputes are common in our industry. We have in the past and may in the future be subject to claims alleging that we
have misappropriated, misused, or infringed other parties’ intellectual property rights. Some companies, including certain of our competitors, own larger
numbers of patents, copyrights and trademarks than we do, which they may use to assert claims against us. Third parties may also assert claims of intellectual
property rights infringement against our FI partners, whom we are typically required to indemnify. As the numbers of solutions and competitors in our market
increases and overlap occurs, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of
infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause us to incur substantial
costs defending against the claim and could distract our management from our business.
The patent portfolios of our most significant competitors are larger than ours. This disparity may increase the risk that they may sue us for patent infringement
and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third
parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenues and against
whom our own patents may therefore provide little or no deterrence or protection. There can be no assurance that we will not be found to infringe or
otherwise violate any third-party intellectual property rights or to have done so in the past.
An adverse outcome of a dispute may require us to:
•
•
•
•
•
pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights;
cease developing or selling solutions that rely on technology that is alleged to infringe or misappropriate the intellectual property of others;
expend additional development resources to attempt to redesign our solutions or otherwise develop non-infringing technology, which may not be
successful;
enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property
rights; and
indemnify our FI partners and other third parties.
In addition, royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant
royalty payments and other expenditures. Some licenses may also be non-exclusive, and therefore our competitors may have access to the same technology
licensed to us. Any of the foregoing events could seriously harm our business, financial condition and operating results.
33
Table of Contents
Our use of open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.
We use open source software to deliver our solutions and expect to continue to use open source software in the future. Some of these open source licenses
may require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software
continue to be licensed under open source licenses. This may require that we make certain proprietary code available under an open source license. We may
face claims from others claiming ownership of, or seeking to enforce the license terms applicable to such open source software, including by demanding
release of the open source software, derivative works or our proprietary source code that was developed using such software. Few of the licenses applicable to
open source software have been interpreted by courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated
conditions or restrictions on our ability to commercialize our products. These claims could also result in litigation, require us to purchase costly licenses or
require us to devote additional research and development resources to change the software underlying our solutions, any of which would have a negative
effect on our business, financial condition and operating results and may not be possible in a timely manner. We and our customers may also be subject to
suits by parties claiming infringement due to the reliance by our solutions on certain open source software, and such litigation could be costly for us to defend
or subject us to an injunction. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur
additional costs. Finally, we cannot assure you that we have not incorporated open source software into the software underlying our solutions in a manner that
may subject our proprietary software to an open source license that requires disclosure, to customers or the public, of the source code to such proprietary
software. In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly
release portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which
could reduce or eliminate the value of our solutions and technologies and materially and adversely affect our ability to sustain and grow our business. Many
open source licenses also limit our ability to bring patent infringement lawsuits against open source software that we use without losing our right to use such
open source software. Therefore, the use of open source software may limit our ability to bring patent infringement lawsuits, to the extent we ever have any
patents that cover open source software that we use.
We are subject to government regulation, including import, export, economic sanctions and anti-corruption laws and regulations that may expose us to
liability and increase our costs.
Various of our products are subject to U.S. export controls, including the U.S. Department of Commerce’s Export Administration Regulations and economic
and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. These regulations may limit the export of
our products and provision of our solutions outside of the U.S., or may require export authorizations, including by license, a license exception or other
appropriate government authorizations, including annual or semi-annual reporting and the filing of an encryption registration. Export control and economic
sanctions laws may also include prohibitions on the sale or supply of certain of our products to embargoed or sanctioned countries, regions, governments,
persons and entities. In addition, various countries regulate the importation of certain products, through import permitting and licensing requirements, and
have enacted laws that could limit our ability to distribute our products. The exportation, reexportation, and importation of our products and the provision of
solutions, including by our partners, must comply with these laws or else we may be adversely affected, through reputational harm, government
investigations, penalties and a denial or curtailment of our ability to export our products or provide solutions. Complying with export control and sanctions
laws may be time consuming and may result in the delay or loss of sales opportunities. Although we take precautions to prevent our products from being
provided in violation of such laws, our products may have previously been, and could in the future be, provided inadvertently in violation of such laws,
despite the precautions we take. If we are found to be in violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties for
us and for the individuals working for us. Changes in export or import laws or corresponding sanctions, may delay the introduction and sale of our products in
international markets, or, in some cases, prevent the export or import of our products to certain countries, regions, governments, persons or entities altogether,
which could adversely affect our business, financial condition and results of operations.
We are also subject to various domestic and international anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, as
well as other similar anti-bribery and anti-kickback laws and regulations. These laws and regulations generally prohibit companies and their employees and
intermediaries from authorizing, offering or providing improper payments or benefits to officials and other recipients for improper purposes. We rely on
certain third parties to support our sales and regulatory compliance efforts and can be held liable for their corrupt or other illegal activities, even if we do not
explicitly authorize or have actual knowledge of such activities. Although we take precautions to prevent violations of these laws, our exposure for violating
these laws increases as our international presence expands and as we increase sales and operations in foreign jurisdictions.
34
Table of Contents
Risks Related to Ownership of Our Common Stock
An active trading market for our common stock may not develop or be sustained.
Prior to our initial public offering on February 8, 2018, there was no public market for our common stock. Although our common stock is listed on the
Nasdaq Global Market, we cannot assure you that an active trading market for our shares will develop or be sustained. If an active market for our common
stock does not develop or is not sustained, it may be difficult for investors in our common stock to sell shares without depressing the market price for the
shares or to sell the shares at all.
The market price of our common stock has been and is likely to continue to be volatile.
The market price of our common stock may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are
related in complex ways. Since shares of our common stock were sold in our IPO in February 2018 at a price of $13.00 per share, our stock price has ranged
from an intraday low of $11.10 to an intraday high of $20.99 through of February 28, 2018. Factors that may affect the market price of our common stock
include:
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our financial condition and operating results;
variance in our financial performance from expectations of securities analysts or investors;
changes in the prices of our solutions;
changes in laws or regulations applicable to our solutions;
announcements by us or our competitors of significant business developments, acquisitions or new offerings;
our involvement in litigation;
our sale of our common stock or other securities in the future;
changes in senior management or key personnel;
trading volume of our common stock;
changes in the anticipated future size and growth rate of our market; and
general economic, regulatory and market conditions.
The stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity
securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad
market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our
common stock. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action
litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.
We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on
appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate
that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay
dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price
appreciation, which may never occur, as the only way to realize any future gains on their investments.
Concentration of ownership among our current directors, executive officers and their affiliates may limit an investor’s ability to influence significant
corporate decisions.
As of February 28, 2018, our directors and executive officers, together with their affiliates, beneficially own 23.9% of our outstanding capital stock. As a
result, these stockholders, acting together, will have substantial influence over the outcome of matters submitted to our stockholders for approval, including
the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of
ownership could delay, defer or prevent a change in control of the company, merger, consolidation, takeover or other business combination, which in turn
could adversely affect the market price of our common stock.
35
Table of Contents
Future sales of our common stock in the public market could cause our share price to decline.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market
price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that
sales, particularly sales by our directors, executive officers, and significant stockholders, may have on the prevailing market price of our common stock. The
shares of common stock subject to outstanding options under our equity incentive plans and the shares reserved for future issuance under our equity incentive
plans, as well as shares issuable upon vesting of restricted stock unit awards, will become eligible for sale in the public market in the future, subject to certain
legal and contractual limitations. In addition, certain holders of our common stock have the right, subject to various conditions and limitations, to request we
include their shares of our common stock in registration statements we may file relating to our securities.
We may issue common stock or other securities if we need to raise additional capital. The number of new shares of our common stock issued in connection
with raising additional capital could constitute a material portion of our then-outstanding shares of our common stock.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price
and trading volume could decline.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business.
We do not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us
downgrade our stock or change their opinion of our business or market value, our share price would likely decline. If one or more of these analysts cease
coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume
to decline.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the U.S.
Generally accepted accounting principles in the U.S., or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the U.S.
Securities and Exchange Commission, or SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these
principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before
the announcement of a change.
In particular, in May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606),
which supersedes the revenue recognition requirements in Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition. The core principle
of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. As an “emerging growth company,” the Jumpstart our
Business Startups Act of 2012, or JOBS Act, allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until
such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act with respect to
ASU 2014-09, which will result in ASU 2014-09 becoming applicable to us on January 1, 2019. We are evaluating ASU 2014-09 and have not yet determined
the impact it may have on our financial reporting.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will
make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act and we may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, the auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act, or Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy
statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive if we choose to rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock
price may be more volatile.
As an “emerging growth company,” the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies
until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. As a result,
our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for
new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors.
36
Table of Contents
We have incurred and will continue to incur increased costs as a result of being a public company.
As a newly public company, and particularly after we are no longer an “emerging growth company,” we have incurred and we will continue to incur
significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and
Consumer Protection Act, the listing requirements of the Nasdaq Stock Market and other applicable securities rules and regulations impose various
requirements on public companies. We expect that compliance with these requirements will continue to increase certain of our expenses and make some
activities more time-consuming than they have been in the past when we were a private company. Such additional costs going forward could negatively affect
our financial results.
As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting and
any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our
common stock.
We will be required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over
financial reporting on an annual basis, beginning with our 2019 fiscal year. This assessment will need to include disclosure of any material weaknesses
identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest
to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no
longer an “emerging growth company,” as defined in the JOBS Act. We will be required to disclose significant changes made in our internal control
procedures on a quarterly basis.
We have commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed
to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. Our compliance
with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal
audit group, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting
knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.
During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial
reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material
weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial
reporting could severely inhibit our ability to accurately report our financial condition and operating results. If we are unable to conclude that our internal
control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant
deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the
market price of our common stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to
remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public
companies, could also restrict our future access to the capital markets.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our
stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change
in control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions
that:
•
•
•
•
authorize our board of directors to issue preferred stock without further stockholder action and with voting liquidation, dividend and other rights
superior to our common stock;
require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent, and limit
the ability of our stockholders to call special meetings;
establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of
persons for director nominees;
establish that our board of directors is divided into three classes, with directors in each class serving three-year staggered terms;
37
Table of Contents
•
•
•
require the approval of holders of two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our amended and
restated bylaws or amend or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of
directors and the ability of stockholders to take action by written consent or call a special meeting;
prohibit cumulative voting in the election of directors; and
provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for
stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are
incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date
on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in
the future for shares of our common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a
premium for your shares of our common stock in an acquisition.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain
litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Pursuant to our amended and restated certificate of incorporation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery
of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a
claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim arising
pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated
bylaws or (4) any action asserting a claim governed by the internal affairs doctrine. The forum selection clause in our amended and restated certificate of
incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices are located in Atlanta, Georgia where we occupy a facility of approximately 77,000 square feet. Our lease expires in April
2025. We have additional U.S. offices in Chicago, Illinois, New York City, New York and Oakland, California. We also have offices in London, U.K.
We believe that our facilities are sufficient for our current needs and that, should it be needed, additional facilities will be available to accommodate the
expansion of our business.
ITEM 3. LEGAL PROCEEDINGS
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a
party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business,
operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement
costs, diversion of management resources and other factors.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
38
Table of Contents
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock commenced trading on the Nasdaq Global Market on February 9, 2018 and trades under the symbol “CDLX.” Prior to February 9, 2018,
there was no public market for our common stock.
Holders
As of February 28, 2018, there were 234 stockholders of record of our common stock. Because many of our shares are held by brokers and other institutions
on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We have never declared or paid any dividends on our capital stock. We currently intend to retain all available funds and any future earnings for the operation
and expansion of our business and, therefore, we do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will
be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual
arrangements, any limitations on payment of dividends present in our current and future debt agreements, and other factors that our board of directors may
deem relevant. We are subject to covenants under our debt arrangements that place restrictions on our ability to pay dividends.
Use of Proceeds from Initial Public Offering of Common Stock
On February 13, 2018, we closed our initial public offering, or IPO, in which we issued and sold 5,400,000 shares of common stock at a public offering price
of $13.00 per share, resulting in gross proceeds of $70.2 million. On February 14, 2018, pursuant to the underwriters’ partial exercise of their over-allotment
option to purchase up to an additional 810,000 shares from us, we issued and sold an additional 421,355 shares of our common stock, resulting in incremental
gross proceeds of $5.5 million. All of the shares issued and sold in our IPO were registered under the Securities Act pursuant to a registration statement on
Form S-1 (File No. 333-222531), which was declared effective by the SEC on February 8, 2018. Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P.
Morgan Securities LLC acted as joint book-running managers of our IPO. Wells Fargo Securities, LLC and SunTrust Robinson Humphrey, Inc. also acted as
book-runners for the IPO. Raymond James & Associates, Inc. and KeyBanc Capital Markets Inc. acted as the co-managers for the IPO.
The net proceeds to us, after deducting underwriting discounts and commission of approximately $5.3 million and estimated offering expenses of
approximately $4.3 million, were approximately $66.1 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or
their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates. There has been no material change in the
planned use of proceeds from our IPO from those disclosed in the final prospectus for our IPO dated February 8, 2018 and filed with the SEC pursuant to
Rule 424(b)(4) of the Securities Act on February 9, 2018.
Stock Performance Graph
Not applicable.
Recent Sales of Unregistered Securities
Issuances of Options to Purchase Common Stock
From January 1, 2017 through December 31, 2017, we granted under our 2008 Stock Plan, or 2008 Plan, options to purchase an aggregate of 799,133 shares
of our common stock to employees, consultants and directors, having exercise prices ranging from $17.84 to $30.44 per share. From January 1, 2017 through
December 31, 2017, an aggregate of 47,174 shares of our common stock were issued upon the exercise of stock options under the 2008 Plan, at exercise
prices ranging from $2.36 to $28.52 per share, for aggregate proceeds of approximately $0.2 million.
39
Table of Contents
The offers, sales and issuances of the securities described in the preceding paragraph were deemed to be exempt from registration either under Rule 701
promulgated under the Securities Act, or Rule 701, in that the transactions were under compensatory benefit plans and contracts relating to compensation, or
under Section 4(a)(2) of the Securities Act in that the transactions were between an issuer and members of its senior executive management and did not
involve any public offering within the meaning of Section 4(a)(2). The recipients of such securities were our employees, directors or consultants and received
the securities under our equity incentive plans. Appropriate legends were affixed to the securities issued in these transactions.
Issuances of Preferred Stock, Common Stock and Warrants
In May 2017, we sold an aggregate of 346,334 shares of our Series G redeemable convertible preferred stock at a price of $34.4758 per share for aggregate
gross proceeds of approximately $11.9 million.
In May 2017, we issued an aggregate of 1,295,746 shares of our Series G’ redeemable convertible preferred stock upon conversion of outstanding promissory
notes.
In May 2017, we issued an aggregate of 801,329 shares of common stock upon conversion of outstanding promissory notes.
In May 2017, we issued warrants to purchase an aggregate number of shares of our common stock equal to the product obtained by multiplying 346,334 by a
fraction, the numerator of which is the difference between $68.9516 and the volume weighted average closing price of our common stock over the 30 trading
days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants become
exercisable and the denominator of which is such volume weighted average closing price, which warrants are exercisable upon the earlier to occur of the date
(i) 180 days following the date of the prospectus for our IPO, dated February 8, 2018 and (ii) 10 days prior to a sale of our company, at an exercise price of
$0.0004 per share.
In June 2017, we issued a warrant to purchase up to 17,500 shares of common stock at a price per share of $27.68 to National Electrical Benefit Fund.
The offers, sales and issuances of the securities described in the preceding paragraph were deemed to be exempt from registration under the Securities Act in
reliance on Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D promulgated thereunder as a transaction by an issuer not involving a public
offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these
transactions was either an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act or had adequate access, through
employment, business or other relationships, to information about us.
Issuer Purchases of Equity Securities
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
We derived the selected consolidated statements of operations data for the years ended December 31, 2015, 2016 and 2017 and the selected consolidated
balance sheet data as of December 31, 2015, 2016 and 2017 from our audited consolidated financial statements included elsewhere in this Annual Report. Our
historical results are not necessarily indicative of the results to be expected in the future. The selected financial data should be read together with Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in conjunction with our consolidated financial statements,
related notes, and other financial information included elsewhere in this Annual Report. The following tables set forth our selected consolidated financial and
other data for the years ended and as of December 31, 2015, 2016 and 2017 (in thousands, except share and per share data).
40
Table of Contents
Consolidated Statement of Operations:
Revenue
Costs and expenses:
FI Share and other third-party costs
Delivery costs(1)
Sales and marketing expense(1)
Research and development expense(1)
General and administrative expense(1)
Depreciation and amortization expense
Termination of U.K. agreement expense
Total costs and expenses
Operating loss
Interest expense, net
Change in fair value of warrant liability
Change in fair value of convertible promissory notes
Change in fair value of convertible promissory notes—related parties
Other income (expense), net
Total other expense
Loss before income taxes
Income tax benefit
Net loss
Adjustments to the carrying value of redeemable convertible preferred stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic and diluted(2)
Weighted-average common shares outstanding, basic and diluted
(1)
Includes stock-based compensation expense as follows:
Stock-based compensation expense:
Delivery costs
Sales and marketing expense
Research and development expense
General and administrative expense
Total stock-based compensation expense
Year Ended
December 31,
2016
2017
2015
$ 77,634
$ 112,821
$130,365
47,691
4,803
32,784
11,604
18,197
2,194
—
117,273
(39,639)
(1,484)
914
—
—
(432)
(1,002)
(40,641)
16
$ (40,625)
(1,001)
$ (41,626)
66,285
6,127
31,261
13,902
21,355
4,219
25,904
169,053
(56,232)
(6,170)
(32)
(786)
(10,091)
(2,385)
(19,464)
(75,696)
—
$ (75,696)
(982)
$ (76,678)
73,247
7,012
31,927
12,150
20,100
3,028
—
147,464
(17,099)
(8,239)
(581)
(1,244)
6,213
1,309
(2,542)
(19,641)
—
$ (19,641)
(5,743)
$ (25,384)
$ (19.91)
$ (32.48)
$
(7.86)
2,091
2,361
3,230
Year Ended
December 31,
2016
96
$
1,153
574
1,624
$3,447
2015
97
$
1,015
386
955
$2,453
2017
$ 202
1,894
951
2,100
$5,147
(2)
See Note 14 to our consolidated financial statements appearing elsewhere in this Annual Report for further details on the calculation of basic and
diluted net loss per share attributable to common stockholders.
41
Table of Contents
Consolidated Balance Sheet Data:
Cash and cash equivalents
Accounts receivable, net
Working capital(1)
Total assets
Total debt
Total liabilities
Redeemable convertible preferred stock
Warrant liability
Additional paid-in capital
Accumulated deficit
Total stockholders’ deficit
As of December 31,
2016
2017
$ 22,838
42,042
28,720
86,859
111,899
157,672
146,022
2,197
29,867
(248,804)
(216,835)
$ 21,262
48,348
32,490
100,758
57,012
113,007
196,437
10,230
58,693
(268,445)
(208,686)
(1) We define working capital as current assets less current liabilities. See our consolidated financial statements included elsewhere in this Annual Report
for further details regarding our current assets and current liabilities.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements
and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and
analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking
statements that involve risks and uncertainties. You should review Item 1A. “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in
this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion and analysis.
Overview
Cardlytics makes marketing more relevant and measurable through our purchase intelligence platform. With purchase data from more than 2,000 banks and
credit unions, which we refer to as financial institutions, or FIs, we have a secure view into where and when consumers are spending their money. By
applying advanced analytics to this massive aggregation of purchase data, we make it actionable, helping marketers identify, reach and influence likely buyers
at scale, and measure the true sales impact of their marketing spend. This collection of debit, credit, ACH, and bill pay data represented approximately $1.5
trillion in U.S. consumer spend in 2017. In 2017, our platform analyzed over 20.0 billion online and in-store transactions across more than 100.0 million
accounts in the United States, or U.S., representing one in five debit and credit card swipes in the U.S.
We were founded in 2008 with the vision to transform commerce with purchase intelligence. Our first solution was Cardlytics Direct, our proprietary native
bank advertising channel. Cardlytics Direct enables marketers to reach consumers through their trusted and frequently visited online and mobile banking
channels. We have historically derived substantially all of our revenue from sales of Cardlytics Direct. For 2015, 2016 and 2017, our Cardlytics Direct
revenue was $64.4 million, $97.8 million and $122.4 million, respectively. We designed our Other Platform Solutions to further leverage our intelligence
platform and the massive, growing and actionable foundational data asset that we amassed with Cardlytics Direct. For 2015, 2016 and 2017, our Other
Platform Solutions revenue was $13.2 million, $15.0 million and $8.0 million, respectively. Revenue from Other Platform Solutions delivered as a managed
service represented a significant majority of our total Other Platform Solutions revenue in 2015, 2016 and 2017 until it was discontinued on July 31, 2017.
Given that we are now focusing our efforts on more nascent Other Platform Solutions, we do not expect to generate substantial revenue from Other Platform
Solutions for the foreseeable future.
42
Table of Contents
Our partnerships with FIs provide us with access to their purchase data and online banking customers, which we leverage to deliver our solutions to
marketers. As of December 31, 2016 and 2017, we were a partner to 1,659 and 2,035 FIs, respectively, including Bank of America, National Association, or
Bank of America; PNC Bank National Association, or PNC; Branch Banking and Trust Company, or BB&T; SunTrust Banks, Inc., or SunTrust; Lloyds TSB
Bank plc, or Lloyds; Santander UK plc., or Santander; and several of the largest bank processors and digital banking providers to reach customers of small
and mid-sized FIs. Additionally, in the first quarter of 2018, we launched a pilot implementation of Cardlytics Direct with Wells Fargo & Company, or Wells
Fargo, directed at Wells Fargo customers located in Miami, Florida; Charlotte, North Carolina and San Francisco, California.
We pay our FI partners an FI Share, which is a negotiated and fixed percentage of our billings to marketers less any consumer incentives that we pay to the
FIs’ customers and certain third-party data costs. We have a minimum FI Share commitment with a certain FI partner totaling $10.0 million over a 12-month
period after June 30, 2018 and following completion of certain milestones. As the amount of revenue that we can generate from marketers with respect to
Cardlytics Direct is primarily a function of the number of active users on our FI partners’ digital banking platforms, we believe that the number of monthly
active users, or FI MAUs, contributed by any FI partner is indicative of our level of dependence on such FI partner. During 2015, 2016 and 2017, our largest
FI partner, Bank of America, contributed approximately 50%, 47% and 51% of our total FI MAUs, respectively. Lloyds, our largest FI partner in the United
Kingdom, or U.K., contributed approximately 9%, 10% and 9% of our total FI MAUs in 2015, 2016 and 2017, respectively. Digital Insight Corporation, a
subsidiary of NCR Corporation, or Digital Insight, contributed approximately 15%, 13% and 11% of our total FI MAUs in 2015, 2016 and 2017, respectively.
We have experienced rapid growth in our revenue since inception. Our revenue, which excludes consumer incentives, was $53.8 million, $77.6 million,
$112.8 million and $130.4 million, for 2014, 2015, 2016 and 2017, respectively, representing a compound annual growth rate of 34.3%. For 2014, 2015, 2016
and 2017, our net loss was $38.9 million, $40.6 million, $75.7 million and $19.6 million, respectively. Our historical losses have been driven by our
substantial investments in our platform and infrastructure, which we believe will enable us to expand the use of our platform by both FIs and marketers. In
2016, our net loss included a $25.9 million one-time non-cash charge related to the termination of our U.K. agreement with Aimia EMEA Limited, or Aimia,
and a $10.9 million non-cash charge related to the issuance and change in fair value of convertible promissory notes. Our net loss in 2017 includes a
$5.0 million non-cash gain related to the change in fair value of convertible promissory notes. In both 2015 and 2016, we derived 11% of our revenue outside
the U.S. In the year ended December 31, 2017, 13% of our revenue was derived outside the U.S.
Our Business Model
Substantially all of our revenue is derived from our proprietary native banking channel, Cardlytics Direct. We also generate revenue from the sale of our
Other Platform Solutions.
Cardlytics Direct
Our Cardlytics Direct solution is our proprietary native bank advertising channel that enables marketers to reach consumers through their trusted and
frequently visited online and mobile banking channels. Working with a marketer, we design a campaign that targets customers based on their purchase history.
The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that we collect from
marketers to provide these consumer incentives to our FIs’ customers after they make qualifying purchases, which we refer to as Consumer Incentives.
Leveraging our powerful predictive analytics, we are able to create compelling Consumer Incentives that have the potential to increase return on advertising
spend for marketers. We also pay our FI partners an FI Share. We have generated substantially all of our revenue from sales of Cardlytics Direct since
inception.
We price Cardlytics Direct marketing in two primary ways: (1) Cost per Served Sale, or CPS, and (2) Cost per Redemption, or CPR. In 2015, 2016 and 2017,
CPS represented 67%, 69% and 66% of our revenue from Cardlytics Direct, respectively.
We developed our pricing models with the needs of marketers in mind. Given our ability to measure the actual performance of Cardlytics Direct in driving
sales, we are able to offer marketers performance-based pricing models where they only pay us based on actual sales influenced by marketing through our
native bank channel. These pricing models are designed to ensure that marketers realize an actual return on their advertising spend with us.
43
Table of Contents
•
CPS. Our primary and fastest growing pricing model is CPS, which we created to meet the media buying preferences of marketers. We generate
revenue by charging a percentage, which we refer to as the CPS Rate, of all purchases from the marketer by consumers (1) who are served
marketing and (2) subsequently make a purchase from the marketer during the campaign period, regardless of whether consumers select the
marketing and thereby become eligible to earn the applicable Consumer Incentive. We set CPS Rates for marketers based on our expectation of
the marketer’s return on spend for the relevant campaign. Additionally, we set the amount of the Consumer Incentives payable for each campaign
based on our estimation of our ability to drive incremental sales for the marketer. We seek to optimize the level of Consumer Incentives to retain
a greater portion of billings. However, if the amount of Consumer Incentives exceeds the amount of billings that we are paid by the applicable
marketer we are still responsible for paying the total Consumer Incentive. This has occurred infrequently and has been immaterial in amount for
each of the periods presented.
•
CPR. Our initial pricing model is CPR, where marketers specify and fund the Consumer Incentive and pay us a separate negotiated, fixed
marketing fee, or the CPR Fee, for each purchase that we generate. We generate revenue if the consumer (1) is served marketing, (2) selects the
marketing and thereby becomes eligible to earn the applicable Consumer Incentive and (3) makes a qualifying purchase from the marketer during
the campaign period. We set the CPR Fee for marketers based on our estimation of the marketers’ return on spend for the relevant campaign. The
CPR Fee is either a percentage of qualifying purchases or a flat amount.
Other Platform Solutions
We also generate revenue from our Other Platform Solutions offerings. Our Other Platform Solutions enable marketers and marketing service providers to
leverage the power of purchase intelligence outside the bank channel. For example, we use purchase intelligence to help marketers measure the impact of
marketing campaigns outside of the Cardlytics Direct channel on in-store and online sales. To the extent that we use purchase intelligence derived from a
specific FI customer’s anonymized purchase data in the delivery of our Other Platform Solutions, we pay the applicable FI an FI Share calculated based on
the relative contribution of the data provided by the FI to the overall delivery of the solutions. Revenue from our Other Platform Solutions was $13.2 million,
$15.0 million and $8.0 million in 2015, 2016 and 2017, respectively. In order to test the efficacy of our Other Platform Solutions, we historically used
programmatic vendors to run marketing campaigns outside of the Cardlytics Direct channel, and thereby delivered our Other Platform Solutions primarily as
a managed service. This allowed us to gain valuable expertise in leveraging our purchase intelligence outside the banking channel. With regard to delivery of
our Other Platform Solutions as a managed service, we charged marketers a fee based on the number of impressions that we delivered for their marketing
campaign, calculated on a cost per thousand impressions, or CPM, basis. Revenue from Other Platform Solutions delivered as a managed service represented
a significant majority of our total Other Platform Solutions revenue in 2015, 2016 and 2017 until it was discontinued on July 31, 2017. Given that we are now
focusing our efforts on more nascent Other Platform Solutions, we do not expect to generate substantial revenue from Other Platform Solutions for the
foreseeable future, and we expect our overall Other Platforms Solutions revenue to decline in future periods compared to prior periods. Accordingly, our total
revenue may decline in future periods if we are unable to generate sufficient offsetting revenue from sales of Cardlytics Direct.
44
Table of Contents
Our revenue recognition policies for Cardlytics Direct and Other Platform Solutions are discussed in more detail under “Critical Accounting Policies.”
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future will be, primarily driven by the following factors:
•
Ability to Drive Additional Revenue from Cardlytics Direct. The revenue that we generate through our proprietary native bank advertising
channels from each of our FI partners varies. This variance is typically a result of how long the program has been active, the user interface for the
program and the FI’s efforts to promote the program. We continually work with FIs to improve their customers’ user experience, increase
customer awareness, and leverage additional customer outreach channels like email. However, in certain cases, we may have little control over
the design of the user interface that our FI partners choose to use or the extent to which they promote our solution to their customers. To the
extent that our FI partners fail to increase engagement with our solutions within their customer bases, we may be unable to attract and retain
marketers or their agencies and our revenue would suffer.
•
Ability to Increase Spend from Existing Marketers and Acquire New Marketers. Our performance depends on our ability to continue to
increase adoption of our solutions within our existing marketer base and attract new marketers that invest meaningfully in marketing through our
solutions. Our ability to increase adoption among existing marketers is particularly important in light of our land-and-expand business model. We
believe that we have the opportunity to expand our marketer base with a focus on attracting new brands, retailers, service providers and new
categories of marketers that will invest significantly in the use of purchase intelligence. We believe that we also have the opportunity to increase
adoption of our solutions across our existing marketers. In order to expand and further penetrate our marketer base, we have made, and plan to
continue to make, investments in expanding our direct sales teams and indirect sales channels, and increasing our brand awareness. However, our
ability to continue to grow our marketer base is dependent upon our ability to compete within the evolving markets in which we participate.
•
Ability to Expand our FI Partner Network. Our ability to maintain and grow our revenue is contingent upon maintaining and expanding our
relationships with our FI partners. Given our substantial investments to date in our intelligence platform and infrastructure, we believe that we
will be able to add FIs to our network with modest incremental investment. Each new FI partner increases the size of our data asset, increasing
the value of our solutions to both marketers and FIs that are already part of our network. Accordingly, we are focused on the continued expansion
of our FI network to ensure that we have robust purchase data to support a broad array of incentive programs with respect to our Cardlytics Direct
solution and to enrich our Other Platform Solutions. However, our sales and integration cycle with respect to our FI partners can be costly and
long, and it is difficult to predict if or when we will be successful in generating revenue from a new FI relationship.
•
Ability to Integrate our Platform with Partners. We believe that we can improve the value proposition for marketers through the use of purchase
intelligence. We intend to continue to partner with other media platforms, marketing technology providers, and marketing agencies that can
utilize our platform to serve a broad array of customers. To facilitate these partnerships, we intend to focus on continued technological integration
of our platform with those of complementary market participants. To the extent that we are unable to significantly expand our relationships with
key market participants that can drive adoption of our Other Platform Solutions, we may be unable to grow our revenue from our Other Platform
Solutions.
•
Ability to Innovate and Evolve Our Platform. As we continue to grow our data asset and enhance our platform, we are developing new solutions
and increasingly sophisticated analytical capabilities. Our future performance is significantly dependent on the investments that we make in our
research and development efforts and in our ability to continue to innovate, improve functionality, and introduce new features and solutions that
are compelling to our marketers and FIs. We intend to continue to invest in our platform, including by hiring top technical talent and focusing on
core technology innovation.
Reverse Stock Split
On January 26, 2018, our board of directors approved an amended and restated certificate of incorporation to (1) effect a reverse split on outstanding shares of
our common stock and redeemable convertible preferred stock on a one-for-four basis (the “Reverse Stock Split”), (2) modify the threshold for automatic
conversion of our preferred stock into shares of our common stock in connection with an IPO to eliminate the requirement of gross proceeds to the Company
of not less than $70.0 million and (3) authorize us to issue up to 100,000,000 shares of common stock, $0.0001 par value per share and 25,000,000 shares of
redeemable convertible preferred stock, $0.0001 par value per share (collectively, the “Charter Amendment”). The authorized shares and par values of our
common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. The Charter Amendment
45
Table of Contents
was approved by the Company’s stockholders on January 26, 2018 and became effective upon the filing of the Charter Amendment with the State of
Delaware on January 26, 2018. All issued and outstanding common stock and preferred stock and related share and per share amounts contained in this
Annual Report on Form 10-K have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.
Non-GAAP Measures and Other Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our
business metrics may be calculated in a manner different than similar business metrics used by other companies.
FI monthly active users (FI MAU)
Average revenue per user (ARPU)
Adjusted contribution
Adjusted EBITDA
Monthly Active Users
Year Ended
December 31,
2016
(in thousands, except ARPU)
2015
2017
38,957
1.65
$
$ 29,943
$(34,774)
43,927
2.23
$
$ 46,536
$(17,046)
54,943
2.23
$
$57,118
$ (7,178)
We define FI MAUs as unique customers of our FI partners that logged in and visited the online or mobile banking applications of, or opened an email from,
our FI partners during a monthly period. We then calculate a monthly average of these FI MAUs for the periods presented. We believe that FI MAUs is an
indicator of our and our FI partners’ ability to drive engagement with Cardlytics Direct and is reflective of the marketing base that we offer to marketers
through Cardlytics Direct.
Average Revenue per User
We define average revenue per user, or ARPU, as the total GAAP Cardlytics Direct revenue generated in the applicable period, divided by the average
number of FI MAUs in the applicable period. We believe that ARPU is an indicator of the value of our relationships with our FI partners with respect to
Cardlytics Direct.
Adjusted Contribution
Adjusted contribution represents our revenue less our FI Share and other third-party costs. We review adjusted contribution for internal management purposes
and believe that the elimination of our primary cost of revenue, FI Share and other third-party costs, can provide a useful measure for period-to-period
comparisons of our core business. More specifically, we report our revenue gross of FI Share and other third-party costs, but net of any consumer incentives
that we pay to our FIs’ customers. Adjusted contribution is not a measure calculated in accordance with GAAP. We believe that adjusted contribution
provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and
board of directors. Nevertheless, our use of adjusted contribution has limitations as an analytical tool, and you should not consider it in isolation or as a
substitute for analysis of our financial results as reported under GAAP. Other companies, including companies in our industry that have similar business
arrangements, may address the impact of FI Share and other third-party costs differently. See Note 15 to our consolidated financial statements appearing
elsewhere in this Annual Report for further details on our adjusted contribution by segment. You should consider adjusted contribution alongside our other
GAAP financial results. The following table presents a reconciliation of adjusted contribution to revenue, the most directly comparable GAAP measure, for
each of the periods indicated:
Revenue
Minus: FI Share and other third-party costs
Adjusted contribution
Adjusted EBITDA
2015
$77,634
47,691
$29,943
Year Ended
December 31,
2016
(in thousands)
$112,821
66,285
$ 46,536
2017
$130,365
73,247
$ 57,118
Adjusted EBITDA represents our net loss before income tax benefit; interest expense, net; depreciation and amortization; stock-based compensation expense;
change in fair value of warrant liability; change in fair value of convertible promissory notes; foreign currency (gain) loss; loss on extinguishment of debt;
costs associated with financing events; restructuring costs; amortization and impairment of
46
Table of Contents
deferred FI implementation costs; and termination of U.K. agreement expense. We do not consider these excluded items to be indicative of our core operating
performance. The items that are non-cash include change in fair value of warrant liability, change in fair value of convertible promissory notes, foreign
currency (gain) loss, amortization of FI implementation costs, depreciation and amortization expense and stock-based compensation expense. Adjusted
EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends and to generate future operating plans,
make strategic decisions regarding the allocation of capital and invest in initiatives that are focused on cultivating new markets for our solution. In particular,
the exclusion of certain expenses in calculating adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Adjusted
EBITDA is not a measure calculated in accordance with GAAP.
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; (3) adjusted EBITDA does not reflect tax payments or receipts that may represent a reduction or increase in cash available to us and (4) other
companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of the
metric as a comparative measure. Because of these and other limitations, you should consider adjusted EBITDA alongside our net loss and other GAAP
financial results. The following table presents a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP measure, for each of the
periods indicated:
Net loss
Plus:
Income tax benefit
Interest expense, net
Depreciation and amortization
Stock-based compensation expense
Change in fair value of warrant liability
Change in fair value of convertible promissory notes
Foreign currency (gain) loss
Loss on extinguishment of debt
Costs associated with financing events
Restructuring costs
Amortization and impairment of deferred FI implementation costs
Termination of U.K. agreement expense
Adjusted EBITDA
2015
Year Ended
December 31,
2016
(in thousands)
2017
$(40,625)
$(75,696)
$(19,641)
(16)
1,484
2,194
2,453
(914)
—
440
—
—
—
210
—
$(34,774)
—
6,170
4,219
3,447
32
10,877
1,926
462
2,632
1,291
1,690
25,904
$(17,046)
—
8,239
3,028
5,147
581
(4,969)
(1,318)
—
129
—
1,626
—
$ (7,178)
Components of Results of Operations
Revenue
We generate revenue from the sale of our Cardlytics Direct solution and our Other Platform Solutions. We sell our solutions by entering into agreements
directly with marketers or their marketing agencies. These agreements state the terms of the arrangement, the agreed-upon fee and, with respect to Cardlytics
Direct, the fixed period of time the offers will be available to FI customers. We generally bill for our solutions on a monthly basis following delivery of our
solutions. We report revenue net of Consumer Incentives. See “Our Business Model” for additional information.
Cost and Expense
We classify our operating expenses into the following categories: FI Share and other third-party costs; delivery costs; sales and marketing expense; research
and development expense; general and administrative expense; termination of U.K. agreement expense and depreciation and amortization expense.
47
Table of Contents
FI Share and Other Third-Party Costs
FI Share and other third-party costs consist primarily of the FI Share that we pay our FI partners, media and data costs and, through June 30, 2016, allocation
of revenue in the U.K. to Aimia. In June 2016, we acquired full control of, and the right to retain all revenue with respect to, our business in the U.K. from
Aimia. FI Share and other third-party costs also include the amortization or impairment of deferred implementation costs incurred pursuant to our agreements
with certain FI partners and any incremental costs due to FIs as part of revenue commitment arrangements, as well as non-cash expense that we may incur
from time to time upon the vesting of outstanding performance-based warrants to purchase shares of our common stock that we issued to certain FI partners,
or the Performance Warrants. As of December 31, 2017, we have not recorded an expense associated with these Performance Warrants, as none of the
performance conditions have been deemed to have been achieved. In connection with the consummation of our IPO, we expect to incur $2.5 million in a
non-cash expense, based on the initial public offering, or IPO, price of $13.00 per share, during the first quarter of 2018, as the vesting conditions on the
Performance Warrants are deemed to have been achieved upon completion of the offering.
Delivery Costs
Delivery costs consist primarily of personnel-related costs of our campaign, data operations and production support teams, including salaries, benefits,
bonuses and payroll taxes, as well as stock-based compensation expense. Delivery costs also include hosting facility costs, internally developed and
purchased or licensed software costs, outsourcing costs and professional services costs. As we add data center capacity and support personnel in advance of
anticipated growth, our delivery costs will increase in absolute dollars and if such anticipated revenue growth does not occur, our delivery costs as a
percentage of revenue will be adversely affected.
Sales and Marketing Expense
Sales and marketing expense consists primarily of personnel costs of our sales and marketing employees, including salaries, benefits, bonuses, commissions,
incentive compensation and payroll taxes. Sales and marketing expense also includes stock-based compensation expense, professional fees, marketing
programs such as trade shows, marketing materials, public relations, sponsorships and other brand building expenses, as well as outsourcing costs, travel and
entertainment expenses and company funded consumer testing expenses for certain marketers that are not current customers. We expect that our sales and
marketing expense will increase in absolute dollars as a result of hiring new sales representatives and as we invest to enhance our brand. Over time, we expect
sales and marketing expenses will decline as a percentage of revenue.
Research and Development Expense
Research and development expense consists primarily of personnel costs of our research and development employees, including salaries, benefits and
bonuses. Research and development expense also includes stock-based compensation expense, outsourcing costs, software licensing costs, professional fees
and travel expenses. We focus our research and development efforts on improving our solutions and developing new ones. We expect research and
development expense to increase in absolute dollars as we continue to create new solutions and improve the functionality of our existing solutions. We
capitalize software development costs during the application development stage, and amortize such costs on a straight-line basis over the estimated useful life
of the related asset.
General and Administrative Expense
General and administrative expense consist of personnel costs and related expenses for executive, finance, legal, compliance, information technology and
human resources personnel, including salaries, benefits, bonuses and incentive compensation. General and administrative expense also includes stock-based
compensation expense, professional fees for external legal, accounting and other consulting, financing transaction costs, facilities costs such as rent and
utilities, royalties, bad debt expense, travel expense and property and franchise taxes. We expect that general and administrative expenses will increase on an
absolute dollar basis but decrease as a percentage of revenue as we focus on processes, systems and controls to enable the our internal support functions to
scale with the growth of our business. We also anticipate increases to general and administrative expenses as we incur the costs of compliance associated with
being a publicly traded company, including audit and consulting fees, as well as increased costs for directors’ and officers’ liability insurance.
Depreciation and Amortization Expense
Depreciation and amortization expense includes depreciation of property and equipment over the estimated useful life of the applicable asset as well as
amortization of deferred patent and capitalized internal-use software development costs.
48
Table of Contents
Termination of U.K. Agreement Expense
Termination of U.K. agreement expense reflects the value of the convertible promissory notes issued to Aimia in connection with the termination of our
historical cooperation agreement in the U.K. In June 2016, we acquired full control of, and the right to retain all revenue with respect to, our business in the
U.K. from Aimia.
Interest Expense, Net
Interest expense, net consists of interest incurred on our outstanding debt instruments, as well as related discount amortization and financing costs, partially
offset by interest income on our cash balances.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability represents adjustments to the fair value of warrants based upon changes in the fair value of the underlying stock.
Change in Fair Value of Convertible Promissory Notes Including Related Parties
In April, May, June and July 2016, we issued unsecured convertible promissory notes to certain of our directors, executive officers and existing stockholders
in an aggregate principal amount of $27.0 million, at an interest rate of 10% per year, compounded annually. Change in fair value of convertible promissory
notes represents adjustments to the fair value of our convertible promissory notes as a result of our election of the fair value option. In May 2017, these
convertible promissory notes converted into shares of our redeemable convertible preferred stock.
Other Income (Expense), Net
Other income (expense), net consists primarily of gains and losses on foreign currency transactions and expenses recorded in connection with the termination
of our historical term loan and line of credit.
Income Taxes
We have generated losses before income taxes in the U.S., including most U.S. state income tax jurisdictions, and the U.K. We have generated historical net
losses and recorded a full valuation allowance against our deferred tax assets. We expect to maintain a full valuation allowance in the near term. Due to our
history of losses and our expectation of maintaining a full valuation allowance, we have not recorded an income tax provision or benefit during the periods
presented. Realization of any of our deferred tax assets depends upon future earnings, the timing and amount of which are uncertain.
49
Table of Contents
Results of Operations
The following table sets forth our condensed consolidated statements of operations:
Revenue
Costs and expenses:
FI Share and other third-party costs
Delivery costs(1)
Sales and marketing expense(1)
Research and development expense(1)
General and administrative expense(1)
Depreciation and amortization expense
Termination of U.K. agreement expense
Total costs and expenses
Operating loss
Interest expense, net
Change in fair value of warrant liability
Change in fair value of convertible promissory notes
Change in fair value of convertible promissory notes—related parties
Other income (expense), net
Total other expense
Loss before income taxes
Income tax benefit
Net loss
(1)
Includes stock-based compensation expense as follows:
50
Year Ended
December 31,
2016
(in thousands)
$ 112,821
66,285
6,127
31,261
13,902
21,355
4,219
25,904
169,053
(56,232)
(6,170)
(32)
(786)
(10,091)
(2,385)
(19,464)
(75,696)
—
$ (75,696)
2015
$ 77,634
47,691
4,803
32,784
11,604
18,197
2,194
—
117,273
(39,639)
(1,484)
914
—
—
(432)
(1,002)
(40,641)
16
$ (40,625)
2017
$130,365
73,247
7,012
31,927
12,150
20,100
3,028
—
147,464
(17,099)
(8,239)
(581)
(1,244)
6,213
1,309
(2,542)
(19,641)
—
$ (19,641)
Table of Contents
Stock-based compensation expense:
Delivery costs
Sales and marketing expense
Research and development expense
General and administrative expense
Total stock-based compensation expense
Year Ended
December 31,
2016
(in thousands)
$
96
1,153
574
1,624
$3,447
2015
$
97
1,015
386
955
$2,453
2017
$ 202
1,894
951
2,100
$5,147
The following table sets forth our condensed consolidated statements of operations expressed as a percentage of revenue:
Revenue
Costs and expenses:
FI share and other third-party costs
Delivery costs
Sales and marketing expense
Research and development expense
General and administrative expense
Depreciation and amortization expense
Termination of U.K. agreement expense
Total costs and expenses
Operating loss
Interest expense, net
Change in fair value of warrant liability
Change in fair value of convertible promissory notes
Change in fair value of convertible promissory notes—related parties
Other income (expense), net
Total other expense
Loss before income taxes
Income tax benefit
Net loss
Year Ended
December 31,*
2016
100%
59
5
28
12
19
4
23
150
(50)
(5)
—
(1)
(9)
(2)
(17)
(67)
—
(67)%
2015
100%
61
6
42
15
23
3
—
151
(51)
(2)
1
—
—
(1)
(1)
(52)
—
(52)%
2017
100%
56
5
24
9
15
2
—
113
(13)
(6)
—
(1)
5
1
(2)
(15)
—
(15)%
*
Certain figures may not sum due to rounding.
Years Ended December 31, 2016 and 2017
Revenue
Revenue by solution:
Cardlytics Direct
Other Platform Solutions
Total revenue
Year Ended
December 31,
2016
2017
$
(dollars in thousands)
2016 v. 2017 Change
%
$ 97,789
15,032
$112,821
$122,391
7,974
$130,365
$ 24,602
(7,058)
$ 17,544
25%
(47)
16%
51
Table of Contents
Revenue increased by $17.5 million in 2017 compared to 2016, primarily due to a $24.6 million increase in revenue generated from sales of our Cardlytics
Direct solution. Of this increase, $12.5 million related to sales of Cardlytics Direct to new marketers, while $12.1 million related to increased sales of
Cardlytics Direct to existing marketers. Consumer Incentives remained relatively consistent at $57.0 million in 2016 compared to $61.2 million in 2017,
which reflects our efforts to optimize the level of Consumer Incentives needed to drive incremental sales for marketers, and resulted in an increase in our
revenue. Revenue from Other Platform Solutions decreased by $7.1 million in 2017 compared to 2016, with such decrease primarily driven by the
discontinuation of our Other Platform Solutions delivered as a managed service. We do not expect to generate substantial revenue from Other Platform
Solutions delivered as a managed service in future periods as we discontinued sales of Other Platform Solutions delivered as a managed service as of July 31,
2017.
Costs and Expenses
FI Share and Other Third-Party Costs
FI Share and other third-party costs by solution:
Cardlytics Direct
Other Platform Solutions
Total FI Share and other third-party costs
% of revenue
Year Ended
December 31,
2016 v. 2017 Change
2016
2017
(dollars in thousands)
$
%
$58,105
8,180
$66,285
$68,833
4,414
$73,247
$ 10,795
(3,766)
6,962
$
18%
(46)
11%
59%
56%
FI Share and other third-party costs increased by $7.0 million in 2017 compared to 2016, primary due to an increase in revenue from sales of Cardlytics
Direct, partially offset by a $2.6 million decrease in FI share revenue commitments in excess of the FI Share otherwise earned by the applicable FI partners
and a $1.2 million decrease as a result of us no longer allocating revenue and FI Share and other third-party costs to Aimia following termination of our
cooperation agreement in June 2016. Other Platform Solutions FI Share and other third-party costs decreased $3.8 million in 2017 compared to 2016,
primarily due to a decline in media and data costs as we discontinued delivering Other Platform Solutions as a managed service as of July 31, 2017.
Delivery Costs
Delivery costs
% of revenue
Year Ended
December 31,
2016
$6,127
$
2017
(dollars in thousands)
$7,012
$
5%
5%
2016 v. 2017 Change
%
885
14%
Delivery costs increased by $0.9 million in 2017 compared to 2016, primarily to support enhancements for existing FI partners and implementation for new
FI partners. These costs include a $0.7 million increase in personnel-related costs for our campaign, data operations and production support teams and a
$0.1 million increase in stock-based compensation expense.
Sales and Marketing Expense
Sales and marketing expense
% of revenue
Year Ended
December 31,
2016
2017
2016 v. 2017 Change
%
$
$31,261
(dollars in thousands)
$31,927
$
666
2%
28%
24%
Sales and marketing expense increased by $0.7 million in 2017 compared to 2016, primarily due to a $0.3 million increase in personnel costs associated with
our additional sales and marketing headcount and a $0.8 million increase in incentive compensation as a result of incremental sales and a $0.7 million
increase in stock-based compensation expense offset by a $0.5 decrease in travel and entertainment related expense, a $0.3 million decrease in professional
fees and a $0.2 million decrease in marketing related expenses related to reductions in advertising and public relations expenses, reduced sponsorships and
consumer testing expenses.
52
Table of Contents
Research and Development Expense
Research and development expense
% of revenue
Year Ended
December 31,
2016 v. 2017 Change
2016
$13,902
12%
2017
(dollars in thousands)
$12,150
9%
$
%
$ (1,752)
(13)%
Research and development expense decreased by $1.8 million in 2017 compared to 2016, primarily due to a $1.6 million decrease in personnel costs
associated with our research and development headcount, a $0.4 million decrease in professional services and a $0.4 million decrease in outsourcing costs,
offset by a $0.4 million increase in stock-based compensation and a $0.2 million increase in technology related expenses.
General and Administrative Expense
General and administrative expense
% of revenue
Year Ended
December 31,
2016
$21,355
2017
(dollars in thousands)
$20,100
19%
15%
2016 v. 2017 Change
%
$
$ (1,255)
(6)%
General and administrative expense decreased by $1.3 million in 2017 compared to 2016, primarily due to a $2.5 million decrease in financing-related costs
and a $1.0 million decrease in bad debt expense, offset by a $1.4 million increase in personnel costs related to our increased headcount, a $0.5 million
increase in stock-based compensation and a $0.3 million increase in facility costs.
Depreciation and Amortization Expense
Depreciation and amortization expense
% of revenue
Year Ended
December 31,
2016 v. 2017 Change
2016
$4,219
2017
$
(dollars in thousands)
$3,028
$ (1,191)
%
(28)%
4%
2%
Depreciation and amortization expense decreased by $1.2 million in 2017 compared to 2016, primarily due to $1.2 million of accelerated amortization of
internal-use software development costs we incurred in 2016.
Termination of U.K. Agreement Expense
Termination of U.K. agreement expense
% of revenue
Year Ended
December 31,
2016 v. 2017 Change
2016
$25,904
23%
2017
$
(dollars in thousands)
$—
—%
$(25,904)
%
(100)%
Termination of U.K. agreement expense was $25.9 million expense in 2016 and reflects the value of convertible promissory notes issued to Aimia in
connection with the termination of our historical cooperation agreement in the U.K.
Interest Expense, Net
Interest expense, net
% of revenue
Year Ended
December 31,
2016 v. 2017 Change
2016
$(6,170)
2017
(dollars in thousands)
$(8,239)
$
$ (2,069)
%
34%
(5)%
(6)%
53
Table of Contents
Interest expense, net increased by $2.1 million in 2017 compared to 2016, primarily due to a $3.3 million increase related to our new, larger debt facilities
entered into in during the third quarter of 2016, offset by a $1.2 million reduction of interest expense related to our promissory notes that converted into
redeemable convertible preferred stock in May 2017.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability
% of revenue
$(32)
—%
$(581)
—%
$ (549)
1716%
Change in fair value of warrant liability decreased in 2017 due to decreases in the value of our redeemable convertible preferred stock and common stock.
Year Ended
December 31,
2016
2016 v. 2017 Change
%
2017
(dollars in thousands)
$
Change in Fair Value of Convertible Promissory Notes
Year Ended
December 31,
2016
2017
$
(dollars in thousands)
2016 v. 2017 Change
%
Change in fair value of convertible promissory notes
% of revenue
$(786)
$(1,244)
$
(458)
58%
(1)%
(1)%
Change in fair value of convertible promissory notes reflects an increase in the value of our convertible promissory notes, which was driven by periodic
valuations.
Change in Fair Value of Convertible Promissory Notes—Related Parties
Change in fair value of convertible promissory notes—related parties
% of revenue
Year Ended
December 31,
2016 v. 2017 Change
2016
$(10,091)
2017
$
(dollars in thousands)
$6,213
$ 16,304
%
(162)%
(9)%
5%
Change in fair value of convertible promissory notes reflects a decrease in the value of our convertible promissory notes, which was driven by periodic
valuations.
Other Income (Expense), Net
Other income (expense), net
% of revenue
Year Ended
December 31,
2016 v. 2017 Change
2016
$(2,385)
2017
$
(dollars in thousands)
$1,309
$ 3,694
%
(155)%
(2)%
1%
Other income (expense), net increased by $3.7 million in 2017 compared to 2016, primarily due to the increase in the value of the British pound relative to the
U.S. dollar and $0.5 million of debt extinguishment costs in 2016.
54
Table of Contents
Years Ended December 31, 2015 and 2016
Revenue
Revenue by solution:
Cardlytics Direct
Other Platform Solutions
Total revenue
Year Ended
December 31,
2015
2016
$
(dollars in thousands)
2015 v. 2016 Change
%
$64,447
13,187
$77,634
$ 97,789
15,032
$112,821
$ 33,342
1,845
$ 35,187
52%
14
45%
Revenue increased by $35.2 million in 2016 compared to 2015, primarily due to a $33.3 million increase in revenue generated from sales of our Cardlytics
Direct solution. Of this increase, $12.1 million related to sales of Cardlytics Direct to new marketers, while $21.2 million related to increased sales of
Cardlytics Direct to existing marketers. Consumer Incentives remained relatively consistent at $56.3 million in 2015 compared to $57.0 million in 2016,
which reflects our efforts to optimize the level of Consumer Incentives needed to drive incremental sales for marketers, and resulted in an increase in our
revenue. Revenue from Other Platform Solutions consisted substantially of revenue from sales of our Other Platform Solutions delivered as a managed
service and increased by $1.8 million in 2016 compared to 2015, with such increase primarily driven by increased adoption of Other Platform Solutions
delivered other than as a managed service. We do not expect to generate substantial revenue from Other Platform Solutions delivered as a managed service in
future periods as we discontinued sales of Other Platform Solutions delivered as a managed service as of July 31, 2017.
Costs and Expenses
FI Share and Other Third-Party Costs
FI Share and other third-party costs by solution:
Cardlytics Direct
Other Platform Solutions
Total FI Share and other third-party costs
% of revenue
Year Ended
December 31,
2015 v. 2016 Change
2015
2016
(dollars in thousands)
$
%
$38,664
9,027
$47,691
$58,105
8,180
$66,285
$ 19,441
(847)
$ 18,594
50%
(9)
39%
61%
59%
FI Share and other third-party costs increased by $18.6 million in 2016 compared to 2015, primary due to an increase in revenue from sales of Cardlytics
Direct. In addition to an increase driven by the increase in revenue, the $18.6 million increase in FI Share and other third-party costs included a $2.6 million
increase in FI share revenue commitments in excess of the FI Share otherwise earned by the applicable FI partners, partially offset by a $1.2 million decrease
as a result of us no longer allocating revenue and FI Share and other third-party costs to Aimia following termination of our cooperation agreement in June
2016. Other Platform Solutions FI Share and other third-party costs decreased $0.8 million in 2016 compared to 2015, primarily due to a decline in media and
data costs as we began to shift our focus away from delivering Other Platform Solutions as a managed service.
Delivery Costs
Delivery costs
% of revenue
Year Ended
December 31,
2015
$4,803
$
2016
(dollars in thousands)
$6,127
$
6%
5%
2015 v. 2016 Change
%
1,324
28%
Delivery costs increased by $1.3 million in 2016 compared to 2015, primarily to support enhancements for existing FI partners and implementation for new
FI partners. These costs include a $0.7 million increase in personnel-related costs for our campaign, data operations and production support teams and a
$0.3 million increase in personnel costs and stock-based compensation expense.
55
Table of Contents
Sales and Marketing Expense
Sales and marketing expense
% of revenue
Year Ended
December 31,
2015
$32,784
2016
(dollars in thousands)
$31,261
42%
28%
2015 v. 2016 Change
%
$
$ (1,523)
(5)%
Sales and marketing expense decreased by $1.5 million in 2016 compared to 2015, primarily due to a $3.5 million decrease in marketing costs related to
reductions in advertising and public relations expenses, reduced sponsorships and consumer testing expenses, and a $0.7 million decrease in outsourcing
costs, offset by a $1.7 million increase in personnel cost associated with our additional sales and marketing headcount and a $1.4 million increase in incentive
compensation as a result of incremental sales.
Research and Development Expense
Research and development expense
% of revenue
Year Ended
December 31,
2015
2016
2015 v. 2016 Change
%
$
$11,604
(dollars in thousands)
$13,902
$
2,298
20%
15%
12%
Research and development expense increased by $2.3 million in 2016 compared to 2015, primarily due to a $0.8 million increase in personnel costs
associated with our increased research and development headcount, a $1.1 million increase in incentive compensation and a $0.5 million increase in
outsourcing costs.
General and Administrative Expense
General and administrative expense
% of revenue
Year Ended
December 31,
2015
2016
2015 v. 2016 Change
%
$
$18,197
(dollars in thousands)
$21,355
$
3,158
17%
23%
19%
General and administrative expense increased by $3.2 million in 2016 compared to 2015, primarily due to a $2.7 million increase in financing-related costs,
offset by a $0.5 million decrease in professional services. Incentive compensation also increased by $1.1 million over the same period.
Depreciation and Amortization Expense
Depreciation and amortization expense
% of revenue
Year Ended
December 31,
2015
$2,194
2016
$
(dollars in thousands)
$4,219
$
3%
4%
2015 v. 2016 Change
%
2,025
92%
Depreciation and amortization expense increased by $2.0 million in 2016 compared to 2015, primarily due to $1.2 million of accelerated amortization of
internal-use software development costs and a $0.8 million increase in depreciation related to technology equipment.
56
Table of Contents
Termination of U.K. Agreement Expense
Termination of U.K. agreement expense
% of revenue
Year Ended
December 31,
2015
2016
2015 v. 2016 Change
%
$
(dollars in thousands)
$25,904
$
25,904 N/A
$ —
—%
23%
Termination of U.K. agreement expense was $25.9 million expense in 2016 and reflects the value of convertible promissory notes issued to Aimia in
connection with the termination of our historical cooperation agreement in the U.K.
Interest Expense, Net
Interest expense, net
% of revenue
Year Ended
December 31,
2015
$(1,484)
2016
$
(dollars in thousands)
$(6,170)
(2)%
(5)%
2015 v. 2016 Change
%
$ (4,686) 316%
Interest expense, net increased by $4.7 million in 2016 compared to 2015, primarily due to interest payable on our new debt facilities entered into in 2016.
Change in Fair Value of Warrant Liability
Change in fair value of warrant liability
% of revenue
Year Ended
December 31,
2015
$914
1%
$
2016
(dollars in thousands)
$(32)
—%
$ (946)
2015 v. 2016 Change
%
(104)%
Change in fair value of warrant liability decreased in 2016 due to decreases in the value of our redeemable convertible preferred stock.
Change in Fair Value of Convertible Promissory Notes
Change in fair value of convertible promissory notes
% of revenue
Year Ended
December 31,
2015
2016
2015 v. 2016 Change
%
$
(dollars in thousands)
$
$ (786)
(786) N/A
$—
—%
(1)%
Change in fair value of convertible promissory notes reflects an increase in the value of our convertible promissory notes, which was driven by periodic
valuations.
Change in Fair Value of Convertible Promissory Notes—Related Parties
Year Ended
December 31,
2015
2016
2015 v. 2016 Change
%
$
(dollars in thousands)
Change in fair value of convertible promissory notes—related parties
% of revenue
57
$—
—%
(9)%
$(10,091)
$ (10,091) N/A
Table of Contents
Change in fair value of convertible promissory notes reflects an increase in the value of our convertible promissory notes, which was driven by periodic
valuations.
Other Income (Expense), Net
Other income (expense), net
% of revenue
Year Ended
December 31,
2015
$(432)
(1)%
2016
(dollars in thousands)
$(2,385)
(2)%
2015 v. 2016
Change
$
%
$(1,953)
452%
Other income (expense), net decreased by $2.0 million in 2016 compared to 2015, primarily due to the decrease in the value of the British pound relative to
the U.S. dollar and $0.5 million debt extinguishment costs in 2016.
Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statements of operations data for each of our eight most recently completed quarters. We
have prepared the quarterly financial data on the same basis as the audited consolidated financial statements included in this Annual Report. In our opinion,
the quarterly financial data reflects all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of this
data. This quarterly financial data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this
Annual Report. Our historical results are not necessarily indicative of the results to be expected in the future.
Revenue by solution:
Cardlytics Direct
Other Platform Solutions
Total revenue
Costs and expenses:
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
Three Months Ended
$ 16,257 $ 22,703 $
3,085
19,342
3,186
25,889
26,993 $
4,176
31,169
31,836 $ 24,454 $28,947 $
4,585
2,427
26,881
36,421
3,865
32,812
30,214 $
1,192
31,406
38,776
490
39,266
11,467
FI Share and other third-party costs
1,596
Delivery costs
7,576
Sales and marketing expense
4,099
Research and development expense
5,171
General and administration expense
709
Depreciation and amortization expense
Termination of U.K. agreement expense —
30,618
(11,276)
Total costs and expenses
15,737
1,568
7,752
3,792
6,470
805
13,637
49,761
(23,872)
17,782
1,565
7,522
3,210
4,599
1,918
12,267
48,863
(17,694)
21,299
1,398
8,411
2,801
5,115
787
—
39,811
(3,390)
16,677
1,553
7,232
3,013
4,689
765
—
33,929
(7,048)
19,680
1,896
7,920
3,093
4,773
767
—
38,129
(5,317)
(534)
148
(934)
421
(2,155)
71
(2,547)
(671)
(2,644)
(327)
(2,020)
(1,466)
Operating loss
Other income (expense):
Interest expense, net
Change in fair value of warrant liability
Change in fair value of convertible
14,529
1,646
8,302
3,421
5,276
771
—
33,945
(2,539)
(1,763)
1,381
22,361
1,917
8,473
2,623
5,362
725
—
41,461
(2,195)
(1,812)
(169)
promissory notes
—
(28)
(791)
32
(383)
(861)
—
—
58
Table of Contents
Change in fair value of convertible
promissory notes—related parties
Other income (expense), net
Total other income (expense)
Loss before income taxes
Income tax benefit
Net loss
Adjustments to the carrying value of
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
Three Months Ended
—
(258)
(644)
(11,920)
—
(6,636)
(581)
(7,758)
(31,630)
—
$ (11,920) $(31,630) $
(3,644)
(888)
(7,407)
(25,101)
—
(25,101) $
190
(659)
(3,655)
(7,045)
—
(2,223)
162
(5,415)
(12,463)
—
8,436
580
4,669
(648)
—
(7,045) $(12,463) $ (648) $
—
447
65
(2,474)
—
(2,474) $
—
120
(1,861)
(4,056)
—
(4,056)
redeemable convertible preferred stock
(245)
(252)
(244)
(241)
(244)
(4,789)
(350)
(360)
Net loss attributable to common
stockholders
Net loss per share attributable to common
$(12,165) $(31,882) $
(25,345) $
(7,286) $(12,707) $(5,437) $
(2,824) $
(4,416)
stockholders, basic and diluted
$
(5.69) $ (14.80) $
(9.87) $
(2.82) $
(4.80) $ (1.69) $
(0.80) $
(1.26)
Weighted-average common shares
outstanding, basic and diluted
Quarterly Trends
Revenue
2,138
2,154
2,567
2,582
2,645
3,221
3,542
3,498
Our revenue has generally increased over the past eight quarters, driven primarily by increased sales to new marketers and increased sales to existing
marketers. Our revenue is tied to our marketers’ advertising spending, which is traditionally strongest in the fourth quarter of each year and weakest in the
first quarter of each year.
Cost of Revenue, Operating Expenses and Other Expenses
Cost of revenue generally increased during every quarter, primarily driven by increases in revenue. FI Share and other third-party costs are directly related to
the amount of revenue that we generate, and therefore increased as our revenue increased. Our increased operating expenses reflect increases in headcount,
investments made to continue growing our business and expenses related to the termination of our U.K. agreement. Total other expense increased over the
periods presented, driven primarily by convertible promissory notes issued over the course of 2016.
Segment Information
We have two reportable segments: Cardlytics Direct and Other Platform Solutions, as determined by the information that both our Chief Executive Officer
and President and Chief Operating Officer, who we consider our chief operating decision makers, use to make strategic goals and operating decisions. Our
Cardlytics Direct segment represents our proprietary native bank advertising channel. Our Other Platform Solutions segments represents solutions that enable
marketers and marketing service providers to leverage the power of purchase intelligence outside the banking channel.
59
Table of Contents
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make
estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and
assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions
on an ongoing basis. Our actual results may differ from these estimates. Our most critical accounting policies are summarized below. See Note 2 to our
consolidated financial statements beginning on page 70 of this Annual Report for a description of our other significant accounting policies.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition, on a transaction when all of the
following conditions have been satisfied:
•
•
•
•
persuasive evidence of an agreement exists;
the solution has been provided to the customer;
fees are fixed or determinable; and
the collection of the fees is reasonably assured.
If any of these criteria are not met, revenue recognition is deferred until such time that all of the criteria are met. Our deferred revenue is primarily comprised
of payments received in advance for Cardlytics Direct marketing campaigns.
We sell our solutions by entering into agreements directly with marketers or their marketing agencies. The agreements state the terms of the arrangement, the
agreed upon fee and, with respect to Cardlytics Direct, the fixed period of time the offers will be available to FI customers. Persuasive evidence of an
arrangement is considered to exist and the fee is considered fixed and determinable upon the execution of an agreement. With respect to our Cardlytics Direct
solution, the solution is deemed to have been provided to the marketer as FIs’ customers make qualifying purchases during the marketing campaign term.
With respect to Other Platform Solutions, the solution is deemed to have been provided (1) for non-managed service campaigns, when we deliver the
purchase intelligence to the marketer and (2) for managed service campaigns, when the digital advertising impressions contemplated by the campaign have
been served to targeted consumers. We determine collectability upfront and on an on-going basis by performing credit evaluations and monitoring our
marketers’ accounts receivable balances.
Gross/Net Consideration
We evaluate the appropriateness of revenue recognition on a gross or net basis by considering the indicators outlined within ASC Topic 605-45, Revenue
Recognition—Principal Agent Considerations and ASC Topic 605-50, Customer Payments and Incentives. We consider the nature of the costs and risks
associated with the indicators present in evaluating the substance of an arrangement. We consider the relative strength of each indicator and certain factors
may be assessed to carry more weight in the evaluation.
Consumer Incentives
We report our revenue on our consolidated statement of operations net of Consumer Incentives. We generally pay Consumer Incentives only with respect to
our Cardlytics Direct solution. We do not provide the goods or services that are purchased by our FIs’ customers from the marketers to which the Consumer
Incentives relate. Accordingly, the marketer is deemed to be the principal in the relationship with the customer and, therefore, the Consumer Incentive is
deemed to be a reduction in the purchase price paid by the customer for the marketer’s goods or services. While we are responsible for remitting Consumer
Incentives to our FI partners for further payment to their customers, we function solely as an agent of marketers in these arrangements.
Accounts receivable is recorded at the amount of gross billings to marketers, net of allowances, for the fees and Consumer Incentives that we are responsible
to collect. Our accrued liabilities also include the amount of Consumer Incentives due to FI partners. As a result, accounts receivable and accounts payable
may appear large in relation to revenue, which is reported on a net basis. During 2015, 2016 and 2017, Consumer Incentives totaled $56.3 million,
$57.0 million and $61.2 million, respectively.
60
Table of Contents
FI Share and Other Third-Party Costs
We report our revenue on our consolidated statement of operations gross of FI Share. FI Share is included in FI share and other third-party costs in our
consolidated statements of operations, rather than as a reduction of revenue, because we and not our FI partners act as the principal in our arrangements with
marketers. We are responsible for fulfillment and acceptability of the solutions purchased by marketers. We also have latitude in establishing the price of our
solutions, have discretion in supplier selection and earn variable amounts. FIs only supply consumer purchase data and digital marketing space and have no
involvement in the marketing campaigns or relationship (contractual or otherwise) with marketers.
We report our revenue on our consolidated statement of operations gross of media costs. We incur media costs in connection with the delivery of managed
services with respect to our Other Platform Solutions. Media costs are included in FI share and other third-party costs in our consolidated statements of
operations, rather than as a reduction of revenue, because we and not exchanges or digital publishers act as the principal in our arrangements with marketers.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax
bases, and operating loss and tax credit carryforwards. Valuation allowances are provided when we determine that it is more likely than not that all of, or a
portion of, deferred tax assets will not be utilized in the future.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance,
we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the
event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a
corresponding impact to the provision for income taxes in the period in which such determination is made.
Estimates of future taxable income are based on assumptions that are consistent with our plans. Assumptions represent management’s best estimates and
involve inherent uncertainties and the application of management’s judgment. If actual amounts differ from our estimates, the amount of our tax expense and
liabilities could be materially impacted.
We have recorded a full valuation allowance related to our deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those
assets.
We recognize the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely on its technical merits as of the reporting
date, and then, only in an amount more likely than not to be sustained upon review by the tax authorities. Where applicable, we classify associated interest
and penalties as income tax expense. The total amounts of interest and penalties were not material. We consider many factors when evaluating and estimating
our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Stock-Based Compensation
We measure and recognize compensation expense for all stock options based on the estimated fair value of the award on the grant date. We use the Black-
Scholes option pricing model to estimate the fair value of stock option awards. The fair value is recognized as expense over the requisite service period,
which is generally the vesting period of the respective award, on a straight-line basis when the only condition to vesting is continued service. Forfeitures are
accounted for when they occur. We recognize the fair value of stock options which contain performance conditions based upon the probability of the
performance conditions being met. We have not issued awards where vesting is subject to a market condition; however, if we were to grant such awards in the
future, recognition would be based on the derived service period. Expense for awards with performance conditions are estimated and adjusted on a quarterly
basis based upon our assessment of the probability that the performance condition will be met.
61
Table of Contents
The determination of the grant date fair value of options using an option pricing model is affected principally by our estimated common stock fair value and
requires management to make a number of other assumptions, including the expected life of the option, the volatility of the underlying stock, the risk-free
interest rate and expected dividends. The assumptions used in our Black-Scholes option-pricing model represent management’s best estimates at the time of
grant. These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are
inherently subjective. If any assumptions change, our stock-based compensation expense could be materially different in the future. For more information
refer to Note 2 and 6 to the consolidated financial statements.
These assumptions are estimated as follows:
•
•
•
•
•
Fair Value of Common Stock. As our common stock has not historically been publicly traded, we estimated the fair value of common stock. See
“—Fair Value of Common and Preferred Stock.”
Expected Term. The expected term represents the period that our stock options are expected to be outstanding. We calculated the expected term
using the simplified method based on the average of each option’s vesting term and the contractual period during which the option can be
exercised, which is typically 10 years following the date of grant.
Expected Volatility. The expected volatility was based on the historical stock volatility of several of our comparable publicly traded companies
over a period of time equal to the expected term of the options, as we do not have any trading history to use the volatility of our own common
stock.
Risk-Free Interest Rate. The risk-free interest rate was based on the yields of U.S. Treasury securities with maturities appropriate for the term of
the award.
Expected Dividend Yield. We have not paid dividends on our common stock nor do we expect to pay dividends in the foreseeable future.
The following table reflects the weighted average assumptions used to estimate the fair value of options granted during the periods presented:
Expected term (years)
Expected volatility
Risk-free interest rate
Expected dividend yield
Fair Value of Common and Preferred Stock
2015
7.0 years
Year Ended December 31,
2016
7.0 years
51-55%
1.6-1.9%
0%
51-56%
0.5-2.1%
0%
2017
7.0 years
50-51%
0.7-2.2%
0%
Historically, for all periods prior to December 31, 2017, the fair values of the shares of common stock underlying our stock options and shares of preferred
stock underlying warrants were estimated on each grant date by our board of directors. In order to determine the fair value of our common and preferred
stock, our board of directors considered, among other things, contemporaneous valuations of our common and preferred stock prepared by unrelated third-
party valuation firms in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. Given the absence of a public trading market of our capital stock, our
board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value
of our common and preferred stock, including:
•
•
•
•
•
•
•
contemporaneous third-party valuations of our common and preferred stock;
the prices, rights, preferences and privileges of our preferred stock relative to the common stock;
our business, financial condition and results of operations, including related industry trends affecting our operations;
the likelihood of achieving a liquidity event, such as an IPO or sale of our company;
the lack of marketability of our common and preferred stock;
the market performance of comparable publicly traded technology companies; and
U.S. and global economic and capital market conditions and outlook.
62
Table of Contents
The following table summarizes by grant date the number of shares of common stock subject to stock options granted from June 30, 2016, as well as the
associated per share exercise price and the estimated fair value per share of our common stock as of the grant date:
Grant Date
August 2, 2016
August 4, 2016
September 15, 2016
October 14, 2016
November 17, 2016
December 6, 2016
February 3, 2017
April 1, 2017
April 3, 2017
April 4, 2017
April 26, 2017(1)
May 4, 2017(1)
July 18, 2017
December 15, 2017(2)
Number of
Options Granted (#)
680,119
153,770
468
50,000
25,000
50,000
60,919
342,823
1,250
375
1,112
262,499
19,529
28,748
Exercise Price per
Share of
Common
Stock ($)
20.00
20.00
20.00
20.00
20.00
20.00
17.84
24.48
24.48
24.48
30.44
30.44
30.44
24.24
Estimated Fair
Value Per
Share of
Common Stock ($)
17.92
17.92
17.88
17.84
17.84
22.68
25.88
28.16
28.16
28.16
24.60
24.60
24.76
13.00
(1) These options were deemed granted for financial reporting purposes on July 7, 2017 when the exercise price was determined.
(2) These options were deemed granted for financial reporting purposes on February 8, 2018 when the exercise price was determined.
Based on the IPO price of $13.00 per share, the intrinsic value of vested and unvested stock options outstanding as of December 31, 2017 was $4.9 million
and $0.1 million, respectively. In 2016, we extended the exercise period of vested stock options held by employees affected by our reduction in force and
recognized less than $0.1 million of additional expense related to these modifications, which expense is not reflected in the table above.
Common and Preferred Stock Valuation Methodology
In valuing our common and preferred stock, our board of directors determined the equity value of our business generally using a combination of the income
approach and the market approach valuation methods.
The income approach estimates value based on the expectation of future cash flows that a company will generate, such as cash earnings, cost savings, tax
deductions and the proceeds from disposition. These future cash flows are discounted to their present values using a discount rate derived based on an
analysis of the cost of capital of comparable publicly traded companies in similar lines of business, as of each valuation date, and is adjusted to reflect the
risks inherent in our cash flows.
The market approach estimates the fair value of a company by applying market multiples of comparable publicly traded companies in a similar line of
business. The market multiples are based on relevant metrics implied by the price that investors have paid for the equity of publicly traded companies. Given
our significant focus on investing in and growing our business, we primarily utilized the forward-looking revenue multiple when performing valuation
assessments under the market approach and considered both trading and transaction multiples. When considering which companies to include as our
comparable industry peer companies, we focused on U.S.-based publicly traded companies that were broadly comparable to us based on consideration of
industry, market and line of business. From the comparable companies, a representative market value multiple was determined and applied to our operating
results to estimate the value of our company. The market value multiple was determined based on consideration of multiples of revenue to each of the
comparable companies’ last 12-month revenue and the forecasted future 12-month revenue. In addition, the market approach considers IPO and merger and
acquisition transactions involving companies similar to the company’s business being valued. Multiples of revenue are calculated for these transactions and
then applied to the business being valued, after reduction by an appropriate discount.
63
Table of Contents
Once an equity value was determined, we utilized the option price method, or OPM, or probability-weighted expected return method, or PWERM, to allocate
the overall value of equity to the various share classes. The OPM was used in valuations as of and for dates prior to December 31, 2016 and the PWERM was
used in all subsequent valuations. The OPM treats common stock and convertible preferred stock as call options on a company’s enterprise value with
exercise prices based on the liquidation preferences of the convertible preferred stock. Under this method, the common stock only has value if the funds
available for distribution to stockholders exceed the value of the liquidation preference at the time of an assumed liquidity event. The value assigned to the
common stock is the remaining value after the convertible preferred stock is liquidated. The OPM prices the call option using the Black-Scholes model. The
PWERM relies on a forward-looking analysis to predict the possible future value of a company. Under this method, discrete future outcomes, including an
IPO and non-IPO scenarios, are weighted based on the estimated the probability of each scenario. The PWERM is used when discrete future outcomes can be
predicted with reasonable certainty based on a probability distribution. We relied on the PWERM to allocate the value of equity under a liquidity scenario.
The projected equity value relied upon in the PWERM scenario was based on (1) guideline IPO transactions involving companies that were considered
broadly comparable to us and (2) our expectation of the pre-money valuation that we needed to achieve to consider an IPO as a viable exit strategy. See Note
10 to our consolidated financial statements appearing elsewhere in this Annual Report for further details on our valuation methodology.
Following the closing of our IPO, the fair value of our common stock will be determined based on the closing price of our common stock on the Nasdaq
Global Market.
Fair Value of Convertible Promissory Notes
The redemption features included in the terms of our convertible promissory notes were determined to be derivative liabilities due to a significant discount
within the redemption features for the note holders. Embedded derivatives that are not clearly and closely related to the host contract are required to be
bifurcated and recorded at fair value unless the fair value option is elected on the host contract. Under the fair value option, bifurcation of the embedded
derivative is not necessary as all related gains (losses) on the host contract and derivative will be reflected in the consolidated statements of operations. We
elected the fair value option for our convertible promissory notes and recognized losses from their initial measurement. Initial losses of $7.6 million is
recorded in change in fair value of convertible promissory notes and additional initial losses of $7.9 million related to the convertible promissory notes issued
to Aimia is recorded in termination of U.K. agreement expense on our consolidated statements of operations. Subsequent changes in fair value of our
convertible promissory notes are included in change in fair value of convertible promissory notes on our consolidated statements of operations.
To determine the fair value of our convertible promissory notes, we utilized key assumptions from the PWERM, as shown above. Under this method, we
considered the redemption features of the convertible promissory notes, as described in Note 5 to our consolidated financial statements appearing elsewhere
in this Annual Report, to determine the fair value under discrete future outcomes, including IPO and non-IPO scenarios. We weighted the fair values based on
the estimated probability of each scenario to determine the overall fair value of the convertible promissory notes as of the balance sheet date. See Note 10 to
our consolidated financial statements appearing elsewhere in this Annual Report for further details on our valuation methodology.
Fair Value of Preferred Stock Warrants
We derived the fair value of the preferred stock warrants using key assumptions from the PWERM, as shown above, and an interpolation methodology that
considered the timing of future potential liquidity events, changes to our forecasted financial results and changes in the valuation of comparable companies to
determine the fair value of the warrants to purchase shares of our Series B-R redeemable convertible preferred stock and Series D-R redeemable convertible
preferred stock.
Fair Value of Common Stock Warrants
To determine the fair value of our common stock warrants issued in connection with our Series G preferred stock financing, we utilized a Monte Carlo
simulation, which allows for the modeling of complex securities and evaluates many possible outcomes to forecast the stock price of the company post-IPO.
As part of the valuation, we considered various scenarios related to the pricing, timing and probability of an IPO. We applied an annual equity volatility of
59% and a discount for lack of marketability of 11% to arrive at a valuation of $7.5 million on the issuance date.
64
Table of Contents
Recent Accounting Pronouncements
See Note 3 to our consolidated financial statements appearing elsewhere in this Annual Report for a description of recent accounting pronouncements
applicable to our consolidated financial statements.
Liquidity and Capital Resources
The following table summarizes our cash and cash equivalents, accounts receivable, net and working capital, for the periods indicated (in thousands):
Cash and cash equivalents
Accounts receivable, net
Working capital
December 31,
2016
$22,838
42,042
28,720
2017
$21,262
48,348
32,490
We define working capital as current assets minus current liabilities. Our cash and cash equivalents as of December 31, 2017 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; therefore, our cash and cash equivalents are held in demand deposit accounts that generate very low returns.
Through December 31, 2017, we have incurred accumulated net losses of $268.4 million since inception, including losses of $40.6 million, $75.7 million and
$19.6 million for the years ended December 31, 2015, 2016 and 2017, respectively. We expect to incur additional operating losses as we continue our efforts
to grow our business. We have historically financed our operations and capital expenditures through convertible note financings and private placements of our
redeemable convertible preferred stock, as well as lines of credit and term loans. We have received net proceeds of $196.2 million from the issuance of
preferred stock and convertible promissory notes through December 31, 2017. Our historical uses of cash have primarily consisted of cash used in operating
activities to fund our operating losses and working capital needs.
As of December 31, 2017, we had $21.3 million in cash and cash equivalents and $13.4 million of available borrowings under our Line of Credit. As of
December 31, 2017, we had $1.9 million in cash and cash equivalents in the U.K. While our investment in Cardlytics UK Limited is not considered
indefinitely invested, we do not plan to repatriate these funds. As of December 31, 2017, we had $25.1 million outstanding under our Line of Credit and
$32.9 million outstanding under our Term Loan, exclusive of the unamortized discount of $1.1 million. In connection with our Line of Credit, we are subject
to financial covenants that include a requirement of a total cash balance plus availability under the Line of Credit of not less than $5.0 million and a moving
minimum trailing twelve month revenue covenant. In February 2018, we raised $66.1 million in net proceeds from our IPO.
Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and
development efforts, the continued expansion of sales and marketing activities, the enhancement of our platform, the introduction of new solutions and the
continued market acceptance of our solutions. We expect to continue to incur operating losses for the foreseeable future and may require additional capital
resources to continue to grow our business. We believe that current cash and cash equivalents will be sufficient to fund our operations and capital
requirements for at least the next 12 months following the date our consolidated financial statements were issued. In the event that additional financing is
required from outside sources, we may not be able to raise such financing on terms acceptable to us or at all.
Sources of Funds
Initial Public Offering
On February 13, 2018, we closed our IPO in which we issued and sold 5,400,000 shares of common stock at a public offering price of $13.00 per share,
resulting in gross proceeds of $70.2 million. On February 14, 2018, pursuant to the underwriters’ partial exercise of their over-allotment option to purchase up
to an additional 810,000 shares from us, we issued and sold an additional 421,355 additional shares of our common stock, resulting in additional gross
proceeds to us of $5.5 million. In total, we issued 5,821,355 shares of common stock and raised $75.7 million in gross proceeds, or $66.1 million in net
proceeds after deducting underwriting discounts and commissions of $5.3 million and estimated offering costs of $4.3 million.
65
Table of Contents
The principal purposes of the IPO were to increase our financial flexibility, create a public market for our common stock, and facilitate our future access to
the capital markets. We have used and expect to continue to use the net proceeds of the IPO for working capital and other general corporate purposes. These
expectations are subject to change.
Series G Preferred Stock Financing
In May 2017, we sold an aggregate of 346,334 shares of our Series G redeemable convertible preferred stock, including to certain of our existing
stockholders, at a price of $34.4758 per share for aggregate gross proceeds of approximately $11.9 million. In connection with the issuance of our Series G
redeemable convertible preferred stock, we issued warrants to purchase an aggregate number of shares of our common stock equal to the product obtained by
multiplying 346,334 by a fraction, the numerator of which is the difference between $68.9516 and the volume weighted average closing price of our common
stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which
such warrants become exercisable and the denominator of which is such volume weighted average closing price, which warrants are exercisable upon the
earlier to occur of the date (i) 180 days following the date of the prospectus for our IPO, dated February 8, 2018 and filed with the SEC pursuant to Rule
424(b)(4) of the Securities Act on February 9, 2018 and (ii) 10 days prior to a sale of our company.
Issuance of Convertible Notes
In April, May, June and July 2016, we raised capital through the issuance of unsecured convertible promissory notes, or collectively, the Existing Stockholder
Notes, to certain of our existing stockholders in an aggregate principal amount of $27.0 million, at an interest rate of 10% per year, compounded annually.
The maturity date of the Existing Stockholder Notes, or the Maturity Date, was the earliest to occur of: (1) a date after April 26, 2018, as specified by the
holders of a majority of the aggregate unpaid principal amount outstanding under the Existing Stockholder Notes, (2) our liquidation, dissolution or wind up,
including a sale of all or substantially all of our assets or a majority of our voting power or (3) an event of default under the Existing Stockholder Notes. The
Existing Stockholder Notes were subordinate to our existing credit facilities with National Electrical Benefit Funds, Ally Bank and Pacific Western Bank
described below. In February 2017, we extended the Maturity Date of the Existing Stockholder Notes to the earliest to occur upon the earliest of April 26,
2019 or the occurrence of the events specified in clauses (2) or (3) above. The Existing Stockholder Notes were convertible into shares of our capital stock,
depending on certain triggering events. In May 2017, upon the closing of the Series G preferred stock financing described above, the convertible promissory
notes converted into an aggregate of 1,295,746 shares of Series G’ redeemable convertible preferred stock.
Uses of Funds
Our collection cycles can vary from period to period based on the payment practices of our marketers and their agencies. We are typically obligated to pay
Consumer Incentives with respect to our Cardlytics Direct solution by the end of the month following redemption, regardless of whether we have collected
payment from a marketer or its agency. We are generally obligated to pay our FI partners’ FI Share by the end of the month following our collection of
payment from the applicable marketer or its agency. As a result, timing of cash receipts from our marketers can significantly impact our cash provided by
(used in) operating activities for any period. Further, the timing of payment of commitments and implementation fees to our FI partners may also result in
variability of our cash provided by (used in) operating activities for any period. During the first quarter of the calendar year, our working capital needs
increase due to the seasonality of our business, which may exacerbate any lag between the timing of our payment of Consumer Incentives and our receipt of
payment from marketers and their agencies. These cash flow dynamics may change over time as we continue to grow sales of our Other Platform Solutions as
a percentage of revenue.
66
Table of Contents
Historical Cash Flows
The following table shows a summary of our cash flows for the periods presented:
Cash and cash equivalents at beginning of period
Net cash used in operating activities
Net cash used in investing activities
Net cash from financing activities
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at end of period
2015
$ 51,198
(29,158)
(6,301)
11,927
(57)
$ 27,609
Year Ended
December 31,
2016
(in thousands)
$ 27,609
(32,498)
(2,545)
30,809
(407)
$ 22,968
2017
$ 22,968
(22,102)
(1,647)
21,761
282
$ 21,262
Operating Activities
Cash used in operating activities is primarily driven by our operating losses. We expect that we will continue to use cash from operating activities in 2017 as
we invest in our business.
Operating activities used $22.1 million of cash in 2017, which reflected growth in revenue, offset by continued investment in our operations. Cash used in
operating activities reflected our net loss of $19.6 million and a $14.2 million change in our net operating assets and liabilities, partially offset by non-cash
charges of $11.8 million. The non-cash charges primarily related to depreciation and amortization expense, accretion of debt discount charged to interest
expense, and stock-based compensation expense, offset by a gain related to change the change in fair value of convertible promissory notes. The change in
our net operating assets and liabilities was primarily due to a $6.8 million increase in deferred FI Implementation costs, a $7.5 million increase in accounts
receivable resulting from increased sales from 2017 compared to 2016 and a $1.4 million increase in accounts payable and accrued expenses, offset by
increases in FI Share liability and Consumer reward liability also resulting from increased sales from 2017 compared to 2016.
Operating activities used $32.5 million of cash in 2016, which reflected growth in revenue from new customers and changes to our pricing model, offset by
continued investment in our operations. Cash used in operating activities reflected our net loss of $75.7 million and a $13.9 million change in our net
operating assets and liabilities, partially offset by non-cash charges of $57.1 million. The non-cash charges primarily related to the termination of the U.K.
cooperation agreement, depreciation and amortization expense, and stock-based compensation expense. The change in our net operating assets and liabilities
was primarily due to an $8.2 million increase in deferred FI implementation costs, a $5.8 million increase in accounts receivable resulting from additional
sales, and a $5.2 million increase in accounts payable and accrued expenses.
Operating activities used $29.2 million of cash in 2015, which reflected growth in revenue, offset by continued investment in our operations. Cash used in
operating activities reflected our net loss of $40.6 million, partially offset by a change in our operating assets and liabilities of $6.1 million and non-cash
charges of $5.3 million primarily related stock-based compensation expense and depreciation and amortization expense. The change in our net operating
assets and liabilities was primarily due to a $13.2 million increase in operating liabilities, partially offset by a $7.5 million increase in accounts receivable and
deferred FI implementation costs.
Investing Activities
Our cash flows from investing activities are primarily driven by our investments in, and purchases of, property and equipment and the capitalization of costs
to develop internal-use software. We expect that we will continue to use cash for investing activities in 2017 as we continue to invest in and grow our
business.
Investing activities used $1.6 million in cash in 2017. Our investing cash flows during this period primarily consisted of purchases of technology hardware
and costs to develop internal-use software.
Investing activities used $2.5 million in cash in 2016. Our investing cash flows during 2016 primarily consisted of purchases of technology hardware and
software and costs to develop internal-use software.
67
Table of Contents
Investing activities used $6.3 million in cash in 2015. Our investing cash flows during 2015 primarily consisted of purchases for leasehold improvements to
our new corporate headquarters, purchases of our new transaction data storage and analysis systems and costs to develop internal-use software to support our
growth.
Financing Activities
Our cash flows from financing activities have primarily been comprised of net proceeds from our borrowings under our debt facilities.
Financing activities provided $21.8 million in cash during the year ended December 31, 2017. Our financing activities during this period consisted primarily
of the issuance of $11.9 million of redeemable convertible preferred stock, $5.0 million of borrowings under our Term Loan and $7.5 million of borrowings
under our Line of Credit, partially offset by equity issuance costs of $2.7 million.
Financing activities provided $30.8 million in cash in 2016. Our financing activities during 2016 primarily consisted of $24.0 million of borrowings under our
Term Loan, $27.0 million from the issuance of our Existing Stockholder Notes, $15.3 million of borrowing under our Line of Credit, offset by a $32.0 million
extinguishment of our Repaid Term Loan and our Repaid Line of Credit.
Financing activities provided $11.9 million in cash in 2015. Our financing activities during 2015 primarily consisted of $12.1 million of borrowings under our
Repaid Line of Credit.
Contractual Obligations & Commitments
The following table summarizes our commitments to settle contractual obligations as of December 31, 2017:
Debt(1)
Capital leases(2)
Operating leases(3)
FI implementation costs(4)
Total
Less than 1 Year
1 to 3 Years
3 to 5 Years
$
$
(in thousands)
—
44
2,664
9,250
11,958
$ 57,969
44
4,778
—
$ 62,791
$ —
13
3,357
—
3,370
$
More than
5 Years
$ —
—
4,173
—
$ 4,173
Total
$57,969
101
14,972
9,250
$82,292
(1) Amount represents $25.1 million of our Line of Credit and $32.9 million of our Term Loan. Included in this balance are principal and interest payments
due under our Line of Credit and our Term Loan. Accrued interest included in this amount is $6.2 million.
(2) Capital leases represent principal payments.
(3) Operating lease obligations represent future minimum lease payments under our non-cancelable operating leases with an initial term in excess of one year.
(4) FI implementation costs represent gross amounts due to FIs for implementation of certain of our solutions. These agreements allow for $5.4 million and
$4.6 million to be reimbursed to us through future reductions to FI Share in 2018 and 2019, respectively.
The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms,
including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts.
The table above does not include obligations under agreements that we can cancel without a significant penalty.
We also have a minimum FI Share commitment to a certain FI partner totaling $10.0 million over a 12-month period after June 30, 2018 and upon completion
of milestones which have not yet been met. Also, unrecognized tax benefits totaled $0.7 million as of December 31, 2017. The table above does not include
these obligations.
In 2017, we entered into agreements with certain FI partners to fund implementation and development costs of $0.9 million and $9.3 million in 2017 and
2018, respectively, of which $5.0 million will be reimbursed to us through reductions in FI Share in 2019.
68
Table of Contents
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.
Debt Obligations
In July 2016, we entered into a credit agreement, or the Term Loan, for a term loan with National Electrical Benefit Fund as lender, or the Lender, and
Columbia Partners, L.L.C as investment manager. As of December 31, 2017, there was approximately $31.8 million outstanding under the Term Loan. The
Term Loan is secured by substantially all of our assets and carries a fixed interest rate equal to (1) 13.25%, of which 3% is payable in cash and the remaining
10.25% is payable in-kind, (2) 12.75%, subsequent to an IPO with gross proceeds of at least $75.0 million, of which 3% is payable in cash and the remaining
9.75% is payable in-kind or (3) 11.25%, if our adjusted EBITDA for the four most recent trailing fiscal quarters then-ended is greater than $1.0 million and
we are not in an event of default, of which 3% is payable in cash and the remaining 8.25% is payable in-kind. The Term Loan expires in July 2019.
The Term Loan contains customary affirmative and negative covenants, including restrictions on mergers, acquisitions and dispositions of assets, incurrence
of indebtedness and encumbrances on our assets and restrictions on payments of dividends. The Term Loan also requires us to maintain a total cash balance
and unrestricted availability under our senior Line of Credit of not less than $3.0 million. Once we have achieved an adjusted EBITDA of at least $1.0 million
for two consecutive fiscal quarters, this cash balance requirement will be permanently waived. The Term Loan contains customary event of default
provisions, including in the event of a change of control, the occurrence of which could lead to an acceleration of our obligations under the Term Loan. We
were in compliance with all covenants as of December 31, 2017.
Pursuant to the Term Loan, we granted National Electrical Benefit Fund a warrant to purchase 97,125 shares of our common stock at a price per share of
$20.00. We also issued to National Electrical Benefit Fund an unsecured convertible promissory note in an aggregate principal amount of $6.0 million, at an
interest rate of 10% per year, compounded annually. This unsecured convertible promissory note was issued under the same terms as the Existing Stockholder
Notes.
In April 2017, we amended our Term Loan to remove the acceleration of our repayment upon an IPO and reduce the interest rate by 0.5% subsequent to an
IPO. In June 2017, we amended and restated our Term Loan to permit us to borrow an additional $5.0 million. In connection with this amendment, we issued
National Electrical Benefit Fund warrants to purchase up to an aggregate of 17,500 shares of common stock at a price per share of $27.68.
In September 2016, we entered into a loan and security agreement, or the Line of Credit, with Ally Bank and Pacific Western Bank. Under the Line of Credit,
we are able to borrow up to the lesser of $50.0 million or 85% of the amount of our eligible accounts receivable. The Line of Credit is secured by
substantially all of our assets and carries a floating interest rate equal to the prime rate in effect from time to time plus 3.5%, not to be less than 7.0% per year,
provided that in no event will the accrued interest payable be less than $87,500 per month. All other amounts borrowed are to be paid in full on the maturity
date in March 2019.
The Line of Credit contains customary affirmative and negative covenants, including restrictions on mergers, acquisitions and dispositions of assets,
incurrence of indebtedness and encumbrances on our assets and restrictions on payments of dividends. The Line of Credit requires us to maintain a total cash
balance plus liquidity under the Line of Credit of not less than $5.0 million. The Line of Credit also contains a moving minimum trailing twelve month
revenue covenant, which was $119.5 million for the period ended December 31, 2017. The Line of Credit contains customary event of default provisions,
including in the event of a material adverse change, the occurrence of which would allow the lenders to cease making advances and accelerate repayment of
all the then outstanding amounts. We were in compliance with all covenants as of December 31, 2017. As of December 31, 2017, there was $25.1 million
outstanding under the Line of Credit.
69
Table of Contents
Terminated Loan Agreements
We were party to an Amended and Restated Loan and Security Agreement, or the Repaid Line of Credit, for a line of credit with Silicon Valley Bank, as
lender. Under the Repaid Line of Credit, we were able to borrow up to the lesser of $25.0 million or 80% of eligible accounts receivable. The Repaid Line of
Credit also required us to maintain a minimum adjusted quick ratio of at least 1.00:1.00. We were not in compliance with the financial covenant related to our
quick ratio during September and October 2015. On October 14, 2015, we entered into a First Loan Modification Agreement, providing a waiver for these
defaults as well as updating the financial covenant and springing lockbox feature. Under the amended terms, the financial covenants include a $10.0 million
minimum cash balance and minimum quarterly profitability thresholds, and the springing lockbox feature was based on maintaining a $15.0 million minimum
cash balance. We were not in compliance with our minimum quarterly profitability threshold during the fourth quarter of 2015. In February 2016, we obtained
a waiver from the lender of this default. On June 16, 2016, we entered into a Second Loan Modification Agreement, providing for changes to the interest rate
and additional terms. On July 21, 2016, we entered into a Third Loan Modification Agreement, approving a subordinated credit agreement and changing
requirements regarding additional financing. On July 29, 2016, we entered into a Fourth Loan Modification Agreement, altering various financial covenants.
We paid off this loan in full on September 12, 2016.
We were also party to an Amended and Restated Loan and Security Agreement, or the Repaid Term Loan, for growth capital advances with Gold Hill Capital
2008, L.P. and Silicon Valley Bank, as lenders, pursuant to which we received loans of $2.0 million in 2010, $10.0 million in 2012 and approximately
$1.2 million in 2015. We paid off this loan in full in July 2016.
ITEM 7A. 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
We are exposed to interest rate risk in the ordinary course of our business. Our cash and cash equivalents include cash in readily available checking and
money market accounts. These securities are not dependent on interest rate fluctuations that may cause the principal amount of these assets to fluctuate.
Additionally, the interest rate on our Line of Credit, Term Loan and convertible notes is fixed and not subject to changes in market interest rates. However, the
interest rate on our Line of Credit with Ally is variable, with an interest rate of prime plus 3.50%. The current prime rate is 4.50% and a 10% increase in the
current prime rate would, for example, result in a $0.2 million increase in interest expense if the maximum borrowable amount under our $50.0 million line of
credit were outstanding for an entire year.
Foreign Currency Exchange Risk
Both revenue and operating expense in our U.K. entity 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 2017, our operating expense would have increased
by $0.9 million and if the average value of the British pound had been 10% higher relative to the U.S. dollar during 2016, our operating expense would have
increased by $0.6 million.
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.
70
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CARDLYTICS, INC.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
71
72
73
75
76
77
78
80
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Cardlytics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cardlytics, Inc. and its wholly-owned subsidiary (the “Company”) as of December 31,
2017 and 2016, the related consolidated statements of operations, stockholders’ deficit, and cash flows, for each of the three years in the period ended
December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 19, 2018
We have served as the Company’s auditor since 2012.
72
Table of Contents
CARDLYTICS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Other receivables
Prepaid expenses and other assets
Total current assets
PROPERTY AND EQUIPMENT, net
INTANGIBLE ASSETS, net
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net
DEFERRED FI IMPLEMENTATION COSTS, net
OTHER LONG-TERM ASSETS
Total assets
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable
Accrued liabilities:
Accrued compensation
Accrued expenses
FI Share liability
Consumer Incentive liability
Deferred billings
Short-term debt:
Capital leases
Total current liabilities
LONG-TERM LIABILITIES:
Deferred liabilities
Warrant liability
Long-term debt, net of current portion:
Lines of credit
Term loans
Capital leases
Convertible promissory notes (recognized at fair value through net loss)
Convertible promissory notes—related parties (recognized at fair value through net loss)
Total long-term liabilities
See notes to the consolidated financial statements
73
December 31,
2016
2017
$ 22,838 $ 21,262
—
48,348
2,898
2,121
74,629
7,319
528
433
13,625
4,224
$ 86,859 $100,758
130
42,042
1,774
1,540
68,324
8,345
476
—
8,451
1,263
$
2,369 $
1,554
3,122
4,410
23,109
5,857
638
4,638
4,615
23,914
7,242
132
44
99
$ 39,604 $ 42,139
$
4,071 $
2,197
3,670
10,230
15,652
23,715
101
8,662
63,670
25,081
31,830
57
—
—
$118,068 $ 70,868
Table of Contents
CARDLYTICS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except par value amounts)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
COMMITMENTS AND CONTINGENCIES (Note 13)
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series G’ preferred stock, $0.0001 par value—5,339 shares authorized and 1,296 shares issued and outstanding as of
December 31, 2017
$
— $ 44,672
Series G preferred stock, $0.0001 par value—1,385 shares authorized and 346 shares issued and outstanding as of
December 31,
2016
2017
December 31, 2017
Series F/F-R preferred stock, $0.0001 par value—10,000 and 5,000 shares authorized and 1,199 shares issued and
outstanding as of December 31, 2016 and 2017, respectively
Series E/E-R preferred stock, $0.0001 par value—14,800 and 7,400 shares authorized and 795 shares issued and
outstanding as of December 31, 2016 and 2017, respectively
Series D/D-R preferred stock, $0.0001 par value—11,574 and 5,787 shares authorized and 1,396 shares issued and
outstanding as of December 31, 2016 and 2017, respectively
Series C/C-R preferred stock, $0.0001 par value—12,063 and 6,032 shares authorized and 1,508 shares issued and
outstanding as of December 31, 2016 and 2017, respectively
Series B/B-R preferred stock, $0.0001 par value—19,191 and 9,596 shares authorized and 2,247 shares issued and
outstanding as of December 31, 2016 and 2017, respectively
Series A/A-R preferred stock, $0.0001 par value—15,055 and 7,528 shares authorized and 1,857 shares issued and
outstanding as of December 31, 2016 and 2017, respectively
Total redeemable convertible preferred stock
STOCKHOLDERS’ DEFICIT:
Common stock, $0.0001 par value—64,000 and 83,000 shares authorized and 2,590 and 3,439 shares issued and
outstanding as of December 31, 2016 and 2017, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
See notes to the consolidated financial statements
74
—
5,110
57,958
58,449
29,963
29,972
32,642
32,728
18,323
18,366
5,286
5,288
1,850
1,852
$ 146,022 $ 196,437
$
— $
—
58,693
1,066
(268,445)
(208,686)
$ 86,859 $ 100,758
29,867
2,102
(248,804)
(216,835)
Table of Contents
CARDLYTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
REVENUE
COSTS AND EXPENSES:
FI Share and other third-party costs
Delivery costs
Sales and marketing expense
Research and development expense
General and administration expense
Depreciation and amortization expense
Termination of U.K. agreement expense
Total costs and expenses
OPERATING LOSS
OTHER INCOME (EXPENSE):
Interest expense, net
Change in fair value of warrant liability
Change in fair value of convertible promissory notes
Change in fair value of convertible promissory notes—related parties
Other (expense) income, net
Total other expense
LOSS BEFORE INCOME TAXES
INCOME TAX BENEFIT
NET LOSS
Adjustments to the carrying value of redeemable convertible preferred stock
Net loss attributable to common stockholders
Net loss per share attributable to common stockholders, basic and diluted
Weighted-average common shares outstanding, basic and diluted
See notes to the consolidated financial statements
75
Year Ended December 31,
2016
$ 77,634 $ 112,821 $130,365
2015
2017
47,691
4,803
32,784
11,604
18,197
2,194
—
117,273
(39,639)
66,285
6,127
31,261
13,902
21,355
4,219
25,904
169,053
(56,232)
73,247
7,012
31,927
12,150
20,100
3,028
—
147,464
(17,099)
(1,484)
914
—
—
(432)
(1,002)
(40,641)
16
(6,170)
(32)
(786)
(10,091)
(2,385)
(19,464)
(75,696)
—
(8,239)
(581)
(1,244)
6,213
1,309
(2,542)
(19,641)
—
$ (40,625) $ (75,696) $ (19,641)
(5,743)
$ (41,626) $ (76,678) $ (25,384)
(1,001)
(982)
$ (19.91) $ (32.48) $
(7.86)
2,091
2,361
3,230
Table of Contents
CARDLYTICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in thousands)
NET LOSS
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments, net of zero tax
TOTAL COMPREHENSIVE LOSS
See notes to the consolidated financial statements
76
Year Ended December 31,
2016
$(40,625) $(75,696) $(19,641)
2015
2017
383
(1,036)
$(40,242) $(74,177) $(20,677)
1,519
Table of Contents
CARDLYTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Amounts in thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Accumulated
Income
Deficit
Total
BALANCE — December 31, 2014
2,041 $ — $ 8,283 $
200 $ (132,125) $(123,642)
Cumulative effect adjustment upon adoption of ASU 2016-09
Exercise of common stock options
Repurchase of common stock
Stock-based compensation
Accretion of redeemable convertible preferred
stock to redemption value
Other comprehensive income
Net loss
BALANCE — December 31, 2015
—
102
(8)
—
—
—
—
—
165
464
—
2,453
—
—
—
2,135 $ — $ 10,364 $
(1,001)
—
—
—
—
—
Conversion of preferred stock
Conversion of preferred stock warrants
Exercise of common stock options
Issuance of common stock warrants
Stock-based compensation
Accretion of redeemable convertible preferred stock to redemption
412
—
43
—
—
—
—
—
—
—
15,021
777
279
961
3,447
value
Other comprehensive income
Net loss
BALANCE — December 31, 2016
—
—
—
2,590 $ — $ 29,867 $
(982)
—
—
—
—
—
Conversion of convertible promissory notes to common stock
Exercise of common stock options
Issuance of common stock warrants
Stock-based compensation
Beneficial conversion feature of Series G preferred stock
Deemed dividend related to beneficial redemption feature
Accretion of redeemable convertible preferred stock to redemption
801
48
—
—
—
—
—
—
—
—
—
—
24,392
230
312
5,147
4,488
(4,488)
value
Other comprehensive loss
Net loss
BALANCE — December 31, 2017
—
—
—
3,439 $ — $ 58,693 $
(1,255)
—
—
—
—
—
See notes to the consolidated financial statements
77
—
—
—
—
(165)
—
(193)
—
—
464
(193)
2,453
(1,001)
—
—
383
—
383
—
(40,625)
(40,625)
583 $ (173,108) $(162,161)
—
—
—
—
—
—
—
—
—
—
15,021
777
279
961
3,447
—
1,519
—
(982)
—
1,519
—
(75,696)
(75,696)
2,102 $ (248,804) $(216,835)
—
—
—
—
—
—
—
—
—
—
—
—
24,392
230
312
5,147
4,488
(4,488)
—
(1,036)
—
(1,255)
—
(1,037)
—
(19,641)
(19,641)
1,066 $ (268,445) $(208,686)
Table of Contents
CARDLYTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Increase in allowance for doubtful accounts
Depreciation and amortization expense
Amortization of financing costs charged to interest expense
Accretion of debt discount charged to interest expense
Stock-based compensation expense
Termination of U.K. agreement expense
Change in fair value of warrant liability
Change in fair value of convertible promissory notes
Change in fair value of convertible promissory notes—related parties
Other non-cash expenses
Change in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Deferred FI implementation costs
Accounts payable
Other accrued expenses
Payable to related party, net
FI Share liability
Consumer Incentive liability
Total adjustment
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment
Acquisition of intangible assets
Capitalized software development costs
Net cash used in investing activities
See notes to the consolidated financial statements
78
Year Ended December 31,
2016
2015
2017
$(40,625) $(75,696) $(19,641)
1,100
4,219
297
4,368
3,447
725
2,194
152
75
2,453
73
3,028
560
6,889
5,147
— 25,904 —
581
1,244
(6,213)
451
32
(914)
—
786
— 10,091
6,809
650
(5,789)
(529)
(8,200)
(1,234)
(3,940)
(5,476)
480
(2,023)
1,972
4,076
2,542
1,756
2,805
(7,503)
(666)
(6,800)
(1,907)
466
(459) —
804
8,482
1,385
(2,186)
11,467 43,198
(2,461)
$(29,158) $(32,498) $(22,102)
(5,704)
(57)
(540)
(1,215)
(60)
(372)
$ (6,301) $ (2,545) $ (1,647)
(1,827)
(72)
(646)
Table of Contents
CARDLYTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2016
2015
2017
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt
Proceeds from issuance of debt — related parties
Principal payments of debt
Proceeds from issuance of common stock
Proceeds from issuance of Series G preferred stock
Equity issuance costs
Debt issuance costs
Debt extinguishment costs
Repurchase of common stock
Net cash from financing activities
EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — beginning of period
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — end of period
Supplemental schedule of non-cash investing and financing activities:
Cash paid for interest
Amounts accrued for property and equipment
Amounts accrued for capitalized software development costs
See notes to the consolidated financial statements
79
—
(35,900)
464
—
(199)
(162)
—
(193)
19,485
(32,346)
279
—
(1,674)
(1,417)
(312)
—
$ 47,917 $ 46,794 $12,500
—
(99)
230
11,940
(2,668)
(142)
—
—
$ 11,927 $ 30,809 $21,761
282
(1,706)
22,968
$ 27,609 $ 22,968 $21,262
(407)
(4,641)
27,609
(57)
(23,589)
51,198
$ 1,279 $ 1,632 $
$
211 $ — $
$ — $ — $
873
750
61
Table of Contents
1.
NATURE OF OPERATIONS
CARDLYTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cardlytics, Inc. (“we,” “our,” “us,” the “Company,” or “Cardlytics”), is a Delaware corporation, and was formed on June 26, 2008. We make marketing
more relevant and measurable through our purchase intelligence platform. Using one of the largest aggregations of purchase data through our
partnerships with banks and credit unions, which we refer to as financial institutions (“FIs”), we have a secure view into where and when consumers
are spending their money. By applying advanced analytics to this massive aggregation of purchase data, we make it actionable, helping marketers
identify, reach and influence likely buyers at scale, and measure the true sales impact of their marketing spend.
On May 4, 2012, we formed Cardlytics UK Limited (“Cardlytics UK”), a wholly-owned subsidiary registered as a private limited company in England
and Wales. As discussed in Note 12—Variable Interest Entity, Cardlytics UK was a party to a collaboration agreement whereby 50% of its income and
losses are shared with Aimia EMEA Limited (“Aimia”). Cardlytics, Inc. obtained full control of Cardlytics UK in June 2016 upon the termination of
the cooperation agreement in exchange for convertible promissory notes of the Company as discussed in Note 5—Debt.
On February 13, 2018, we closed our initial public offering (“IPO”), in which we issued and sold 5,400,000 shares of common stock at a public
offering price of $13.00 per share, resulting in gross proceeds of $70.2 million. On February 14, 2018, pursuant to the underwriters’ partial exercise of
their over-allotment option to purchase up to an additional 810,000 shares from us, we issued and sold an additional 421,355 additional shares of our
common stock, resulting in additional gross proceeds to us of $5.5 million. In total, we issued 5,821,355 shares of common stock and raised
$75.7 million in gross proceeds, or $66.1 million in net proceeds after deducting underwriting discounts and commissions of $5.3 million and estimated
offering costs of $4.3 million. Upon the closing of the IPO, all of the outstanding shares of redeemable convertible preferred stock automatically
converted into shares of common stock and all warrants to purchase shares of redeemable convertible preferred stock were automatically converted into
warrants to purchase shares of common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock or warrants to purchase
shares of redeemable convertible preferred stock outstanding. The consolidated financial statements as of December 31, 2017, including share and per
share amounts, do not give effect to the IPO or conversion of the redeemable convertible preferred stock, as the IPO and such conversions were
completed subsequent to December 31, 2017.
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Cardlytics and Cardlytics UK. All intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“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. Actual results could differ from these estimates. Significant items subject to such
estimates and assumptions include revenue recognition, internal-use software development costs, income taxes, stock-based compensation, derivative
instruments, income tax valuation allowance, contingencies and changes in fair value of our convertible promissory notes. We base our estimates on
historical experience and also on assumptions that we believe are reasonable. Changes in facts or circumstances may cause us to change our
assumptions and estimates in future periods and it is possible that actual results could differ from our current or revised future estimates.
80
Table of Contents
Foreign Currency
Our foreign subsidiary, Cardlytics UK, records its assets, liabilities and results of operations in British Pounds, its functional currency. We translate
Cardlytics UK’s financial statements into U.S. dollars each reporting period for purposes of consolidation. Assets and liabilities are translated at the
period-end currency exchange rates, certain equity accounts are translated at historical exchange rates and income and expense amounts are translated
at average currency exchange rates in effect for the period. The effect of these translation adjustments is reported in a separate component of
stockholders’ deficit titled accumulated other comprehensive income.
We are also subject to gains and losses from foreign currency denominated transactions and the remeasurement of foreign currency denominated
balance sheet accounts, both of which are included in other expense, net in the accompanying consolidated statements of operations. We recorded
foreign currency losses totaling $0.4 million and $1.9 million in 2015 and 2016, respectively, and a foreign currency gain totaling $1.3 million in 2017.
Revenue
We have two reportable segments and generate revenue through the sale of two categories of solutions that leverage our intelligence platform: (1) our
proprietary native banking channel, Cardlytics Direct and (2) our Other Platform Solutions. We generate revenue from the sale of our Cardlytics Direct
service in the United States (“U.S.”) and the United Kingdom (“U.K.”) and our Other Platform Solutions in the U.S.
Cardlytics Direct
Our Cardlytics Direct solution is our proprietary native bank advertising channel that enables marketers to reach consumers through their trusted and
frequently visited online and mobile banking channels. Working with the marketer, we design a campaign that targets customers based on their
purchase history. The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that
we collect from marketers to provide these consumer incentives to our FIs’ customers after they make qualifying purchases, which we refer to as
Consumer Incentives. Leveraging our powerful predictive analytics, we are able to create compelling Consumer Incentives that have the potential to
increase return on advertising spend for marketers. We also pay our FI partners an FI Share. We have generated substantially all of our revenue from
sales of Cardlytics Direct since inception.
We price Cardlytics Direct in two primary ways: (1) Cost per Served Sale (“CPS”), and (2) Cost per Redemption (“CPR”). In 2015, 2016 and 2017,
CPS represented 67%, 67% and 66% of our revenue from Cardlytics Direct.
•
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, which we refer to as the CPS Rate, of all purchases from the marketer by consumers (1) who are served marketing
and (2) subsequently make a purchase from the marketer during the campaign period, regardless of whether consumers select the
marketing and thereby 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. We seek to optimize the
level of Consumer Incentives to retain a greater portion of billings. However, if the amount of Consumer Incentives exceeds the amount
of billings that we are paid by the applicable marketer we are still responsible for paying the total Consumer Incentive. This has occurred
infrequently and has been immaterial in amount for each of the periods presented.
•
CPR. Our initial pricing model is CPR, where marketers specify and fund the Consumer Incentive and pay us a separate negotiated, fixed
marketing fee, or the CPR Fee, for each purchase that we generate. We generate revenue if the consumer (1) is served marketing,
(2) selects the marketing and thereby becomes eligible to earn the applicable Consumer Incentive and (3) makes a qualifying purchase
from the marketer during the campaign period. We set the CPR Fee for marketers based on our estimation of the marketers’ return on
spend for the relevant campaign. The CPR Fee is either a percentage of qualifying purchases or a flat amount.
Other Platform Solutions
We also generate revenue from our Other Platform Solutions offerings. Our Other Platform Solutions enable marketers and marketing service providers
to leverage the power of purchase intelligence outside the bank channel. For example, we use purchase intelligence to help marketers measure the
impact of marketing campaigns outside of the Cardlytics
81
Table of Contents
Direct channel on in-store and online sales. To the extent that we use purchase intelligence derived from a specific FI customer’s anonymized purchase
data in the delivery of our Other Platform Solutions, we pay the applicable FI an FI Share calculated based on the relative contribution of the data
provided by the FI to the overall delivery of the solutions. In order to test the efficacy of our Other Platform Solutions, we historically used
programmatic vendors to run marketing campaigns outside of the Cardlytics Direct channel, and thereby delivered our Other Platform Solutions
primarily as a managed service, which we discontinued as of July 31, 2017. This allowed us to gain valuable expertise in leveraging our purchase
intelligence outside the banking channel. With regard to delivery of our Other Platform Solutions as a managed service, we charged marketers a fee
based on the number of impressions that we delivered for their marketing campaign, calculated on a cost per thousand impressions, or CPM, basis.
Revenue from Other Platform Solutions delivered as a managed service represented a significant majority of our total Other Platform Solutions revenue
in 2015, 2016 and 2017 until it was discontinued on July 31, 2017.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, on a transaction when all of
the following conditions have been satisfied:
•
•
•
•
persuasive evidence of an agreement exists;
the service has been provided to the customer;
fees are fixed or determinable; and
the collection of the fees is reasonably assured.
If any of these criteria are not met, revenue recognition is deferred until such time that all of the criteria are met. Our deferred revenue is primarily
comprised of payments received in advance for Cardlytics Direct marketing campaigns.
We sell our solutions by entering into agreements directly with marketers or their marketing agencies. The agreements state the terms of the
arrangement, the agreed upon fee and, with respect to Cardlytics Direct, the fixed period of time the offers will be available to FI customers. Persuasive
evidence of an arrangement is considered to exist and the fee is considered fixed and determinable upon the execution of an insertion order. With
respect to our Cardlytics Direct service, the service is deemed to have been provided to the marketer as FIs’ customers make qualifying purchases
during the marketing campaign term. With respect to Other Platform Solutions, the service is deemed to have been provided (1) for non-managed
service campaigns, when we deliver the purchase intelligence to the marketer and (2) for managed service campaigns, when the digital advertising
impressions contemplated by the campaign have been served to targeted consumers. We determine collectability upfront and on an on-going basis by
performing credit evaluations and monitoring our marketers’ accounts receivable balances.
Gross/Net Consideration
We evaluate the appropriateness of revenue reporting on a gross or net basis by considering the indicators outlined within ASC Topic 605-45, Revenue
Recognition—Principal Agent Considerations and ASC Topic 605-50, Customer Payments and Incentives. We consider the nature of the costs and
risks associated with the indicators present in evaluating the substance of an arrangement. We consider the relative strength of each indicator and
certain factors may be assessed to carry more weight in the evaluation.
Consumer Incentives
We report our revenue on our consolidated statements of operations net of Consumer Incentives. We generally pay Consumer Incentives only with
respect to our Cardlytics Direct service. We do not provide the goods or services that are purchased by our FIs’ customers from the marketers to which
the Consumer Incentives relate. Accordingly, the marketer is deemed to be the principal in the relationship with the customer and, therefore, the
Consumer Incentive is deemed to be a reduction in the purchase price paid by the customer for the marketer’s goods or services. While we are
responsible for remitting Consumer Incentives to our FI partners for further payment to their customers, we function solely as an agent of marketers in
these arrangements.
82
Table of Contents
Accounts receivable is recorded at the amount of gross billings to marketers, net of allowances, for the fees and Consumer Incentives that we are
responsible to collect. Our accrued liabilities also include the amount of Consumer Incentives due to FI partners. As a result, accounts receivable and
accrued liabilities may appear large in relation to revenue, which is reported on a net basis. During 2015, 2016 and 2017, Consumer Incentives totaled
$56.3 million, $57.0 million and $61.2 million, respectively.
FI Share and Other Third-Party Costs
We report our revenue on our consolidated statements of operations gross of FI Share. FI Share is included in FI Share and other third-party costs in our
consolidated statements of operations, rather than as a reduction of revenue, because we and not our FI partners act as the principal in our arrangements
with marketers. We are responsible for the fulfillment and acceptability of the services purchased by marketers. We also have latitude in establishing
the price of our services, have discretion in supplier selection and earn variable amounts. FIs only supply consumer purchase data and digital marketing
space and have no involvement in the marketing campaigns or relationship (contractual or otherwise) with marketers.
We report our revenue on our consolidated statements of operations gross of media costs. We incur media costs in connection with the delivery of
managed services with respect to our Other Platform Solutions. Media costs are included in FI Share and other third-party costs in our consolidated
statements of operations, rather than as a reduction of revenue, because we and not exchanges or digital publishers act as the principal in our
arrangements with marketers.
FI Share and Other Third-Party Costs
FI Share and other third-party costs consist primarily of the FI Share that we pay our FI partners, media and data costs, and through June 30, 2016,
allocation of revenue in the U.K. to Aimia as discussed in Note 12—Variable Interest Entity. FI Share and other third-party costs also include the
amortization or impairment of implementation costs incurred pursuant to our agreements with certain FI partners, any incremental costs due to FIs as
part of FI Share commitments, as well as non-cash expense that we may incur from time to time upon the vesting of outstanding performance-based
warrants to purchase shares of our redeemable convertible preferred stock and common stock that we issued to certain FI partners. With respect to
Cardlytics Direct, we pay FI Share based on the full amount of billings to marketers less any Consumer Incentives that we pay to the FIs’ customers
and certain third-party data costs. To the extent that we use a specific FI customer’s anonymized purchase data in the delivery of our Other Platform
Solutions, we pay the applicable FI an FI Share calculated based on the relative contribution of the data provided by the FI to the overall delivery of the
services.
Delivery Costs
Delivery costs consist primarily of personnel-related costs of our campaign, data operations and production support teams, including salaries, benefits,
bonuses and payroll taxes, as well as stock-based compensation expense. Delivery costs also include hosting facility costs, internally developed and
purchased or licensed software costs, outsourcing costs and professional services costs.
Accounts Receivable
Accounts receivable are carried at the original invoiced amount less an allowance for doubtful accounts, determined based on the probability of future
collection. When we become aware of circumstances that may decrease the likelihood of collection, we record a specific allowance against amounts
due, which reduces the receivable to the amount that we believe will be collected. For all other accounts receivable, we determine the adequacy of the
allowance based on historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with
specific accounts. The following table presents changes in the allowance for doubtful accounts (in thousands):
Beginning balance
Bad debt expense
Write-offs, net of recoveries
Ending balance
83
Year Ended December 31,
2015
$ 143
725
(122)
$ 746
2016
746
$
1,100
(1,193)
653
$
2017
$ 653
73
(621)
$ 105
Table of Contents
Unbilled receivables were $0.5 million and $0.1 million as of December 31, 2016 and December 31, 2017, respectively. An unbilled receivable
represents revenue earned and recognized from customer activity that was not billed prior to the end of the reporting period. Unbilled receivables are
included in accounts receivable, net on our consolidated balance sheets.
Concentrations of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and
accounts receivable. Our cash and cash equivalents and restricted cash are held with one financial institution, which we believe is of high credit quality.
We believe that our accounts receivable credit risk exposure is limited as a result of being diversified among a large number of marketers segregated by
both geography and industry. In 2015, we recorded a reserve of $0.5 million related to a large retailer in the U.S. that declared bankruptcy in 2016. In
2016, we recorded a reserve of $0.4 million related to a disputed invoice from a different retailer in the U.S. Apart from these specific reserves,
historically, we have not experienced significant write-downs of our accounts receivable. No single marketer represented a significant concentration of
accounts receivable as of December 31, 2016 or December 31, 2017, and no single marketer represented a significant concentration of our revenue
during 2015, 2016 and 2017.
Our business is substantially dependent on a limited number of FI partners. We require participation from our FI partners in Cardlytics Direct and
access to their purchase data in order to offer our solutions to marketers and their agencies. We must have FI partners with a sufficient number of
customers and levels of customer engagement to ensure that we have robust purchase data and marketing space to support a broad array of incentive
programs for marketers. Our agreements with a substantial majority of our FI partners have terms of three to five years but are 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 2015, 2016 and 2017, our largest FI partner in the U.S. accounted for approximately 63%, 64% and 63% of FI Share, respectively. Two other FI
partners accounted for over 10% of FI Share during the periods presented. During 2015, 2016 and 2017, an FI partner in the U.S. accounted for 10%,
9% and 7% of FI Share, respectively, and an FI partner in the U.K. accounted for 11%, 10% and 12% of FI Share, respectively.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash held in checking accounts. We consider all highly liquid instruments purchased with an initial maturity of
three months or less to be cash equivalents. The average balance in this account is substantially higher than the maximum insurance provided by the
Federal Deposit Insurance Corporation.
Restricted cash represents money market accounts and certificates of deposit held at a financial institution principally as security in connection with our
corporate credit card balance and automated clearing house activities.
Cash and cash equivalents
Restricted cash
Cash, cash equivalents and restricted cash
Property and Equipment
December 31,
2016
$22,838
130
$22,968
2017
$21,262
—
$21,262
Property and equipment are stated at cost. Expenditures for maintenance and repairs are expensed as incurred, while betterments that materially extend
the life of an asset are capitalized. The cost of assets sold, retired or otherwise disposed of, and the related accumulated depreciation, are eliminated
from the accounts and any resulting gain or loss is recognized.
84
Table of Contents
Depreciation of property and equipment is determined using the straight-line method over the estimated useful lives of the applicable assets, which are
as follows:
Computer equipment:
Furniture and fixtures:
Leasehold improvements:
2–3 years
5 years
Lesser of estimated useful life or life of the lease
Intangible Assets
Intangible assets are recorded at cost and consist of costs incurred for software patent applications. We received approval for three patents in 2013 and
began amortizing the costs of obtaining these patents over the estimated remaining lives of the patents. If a patent application is rejected or if we
abandon efforts to obtain a new patent, all deferred patent costs are expensed immediately. Deferred patent costs related to patents for which we have
not yet obtained approval totaled $0.4 million as of December 31, 2016 and 2017, respectively. Based on deferred patent costs as of December 31,
2017, the related amortization expense will be less than $0.1 million in each of the next five years. Intangible assets are as follows (in thousands):
Deferred patent costs, gross
Less accumulated amortization
Deferred patent costs, net
Internal-Use Software Development Costs
December 31,
2016
$503
(27)
$476
2017
$563
(35)
$528
Capitalized software development costs consist of costs incurred in the development of internal-use software, primarily associated with the
development and enhancement of our offer management system and offer placement system. We capitalize the costs of software developed or obtained
for internal use in accordance with ASC Topic 350-40, Internal Use Software. We begin to capitalize our costs upon completion of the preliminary
project stage. We consider the preliminary project stage to be complete and the application development stage to have begun when preliminary
development efforts are successfully completed, management has authorized and committed project funding and it is probable that the project will be
completed and the software will be used as intended. These costs are amortized on a straight-line basis over the estimated useful life of the related asset,
generally estimated to be five years. Costs incurred in the preliminary project stage and post-implementation operation stages are expensed as incurred
and recorded in research and development expense on our consolidated statements of operations.
We capitalized $1.1 million in costs related to the development of our offer management system and offer placement system in 2009, and began
amortizing those costs when the software was placed in service, with an expected useful life of 5 years. These software costs were fully amortized as of
December 31, 2015.
During 2015 and 2016, we capitalized $0.6 million and $0.6 million, respectively, of development costs for new technology related to the delivery of
our Other Platform Solutions as well as a new billing system. In 2016, we suspended these development efforts and wrote off development costs
totaling $1.2 million recognized in depreciation and amortization on our consolidated statement of operations. During 2017, we capitalized $0.4 million
of development costs for enhancements to our offer management system as well as the implementation of a new billing system. Capitalized software
development costs are as follows (in thousands):
Capitalized software development costs, gross
Less accumulated amortization
Capitalized software development costs, net
85
December 31,
2016
$ 1,054
(1,054)
$ —
2017
$ 1,487
(1,054)
433
$
Table of Contents
Impairment of Long-Lived Assets
We review long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be fully recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the
undiscounted future net cash flows expected to be generated by the assets. If such assets are not considered to be recoverable, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During 2015 and 2017, no
impairment of our long-lived assets and intangibles assets was recognized. During 2016, we wrote off $0.8 million of deferred FI implementation costs
as discussed in Note 13—Commitments and Contingencies.
Debt Issuance Costs
Costs incurred to obtain loans, other than lines of credit, are recorded as a reduction of the carrying amount of the related liability and amortized over
the applicable loans’ life using the effective interest method. Costs incurred to obtain lines of credit are capitalized and included in other long-term
assets on our consolidated balance sheets and amortized ratably over the term of the arrangement. Costs incurred to obtain loans for which we have
elected the fair value option are expensed upon the issuance of the loan and recorded within general and administrative expense on our consolidated
statements of operations. As described in Note 5—Debt, we issued multiple new debt facilities in 2016 and deferred debt issuance costs of $1.1 million
in connection with these transactions. Amortization of debt issuance costs included in interest expense, net totaled $0.2 million, $0.3 million and
$0.6 million in 2015, 2016 and 2017, respectively. In 2016, we also incurred $0.7 million of issuance costs, recorded in general and administrative
expense, related to our convertible promissory notes, for which we have elected the fair value option.
Deferred debt issuance costs related to our lines of credit included in other long-term assets are as follows (in thousands):
Debt issuance costs, gross
Less accumulated amortization
Debt issuance costs, net
Deferred debt issuance costs related to our term loans included in debt are as follows (in thousands):
Debt issuance costs, gross
Less accumulated amortization
Debt issuance costs, net
Future amortization of debt issuance costs is as follows (in thousands):
Years Ending December 31,
2018
2019
Total
Deferred Offering Costs
December 31,
2016
$678
(82)
$596
2017
$ 695
(366)
$ 329
December 31,
2016
$468
(59)
$409
2017
$ 572
(246)
$ 326
Amortization
484
$
171
655
$
Deferred offering costs consist of incremental costs directly attributable to equity offerings. Upon completion of an offering, these amounts are offset
against the proceeds of the offering. Deferred offering costs are included in other long-term assets on our consolidated balance sheets. We deferred
offering costs totaling $1.2 million in 2015 and $0.7 million in 2016 related to a proposed equity offering. We terminated the proposed equity offering
in 2016 and expensed the related deferred offering costs, which totaled $1.9 million. During 2017, we deferred offering costs related to our IPO totaling
$3.1 million. Deferred costs totaled $0 and $3.1 million as of December 31, 2016 and 2017, respectively. Unpaid amounts as of December 31, 2016 and
2017 totaled $0.2 million and $0.8 million, respectively.
86
Table of Contents
Reduction in Force
In 2016, we announced a strategic shift to rebalance our resources and put us on a faster path to potential profitability. This workforce reduction plan
resulted in $1.3 million of charges, consisting primarily of severance and medical benefits, recognized in 2016 when the extent of our action was
determined and could be estimated. All severance and medical benefits were paid to former employees as of December 31, 2016. Additionally, vested
stock options of affected employees were cancelled and re-granted with similar terms, but with exercise periods of up to two years, resulting in stock
compensation expense of less than $0.1 million.
The following table summarizes the allocation of expenses related to the reduction in force on the consolidated statements of operations (in thousands):
Delivery costs
Sales and marketing
Research and development
General and administration
Total reduction in force costs
Year Ended
December 31, 2016
93
$
396
553
249
1,291
$
Advertising
We expense advertising costs as incurred. These costs are included in sales and marketing expense on our consolidated statements of operations.
Advertising costs include direct marketing costs such as print advertisements, market research, direct mail, public relations and trade show expenses
and totaled $2.0 million, $0.9 million and $0.7 million in 2015, 2016 and 2017, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs consist primarily of personnel costs of our research and
development employees, including salaries, benefits and bonuses. Research and development costs also includes stock-based compensation expense,
outsourcing costs and travel expenses.
Stock-Based Compensation
We measure and recognize compensation expense for all stock options based on the estimated fair value of the award on the grant date. We use the
Black-Scholes option pricing model to estimate the fair value of stock option awards. The fair value is recognized as expense over the requisite service
period, which is generally the vesting period of the respective award, on a straight-line basis when the only condition to vesting is continued service.
Forfeitures are accounted for when they occur. We recognize the fair value of stock options which contain performance conditions based upon the
probability of the performance conditions being met. We have not issued awards where vesting is subject to a market condition; however, if we were to
grant such awards in the future, recognition would be based on the derived service period. Expense for awards with performance conditions are
estimated and adjusted on a quarterly basis based upon our assessment of the probability that the performance condition will be met. See Note 6—
Stock-Based Compensation for additional information regarding our specific award plans and estimates and assumptions used to determine fair value.
Redeemable Convertible Preferred Stock Warrant Liability
We have outstanding warrants to purchase shares of our redeemable convertible preferred stock that are accounted for as derivative liabilities in
accordance with ASC Topic 815, Derivatives and Hedging due to the terms of the warrants and related agreements. We have determined that these
warrants do not meet the scope exception of a contract indexed to our stock because of fair value protections contained in agreements governing our
redeemable convertible preferred stock as described in Note 8—Redeemable Convertible Preferred Stock. We record preferred stock warrant liabilities
in our consolidated balance sheets at their fair value. We record the changes in fair value of such instruments as non-cash gains or losses in our
statements of operations. See Note 10—Fair Value Measurements, for additional information regarding these warrants.
87
Table of Contents
Common Stock Warrant Liability
In connection with the Series G Stock financing, we issued warrants to purchase shares of our common stock that are accounted for as liabilities in
accordance with ASC Topic 480, Distinguishing Liabilities From Equity due to the terms of the warrants and related agreements. We record these
common stock warrant liabilities in our consolidated balance sheets at their fair value. We record the changes in fair value of such instruments as
non-cash gains or losses in our statements of operations. See Note 10—Fair Value Measurements, for additional information regarding these warrants.
Fair Value of Financial Instruments
When required by GAAP, assets and liabilities are reported at fair value in our consolidated financial statements. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation
techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Valuation inputs are
arranged in a hierarchy that consists of the following levels:
•
•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
Level 2 inputs are inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities; quoted prices in markets with
insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are
observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or
liabilities.
•
Level 3 inputs are unobservable inputs for the asset or liability.
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, other receivables, prepaid expenses and other assets, accounts
payable, and accrued liabilities, approximate their fair market value because of their short-term nature. We believe the carrying value of our lines of
credit and term loans approximate fair value as the borrowing rates for these instruments are similar to those available to the Company.
The redemption features included in the terms of the convertible promissory notes were determined to be derivative liabilities as a result of a significant
discount within the redemption features for the note holders. See Note 5—Debt for additional information regarding the convertible promissory notes.
Embedded derivatives that are not clearly and closely related to the host contract are required to be bifurcated and recorded at fair value unless the fair
value option is elected on the host contract. Under the fair value option, bifurcation of the embedded derivative is not necessary as all related gains
(losses) on the host contract and derivative will be reflected in the consolidated statements of operations. We elected the fair value option for the
Existing Stockholder Notes and Aimia Notes upon their issuance. The convertible promissory notes are measured using unobservable inputs that
required a high level of judgment to determine fair value, and are therefore classified as Level 3. See Note 10—Fair Value Measurements for additional
information.
Redeemable convertible preferred stock is stated at the amount of proceeds received, net of issuance costs and the fair value of warrants, increased by
accretion such that the carrying amount will equal the stated redemption amount at May 4, 2022. Our redeemable convertible preferred stock warrant
liabilities and common stock warrant liabilities are recorded at fair value and are measured using unobservable inputs that required a high level of
judgment to determine fair value, and are therefore classified as Level 3. See Note 10—Fair Value Measurements for additional information.
Our nonfinancial assets that we recognize or disclose at fair value in our consolidated financial statements on a nonrecurring basis include property and
equipment, intangible assets, capitalized software development costs and deferred FI implementation costs. The fair values for these assets are
evaluated when events or changes in circumstances indicate the carrying value may not be recoverable.
88
Table of Contents
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
income tax bases, and operating loss and tax credit carryforwards. Valuation allowances are provided when we determine that it is more likely than not
that all of, or a portion of, deferred tax assets will not be utilized in the future.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation
allowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning
strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation
allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Estimates of future taxable income are based on assumptions that are consistent with our plans. Assumptions represent management’s best estimates
and involve inherent uncertainties and the application of management’s judgment. If actual amounts differ from our estimates, the amount of our tax
expense and liabilities could be materially impacted.
We have recorded a full valuation allowance related to our net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits
of those assets.
We recognize the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely on its technical merits as of the
reporting date, and then, only in an amount more likely than not to be sustained upon review by the tax authorities. Where applicable, we classify
associated interest and penalties as income tax expense. The total amounts of interest and penalties were not material. We consider many factors when
evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual
outcomes.
3.
ACCOUNTING STANDARDS
Recently Adopted Accounting Pronouncements
In November 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid
Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. This ASU addresses diversity in practice in the assessment of
preferred stock and other hybrid equity instruments. The widely used “chameleon approach” has been eliminated and outstanding hybrid equity
instruments must be reassessed upon adoption. The effects of initial adoption should be applied on a modified retrospective basis to existing hybrid
financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendment is effective. Retrospective application
is permitted to all relevant prior periods. This ASU was effective for our interim and annual reporting periods in 2017. Adoption of this ASU did not
have an impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09
supersedes the recognition guidance in ASC Topic 605 and most industry specific revenue guidance and requires an entity to recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange
for those goods or services. In addition, this ASU requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising
from contracts with customers. This ASU supersedes most existing GAAP revenue recognition principles, and it permits the use of either the
retrospective or modified retrospective transition method. For public entities, this ASU is effective for fiscal years beginning after December 15, 2017,
including interim periods within those annual periods. For non-public entities, this ASU is effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. We have made the election to use the extended transition period for complying with new or revised
accounting standards under Section 102(b)(1) of the JOBS Act, therefore we will be required to apply this ASU for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Retrospective application will be required for each period presented through
either the recasting of the prior periods for the effects of the adoption of this ASU or retrospectively through a cumulative catch up recognized at the
date of adoption. We are currently evaluating the potential impact of this ASU on our condensed consolidated financial statements.
89
Table of Contents
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities, which is intended to enhance the reporting model for financial instruments to provide users of financial statements with more
decision-useful information. This ASU requires equity investments to be measured at fair value with changes in fair values recognized in net earnings,
(public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes), simplifies the impairment
assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and eliminates
the requirement to disclose fair values, the methods and significant assumptions used to estimate the fair value of financial instruments measured at
amortized cost. This ASU also clarifies that management should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale debt securities in combination with other deferred tax assets. For public business entities, this ASU is effective for fiscal years
beginning after December 15, 2017, including interim periods within those annual periods. For non-public business entities, this ASU is effective for
fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is
permitted. We have made the election to use the extended transition period for complying with new or revised accounting standards under
Section 102(b)(1) of the JOBS Act, therefore we will be required to apply this ASU for annual reporting periods beginning after December 15, 2018,
and interim periods within fiscal years beginning after December 15, 2019. We are currently evaluating the potential impact of this recently issued
guidance on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes ASC Topic 840, Leases. The ASU does not significantly
change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. The ASU’s primary
change is the requirement for lessee entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased
asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and
liability for leases with a term of twelve months or less. Lessors’ accounting under the ASU is largely unchanged from the previous accounting
standard. In addition, the ASU expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective
transition approach. For public entities, this ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years. For non-public entities, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. We have made the election to use the extended transition period for complying with new or revised accounting standards under
Section 102(b)(1) of the JOBS Act, therefore we will be required to adopt this ASU for annual reporting periods beginning after December 15, 2019,
including interim periods within those fiscal years. Early adoption is permitted. Although we are currently evaluating the impact of this guidance on our
consolidated financial statements, we expect that most of our operating lease commitments will be recognized as operating lease liabilities and
right-of-use assets upon adoption of the new guidance.
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based
payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would
be required to apply modification accounting under ASC Topic 718, Compensation—Stock Compensation. For all entities, the ASU is effective for
fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in
any interim period. We plan to adopt the standard effective January 1, 2018. The adoption is not expected to have a material impact on our condensed
consolidated financial statements.
4.
PROPERTY AND EQUIPMENT
Significant components of property and equipment are as follows (in thousands):
Computer equipment
Leasehold improvements
Furniture and fixtures
Property and equipment, gross
Less accumulated depreciation
Property and equipment, net
90
December 31,
2016
$ 9,068
5,194
818
15,080
(6,735)
$ 8,345
2017
$10,827
5,399
824
17,050
(9,731)
$ 7,319
Table of Contents
Assets acquired under capital leases, included within computer equipment, are as follows (in thousands):
Capital lease assets, gross
Less accumulated depreciation
Capital lease assets, net
Depreciation expense was $2.2 million, $3.0 million and $3.0 million in 2015, 2016 and 2017, respectively.
5.
DEBT
Our debt consists of the following (in thousands):
Lines of credit:
Line of credit
Term loans:
Term loan, net of unamortized discount and debt issuance costs of $1,069 and $1,058
at December 31, 2016 and 2017, respectively
Capital leases
Convertible promissory notes
Total debt
Less short-term debt
Long-term debt—net of current portion
Lines of Credit
December 31,
2016
$1,096
(787)
$ 309
2017
$ 1,096
(1,022)
74
$
December 31,
2016
2017
$ 15,652
$25,081
23,715
200
72,332
111,899
(99)
$111,800
31,830
101
—
57,012
(44)
$56,968
In January 2010, we entered into a loan and security agreement with a financial institution with respect to a line of credit (“Repaid Line of Credit”).
The Repaid Line of Credit was collateralized by substantially all of our assets. Maximum borrowings on the Repaid Line of Credit were not permitted
to exceed total eligible accounts receivable, as defined in the loan and security agreement. The Repaid Line of Credit contained a springing lockbox
feature and subjective acceleration clause. The lockbox feature required that borrowings be repaid upon receipt of eligible accounts receivable or, if
earlier, the date on which receivables are no longer eligible to borrow against. Amounts outstanding under the Repaid Line of Credit are classified as
short-term due to the springing lockbox feature and subjective acceleration clause.
In May 2015, we entered into an amended and restated loan and security agreement with respect to the Repaid Line of Credit to extend the maturity
from July 2015 to May 2017 and increase maximum borrowings available thereunder from $16.0 million to the lesser of $25.0 million or 80% of
eligible accounts receivable. The Repaid Line of Credit, as amended, carried a floating interest rate equal to the prime rate plus 0.5%. Under the
amended terms, the Repaid Line of Credit included a financial covenant related to our quick ratio.
We were not in compliance with the quick ratio financial covenant under our Repaid Line of Credit during September and October 2015. In October
2015, we entered into a loan modification agreement, providing a waiver for these defaults as well as updating the financial covenant and springing
lockbox feature. Under the amended terms, the financial covenants included a $10.0 million minimum cash balance and minimum quarterly
profitability thresholds, and the springing lockbox feature was based on maintaining a $15.0 million minimum cash balance. We were not in
compliance with our minimum quarterly profitability threshold under our Repaid Line of Credit during the fourth quarter of 2015. In February 2016,
we obtained a waiver from the lender for this default. The Repaid Line of Credit was extinguished in September 2016 at which time the unamortized
debt issuance costs of $0.1 million was recorded as an expense in other expense, net on our consolidated statements of operations.
In September 2016, we entered into a new loan and security agreement (“Line of Credit”) with a new lender which matures on March 14, 2019.
Maximum borrowings are stated as the lesser of $50.0 million or 85% of our eligible accounts receivable. The Line of Credit is collateralized by
substantially all of our assets and carries a floating interest
91
Table of Contents
rate equal to the Prime Rate in effect plus 3.50%, not to be less than 7.0% per year. Fees include an unused line fee of 0.50% and an annual
administrative fee of less than $0.1 million. Interest and fees under the Line of Credit may be added to the principal balance of the loan due and payable
at maturity. Amounts outstanding under the Line of Credit are classified as long-term. We capitalized $0.7 million of debt issuance costs associated
with obtaining the Line of Credit.
The Line of Credit includes customary affirmative and negative covenants, including restrictions on mergers, acquisitions and dispositions of assets,
incurrence of indebtedness and encumbrances on our assets and restrictions on payments of dividends. We are also required to maintain a total cash
balance plus liquidity under the Line of Credit of not less than $5.0 million and maintain a moving minimum twelve-month revenue throughout the
term of the Line of Credit, with minimum revenue of at least $119.5 million for the twelve months ending December 31, 2017. We believe we were in
compliance with all financial covenants as of December 31, 2017. As of December 31, 2017, we had $13.4 million of unused available borrowings
under our Line of Credit.
We expect to refinance or obtain a similar line of credit prior to its maturity date. In the event we are unable to refinance or obtain a similar line of
credit under acceptable terms, we would repay our Line of Credit at or before its maturity.
Term Loans
We were party to an amended and restated loan and security agreement for growth capital advances (“Repaid Term Loan”) with two financial
institutions, pursuant to which we received loans of $2.0 million in 2010, $10.0 million in 2012 and $1.2 million in 2015. As of December 31, 2015,
there was $9.8 million of principal outstanding under the Repaid Term Loan. Interest on the outstanding principal balance accrued at a rate of
9.75% per annum. Interest-only payments were payable through May 2017. Commencing in June 2017, principal payments, along with associated
interest, were payable for a period of 24 months, or until the Repaid Term Loan was repaid. The Repaid Term Loan was secured by substantially all of
our assets. The amended and restated loan and security agreement contains customary events of default and affirmative and negative covenants,
including restrictions on mergers, acquisitions and dispositions of assets, incurrence of indebtedness and encumbrances on our assets and restrictions on
payments of dividends.
In connection with originally obtaining the Repaid Term Loan in September 2012, we issued ten-year warrants to purchase up to an aggregate of 50,750
shares of Series D Stock to the financial institutions at an exercise price of $23.64 per share. In conjunction with the issuance of the warrants as a
liability instrument, we recorded a debt discount of $0.5 million. This discount was being accreted over the life of the Repaid Term Loan using the
effective interest rate method. The accretion charges were accounted for as interest expense and totaled less than $0.1 million in both 2015 and 2016.
The Repaid Term Loan was extinguished in July 2016 at which time the unamortized discount of $0.1 million and unpaid debt issuance costs of
$0.2 million were recorded as an expense in other expense, net on our consolidated statements of operations.
In July 2016, we entered into a $24.0 million credit agreement (“Term Loan”) with a new lender which matures on July 21, 2019. The Term Loan is
secured by substantially all of our assets and carries a fixed interest rate equal to (1) 13.25%, of which 3% is payable in cash and the remaining 10.25%
is payable in-kind, (2) 12.75%, subsequent to an IPO with gross proceeds of at least $75.0 million, of which 3% is payable in cash and the remaining
9.75% is payable in-kind or (3) 11.25%, if our adjusted EBITDA for the four most recent trailing fiscal quarters then-ended is greater than $1.0 million
and we are not in an event of default, of which 3% is payable in cash and the remaining 8.25% is payable in-kind. The lender funded an initial loan of
$19.0 million at closing and a subsequent loan of $5.0 million in November 2016 when the amount became available upon achieving trailing-four
quarter revenue of $100.0 million. In April 2017, we amended our Term Loan to remove the acceleration of our repayment upon IPO and reduce the
interest rate by 0.5% subsequent to an IPO. In June 2017, we amended and restated our Term Loan and borrowed an additional $5.0 million.
The Term Loan contains customary affirmative and negative covenants, including restrictions on mergers, acquisitions and dispositions of assets,
incurrence of indebtedness and encumbrances on our assets and restrictions on payments of dividends. The Term Loan also requires us to maintain a
total cash balance and unrestricted availability under our Line of Credit of not less than $3.0 million. Once we have achieved an adjusted EBITDA of at
least $1.0 million for two consecutive fiscal quarters, this requirement will be permanently waived. The Term Loan contains customary event of default
provisions, including in the event of a change of control, the occurrence of which could lead to an acceleration of our obligations under the Term Loan.
92
Table of Contents
Pursuant to the Term Loan, in July 2016, we issued ten-year warrants to purchase up to an aggregate of 97,125 shares of our common stock at an
exercise price of $20.00 per share. The fair value of the warrants was calculated to be $1.0 million under the Black-Scholes option pricing model. In
June 2017, we issued additional ten-year warrants to purchase up to an aggregate of 17,500 shares of common stock at a price per share of $27.68. The
fair value of the warrants was calculated to be $0.3 million under the Black-Scholes option pricing model. Under the guidance provided by ASC Topic
470-20, Debt with Conversion and Other Options, proceeds from the sale of debt instruments with stock purchase warrants are allocated to the two
elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of
the proceeds allocated to the warrants is accounted for as paid-in capital, as the warrants meet the scope exception within ASC Topic 815 and are
considered indexed to the Company’s own stock and accounted for as equity. The remainder of the proceeds is allocated to the debt instrument portion
of the transaction. We believe we were in compliance with all financial covenants as of December 31, 2017.
We expect to refinance or obtain a similar loan prior to its maturity date. In the event we are unable to refinance or obtain a similar loan under
acceptable terms, we would repay our Term Loan at or before its maturity.
Convertible Promissory Notes
Existing Stockholder Notes
During 2016, we raised capital through the issuance of unsecured convertible promissory notes (“Existing Stockholder Notes”) to our founders and
certain of our existing stockholders in an aggregate principal amount of $27.0 million, at an interest rate of 10% per year, compounded annually. The
maturity date of the Existing Stockholder Notes, or the Maturity Date, is the earliest to occur of: (1) a date after April 26, 2019, as specified by the
holders of a majority of the aggregate unpaid principal amount outstanding under the Existing Stockholder Notes, (2) our liquidation, dissolution or
wind up, including a sale of all or substantially all of our assets or a majority of our voting power or (3) an event of default under the Existing
Stockholder Notes. The Existing Stockholder Notes are subordinate to our Term Loan and Line of Credit. As discussed in Note 11—Related Parties, we
issued Existing Stockholder Notes to related parties in an aggregate principal amount of $19.5 million.
The Existing Stockholder Notes were convertible into shares of our capital stock, depending on certain triggering events. In the event we completed an
equity financing in which we received proceeds in excess of $10.0 million, the Existing Stockholder Notes were to automatically convert into shares of
the same series of our capital stock as the investors in the financing, at a price per share equal to 80% of the price per share paid by such investors. See
Note 8—Redeemable Convertible Preferred Stock for a description of the Series G Stock financing and the transactions that resulted in the conversion
of the Existing Stockholder Notes into shares of our Series G’ Stock.
Aimia Notes
During 2016, we issued to Aimia unsecured convertible promissory notes (“Aimia EMEA Notes”), in an aggregate principal amount of $18.0 million,
which accrue interest at a rate of 10% per year, compounded annually. In consideration for our outstanding obligations to Aimia Inc. at the time we
terminated our U.K. cooperation agreement, we issued to Aimia an unsecured convertible promissory note (“Outstanding Obligation Note”) in an
aggregate principal amount of approximately $5.7 million, at an interest rate of 10% per year, compounded annually. Both the Aimia EMEA Notes and
the Outstanding Obligation Note, (collectively the “Aimia Notes”) are due and payable on the earliest to occur of: (a) a date after June 30, 2019, as
specified by the holder, (b) our liquidation, dissolution or wind up, including a sale of all or substantially all of our assets or a majority of our voting
power or (c) an event of default. The Aimia Notes are subordinate to our Term Loan and Line of Credit. See Note 11—Related Parties for a discussion
of the termination of the cooperation agreement with Aimia.
The Aimia Notes were convertible into shares of our capital stock, depending on certain triggering events. In the event we completed an equity
financing in which we received proceeds in excess of $10.0 million, the Aimia EMEA Notes were to automatically convert into shares of our common
stock, at a price per share equal to 80% of the price per share determined by an independent third party valuation firm and the Outstanding Obligation
Note was to automatically convert into shares of the same series of our capital stock as the investors in the financing, at a price per share equal to 80%
of the price per share paid by such investors. In connection with the Series G Stock financing, the Aimia EMEA Notes converted into 801,329 shares of
common stock. See Note 8—Redeemable Convertible Preferred Stock for a description of the Series G Stock financing and the transactions that
resulted in the conversion of the Aimia EMEA Notes into shares of our common stock and the conversion of the Outstanding Obligation Note into
shares of our Series G’ Stock.
93
Table of Contents
The redemption features included in the terms of the convertible promissory notes were determined to be derivative liabilities as a result of a significant
discount within the redemption features for the note holders. Embedded derivatives that are not clearly and closely related to the host contract are
required to be bifurcated and recorded at fair value unless the fair value option is elected on the host contract. Under the fair value option, bifurcation of
the embedded derivative is not necessary as all related gains (losses) on the host contract and derivative will be reflected in the consolidated statements
of operations. We elected the fair value option for the Existing Stockholder Notes and Aimia Notes and recognized losses from their initial
measurement. Initial losses of $7.6 million related to the Existing Stockholder Notes is recorded in change in fair value of convertible promissory notes
and the initial loss of $7.9 million related to the Aimia Notes is recorded in termination of U.K. agreement expense on our consolidated statements of
operations. Subsequent changes in fair value of the Existing Stockholder Notes and Aimia Notes are included in change in fair value of convertible
promissory notes on our consolidated statements of operations. See Note 10—Fair Value Measurements for additional information.
Working Capital Line of Credit
We were party to a working capital line of credit with Aimia with maximum borrowings of £3.0 million (the “Working Capital Line of Credit”). The
interest rate for borrowings under the Working Capital Line of Credit was equal to the 3-month LIBOR rate plus 5.25%. The Working Capital Line of
Credit was secured by funds in a merchant bank account of Cardlytics UK and could only be used in the event that there was insufficient funds within
the merchant account to fund Consumer Incentives in the U.K. The borrowings require repayment as customer payments were received by Cardlytics
UK.
The termination of the co-cooperation agreement also resulted in a termination of this Working Capital Line of Credit. Also see Note 11—Related
Parties for additional information regarding the related party relationship between Aimia and Cardlytics.
Capital Leases
We took delivery of leased computer equipment with minimum capital lease obligations of less than $0.1 million in 2015, $0.1 million in 2016 and $0
in 2017. Effective interest rates for equipment capital leases range from 0% to 13.3%. Fixed monthly payments for equipment under capital leases will
be made through June 2021.
Future Payments
Aggregate future payments of principal and interest due upon maturity are as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
Total principal payments
Less unamortized debt issuance costs
Less unamortized debt discount
Total debt
Debt
—
57,969
—
—
57,969
(326)
(732)
$56,911
Capital Leases
44
20
24
13
101
—
—
101
$
Total Debt
44
57,989
24
13
58,070
(326)
(732)
$ 57,012
Accrued interest included in debt totaled $4.2 million and $6.2 million as of December 31, 2016 and 2017, respectively.
6.
STOCK-BASED COMPENSATION
In connection with the Series G Stock financing, our board of directors and stockholders approved an increase in the total number of shares of common
stock issuable under our 2008 Stock Plan from 3,120,000 to 3,495,000 shares. In January 2018, our board of directors and stockholders approved an
increase in the total number of shares of common stock issuable under our 2008 Stock Plan to 4,020,000 shares. Awards may be granted under the
Stock Plan until June 15, 2019.
94
Table of Contents
The following table summarizes the allocation of stock-based compensation in the consolidated statements of operations (in thousands):
Delivery costs
Sales and marketing
Research and development
General and administration
Total stock-based compensation
Common Stock Options
Year Ended December 31,
2015
$
97
1,015
386
955
$2,453
2016
$
96
1,153
574
1,624
$3,447
2017
$ 202
1,894
951
2,100
$5,147
The term of each option to purchase shares of our common stock pursuant to the Stock Plan is set by our board of directors or a committee thereof.
Option awards are generally granted with an exercise price not less than the fair value per share of our common stock at the grant date. Option awards
generally vest over four years and expire 10 years following the date of grant. We determine the grant date fair value of options using the Black-Scholes
option pricing model, which is affected by the estimated fair value of our common stock as well as the following significant inputs:
Weighted-average grant date fair value
Significant inputs:
Value of common stock
Expected term
Volatility
Risk-free interest rate
Dividend yield
2015
$14.16
Year Ended December 31,
2016
$7.00
2017
$12.11
$24.40 to $28.52
7.0 years
51% to 55%
1.6% to 1.9%
—%
$17.84 to $22.68
7.0 years
51% to 56%
0.5% to 2.1%
—%
$24.60 to $28.16
7.0 years
50% to 51%
0.7% to 2.2%
—%
We determined that a retrospective valuation of the fair value of our common stock on each grant date in 2016 was appropriate for financial reporting
purposes. In connection with the preparation of our retrospective valuation, we noted that the fair value of our common stock, as determined by
contemporaneous third-party valuations, decreased from $19.72 per share on April 30, 2016 to $17.84 per share on September 30, 2016. The decrease
in the fair value of our common stock primarily resulted from the dilutive effect of issuing our convertible promissory notes as the Company’s
enterprise values on April 30, 2016 and September 30, 2016 were similar and there were no events, or series of events, other than the issuance of the
convertible promissory notes, which would have clearly resulted in a decrease in the fair value of our common stock. We derived the fair value of our
common stock on each grant date between April 30, 2016 and September 30, 2016 using an interpolation methodology that considered both the timing
and amount of dilution from issuing convertible promissory notes.
For awards granted during the fourth quarter of 2016, we applied a straight-line calculation between the $17.84 per share price on September 30, 2016
to the $24.48 per share price on December 31, 2016. Using the benefit of hindsight, we determined that the straight-line calculation would provide the
most appropriate conclusion for the valuation of our common stock on the interim dates between valuations because we did not identify any single
event, or series of events, that occurred during this interim period that would have caused a material change in fair value other than our progress
towards an IPO.
We determined that a retrospective valuation of the fair value of our common stock on each grant date in 2017 was appropriate for financial reporting
purposes. In connection with the preparation of our retrospective valuation, we noted that the fair value of our common stock, as determined by
contemporaneous third-party valuations, was $24.48 per share on December 31, 2016, $27.68 per share on February 28, 2017, $30.44 per share on
May 15, 2017 and $24.24 per share on September 30, 2017. The changes in fair value of our common stock primarily resulted from the dilutive effect
of our Series G Stock financing, the timing of future potential liquidity events, changes to our forecasted financial results and changes in the valuation
of comparable companies. We derived the fair value of our common stock on December 31, 2017 using a similar interpolation methodology and
determined the fair value of our common stock to be $26.74 per share.
95
Table of Contents
A summary of common stock option activity under the Stock Plan is as follows (in thousands, except per share amounts):
Options outstanding — December 31, 2014
Granted
Exercised
Forfeited/cancelled
Options outstanding — December 31, 2015
Granted
Exercised
Forfeited/cancelled
Options outstanding — December 31, 2016
Granted
Exercised
Forfeited/cancelled
Options outstanding — December 31, 2017
Shares
1,560
325
(101)
(108)
1,676
1,330
(44)
(825)
2,137
799
(47)
(375)
2,514
Weighted-Average
Exercise Price
Per Share
$
$
$
$
7.20
27.36
4.28
10.92
11.04
18.08
6.00
12.40
15.00
23.78
4.83
12.08
18.42
As of December 31, 2016 and 2017, there were exercisable options outstanding with respect to 1,069,834 and 1,302,946 shares of our common stock
with weighted-average exercise prices of $9.16 and $13.29 per share, respectively, and with weighted-average remaining lives of 4.6 years and 5.4
years, respectively. We granted options to purchase 730,119 and 356,243 shares of our common stock to certain executives in 2016 and 2017,
respectively. No options were granted to executives in 2015.
Aggregate intrinsic value represents the difference between the fair value of our common stock and the exercise price of outstanding in-the-money
options to purchase shares of our common stock. The total aggregate intrinsic value of options exercised during 2015, 2016 and 2017 was $2.1 million,
$0.6 million and $1.2 million, respectively. The aggregate intrinsic value of options outstanding as of December 31, 2016 and 2017 was $18.4 million
and $18.0 million, respectively.
The total fair value of shares that vested and became exercisable during 2015, 2016 and 2017 was $2.5 million, $2.9 million and $4.3 million,
respectively.
As of December 31, 2016 and 2017, unamortized stock-based compensation expense related to unvested common stock options was $9.6 million and
$12.8 million, respectively, and the weighted-average period over which such stock-based compensation expense will be recognized was approximately
3.0 years and 2.8 years, respectively.
Restricted Stock Units
During the first quarter of 2018, two separate tranches of performance-based restricted stock units (“PSUs”) to receive 437,500 shares of common stock
were granted to employees. The vesting of the PSUs was contingent upon the completion of our IPO and includes other performance-based conditions.
The performance condition in the first tranche will be satisfied if we attain 70.0 million of FI monthly active users (or “FI MAUS”) within three years
of the grant date. The performance condition in the second tranche will be satisfied if we attain 85.0 million of FI MAUs within five years of the grant
date. The definition of FI MAUs is included elsewhere in this document. The unamortized stock-based compensation expense related to these PSUs is
$19.2 million, which will be recognized as stock-based compensation expense over the vesting periods of the awards.
96
Table of Contents
During the first quarter of 2018, we granted RSUs to receive 336,515 shares of common stock to employees and our non-employee directors, which
have annual vesting periods ranging from one to four years. The unamortized stock-based compensation expense related to these RSUs is $6.0 million,
which will be recognized as stock-based compensation expense over the respective vesting periods of the awards.
Restricted Securities Units
In connection with the issuance of the Existing Stockholder Notes, we granted $1.0 million of restricted securities units to certain executives in lieu of
cash bonuses during 2016. Upon issuance, the restricted securities units were indexed to Existing Stockholder Notes with similar terms to those issued
to our founders and existing holders of our redeemable convertible preferred stock and if an event or action resulted in the Existing Stockholder Notes
converting into cash or equity securities, the restricted securities units convert into such alternative. As a result of the Series G Stock financing, the
restricted securities units are indexed to the Series G’ Stock on the same terms as the Series G’ Stock issued upon conversion of the Existing
Stockholder Notes and the Outstanding Obligation Note, but such Series G’ Stock will not be issued.
Vesting requirements include both a service-based condition and a performance-based condition. The service-based condition requires each recipient to
remain employed until the earlier of i) the date 6 months from the restricted securities unit grant date, ii) the date of a qualified liquidity event, or iii)
date of termination without cause. The performance-based condition requires a sale of the Company or IPO event within a fixed period of time not
more than 5 years from the restricted securities unit grant date. The restricted securities units are considered liability classified awards, but due to the
performance condition relating to sale of the Company or IPO, no compensation cost will be recognized until one of these events occur. These warrants
vested upon the completion of our IPO in February 2018 resulting in a non-cash expense of $0.5 million.
7.
INCOME TAXES
Domestic and foreign components of loss before income taxes are as follows (in thousands):
Domestic
Foreign
Loss before income taxes
The significant components of income tax (expense) benefit are as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Change in uncertain tax positions
Change in valuation allowance
Total deferred
Income tax benefit
97
Year Ended December 31,
2016
2015
$(38,578)
(2,063)
$(40,641)
$(73,167)
(2,529)
$(75,696)
2017
$ (16,711)
(2,930)
$(19,641)
Year Ended December 31,
2016
2015
2017
$ —
16
—
16
$ —
—
—
—
$ —
—
—
—
$ 12,541
197
475
(85)
(13,128)
—
16
$
$ 22,449
1,796
864
(117)
(24,992)
—
$ —
$(28,331)
2,345
85
(120)
26,021
—
$ —
Table of Contents
The following table summarizes the significant differences between the U.S. federal statutory tax rate and our effective tax rate:
Tax benefit at federal statutory rate
State income taxes, net of federal benefit
Change in federal statutory rate
Foreign rate differential
Other adjustments
Valuation allowance
Income tax benefit
The significant components of deferred income taxes are as follows (in thousands):
Net operating loss carryforwards
Allowance for doubtful accounts
Depreciation and amortization
Stock-based compensation
Change in fair value of convertible promissory notes
Deferred costs
Other tax credit carryforward
Other temporary differences
Valuation allowance
Net noncurrent deferred tax liability
2015
34.00%
1.20
—
(0.85)
(2.01)
(32.30)
0.04%
Year Ended December 31,
2016
34.00%
1.36
—
(0.80)
(1.54)
(33.02)
0.00%
2017
34.00%
1.82
(156.32)
(1.04)
(10.93)
132.47
0.00%
December 31,
2016
$ 72,104
207
(576)
1,072
6,679
1,580
2,214
1,203
(84,483)
$ —
2017
$ 53,182
18
(485)
1,330
—
1,042
2,720
842
(58,649)
$ —
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law making significant changes to the Internal Revenue Code.
Changes include, but are not limited to, a corporate tax rate decrease to 21% effective for tax years beginning after December 31, 2017. This change in
tax rate resulted in a reduction in our net U.S. deferred tax assets, which was fully offset by a reduction in our valuation allowance. The other
provisions of the Tax Act, including the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, did not have a
material impact on our financial statements as of December 31, 2017.
As of December 31, 2017, pursuant to guidance provided in Staff Account Bulletin No. 118, we have not completed our accounting for the effects of
the Tax Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. For these
items, which are further described below, we have recognized a provisional reduction in U.S. deferred tax assets, which was fully offset by a reduction
in our valuation allowance. To the extent that any other provisions of the Tax Act are determined to affect our December 31, 2017 provision, we have
not recorded provisional amounts.
We have generated historical net losses and recorded a full valuation allowance against our net deferred tax assets. We expect to maintain a full
valuation allowance in the near term. Realization of any of our net deferred tax assets depends upon future earnings, the timing and amount of which
are uncertain.
The following table presents changes in our valuation allowance (in thousands):
Beginning balance
Allowance for domestic and foreign net operating loss carryforwards
Rate change on domestic net operating loss carryforwards
Change in foreign currency
Other changes
Ending balance
98
Year Ended December 31,
2016
2015
$(46,737)
(13,489)
57
75
305
$(59,789)
$(59,789)
(24,791)
(15)
298
(186)
$(84,483)
2017
$(84,483)
(6,509)
30,705
(187)
1,825
$(58,649)
Table of Contents
As of December 31, 2016 and 2017, we have $198.4 million and $220.5 million, respectively, of gross U.S. federal net operating loss carry forwards
that will begin to expire in the 2028 tax year. Additionally, we have $59.9 million and $76.3 million of gross state net operating loss carryforwards as of
December 31, 2016 and 2017, respectively that will also begin to expire in the 2028 tax year.
Ownership changes, as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), may limit the amount of net operating
losses that a company may utilize to offset future taxable income and taxes payable. Pursuant to Section 382 of the Code, an ownership change occurs
when the stock ownership of 5% stockholders increases by more than 50% over a three-year testing period. We completed an evaluation of the potential
effect of Section 382 of the Code on our net operating losses after the completion of our convertible promissory note financing in 2016 and concluded
that we had not experienced an ownership change in the past three years as of that date. We have completed a preliminary updated evaluation through
December 31, 2017 and there are no indications that an ownership change has occurred through this date. It is possible that we have subsequently
undergone an ownership changes as defined by Section 382 of the Code or that we may undergo such a change in the future, in connection with an IPO
or otherwise. Any such ownership change may limit our ability to utilize net operating losses.
Our results during 2015, 2016 and 2017 reflect state tax credits related to hiring and research activities that are utilized through the reduction of state
payroll tax withholdings totaling $1.0 million, $0.6 million and $0.8 million, respectively.
As of December 31, 2016 and 2017, Cardlytics UK had gross net operating losses of $8.6 million and $11.4 million, respectively. Foreign net operating
loss carryforwards expire according to the rules of each country. In the U.K., there is an indefinite carryforward period. As of December 31, 2017,
Cardlytics UK held cash and cash equivalents of $1.9 million. While our investment in Cardlytics UK is not considered to be permanently invested, we
do not plan to repatriate these funds. Further, although the tax basis of our investment in Cardlytics UK exceeds its book basis, we have not recorded a
deferred tax asset since we do not believe that a reversal of this temporary difference will occur in the foreseeable future.
The following table summarizes the activity related to our gross unrecognized tax benefits that would affect our effective tax rate, if recognized (in
thousands):
Beginning balance
Increase related to current year tax position
Ending balance
Year Ended December 31,
2016
$ 441
117
$ 558
2015
$ 356
85
$ 441
2017
$ 558
120
$ 678
All such positions, if recognized, would impact our effective tax rate. We do not currently anticipate any of our positions to change significantly in the
next 12 months. Our tax filings from inception remain subject to income tax examinations.
8.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon the consummation of our IPO, all of the outstanding shares of redeemable convertible preferred stock were automatically converted into shares of
common stock. See Note 16—Subsequent Events for additional information regarding our IPO.
A summary of the change in carrying amount of the outstanding redeemable convertible preferred stock is as follows (in thousands):
Balance — December 31, 2016
Issuance of Series G and Series G’ Stock
Beneficial conversion feature of Series G stock
99
Series G’ Stock
Series G Stock
Shares
—
1,296
—
Amount
$ —
44,672
—
Shares
—
346
—
Amount
$ —
4,488
(4,488)
Table of Contents
Deemed dividend related to beneficial conversion feature
Accretion of redeemable convertible preferred stock
Balance — December 31, 2017
Balance — December 31, 2014
Accretion of redeemable convertible preferred stock
Balance — December 31, 2015
Conversion of redeemable convertible preferred stock to common stock
Accretion of redeemable convertible preferred stock
Balance — December 31, 2016
Accretion of redeemable convertible preferred stock
Balance — December 31, 2017
Balance — December 31, 2014
Accretion of redeemable convertible preferred stock
Balance — December 31, 2015
Conversion of redeemable convertible preferred stock to common stock
Accretion of redeemable convertible preferred stock
Balance — December 31, 2016
Accretion of redeemable convertible preferred stock
Balance — December 31, 2017
Series G’ Stock
Series G Stock
Shares
—
—
1,296
Amount
—
—
$44,672
Shares
—
—
346
Amount
4,488
622
$ 5,110
Series D/D-R Stock
Series F/F-R Stock Series E/E-R Stock
Shares Amount Shares
Shares Amount
Amount
1,199 $56,451 1,193 $ 44,901 1,396 $32,362
—
147
1,199 $57,204 1,193 $ 44,922 1,396 $32,509
753 —
21 —
— — (398) (14,978) — —
133
—
1,199 $57,958 795 $ 29,963 1,396 $32,642
754 —
19 —
—
86
1,199 $58,449 795 $ 29,972 1,396 $32,728
491 —
9 —
Series A/A-R Stock
Series C/C-R Stock Series B/B-R Stock
Shares Amount Shares
Amount
Shares
Amount
1,508 $18,181 2,249 $ 5,283 1,869 $ 1,882
—
3
1,508 $18,254 2,249 $ 5,287 1,869 $ 1,885
73 —
4 —
(38)
— —
—
3
1,508 $18,323 2,247 $ 5,286 1,857 $ 1,850
(5)
(12)
4 —
(2)
69 —
2
—
1,508 $18,366 2,247 $ 5,288 1,857 $ 1,852
43 —
2 —
During the second quarter of 2016, we increased the authorized number of shares of our redeemable convertible preferred stock to 165,366,424 and
issued $21.0 million of convertible promissory notes to our founders and the existing holders of our redeemable convertible preferred stock. Shares of
redeemable convertible preferred stock held by investors that participated in the financing were exchanged for shares of replacement preferred stock.
These replacement shares have rights and preferences equal to their corresponding original series and are designated as Series A-R Stock, Series B-R
Stock, Series C-R Stock, Series D-R Stock, Series E-R Stock and Series F-R Stock. Shares of redeemable convertible preferred stock held by investors
that did not participate in the financing were converted to common stock.
In February 2017, we amended and restated our certificate of incorporation reducing the authorized number of shares of our redeemable convertible
preferred stock to 82,683,212 and cancelled Series A Stock, Series B Stock, Series C Stock, Series D Stock, Series E Stock and Series F Stock.
Pursuant to our Existing Stockholder Note financing, these series of preferred stock were either exchanged for shares of replacement preferred stock
with rights and preferences equal to their corresponding original series or converted to common stock.
Series G
In May 2017, we amended and restated our certificate of incorporation and increased the authorized number of shares of our common stock to
83,000,000 and increased the authorized number of shares of our redeemable convertible preferred stock to 96,131,002. In May 2017, we issued and
sold, for aggregate consideration of $11.9 million, an aggregate of 346,334 shares of Series G redeemable convertible preferred stock, par value
$0.0001 per share with a stated price of $34.4758 per share (“Series G Stock”), and warrants to purchase shares of our common stock.
The Series G Stock carries a stated dividend of $2.758 per annum, payable quarterly when, as, and if declared by our board of directors. These
dividends are noncumulative in nature. The Series G Stock is entitled to certain anti-dilution protections. Issuance costs incurred in connection with the
sale of Series G Stock totaled $0.1 million.
100
Table of Contents
In connection with the Series G Stock financing, we issued warrants to purchase an aggregate of number of shares of common stock equal to the
product obtained by multiplying 346,334 by a fraction, the numerator of which is the difference between $68.9516 and the volume weighted average
closing price of our common stock over the 30 trading days (or such lesser number of days as our common stock has been traded on the Nasdaq Global
Market) prior to the date on which such warrants vest and become exercisable and the denominator of which is such volume weighted average closing
price, which warrants will become vested and exercisable upon the earlier to occur of the date (i) 180 days following the date of the prospectus for our
IPO, dated February 8, 2018 and (ii) 10 days prior to a sale of our company, at an exercise price of $0.0004 per share.
Beneficial conversion feature
The aggregate proceeds of $11.9 million from the Series G Stock financing were first allocated to the warrants to purchase shares of our common stock,
which qualify as liabilities under ASC Topic 480 and are recorded at fair value, with the residual value of $4.5 million allocated to our Series G Stock.
As a result of this allocation, Series G Stock was determined to contain a beneficial conversion feature with an intrinsic value of $6.1 million. The
amount assigned to the beneficial conversion feature was limited to the $4.5 million residual value allocated to Series G Stock and is classified as a
component of additional paid-in capital. During the second quarter of 2017, we recorded a deemed dividend of $4.5 million related to the beneficial
conversion feature, which is reflected below net loss to arrive at net loss available to common stockholders.
See Note 10—Fair Value Measurements, for additional information regarding the warrants issued in connection with the Series G Stock financing.
Series G’
In connection with the Series G Stock financing, the Existing Stockholder Notes and the Outstanding Obligation Note converted into 1,295,746 shares
of Series G’ redeemable convertible preferred stock, par value $0.0001 per share (“Series G’ Stock”), at a price per share of $2.758. The Series G’
Stock carries a stated dividend of $2.758 per annum, payable quarterly when, as, and if declared by our board of directors. These dividends are
noncumulative in nature. The Series G’ Stock is entitled to certain anti-dilution protections.
Series F / Series F-R
In September 2014, we increased the authorized number of shares of our common stock to 64,000,000 and increased the authorized number of shares of
our redeemable convertible preferred stock to 82,683,212. In September 2014, we issued and sold an aggregate of 1,198,637 shares of Series F
redeemable convertible preferred stock, par value $0.0001 per share (“Series F Stock”), at a purchase price of $50.0568 per share for aggregate
consideration of $59,999,995. Issuance costs incurred in connection with the sale of Series F Stock totaled $0.2 million. Of this amount, $0.1 million
was accrued as of December 31, 2014.
The Series F Stock carries a stated dividend of $4.6720 per annum, payable quarterly when, as, and if declared by our board of directors. These
dividends are noncumulative in nature. The Series F Stock is entitled to certain anti-dilution protections.
In connection with the Series F Stock financing, investors also purchased 199,771 shares of common stock from certain members of management at the
purchase price of $50.0568 per share for aggregate consideration of $10.0 million. The difference between the $50.0568 purchase price and the $24.40
transaction date fair value per share of our common stock amounted to $5.1 million and is recorded in general and administrative expense. Placement
fees of $3.6 million and $0.5 million were allocated to the Series F Stock financing and secondary sale of common stock, respectively. Fees allocated to
the Series F Stock financing were recorded as a net reduction in sale proceeds and the fees allocated to the secondary sale of common stock are
included in general and administrative expense.
During 2016, 1,198,637 shares of Series F Stock were replaced with Series F-R Stock.
101
Table of Contents
Series E / Series E-R
In May 2013, we increased the authorized number of shares of our common stock to 50,000,000 and increased the authorized number of shares of our
redeemable convertible preferred stock to 70,664,212. In October 2013, we subsequently increased the authorized number of shares of our common
stock to 52,000,000 and increased the authorized number of shares of our redeemable convertible preferred stock to 72,364,212. In May and October
2013, we issued and sold an aggregate of 1,192,542 shares of Series E redeemable convertible preferred stock, par value $0.0001 per share (“Series E
Stock”), at the purchase price of $37.7344 per share for aggregate consideration of $45.0 million. Issuance costs incurred in connection with the sale of
Series E Stock totaled $0.1 million.
The Series E Stock carries a stated dividend of $3.0187 per annum, payable quarterly when, as, and if declared by our board of directors. These
dividends are noncumulative in nature. The Series E Stock is entitled to certain anti-dilution protections.
During 2016, 397,515 shares of Series E stock were converted to common stock and 795,027 shares of Series E Stock were replaced with Series E-R
Stock.
Series D / Series D-R
In September 2011, we increased the authorized number of shares of our common stock to 45,000,000 and increased the authorized number of shares of
our redeemable convertible preferred stock to 57,458,214. In September 2011, we issued and sold an aggregate of 1,395,936 shares of Series D
redeemable convertible preferred stock, par value $0.0001 per share (“Series D Stock”), at a purchase price of $23.64 per share for aggregate
consideration of $33.0 million.
The Series D Stock carries a stated dividend of $1.8912 per annum, payable quarterly when, as, and if declared by our board of directors. These
dividends are noncumulative in nature. The Series D Stock is entitled to certain anti-dilution protections.
During 2016, 1,395,936 shares of Series D Stock were replaced with Series D-R Stock.
Series C / Series C-R
In August 2010, we increased the authorized number of shares of our common stock to 40,000,000 and increased the authorized number of shares of
our redeemable convertible preferred stock to 46,290,700. In August 2010, we issued and sold an aggregate of 1,507,906 shares of Series C redeemable
convertible preferred stock, par value $0.0001 per share (“Series C Stock”), at the purchase price of $12.2686 per share for aggregate consideration of
$18.5 million, which included $17.2 million paid in cash and the conversion of loans totaling $1.3 million, plus accrued interest of less than
$0.1 million.
The Series C Stock carries a stated dividend of $0.9814 per annum, payable quarterly when, as, and if declared by our board of directors. These
dividends are noncumulative in nature. The Series C Stock is entitled to certain anti-dilution protections.
During 2016, 1,507,906 shares of Series C Stock were replaced with Series C-R Stock.
Series B / Series B-R
In June 2009, we increased the authorized number of shares of our common stock to 27,000,000 and increased the authorized number of shares of our
redeemable convertible preferred stock to 16,518,000. In June 2009, we issued and sold an aggregate of 2,248,865 shares of Series B redeemable
convertible preferred stock, par value $0.0001 per share (“Series B Stock”), at the purchase price of $2.3567 per share from aggregate consideration of
$5.3 million.
The Series B Stock carries a stated dividend of $0.1885 per annum, payable quarterly when, as, and if declared by our board of directors. These
dividends are noncumulative in nature. The Series B Stock is entitled to certain anti-dilution protections.
102
Table of Contents
During 2016, 2,121 shares of Series B stock were converted to common stock and 2,246,744 shares of Series B Stock were replaced with Series B-R
Stock.
Series A / Series A-R
In August 2008, we increased the authorized number of shares of our common stock to 17,000,000 and increased the authorized number of shares of
our redeemable convertible preferred stock to 7,500,000. In August 2008 and May 2009, we issued and sold an aggregate of 1,866,998 shares of
Series A redeemable convertible preferred stock, par value $0.0001 per share (“Series A Stock”), at a purchase price of $1.00 per share for aggregate
consideration of $1.9 million.
The Series A Stock carries a stated dividend of $0.08 per annum, payable quarterly when, as, and if declared by our board of directors. These dividends
are noncumulative in nature. The Series A Stock is entitled to certain anti-dilution protections.
During 2016, 12,375 shares of Series A Stock were converted to common stock and 1,856,998 shares of Series A Stock were replaced with Series A-R
Stock.
Protective Provisions
As long as at least 1,500,000 shares of our redeemable convertible preferred stock are outstanding, subject to certain exceptions, we may not (by
amendment, merger, consolidation or otherwise) without first obtaining the approval of the holders of a majority of the then outstanding shares of
redeemable convertible preferred stock, voting together as a single class on an as-converted basis (i) effect a liquidation transaction, (ii) alter or change
the rights, preferences or privileges of a series of redeemable convertible preferred stock so as to affect adversely the shares of such series, (iii) increase
or decrease the total number of authorized shares of any redeemable convertible preferred stock class, (iv) authorize or issue any other equity security
having a preference over or being on a parity with any series of outstanding redeemable convertible preferred stock with respect to voting, dividends,
redemption, conversion or liquidation, (v) redeem, purchase or otherwise acquire any share or shares of redeemable convertible preferred stock or
common stock, (vi) amend any stock option or purchase plan to modify the number of shares covered thereby, (vii) alter or change the dividend rights,
(viii) declare or pay any dividend, (ix) repay any stockholder notes or obligations to related parties, (x) transfer or grant any rights in any of our
technology, (xi) increase or decrease the authorized number of members of our board of directors, (xii) amend our certificate of incorporation,
(xiii) acquire the capital stock of any other entity or (xiv) incur indebtedness, in a single transaction or series of related transactions, in an amount in
excess of $750,000.
Subject to certain exceptions, we may not, by amendment, merger, consolidation or otherwise, (1) without obtaining the approval of the holders of at
least 75% of the then outstanding shares of Series C-R Stock, voting together as a single class on an as-converted basis, (2) without obtaining the
approval of the holders of a majority of the then outstanding shares of Series D-R Stock, voting together as a single class on an as-converted basis,
(3) without obtaining the approval of the holders of at least 63% of the then outstanding shares of Series E-R Stock, voting together as a single class on
an as-converted basis or (4) without obtaining the approval of the holders of a majority of the then outstanding shares of Series F-R Stock, (5) without
obtaining the approval of the holders of at least 66 2/3% of the then outstanding shares of Series G Stock or (6) without obtaining the approval of the
holders of a majority of the then outstanding shares of Series G’ Stock, voting together as a single class on an as-converted basis, as long as at least
250,000 shares of the Series C-R Stock, Series D-R Stock or Series E-R Stock, at least 299,659 shares of the Series F-R Stock, at least 86,585 shares of
the Series G Stock or at least 333,658 shares of the Series G’ Stock are outstanding, as applicable, negatively alter or change the rights, preferences,
terms or privileges of the shares of Series C-R Stock, Series D-R Stock, Series E-R Stock, Series F-R Stock, Series G Stock or Series G’ Stock, as
applicable.
Subject to certain exceptions, we may not, by amendment, merger, consolidation or otherwise, (1) without obtaining the approval of the holders of a
majority of the then outstanding shares of Series D-R Stock, voting together as a single class on an as-converted basis, (2) without obtaining the
approval of the holders of at least 63% of the then outstanding shares of Series E-R Stock, voting together as a single class on an as-converted basis or
(3) without obtaining the approval of the holders of a majority of the then outstanding shares of Series F-R Stock, voting together as a single class on an
as-converted basis, as long as at least 250,000 shares of the Series D-R Stock or Series E-R Stock or at least 299,659 shares of the Series F-R Stock are
outstanding, as applicable (i) increase or decrease the authorized shares of Series D-R Stock, Series E-R Stock or Series F-R Stock as applicable,
(ii) issue shares of Series D-R Stock, Series E-R
103
Table of Contents
Stock or Series F-R Stock, as applicable, (iii) approve or effect a liquidation transaction in which proceeds are not distributed to holders of Series D-R
Stock, Series E-R Stock or Series F-R Stock, as applicable, pursuant to the certificate of incorporation, (iv) redeem, purchase or otherwise acquire any
shares of redeemable convertible preferred stock or common stock other than in accordance with the redemption provisions of the certificate of
incorporation; provided, however, that this restriction shall not apply to the repurchase of shares of common stock from employees, officers, directors,
consultants or other persons performing services for us or any of our subsidiaries pursuant to agreements under which we have the option to repurchase
such shares or (v) pay or declare any dividend or other distribution that (a) is paid to holders of capital stock within two years following the initial
issuance of the Series D Stock, (b) is paid other than to all holders of capital stock on an as-converted basis or (c) exceeds operating income for the four
quarters trailing the date of declaration of the dividend; provided, however, that after the expiration of two years following the initial issuance of the
Series D Stock, we may declare and distribute a dividend in an amount exceeding our operating income if (1) the amount by which such dividend
exceeds operating income is financed by borrowings, (2) we have a total debt to EBITDA ratio immediately following the dividend that is equal to or
less than 3:1, (3) the amount by which such dividend exceeds operating income is equal to or below the amount of funds we borrowed to finance such
dividend, (4) the amount by which such dividend exceeds operating income does not exceed $25 million in any fiscal year and (5) the dividend is paid
to all holders of capital stock on an as-converted basis.
Subject to certain exceptions, we may not, by amendment, merger, consolidation or otherwise, (1) without obtaining the approval of the holders of at
least 66 2/3% of the then outstanding shares of Series G Stock or (2) without obtaining the approval of the holders of a majority of the then outstanding
shares of Series G’ Stock, voting together as a single class on an as-converted basis, as long as at least 86,585 shares of the Series G Stock or at least
333,658 shares of the Series G’ Stock are outstanding, as applicable (i) increase the authorized shares of Series G Stock or Series G’ Stock as
applicable or (ii) pay or declare any dividend or other distribution that (a) is paid to holders of capital stock within two years following the initial
issuance of the Series D Stock, (b) is paid other than to all holders of capital stock on an as-converted basis or (c) exceeds operating income for the four
quarters trailing the date of declaration of the dividend; provided, however, that after the expiration of two years following the initial issuance of the
Series D Stock, we may declare and distribute a dividend in an amount exceeding our operating income if (1) the amount by which such dividend
exceeds operating income is financed by borrowings, (2) we have a total debt to EBITDA ratio immediately following the dividend that is equal to or
less than 3:1, (3) the amount by which such dividend exceeds operating income is equal to or below the amount of funds we borrowed to finance such
dividend, (4) the amount by which such dividend exceeds operating income does not exceed $25 million in any fiscal year and (5) the dividend is paid
to all holders of capital stock on an as-converted basis.
Redemption
At any time on or after May 4, 2022, upon written request of the holders of not less than 66 2/3% of the shares of redeemable convertible preferred
stock then-outstanding, voting together as a single class on an as-converted to common stock basis, we are required to redeem all outstanding shares of
redeemable convertible preferred stock in eight quarterly installments. The Series A-R Stock, Series B-R Stock, Series C-R Stock, Series D-R Stock,
Series E-R Stock, Series F-R Stock, Series G Stock and Series G’ Stock are redeemable at prices equal to $1.00, $2.3567, $12.2686, $23.64, $37.7344,
$58.40, $34.4758 and $34.4758 per share, plus any declared or accumulated but unpaid dividends, respectively.
To the extent that we have insufficient funds to redeem all outstanding shares of redeemable convertible preferred stock, we are required to first redeem
shares of Series G Stock and Series G’ Stock, then shares of Series F/F-R Stock, then shares of Series E/E-R Stock, then shares of Series D/D-R Stock,
then shares of Series C/C-R Stock and then shares of Series B/B-R Stock and Series A/A-R Stock pari passu, in each case on a pro rata basis among the
holders thereof.
The redeemable convertible preferred stock carrying amount is increased by periodic accretions, using the interest method, so that the carrying amount
will equal the redemption amount at May 4, 2022. Accretion is recorded through a charge against additional paid-in capital.
Liquidation
Upon us (i) selling or otherwise disposing of all or substantially all of our property or business or merging with or into or consolidation with any other
corporation, limited liability company or other entity, (ii) a majority of the voting power of our outstanding capital stock being transferred or disposed
of as a result of a transaction or series of related
104
Table of Contents
transactions that are not issuances of capital stock by us primarily for the purposes of raising equity capital or (iii) any dissolution or winding-up of our
business, the holders of Series G’ Stock, Series G Stock, Series F-R Stock, Series E-R Stock, Series D-R Stock, Series C-R Stock, Series B-R Stock
and Series A-R Stock shall be entitled to receive payments in amounts per share equaling $34.4758, $68.9516, $58.40, $37.7344, $23.64, $21.4701,
$2.3567 and $1.00, plus any declared but unpaid dividends, respectively. Holders of Series G Stock and Series G’ Stock are pari passu and are to be
paid prior, and in preference to, any distribution of assets to the holders of all other classes of capital stock. Holders of Series F-R Stock are to be paid
prior, and in preference to, any distribution of assets to the holders of Series E-R Stock, Series D-R Stock, Series C-R Stock, Series B-R Stock and
Series A-R Stock. Holders of Series E-R Stock are to be paid prior, and in preference to, any distribution of assets to the holders of Series D-R Stock,
Series C-R Stock, Series B-R Stock and Series A-R Stock. Holders of Series D-R Stock are to be paid prior, and in preference to, any distribution of
assets to the holders of Series C-R Stock, Series B-R Stock and Series A-R Stock. Holders of Series C-R Stock are to be paid prior, and in preference
to, any distribution of assets to the holders of Series B-R Stock and Series A-R Stock. Holders of Series A-R Stock and Series B-R Stock are pari passu
and are to be paid prior, and in preference to, any distribution of assets to the holders of common stock.
Upon completion of the distributions detailed above, any remaining assets are to be distributed to the holders of common stock, Series A-R Stock,
Series B-R Stock, Series C-R Stock, Series D-R Stock, Series E-R Stock, Series F-R Stock, Series G Stock and Series G’ Stock; such participation in
the distribution of remaining assets shall cease, however, when the amount that the holders of Series A-R Stock, Series B-R Stock, Series C-R Stock,
Series D-R Stock, Series E-R Stock, Series F-R Stock, Series G Stock and Series G’ Stock are entitled to receive upon liquidation equals $2.00 per
share, $4.7134 per share, $36.8058 per share, $70.92 per share, $113.2032 per share, $175.20 per share, $103.4274 per share and $103.4274 per share,
respectively, plus any declared but unpaid dividends thereon.
If, however, as a result of a conversion from redeemable convertible preferred stock to common stock, a holder would receive, in the aggregate, an
amount greater than the amount that would be distributed to such holder if such holder did not convert such series of redeemable convertible preferred
stock into shares of common stock, such holder shall be deemed to have converted such holder’s shares of redeemable convertible preferred stock into
shares of common stock for the purposes of determining the amount that such holder is entitled to receive upon liquidation and shall not be entitled to
any distribution that would have otherwise been made to the holders of redeemable convertible preferred stock detailed above.
Dividends
No dividends have been declared or paid as of December 31, 2017.
Conversion
The holders of our redeemable convertible preferred stock also have the right, at any time, to convert any or all of their shares into such number of
shares of common stock as is determined by dividing $1.00 in the case of Series A-R Stock, $2.3567 in the case of the Series B-R Stock, $12.2686 in
the case of Series C-R Stock, $23.64 in the case of Series D-R Stock, $37.7344 in the case of Series E-R Stock, $50.0568 in the case of Series F-R
Stock, and $34.4758 in the case of Series G Stock and Series G’ Stock by the applicable conversion price. The initial conversion price is $1.00 in the
case of Series A-R Stock, $2.3567 in the case of the Series B-R Stock, $12.2686 in the case of Series C-R Stock, $23.64 in the case of Series D-R
Stock, $37.7344 in the case of Series E-R Stock, $50.0568 in the case of Series F-R and $34.4758 in the case of Series G Stock and Series G’ Stock. If,
at any time following the initial issuance of shares of Series G Stock, we issue any additional shares of capital stock without consideration or for a
consideration per share less than the then-effective conversion price for our redeemable convertible preferred stock, the conversion price for all series
of outstanding redeemable convertible preferred stock are subject to adjustment. There have been no changes to the conversion price for any series of
redeemable convertible preferred stock as of December 31, 2017.
Voting Rights
The holders of our redeemable convertible preferred stock are entitled to vote on an as-converted to common stock basis and as a single class with
respect to matters presented to our common stockholders for approval.
We evaluated the rights and preferences for all series of redeemable convertible preferred stock for derivatives that might have required bifurcation.
None were identified as of December 31, 2017.
105
Table of Contents
9.
COMMON STOCK WARRANTS
We have granted warrants to purchase shares of our common stock warrants to certain FI partners that include both time-based and performance-based
vesting conditions. These warrants are accounted for under ASC Topic 505-50, Equity-Based Payments to Non-Employees. Since the performance
conditions contained in these warrants are directly related to revenue-producing activities, we incur non-cash expense in FI Share and other third-party
costs on our consolidated statements of operations based on the vesting-date fair value of our common stock underlying these warrants.
A summary of common stock warrant activity, exclusive of the common stock warrants issued in connection with our Series G financing and unvested
performance-based warrants to purchase 231,433 shares of common stock as of December 31, 2015 and 644,365 shares of common stock as of
December 31, 2016 and December 31, 2017, respectively, is as follows (in thousands, except per share amounts):
Warrants outstanding—December 31, 2014
Granted
Exercised
Forfeited/cancelled
Warrants outstanding—December 31, 2015
Granted
Exercised
Redeemable convertible preferred stock warrants converted to common
stock warrants
Forfeited/cancelled
Warrants outstanding—December 31, 2016
Granted
Exercised
Forfeited/cancelled
Warrants outstanding—December 31, 2017
Shares
448
—
—
—
448
97
—
38
—
583
17
—
—
600
Weighted-average
exercise price
per share
$
$
$
$
5.28
—
—
—
5.28
20.00
—
1.92
—
7.52
27.68
—
—
8.11
Pursuant to the Term Loan, in July 2016, we issued 10-year fully vested warrants to purchase 97,125 shares of common stock at an exercise price of
$20.00 per share. In June 2017, we issued an additional warrants to purchase 17,500 shares of common stock at a price of $27.68 per share.
During 2016, warrants to purchase shares of redeemable convertible preferred stock held by parties that did not participate in the Existing Stockholder
Note financing were converted to common stock warrants. As a result, warrants to purchase 12,500 shares of our Series A Stock at an exercise price of
$1.00 per share, warrants to purchase 25,000 shares of our Series B Stock at an exercise price of $2.36 per share and warrants to purchase 644,365
shares of our Series E Stock at an exercise price of $23.64 per share were converted to common stock warrants. The warrants to purchase shares of our
Series A Stock and Series B Stock were fully vested upon issuance. The warrants to purchase 644,365 shares of our Series E Stock have performance-
based vesting conditions, which have not been met as discussed in Note 11—Related Parties. The conversion date fair value of the Series A Stock
warrants and Series B Stock warrants, which were converted to common stock warrants, was reclassified from redeemable convertible preferred stock
warrant liability to additional paid-in capital. See Note 10—Fair Value Measurements for more information.
106
Table of Contents
10.
FAIR VALUE MEASUREMENTS
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The
following table summarizes our liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
Liabilities:
Preferred stock warrants
Convertible promissory notes
Total liabilities
Liabilities:
Preferred stock warrants
Common stock warrants
Total liabilities
Level 1
Level 2
Level 3
Total
December 31, 2016
$ —
—
$ —
$ —
—
$ —
$ 2,197
72,332
$74,529
$ 2,197
72,332
$74,529
Level 1
Level 2
Level 3
Total
December 31, 2017
$ —
—
$ —
$ —
—
$ —
$ 2,285
7,945
$10,230
$ 2,285
7,945
$10,230
Instruments Recorded at Fair Value Using Level 3 Inputs
Our redeemable convertible preferred stock warrants, certain common stock warrants and our convertible promissory notes are measured and recorded
at fair value on a recurring basis using Level 3 inputs. The table below provides a roll forward of the changes in fair value of Level 3 financial
instruments (in thousands):
Balance at December 31, 2014
Changes in fair value of redeemable convertible preferred stock warrants
Balance at December 31, 2015
Fair value of convertible promissory notes at issuance
Accrued interest on convertible promissory notes
Conversion of preferred stock warrants to common stock warrants
Changes in fair value
Balance at December 31, 2016
Accrued interest on convertible promissory notes
Conversion of convertible promissory notes to Series G’ preferred stock
Conversion of convertible promissory notes to common stock
Issuance of common stock warrants
Changes in fair value
Balance at December 31, 2017
Preferred
Stock
Warrants
$ 3,856
(914)
$ 2,942
—
—
(777)
32
$ 2,197
—
—
—
—
88
$ 2,285
Common
Stock
Warrants
$ —
—
$ —
—
—
—
—
$ —
—
—
—
7,452
493
$ 7,945
Convertible
Promissory
Notes
$
$
—
—
—
66,391
2,876
—
3,065
$ 72,332
1,701
(44,672)
(24,392)
—
(4,969)
—
$
In valuing our instruments recorded at fair value using Level 3 inputs, our board of directors determined the equity value of our business generally
using a combination of the income approach and the market approach valuation methods.
The income approach estimates value based on the expectation of future cash flows that a company will generate, such as cash earnings, cost savings,
tax deductions and the proceeds from disposition. These future cash flows are discounted to their present values using a discount rate derived based on
an analysis of the cost of capital of comparable publicly traded companies in similar lines of business, as of each valuation date, and is adjusted to
reflect the risks inherent in our cash flows.
The market approach estimates the fair value of a company by applying market multiples of comparable publicly traded companies in a similar line of
business. The market multiples are based on relevant metrics implied by the price that investors have paid for the equity of publicly traded companies.
Given our significant focus on investing in and growing
107
Table of Contents
our business, we primarily utilized the forward-looking revenue multiple when performing valuation assessments under the market approach and
considered both trading and transaction multiples. When considering which companies to include as our comparable industry peer companies, we
focused on U.S.-based publicly traded companies that were broadly comparable to us based on consideration of industry, market and line of business.
From the comparable companies, a representative market value multiple was determined and applied to our operating results to estimate the value of
our company. The market value multiple was determined based on consideration of multiples of revenue to each of the comparable companies’ last
12-month revenue and the forecasted future 12-month revenue. In addition, the market approach considers IPO and merger and acquisition transactions
involving companies similar to the company’s business being valued. Multiples of revenue are calculated for these transactions and then applied to the
business being valued, after reduction by an appropriate discount.
Once an equity value was determined, we utilized the option price method, or OPM, or probability-weighted expected return method (“PWERM”) to
allocate the overall value of equity to the various share classes. The OPM was used in valuations as of and for dates prior to December 31, 2016 and the
PWERM was used in all subsequent valuations. The OPM treats common stock and convertible preferred stock as call options on a company’s
enterprise value with exercise prices based on the liquidation preferences of the convertible preferred stock. Under this method, the common stock only
has value if the funds available for distribution to stockholders exceed the value of the liquidation preference at the time of an assumed liquidity event.
The value assigned to the common stock is the remaining value after the convertible preferred stock is liquidated. The OPM prices the call option using
the Black-Scholes model. The PWERM relies on a forward-looking analysis to predict the possible future value of a company. Under this method,
discrete future outcomes, including an IPO and non-IPO scenarios, are weighted based on the estimated the probability of each scenario. The PWERM
is used when discrete future outcomes can be predicted with reasonable certainty based on a probability distribution. We relied on the PWERM to
allocate the value of equity under a liquidity scenario. The projected equity value relied upon in the PWERM scenario was based on (1) guideline IPO
transactions involving companies that were considered broadly comparable to us and (2) our expectation of the pre-money valuation that we needed to
achieve to consider an IPO as a viable exit strategy.
Following the closing of our IPO, the fair value of our common stock will be determined based on the closing price of our common stock on the
Nasdaq Global Market.
The following table summarizes key assumptions used in the PWERM for estimating the fair value of our redeemable convertible preferred stock
warrant liability and convertible promissory notes:
Cost of debt applicable to convertible promissory notes
Cost of equity applicable to convertible promissory notes
Weighted-average cost of capital applicable to redeemable convertible
preferred stock warrants
Discount for lack of marketability
Volatility
Risk-free interest rate
Preferred Stock Warrants
2015
—
—
December 31,
2016
12% to 17%
24% to 26%
2017
—
—
23%
7% to 13%
54%
0.7%
23%
8% to 12%
54%
0.7% to 1.2%
21%
7% to 13%
55%
1.2% to 1.4%
Upon the consummation of our IPO, all of the outstanding warrants to purchase shares of redeemable convertible preferred stock were automatically
converted into warrants to purchase shares of common stock. See Note 16—Subsequent Events for additional information regarding our IPO.
A summary of our preferred stock warrants is as follows (in thousands, except per share amounts):
Preferred Series
Series B/B-R
Series D/D-R
Series D/D-R
Total
Grant date
2/26/2010
9/21/2012
9/21/2012
Expiration date
2/25/2020
9/20/2022
9/20/2022
Exercise price
2.36
$
23.64
$
23.64
$
December 31, 2016
59
38
13
110
December 31, 2017
59
38
13
110
On May 26, 2016, warrants to purchase shares of redeemable convertible preferred stock held by parties that did not participate in the Existing
Stockholder Note financing were converted to common stock warrants. As a result, warrants to purchase 12,500 shares of our Series A Stock, 25,000
shares of our Series B Stock and 644,365 shares of our Series E
108
Table of Contents
Stock were converted to common stock warrants. The warrants to purchase 644,365 shares of our Series E Stock have performance-based vesting
conditions, which have not been met as discussed in Note 11—Related Parties. The conversion date fair value of the Series A Stock warrants and Series
B Stock warrants, which were converted to common stock warrants, was reclassified from redeemable convertible preferred stock warrant liability to
additional paid-in capital.
We determined that a retrospective valuation of the fair value of our preferred stock warrants on the conversion date was appropriate for financial
reporting purposes. In connection with the preparation of our retrospective valuation, we noted that the fair value of our Series B Stock warrants
decreased from $20.48 per share on April 30, 2016 to $18.16 per share on September 30, 2016. The decrease in the fair value of the Series B Stock
warrants primarily resulted from the dilutive effect of issuing our convertible promissory notes as the Company’s enterprise values on April 30, 2016
and September 30, 2016 were similar and there were no events, or series of events, other than the issuance of the convertible promissory notes, which
would have clearly resulted in a decrease in the fair value of the Series B Stock warrants. We derived the fair value of the Series B Stock warrants on
the conversion date using an interpolation methodology that considered both the timing and amount of dilution from issuing convertible promissory
notes and determined the conversion date fair value to be $20.36 per share.
The fair value of our Series A Stock warrants was $21.56 per share on April 30, 2016. Historically, the fair value of our Series A Stock warrants have
changed in a similar pattern to our Series B Stock warrants due to similarities between the underlying Series A Stock and Series B Stock. We
determined the conversion date fair value to be $21.44 per share based on similar percentage decline in the fair value of our Series B Stock.
The fair value of the warrants to purchase Series B-R Stock and Series D-R Stock increased from $25.16 per share and $13.84 per share on
December 31, 2016 to $26.80 per share and $13.63 per share on December 31, 2017, respectively. The changes in the fair value of the warrants to
purchase Series B-R Stock and Series D-R Stock primarily resulted from the timing of future potential liquidity events, changes to our forecasted
financial results and changes in the valuation of comparable companies.
Common Stock Warrants
In July 2016, we issued warrants to purchase 97,125 shares of common stock at an exercise price of $20.00 per share to a lender. In June 2017, we
issued the lender additional warrants to purchase 17,500 shares of common stock at a price of $27.68 per share. The fair value of the warrants issued in
July 2016 and June 2017 were calculated to be $1.0 million and $0.3 million, respectively. We determined the grant date fair value of these common
warrants using the Black-Scholes option pricing model, which is affected by the estimated fair value of our common stock as well as the following
significant inputs:
Weighted-average grant date fair value
Significant inputs:
Value of common stock
Expected term
Volatility
Risk-free interest rate
Dividend yield
Common stock
warrants
(issued July 2016)
10.44
$
Common stock
warrants
(issued June 2017)
19.04
$
$
17.92
10 years
51%
1.2%
—%
$
30.08
10 years
50%
2.2%
—%
To determine the fair value of our common stock warrants issued in connection with our Series G Stock financing, we utilized a Monte Carlo
simulation, which allows for the modeling of complex securities and evaluates many possible outcomes to forecast the stock price of the company
post-IPO. As part of the valuation, we considered various scenarios related to the pricing, timing and probability of an IPO. We applied an annual
equity volatility of 59% and a discount for lack of marketability of 11% to arrive at a valuation of $7.5 million on the issuance date.
The fair value of our common stock on September 30, 2017, as determined by an independent third party valuation firm using the PWERM as
discussed above, was $24.24 per share. We derived the fair value of our common stock on December 31, 2017 using an interpolation methodology that
considered the timing of future potential liquidity events, changes to our forecasted financial results and changes in the valuation of comparable
companies and determined the fair value of our common stock to be $26.74 per share. Using inputs consistent with those used to interpolate our
common stock, we derived a fair value of $7.9 million for these common stock warrants on December 31, 2017.
109
Table of Contents
Convertible Promissory Notes
See Note 8—Redeemable Convertible Preferred Stock for a description of the Series G Stock financing and the transactions that resulted in the
conversion of the convertible promissory notes into shares of our Series G’ Stock.
The redemption features included in the terms of the convertible promissory notes were determined to be derivative liabilities due to a significant
discount within the redemption features for the note holders. Embedded derivatives that are not clearly and closely related to the host contract are
required to be bifurcated and recorded at fair value unless the fair value option is elected on the host contract. Under the fair value option, bifurcation of
the embedded derivative is not necessary as all related gains (losses) on the host contract and derivative will be reflected in the consolidated statements
of operations. We elected the fair value option for the Existing Stockholder Notes and Aimia Notes, therefore direct costs and fees associated with the
issuance were recognized in earnings as incurred and were not deferred.
To determine the fair value of our convertible promissory notes, we utilized key assumptions from the PWERM, as shown above. Under this method,
we considered the redemption features of the convertible promissory notes, as described in Note 5—Debt, to determine the fair value under discrete
future outcomes, including IPO and non-IPO scenarios. Under certain non-IPO scenarios, holders of the convertible promissory notes were due to
receive two times preference on the outstanding principal amount. We weighted the fair values based on the estimated probability of each scenario to
determine the overall fair value of the convertible promissory notes as of the balance sheet date. A one percent increase or decrease in the cost of debt
and equity would have a $0.6 million impact on the value of the convertible promissory notes as of December 31, 2016.
The Existing Stockholder Notes and Aimia Notes were issued with an aggregate principal amount of $50.7 million. Paid-in-kind interest during 2016
and 2017 totaled $2.9 million and $1.7 million, respectively, and is recognized in interest expense, net in our consolidated statements of operations.
11. RELATED PARTIES
Convertible Promissory Notes
As discussed in Note 5—Debt, in 2016, we issued Existing Stockholder Notes to our founders and certain of our existing stockholders in an aggregate
principal amount of $27.0 million. The following table summarizes purchases of our convertible promissory notes by our directors, executive officers
and holders of more than 5% of any class of our capital stock as of the date of such transaction (in thousands):
Related Party
Aeroplan Holdings Europe Sàrl(1)
Entities affiliated with Polaris Venture Partners(2)
Canaan VIII L.P.(3)
Entities affiliated with Discovery Capital(4)
Scott D. Grimes
Lynne M. Laube
$
Principal amount of
convertible notes
3,987
5,321
6,514
2,663
650
350
(1) Aeroplan Holdings Europe Sàrl is an affiliate of Aimia Inc. David L. Adams, a member of our board of directors, was the Executive Vice President and
Chief Financial Officer of Aimia Inc. at the time of the issuance.
(2) Consists of convertible promissory notes in an aggregate principal amount of $5,134,443.03 purchased by Polaris Venture Partners V, L.P., or PVP V,
convertible promissory notes in an aggregate principal amount of $100,069.82 purchased by Polaris Venture Partners Entrepreneurs’ Fund V, L.L., or
PVP EF V, convertible promissory notes in an aggregate principal amount of $35,170.61 purchased by Polaris Venture Partners Founders’ Fund V, L.P.,
or PVP FF V, and convertible promissory notes in an aggregate principal amount of $51,344.45 purchased by Polaris Venture Partners Special
Founders’ Fund V, L.P., or PVP SFF V. Polaris Venture Management Co. V, L.L.C. (“PVM V”) is the general partner of each PVP V, PVP EF V, PVP
FF V, and PVP SFF V (collectively, the “Polaris Funds”). PVM V may be deemed to have sole power to vote and dispose of the shares held by each of
the Polaris Funds. Each of Jonathan Flint and Terrance McGuire (collectively, the “Managing Members”) are the managing members of PVM V and
may be deemed to share voting and dispositive power with respect to the shares held by the Polaris Funds. Bryce Youngren, a member of our board of
directors, has a membership interest in PVM V, and may be deemed to share voting and dispositive powers with respect to the shares held by the Polaris
Funds by virtue of his relationship to PVM V. Each of PVM V, the Managing Members and Mr. Youngren disclaim beneficial ownership of all of the
shares owned by the
110
Table of Contents
Polaris Funds, and this report shall not be deemed an admission that any of PVM V, the Managing Members or Mr. Youngren is the beneficial owner of
the shares owned by the Polaris Funds for purposes of Section 16 or for any other purpose, except to the extent of their respective and proportionate
pecuniary interests therein.
(3)
John V. Balen, a member of our board of directors, is a managing member of Canaan Partners VIII LLC, the general partner of Canaan VIII L.P.
Mr. Balen does not have voting or investment power over any shares held directly by Canaan VIII L.P.
(4) Consists of convertible promissory notes in an aggregate principal amount of $2,385,974.51 purchased by Discovery Global Opportunity Master Fund,
Ltd., or Discovery Global Opportunity, and convertible promissory notes in an aggregate principal amount of $277,291.57 purchased by Discovery
Global Focus Master Fund, Ltd., or Discovery Global Focus. Discovery Capital Management, LLC is the manager of each of Discovery Global
Opportunity and Discovery Global Focus, and may be deemed to have the sole voting and dispositive power over the shares held by Discovery Global
Opportunity and Discovery Global Focus.
Series G / Series G’
In May 2017, we issued and sold, for aggregate consideration of $11.9 million, an aggregate of 346,334 shares of our Series G Stock and warrants to
purchase shares of our common stock. In connection with the issuance of our Series G Stock, the principal and accrued interest under the Existing
Stockholder Notes converted into an aggregate of 1,295,746 shares of our Series G’ redeemable convertible preferred stock and the principal and
accrued interest under the Aimia EMEA Notes converted into an aggregate of 801,329 shares of our common stock. The following table summarizes
the participation in the foregoing transactions by our directors, executive officers and holders of more than 5% of any class of our capital stock as of the
date of such transactions (in thousands):
Related Party
Entities affiliated with Aimia, Inc.(1)
Entities affiliated with Polaris Venture Partners(2)
Canaan VIII L.P.(3)
Entities affiliated with Discovery Capital(4)
Scott D. Grimes
Lynne M. Laube
Entities affiliated with Mark A. Johnson(5)
John Klinck.
David Adams
Shares of
Series G
Preferred
Stock
—
29
54
—
—
—
35
6
3
Shares of
Series G’
Preferred
Stock
382
212
260
106
26
14
15
—
—
Shares of
Common
Stock
801
—
—
—
—
—
—
—
—
Warrants to
Purchase
Common
Stock
—
(6)
(6)
—
—
—
(6)
(6)
(6)
(1)
(2)
Consists of 159,207 shares of Series G’ redeemable convertible preferred stock issued to Aeroplan Holdings Europe Sàrl, 223,020 shares of Series G’
redeemable convertible preferred stock issued to Aimia EMEA Limited and 801,329 shares of common stock issued to Aimia EMEA Limited.
Consists of 27,988 shares of Series G redeemable convertible preferred stock purchased by Polaris Venture Partners V, L.P. (“PVP V”), 205,020 shares
of Series G’ redeemable convertible preferred stock issued to PVP V, 545 shares of Series G redeemable convertible preferred stock purchased by
Polaris Venture Partners Entrepreneurs’ Fund V, L.L. (“PVP EF V”), 3,995 shares of Series G’ redeemable convertible preferred stock issued to PVP
EF V, 191 shares of Series G redeemable convertible preferred stock purchased by Polaris Venture Partners Founders’ Fund V, L.P. (“PVP FF V”),
1,404 shares of Series G’ redeemable convertible preferred stock issued to PVP FF V, 280 shares of Series G redeemable convertible preferred stock
purchased by Polaris Venture Partners Special Founders’ Fund V, L.P. (“PVP SFF V”) and 2,050 shares of Series G’ redeemable convertible preferred
stock issued to PVP SFF V. Polaris Venture Management Co. V, L.L.C. (“PVM V”) is the general partner of each PVP V, PVP EF V, PVP FF V, and
PVP SFF V (collectively, the “Polaris Funds”). PVM V may be deemed to have sole power to vote and dispose of the shares held by each of the Polaris
Funds. Each of Jonathan Flint and Terrance McGuire (collectively, the “Managing Members”) are the managing members of PVM V and may be
deemed to share voting and dispositive power with respect to the shares held by the Polaris Funds. Bryce Youngren, a member of our board of directors,
has a membership interest in PVM V, and may be deemed to share voting and dispositive powers with respect to the shares held by the Polaris Funds by
virtue of his relationship to PVM V. Each of PVM V, the Managing Members and Mr. Youngren disclaim beneficial ownership of all of the shares
owned by the Polaris Funds, and this report shall not be deemed an admission that any of PVM V, the Managing Members or Mr. Youngren is the
beneficial owner of the shares owned by the Polaris Funds for purposes of Section 16 or for any other purpose, except to the extent of their respective
and proportionate pecuniary interests therein.
111
Table of Contents
(3)
(4)
(5)
(6)
John V. Balen, a member of our board of directors, is a managing member of Canaan Partners VIII LLC, the general partner of Canaan VIII L.P.
Mr. Balen does not have voting or investment power over any shares held directly by Canaan VIII L.P.
Consists of 95,272 shares of Series G’ redeemable convertible preferred stock issued to Discovery Opportunity Master Fund, Ltd. and 11,072 shares of
Series G’ redeemable convertible preferred stock issued to Discovery Global Focus Master Fund, Ltd.
Consists of 15,045 shares of Series G’ redeemable convertible preferred stock issued to TTP Fund II, L.P., 29,005 shares of Series G redeemable
convertible preferred stock purchased by TTV Ivy Holdings, LLC and 5,801 shares of Series G redeemable convertible preferred stock purchased by
Mr. Johnson. TTV Capital is a provider of management services to TTP GP II, LLC, which is a general partner of TTP Fund II, L.P. TTV Capital is the
manager of TTV Ivy Holdings Manager, LLC, which is the general partner of TTV Ivy Holdings, LLC. Mark A. Johnson, a member of our board of
directors, is a member of each of TTP GP II, LLC and TTV Ivy Holdings Managers, LLC and holds the title of partner of TTV Capital, and may be
deemed to share voting and dispositive power over the shares held by TTP Fund II L.P. and TTV Ivy Holdings, LLC.
The actual number of shares issuable to each investor upon the exercise of such warrants is equal to the product obtained by multiplying the number of
shares of Series G redeemable convertible preferred stock set forth opposite such investor’s name in the table above by a fraction, the numerator of
which is the difference between $68.9516 and the volume weighted average closing price of our common stock over the 30 trading days (or such lesser
number of days as our common stock has been traded on the Nasdaq Global Market) prior to the date on which such warrants become exercisable and
the denominator of which is such volume weighted average closing price.
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. We are also obligated to
make milestone payments to FIS related to the integration and deployment of our solutions. See Note 13—Commitments and Contingencies for
additional information. Prior to our IPO, FIS was entitled to elect a member of our board of directors, who was Robert Legters until his resignation
immediately prior to the IPO in February 2018.
In May 2013, FIS purchased 397,515 shares of our Series E Stock. See Note 8—Redeemable Convertible Preferred Stock for additional information.
We also granted 10-year performance-based warrants to purchase up to 644,365 shares of Series E Stock at an exercise price of $23.64 per share. Since
FIS did not participate in the Existing Stockholder Note financing, their preferred stock warrants were converted to common stock warrants in May
2016. The warrants become exercisable subject to the attainment of certain milestones related to the number of active accounts for which our solutions
have been enabled. We have determined that these warrants are subject to the guidance under ASC Topic 505-50. These warrants will not be subject to
the disclosure requirements under ASC Topic 820, Fair Value Measurements and Disclosures, when and if vested and expensed. As of December 31,
2017, no such warrants have vested and therefore no related expense has been recorded. Since the performance conditions are directly related to
revenue-producing activities, we will incur non-cash expense in our FI Share and other third-party costs based on the vesting-date fair value of our
redeemable convertible preferred stock underlying these warrants. These warrants vested upon the completion of our IPO in February 2018 resulting in
a non-cash expense of $2.5 million.
Agreements with Aimia Inc. and Affiliated Entities
In January 2014, we entered into a cooperation agreement with Aimia, which is a holder of our equity securities. As discussed in Note 12—Variable
Interest Entity, Aimia agreed to terminate the cooperation agreement in June 2016 in exchange for $22.3 million of convertible promissory notes,
resulting in Cardlytics, Inc. obtaining full control of Cardlytics UK. The net payable due to Aimia on June 30, 2016 totaled $5.7 million and was
converted to a convertible promissory note. The termination of the cooperation agreement also resulted in a termination of the Working Capital Line of
Credit. See Note 5—Debt, for additional information regarding the Working Capital Line of Credit and Aimia Notes.
12. VARIABLE INTEREST ENTITY
Cardlytics UK was operated through a cooperation agreement with Aimia whereby we and Aimia shared equally in cost and revenue related to the
business in the U.K. On June 30, 2016, we and Aimia agreed to terminate this agreement, resulting in Cardlytics, Inc. obtaining full control of
Cardlytics UK. While we maintained 100% equity ownership of Cardlytics UK, the cooperation agreement required that we establish a supervisory
board, made up of two representatives from each of Cardlytics and Aimia, which is responsible for strategy and other approvals relating to the
operations. As such, we and Aimia shared
112
Table of Contents
functional control over Cardlytics UK. Accordingly, Cardlytics UK was deemed to be a variable interest entity (“VIE”) while it was operated under the
cooperation agreement. Subsequent to the termination of the cooperation agreement, Cardlytics UK is not considered a VIE as it is fully owned and
controlled by Cardlytics, Inc.
A VIE is an entity that has either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated
financial support, or whose equity investors lack the characteristics of a controlling financial interest (i.e., the ability to make significant decisions
through voting rights and the right to receive the expected residual returns of the entity or the obligation to absorb the expected losses of the entity). A
variable interest holder that has both (1) the power to direct the activities of the VIE that most significantly impact its economic performance and
(2) either an obligation to absorb losses or a right to receive benefits that could potentially be significant to the VIE is referred to as the primary
beneficiary and must consolidate the VIE.
Cardlytics UK was deemed to be a VIE because we shared with Aimia the power to direct the activities that most significantly impacted Cardlytics
UK’s economic performance, and Aimia did not hold any equity investment in Cardlytics UK. Due to the fact that we shared such decision making
with Aimia, we individually did not have the characteristics of a primary beneficiary. However, we consolidated Cardlytics UK because (1) it was part
of a related party group that included Aimia, (2) the related party group had the characteristics of a primary beneficiary and (3) we were most closely
associated with Cardlytics UK. We concluded that we were most closely associated with Cardlytics UK because (1) merchants viewed Cardlytics UK
as the primary obligor in the performance of marketing services with Aimia acting as a de facto agent on behalf of Cardlytics UK and (2) our software
was used by Cardlytics UK in the performance of its services. We also had a disproportionate share of the economic risks when compared to our
functional voting control as we incurred more than 50% of the expenses due to the absorption of 100% of the information technology and systems
support related expenses for Cardlytics UK. There were no restrictions on the assets or liabilities of the VIE as a result of the cooperation agreement.
The liabilities of the VIE were comprised mainly of short-term accrued expenses, and creditors had no recourse to our general credit or assets. Our
conclusion that Cardlytics UK was a VIE was also partially reached due to the fact that Aimia was a related party.
Our consolidated statements of operations includes the reimbursement of expense and allocation of revenue that are due to and due from Aimia
pursuant to the agreement. Operating expense reimbursements and allocation of revenue less FI Share and third-party costs (recorded in FI Share and
other third-party costs), are as follows (in thousands):
Operating expense reimbursements:
Delivery costs
Sales and marketing expense
General and administrative expense
Allocation of revenue less FI Share and other third-party costs
Year Ended December 31,
2015
2016
2017
$
15
1,247
519
1,847
$
24
597
129
1,223
$—
—
—
—
Cardlytics UK’s effect on consolidated operating cash flows is a cash outflow of $0.4 million and $0.6 million during 2015 and 2016, respectively.
There were no material investing or financing cash flows associated with Cardlytics UK during 2015 or 2016.
13. 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
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 consolidated statements of operations. 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 implementation costs and also
result in a cumulative adjustment to accumulated amortization. Reductions to FI Share in 2018 and 2019 are expected to total $5.4 million and
$4.6 million, respectively. Unearned amounts not yet paid to FI partners totaled $9.3 million as of December 31, 2017.
One of our FI partners that we have made milestone payments to has experienced prolonged delays in implementing and supporting our Cardlytics
Direct solution. As a result, we wrote off deferred FI implementation costs totaling $0.8 million to FI Share and other third-party costs on our
consolidated statements of operations in 2016.
113
Table of Contents
The following table presents changes in deferred FI implementation costs (in thousands):
Beginning balance
Deferred costs
Recovery through FI Share
Amortization
Impairment
Ending balance
Year Ended December 31,
2016
$1,936
8,205
—
(876)
(814)
$8,451
2015
$ 123
2,023
—
(210)
—
$1,936
2017
$ 8,451
10,900
(4,100)
(1,626)
—
$13,625
Payments to FI partners not yet earned totaled $3.2 million as of December 31, 2017. Future amortization, based on the amounts earned as of
December 31, 2017, exclusive of amounts expected to be recovered, is as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
Total
Amortization
2,811
$
2,711
2,595
2,299
10,416
$
As a result of not meeting a minimum FI Share commitment in 2016, we were required to pay an FI partner $2.6 million in March 2017. This shortfall
is recorded as of December 31, 2016 as a component of FI Share liability on our consolidated balance sheet and is included in FI Share and other third-
party costs on our consolidated statement of operations. We also have an FI Share commitment to a certain FI partner totaling $10.0 million over a
12-month period after June 30, 2018 and following the completion of certain milestones, which were not met as of December 31, 2017.
Operating Leases
We lease office and apartment space and office equipment under non-cancelable operating lease agreements expiring on various dates through April
2026. For leases that contain rent escalation or rent concession provisions, we record the total rent expense during the lease term on a straight-line basis
over the term of the lease. On our consolidated balance sheets, the current portion of deferred rent is included in accrued liabilities and the noncurrent
portion is included within deferred liabilities. Rent expense during 2016 and 2017 totaled $2.9 million and $3.0 million, respectively.
In August 2013, we entered into a 130-month office lease for our new corporate headquarters in Atlanta, Georgia. The facility was delivered to us in
July 2014 and provides 76,880 square feet of office space. We began recognizing rent expense at the beginning of the lease term in July 2014. The lease
contains a $3.8 million tenant improvement allowance that is included in deferred rent and amortized as a reduction to rent expense over the lease term.
Minimum lease payments under the agreement total $16.0 million.
In July 2015, we entered into a 60-month lease, expanding our existing data center space located in Atlanta, Georgia. Minimum lease payments under
the agreement total $2.3 million.
In December 2016, we entered into a 40-month office lease for our new office in Victoria, London, providing 5,295 square feet of office space. We
began recognizing rent expense at the beginning of the lease term in December 2016. Minimum lease payments under the agreement total £0.8 million.
114
Table of Contents
As of December 31, 2017, future minimum lease payments under non-cancelable operating leases are as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Minimum Lease
Payments
2,664
2,688
2,090
1,654
1,703
4,173
14,972
$
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.
Letters of Credit
In connection with the lease of the new corporate headquarters, we executed a $2.5 million irrevocable letter of credit on April 1, 2014. In December
2016, upon transitioning our operating bank accounts to a new financial institution, we replaced our existing irrevocable letter of credit with a new
$2.0 million irrevocable letter of credit, which reduced to $1.5 million in May 2017.
On September 2, 2015, we executed a $1.0 million irrevocable letter of credit as security for payment of Consumer Incentives to a new FI partner. This
irrevocable letter of credit expired in September 2016 and was not renewed.
14. EARNINGS PER SHARE
Diluted net loss per share is the same as basic net loss per share for 2015, 2016 and 2017 because the effects of potentially dilutive items were anti-
dilutive, given our net loss during these periods. The following securities have been excluded from the calculation of diluted weighted-average
common shares outstanding because the effect is anti-dilutive (in thousands):
Redeemable convertible preferred stock:
Series A/A-R
Series B/B-R
Series C/C-R
Series D/D-R
Series E/E-R
Series F/F-R
Series G
Series G’
Common stock warrants
Redeemable convertible preferred stock warrants
Common stock options
Restricted securities units
Convertible promissory notes
115
2015
December 31,
2016
1,869
2,249
1,508
1,396
1,193
1,199
—
—
564
791
1,676
—
—
1,857
2,247
1,508
1,396
795
1,199
—
—
1,227
110
2,137
53
2,734
2017
1,857
2,247
1,508
1,396
795
1,199
346
1,296
1,245
110
2,514
37
—
Table of Contents
15.
SEGMENTS
We have three operating segments: our Cardlytics Direct solutions in the U.S. and U.K. and Other Platform Solutions, as determined by the information
that both our Chief Executive Officer and President and Chief Operating Officer, who we consider our chief operating decision makers, use to make
strategic goals and operating decisions. Our Cardlytics Direct 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 Other Platform Solutions segment represents solutions that enable marketers and marketing service providers to leverage the power
of purchase intelligence across all of their marketing investments.
Revenues and FI Share and other third-party can be directly attributable to each segment. Our chief operating decision makers allocate resources to, and
evaluate the performance of, our operating segments based on revenue and adjusted contribution. The accounting policies of each of our reportable
segments are the same as those described in the summary of significant accounting policies.
The following table provides information regarding our reportable segments (in thousands):
Cardlytics Direct:
Adjusted contribution
FI Share and other third-party costs
Revenue
Other Platform Solutions:
Adjusted contribution
FI Share and other third-party costs
Revenue
Total:
Adjusted contribution
FI Share and other third-party costs
Revenue
Year Ended December 31,
2016
2017
2015
$25,783
38,664
$64,447
$ 39,684
58,105
$ 97,789
$ 53,558
68,833
$122,391
$ 4,160
9,027
$13,187
$
6,852
8,180
$ 15,032
$
$
3,560
4,414
7,974
$29,943
47,691
$77,634
$ 46,536
66,285
$112,821
$ 57,118
73,247
$130,365
Adjusted Contribution
Adjusted contribution represents our revenue less FI Share and other third-party costs.
The following table presents a reconciliation of loss before income taxes presented in accordance with GAAP to adjusted contribution (in thousands):
Adjusted contribution
Minus:
Delivery costs
Sales and marketing expense
Research and development expense
General and administration expense
Depreciation and amortization expense
Termination of U.K. agreement expense
Total other expense
Loss before income taxes
116
Year Ended December 31,
2016
2015
$ 29,943
$ 46,536
2017
$ 57,118
4,803
32,784
11,604
18,197
2,194
—
1,002
$(40,641)
6,127
31,261
13,902
21,355
4,219
25,904
19,464
$(75,696)
7,012
31,927
12,150
20,100
3,028
—
2,542
$(19,641)
Table of Contents
The following table provides geographical information (in thousands):
Revenue:
United States
United Kingdom
Total
Property and equipment:
United States
United Kingdom
Total
Year Ended December 31,
2016
2017
2015
$69,147
8,487
$77,634
$100,590
12,231
$ 112,821
$ 113,509
16,856
$130,365
December 31,
2016
2017
$8,000
345
$8,345
$6,813
506
$7,319
Capital expenditures within the U.K. were immaterial during 2016 and 2017.
16.
SUBSEQUENT EVENTS
We evaluated subsequent events through March 19, 2018, the date on which these consolidated financial statements were issued.
Charter Amendment
On January 26, 2018, our board of directors approved an amended and restated certificate of incorporation to (1) effect a reverse split on outstanding
shares of our common stock and redeemable convertible preferred stock on a one-for-four basis (the “Reverse Stock Split”), (2) modify the threshold
for automatic conversion of our preferred stock into shares of our common stock in connection with an IPO to eliminate the requirement of gross
proceeds to the Company of not less than $70.0 million and (3) authorize us to issue up to 100,000,000 shares of common stock, $0.0001 par value per
share and 25,000,000 shares of redeemable convertible preferred stock, $0.0001 par value per share (collectively, the “Charter Amendment”). The
authorized shares and par values of our common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock
Split. The Charter Amendment was approved by the Company’s stockholders on January 26, 2018 and became effective upon the filing of the Charter
Amendment with the State of Delaware on January 26, 2018. All issued and outstanding common stock and preferred stock and related share and per
share amounts contained in these financial statements have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.
Initial Public Offering
On February 13, 2018, we closed our IPO, in which we issued and sold 5,400,000 shares of common stock at a public offering price of $13.00 per
share, resulting in gross proceeds of $70.2 million. On February 14, 2018, pursuant to the underwriters’ partial exercise of their over-allotment option
to purchase up to an additional 810,000 shares from us, we issued and sold an additional 421,355 additional shares of our common stock, resulting in
additional gross proceeds to us of $5.5 million. In total, we issued 5,821,355 shares of common stock and raised $75.7 million in gross proceeds, or
$66.1 million in net proceeds after deducting underwriting discounts and commissions of $5.3 million and estimated offering costs of $4.3 million.
Upon the closing of the IPO, all of the outstanding shares of redeemable convertible preferred stock automatically converted into shares of common
stock and all warrants to purchase shares of redeemable convertible preferred stock were automatically converted into warrants to purchase shares of
common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock or warrants to purchase shares of redeemable convertible
preferred stock outstanding. The consolidated financial statements as of December 31, 2017, including share and per share amounts, do not give effect
to the IPO or conversion of the redeemable convertible preferred stock, as the IPO and such conversions were completed subsequent to December 31,
2017.
117
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or
the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosure. 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.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2017. Based on the evaluation of our disclosure controls and procedures as of December 31, 2017, our Chief Executive
Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Controls Over Financial Reporting
The Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation
report of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2017 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
118
Table of Contents
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our Board of Directors
PART III.
As of February 28, 2018, our board of directors consists of eight members. In accordance with our amended and restated certificate of incorporation, which
became effective in connection with our initial public offering, or IPO, on February 8, 2018, our board of directors is divided into three classes with staggered
three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire at that annual meeting are put forward for
election for a three-year term. Our directors are divided among the three classes as follows:
•
•
•
Class I, which consists of Scott D. Grimes, Mark A. Johnson and David L. Adams, and whose term will expire at our 2019 annual
meeting of stockholders;
Class II, which consists of Lynne M. Laube, John Klinck and Tony Weisman, and whose term will expire at our 2020 annual meeting of
stockholders; and
Class III, which consists of John V. Balen and Bryce Youngren, and whose term will expire at our 2021 annual meeting of stockholders.
The following table sets forth information concerning our directors as of February 28, 2018:
Name
Scott D. Grimes
Lynne M. Laube
David L. Adams(2)(3)
John V. Balen(1)(2)
Mark A. Johnson(1)
John Klinck(3)
Tony Weisman(1)
Bryce Youngren(2) (3)
Age Position(s)
55 Chief Executive Officer, Co-Founder and Director
48 Chief Operating Officer, Co-Founder and Director
61 Director
57 Chairman of the Board of Directors
65 Director
54 Director
58 Director
47 Director
(1) Member of the compensation committee.
(2) Member of the nominating and corporate governance committee.
(3) Member of the audit committee.
Mr. Robert Legters served as a member of our board of directors from December 2015 until immediately prior to the closing our IPO.
Class I Directors Continuing In Office Until Our 2019 Annual Meeting of Stockholders
David L. Adams has served as a member of our board of directors since September 2011. From 2007 until he retired in March 2016, Mr. Adams served as
Executive Vice President and Chief Financial Officer of Aimia Inc., a TSX listed, data-driven marketing and loyalty analytics company. Before joining
Aimia, Mr. Adams held a variety of executive finance positions at Photowatt Technologies Inc., SR Telecom Inc. and CAE Inc. Prior to these roles, he held a
number of positions with the Bank of Nova Scotia and Ernst & Young. Mr. Adams serves as a director of Points International (TSX, NASDAQ), Club
Premier (Aeromexico’s frequent flyer program), Plan International Canada and is a member of the Board of Governors of the Stratford Festival. Mr. Adams is
a member of the audit committee of all of these boards, chairs the HRCC at Plan and is a member of the HRCC at Club Premier. Mr. Adams is a chartered
accountant in Canada and holds a B.Comm. in Commerce and Finance from the University of Toronto. Our board of directors believes that Mr. Adams’
financial expertise and experience in the technology industry qualify him to serve on our board of directors.
Scott D. Grimes has served as our Chief Executive Officer and as a member of our board of directors since our founding in June 2008. From 2005 to June
2008, Mr. Grimes was Senior Vice President and General Manager, Payments at Capital One Financial Corporation and, from 2003 to 2005, Mr. Grimes was
Vice President, Strategy at Capital One Financial Corporation. From 2001 to 2003, Mr. Grimes was a Principal at Canaan Partners, a venture capital firm.
Earlier in his career, Mr. Grimes was a Senior Vice President at FreeMarkets Inc., an e-sourcing company, and a Principal at McKinsey & Company, a
management consulting firm. Mr. Grimes began his career at Schlumberger Limited as an electrical engineer. Since August 2014, Mr. Grimes has served as a
director of Great Plains Energy Incorporated, a regulated electric utility, where he also serves on the governance and audit committees. Mr. Grimes holds a
B.S. in Electrical Engineering from Union College and an M.B.A. from Stanford University. Our board of directors believes that Mr. Grimes’s business
expertise and his daily insight into corporate matters as our Chief Executive Officer qualify him to serve on our board of directors.
119
Table of Contents
Mark A. Johnson has served as a member of our board of directors since October 2010. Mr. Johnson joined TTV Capital, a venture capital firm, as a General
Partner in 2008. From 1982 to 2000 and from 2003 to 2008, Mr. Johnson held various positions at CheckFree Corporation, a provider of financial electronic
commerce services and products, including director, Vice President of Operations and Vice Chairman. From 2000 to 2003, Mr. Johnson left CheckFree to
form e-RM Ventures, a private investing consultancy focused on early stage payments-related companies, although he continued to serve as a director of
CheckFree. Prior to joining CheckFree, Mr. Johnson worked for the Federal Reserve Bank and Bank One Corporation. Mr. Johnson serves as a director and
on the audit committee of FleetCor Technologies, Inc., a public company, and serves as a director of a number of privately-held companies. He also is the
former chairman of Venture Atlanta, a technology conference focused on connecting Georgia’s entrepreneurs with the capital providers. Mr. Johnson holds a
B.S. in Business from Miami University and an M.B.A. from Ohio State University. Our board of directors believes that Mr. Johnson’s experience in financial
e-commerce services and his service on numerous private company boards qualify him to serve on our board of directors.
Class II Directors Continuing In Office Until Our 2020 Annual Meeting of Stockholders
Lynne M. Laube has served as our Chief Operating Officer and as a member of our board of directors since our founding in June 2008. From 1995 to June
2008, Ms. Laube held various positions at Capital One, including as a Vice President. Ms. Laube started her career at Bank One Corporation, where she
specialized in operations analysis. Ms. Laube holds a B.S. in Finance and Marketing from University of Cincinnati. Our board of directors believes that
Ms. Laube’s business expertise and her daily insight into corporate matters as our President and Chief Operating Officer qualify her to serve on our board of
directors.
John (“Jack”) Klinck has served as a member of our board of directors since October 28, 2016. Mr. Klinck is currently an active angel and seed stage investor
in FinTech oriented firms. From 2006 to April 2015, Mr. Klinck was Executive Vice President and Head of Global Strategy and New Ventures at State Street
Corporation, where he served on that firm’s management committee and ran several business lines including Alternative Investment Solutions, Credit
Services, Global Exchange and Corporate Strategy. Before joining State Street, Mr. Klinck was Vice Chairman and President of the Investment Manager
Solutions Group at Mellon Financial Corporation. Before joining Mellon in 1997, Mr. Klinck held various management positions at American Express.
Mr. Klinck holds a B.A. from Middlebury College and an M.B.A from the Fuqua School of Business at Duke University. Our board of directors believes that
Mr. Klinck’s diverse management expertise and experience in the financial services industry qualify him to serve on our board of directors.
Tony Weisman has served as a member of our board of directors since October 2014. Mr. Weisman has served as the Chief Marketing Officer of Dunkin’
Donuts since September 2017. From 2007 until September 2017, Mr. Weisman served in senior executive positions at Digitas and as the Chief Executive
Officer of Digitas North America from March 2013 until September 2017. From 2002 to 2006, Mr. Weisman was Chief Marketing Officer at
DraftFCB/Chicago, an advertising agency. Prior to 2002, he held various management positions at advertising agency Leo Burnett. Mr. Weisman holds a B.A.
in Political Science from Brown University. Our board of directors believes that Mr. Weisman’s experience in the advertising industry qualifies him to serve
on our board of directors.
Class III Directors Continuing In Office Until Our 2021 Annual Meeting of Stockholders
John V. Balen has served as a member of our board of directors since August 2008 and as chairman of our board of directors since April 2017. Mr. Balen
joined Canaan Partners, a venture capital firm in 1995 and is currently a Partner, where he focuses on the digital media, enterprise and financial technology
sectors. Before joining Canaan Partners, Mr. Balen held a variety of operational and financial roles, including Managing Director of Horsley Bridge Partners,
a private equity firm. Earlier in his career, Mr. Balen was an engineer at Codenoll Technology, a fiber communications company, and an engineer at Digital
Equipment Corp. Mr. Balen serves as a director for a number of privately-held companies. Mr. Balen holds a B.S. in Electrical Engineering and an M.B.A.
from Cornell University. Our board of directors believes that Mr. Balen’s experience investing in technology businesses and his service on numerous private
company boards qualify him to serve on our board of directors.
Bryce Youngren has served as a member of our board of directors since August 2008. Mr. Youngren joined Polaris Partners, a venture capital firm, in 2002
and currently is a Managing Partner of the firm and co-leads the firm’s technology investing team. Prior to joining Polaris, Mr. Youngren worked for Great
Hill Partners and Willis Stein and Partners, two private equity firms, and for Bear Stearns & Co.’s technology investment banking group. Mr. Youngren serves
as a director for a number of privately-held companies. Mr. Youngren holds a B.A in Economics from the University of Illinois at Urbana-Champaign and an
M.B.A. from the University of Pennsylvania. Our board of directors believes that Mr. Youngren’s experience investing in technology businesses and his
service on numerous private and public company boards qualify him to serve on our board of directors.
120
Table of Contents
Executive Officers
The following table sets forth information regarding our executive officers as of February 28, 2018:
Name
Scott D. Grimes
Lynne M. Laube
David T. Evans
Kirk L. Somers
Age Position(s)
55 Chief Executive Officer, Co-Founder and Director
48 Chief Operating Officer, Co-Founder and Director
42 Chief Financial Officer and Head of Corporate Development
52 Chief Legal & Privacy Officer
Scott D. Grimes. Biographical information regarding Mr. Grimes is set forth above under “Our Board of Directors”.
Lynne M. Laube. Biographical information regarding Ms. Laube is set forth above under “Our Board of Directors”.
David T. Evans has served as our Chief Financial Officer and Head of Corporate Development since October 2016. From August 2014 to October 2016,
Mr. Evans served as our Senior Vice President, Corporate Development. From July 2009 to June 2014, Mr. Evans served as a Director in the Technology,
Media and Telecom Investment Banking group at Wells Fargo Securities. Earlier in his career, Mr. Evans held positions at Wachovia Securities and Cowen
Group. Mr. Evans holds a B.S. in Industrial Engineering from Auburn University and an M.B.A. from Emory University.
Kirk L. Somers has served as our Chief Legal and Privacy Officer since July 2014. From March 2013 to June 2014, Mr. Somers was General Counsel and
Chief Administrative Officer at Think Geek Inc., an internet based retailer. From November 2001 to January 2013, Mr. Somers was Executive Vice President,
Corporate Affairs for Concurrent Computer Corporation, a provider of video software, hardware and professional services. Earlier in his career, Mr. Somers
was the Assistant General Counsel for Melita International Inc., a provider of integrated customer contact applications, and a Partner with the law firm of
Marshall & Melhorn, LLC. Mr. Somers began his legal career as an attorney in the U.S. Air Force. Mr. Somers holds a B.A. in Physics from Cornell
University, a J.D. from Ohio State University, and passed the U.S. patent bar.
There are no family relationships among any of our executive officers or directors.
Certain Corporate Governance Matters
Audit Committee
We have a standing audit committee that is currently composes of three directors, Messrs. Adams, Klinck and Youngren. Our board of directors has
determined that each of Messrs. Adams and Klinck satisfies the independence requirements for audit committee members under the listing standards of the
Nasdaq Stock Market and Rule 10A-3 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Mr. Youngren is an “affiliated person”
under Rule 10A-3 of the Exchange Act and therefore does not meet the independence criteria for audit committee membership pursuant to the listing standard
of the Nasdaq Stock Market. However, we are permitted to phase-in our compliance with the independent audit committee requirements set forth in the rules
of the Nasdsaq Stock Market and the Exchange Act, as follows: (1) we must have one independent member at the time of listing, (2) we must have a majority
of independent members within 90 days of listing and (3) we must have all independent members within one year of listing. We expect that, within one year
of our listing on the Nasdaq Stock Market, Mr. Youngren will either have (1) ceased to be an “affiliated person” under Rule 10A-3 of the Exchange Act or
(2) resigned from our audit committee and an independent director for audit committee purposes (as determined under the listing standards of the Nasdaq
Stock Market and Exchange Act rules) will have been added to our audit committee. Each member of our audit committee meets the financial literacy
requirements of the listing standards of the Nasdaq Global Market. Mr. Adams is the chairman of the audit committee and our board of directors has
determined that Mr. Adams is an audit committee “financial expert” as defined by Item 407(d) of Regulation S-K under the Securities Act.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics, or the Code of Conduct, applicable to all of our employees, executive officers and directors. The
Code of Conduct is available on our website at www.cardlytics.com. The nominating and corporate governance committee of our board of directors is
responsible for overseeing the Code of Conduct and must approve any waivers of the Code of Conduct for employees, executive officers and directors. If we
make any substantive amendments to the Code of Conduct or we grant any waiver from a provision of the Code of Conduct to any executive officer or
director, we will promptly disclose the nature of the amendment or waiver on our website.
121
Table of Contents
Procedures by Which Stockholders May Nominate Directors
Our nominating and corporate governance committee will consider director candidates recommended by our stockholders. The nominating and corporate
governance committee does not intend to alter the manner in which it evaluates a candidate for nomination to the Board based on whether or not the candidate
was recommended by a Company stockholder. Company stockholders who wish to recommend individuals for consideration by the committee to become
nominees for election to the board at an annual meeting of stockholders must do so by delivering no later than the close of business on the 90th day nor earlier
than the close of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting (or in the case of the Company’s 2019 Annual
Meeting of Stockholders, the 10th day following the day on which public announcement of the date of such meeting is first made) a written recommendation
to the nominating and corporate governance committee c/o Cardlytics, Inc., 675 Ponce de Leon Avenue NE, Suite 6000, Atlanta, Georgia 30308, Attn:
Secretary. Submissions must include: (1) the name and address of the Company stockholder on whose behalf the submission is made; (2) the number of
Company shares that are owned beneficially by such stockholder as of the date of the submission; (3) the full name of the proposed candidate; (4) a
description of the proposed candidate’s business experience for at least the previous five years; (5) complete biographical information for the proposed
candidate; (6) a description of the proposed candidate’s qualifications as a director; and (7) such additional information as is required by our bylaws. Each
submission must be accompanied by the written consent of the proposed candidate to be named as a nominee and to serve as a director if elected.
Section 16(a) Beneficial Ownership Reporting Compliance
We did not have any class of equity securities registered pursuant to Section 12 of the Exchange Act during our most recent fiscal year. As a result, none of
our directors, officers or other affiliated persons were subject to Section 16 of the Exchange Act during such year.
ITEM 11. EXECUTIVE COMPENSATION
We are an “emerging growth company,” as defined in the JOBS Act. As an emerging growth company, we have reduced disclosure and are exempt from
certain requirements related to executive compensation, including the requirements to hold nonbinding advisory votes on executive compensation and to
provide information relating to the ratio of total compensation of our Chief Executive Officer to the median of the annual total compensation of all of our
employees.
Summary Compensation Table
The following table sets forth information regarding compensation earned with respect to the years ended December 31, 2016 and 2017 by our named
executive officers, which include our principal executive officer and the next two most highly compensated executive officers in 2017.
Name and Principal
Position
Scott D. Grimes(5)
Chief Executive Officer and Director
Lynne M. Laube(5)
Chief Operating Officer and Director
David T. Evans
Chief Financial Officer
Year
Salary
Awards(1)
Stock
Option
Awards(2)
Non-Equity
Incentive Plan
Compensation
All Other
Compensation
2017 $300,000 $ — $ 653,842 $
2016
2017
2016
2017
2016
435,850
653,842
435,850
435,895
1,342,848
305,769
280,000
286,154
300,000
260,376
119,812
—
111,824
—
99,574
178,231(3) $
22,688(4)
166,349(3)
21,176(4)
178,231(3)
21,176(4)
24,324(6)
18,325(6)
21,268(6)
11,784(6)
73,135(6)(7)
26,831(6)(7)
Total
$1,156,398
902,444
1,121,460
866,788
987,261
1,750,805
(1)
(2)
(3)
This column reflects the aggregate face value of restricted securities units initially denominated as convertible promissory notes granted during the
2016 fiscal year. Following the completion of the Series G preferred stock and warrant financing, these restricted securities units became denominated
in shares of Series G’ redeemable convertible stock. The restricted securities units include a service-based vesting requirement that requires the
employee to remain employed by us and a liquidity event-based vesting requirement, both of which were deemed satisfied upon our IPO. These
restricted securities units are eligible to be settled in 4,653, 4,342 and 3,859 shares of common stock to Mr. Grimes, Ms. Laube and Mr. Evans,
respectively. See Item 13 below for a description of our Series G preferred stock and warrant financing.
This column reflects the aggregate grant date fair value of options granted during the fiscal year as computed in accordance with Financial Accounting
Standards Board Accounting Standards Codification, or ASC, Topic 718, Compensation-Stock Compensation as stock-based compensation in our
consolidated financial statements. The assumptions we used in valuing options are described in Notes 2 and 6 to our consolidated financial statements
included in this Annual Report.
See “— Employment, Severance and Change of Control Agreements—2017 Bonus Plan” below for a description of the material terms of the plan
pursuant to which this compensation was awarded.
122
Table of Contents
(4)
See “— Employment, Severance and Change of Control Agreements—2016 Bonus Plan” below for a description of the material terms of the plan
pursuant to which this compensation was awarded.
(5) Mr. Grimes and Ms. Laube did not receive any additional compensation in his or her capacity as a director.
(6) Reflects our 401(k) plan matching contributions and health insurance premiums paid by us.
(7) Reflects reimbursements for housing expenses.
Outstanding Equity Awards as of December 31, 2017
The following table sets forth certain information about equity awards granted to our named executive officers that remain outstanding as of December 31,
2017.
Name and
Principal Position
Scott D. Grimes
Lynne M. Laube
David T. Evans
Option Awards(1)
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
62,499
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option
Exercise
Price
$ 9.15(2)
Option
Expiration
Date
7/19/2018
18,483
30,808 $ 20.00(3)
8/2/2026
62,499
56,250 $ 30.44(4)
$ 8.32(2)
7/7/2027
7/19/2023
18,483
30,808 $ 20.00(3)
8/2/2026
27,083
22,502
37,499
56,250 $ 30.44(4)
5,417 $ 9.08(5)
7/7/2027
8/8/2024
37,505 $ 20.00(3)
$ 20.00
8/2/2026
8/2/2026
9,375
28,125 $ 20.00(6)
37,500 $ 30.44(4)
12/6/2026
7/7/2027
Stock Awards
Number of
Shares or
Units of Stock
That Have
Not Vested
(#)
Market Value
of Shares or
Units of
Stock
That Have
Not Vested
($)
1,183 $
15,379(7)
2,191 $
1,279 $
28,483(7)
16,627(7)
1,104 $
14,352(7)
2,045 $
1,193 $
26,585(7)
15,509(7)
621 $
—
8,073(7)
2,045 $
1,193 $
26,585(7)
15,509(7)
Grant Date
7/19/2013
6/15/2016
8/2/2016
8/4/2016
10/28/2016
7/7/2017
7/19/2013
6/15/2016
8/2/2016
8/4/2016
10/28/2016
7/7/2017
8/8/2014
6/15/2016
8/2/2016
8/2/2016
8/4/2016
10/28/2016
12/6/2016
7/7/2017
(1) All of the option awards listed in the table above were granted under our 2008 Stock Plan, the terms of which are described below under “—Employee
(2)
(3)
(4)
(5)
(6)
Benefit Plans.”
The shares of common stock underlying this option vested and became exercisable over a four-year period as to 25% of the common stock underlying
the option on March 15, 2014 and as to 75% of the shares of common stock underlying the option in 36 equal monthly installments thereafter, subject to
the recipient’s continued service through each vesting date.
The shares of common stock underlying this option vest and become exercisable over a four-year period as to 25% of the common stock underlying the
option on June 15, 2017 and as to 75% of the shares of common stock underlying the option in 36 equal monthly installments thereafter, subject to the
recipient’s continued service through each vesting date.
The shares of common stock underlying this option vest and become exercisable over a four-year period as to 25% of the common stock underlying the
option on April 1, 2018 and as to 75% of the shares of common stock underlying the option in 36 equal monthly installments thereafter, subject to the
recipient’s continued service through each vesting date.
The shares of common stock underlying this option vest and become exercisable over a four-year period as to 25% of the common stock underlying the
option on August 8, 2015 and as to 75% of the shares of common stock underlying the option in 36 equal monthly installments thereafter, subject to the
recipient’s continued service through each vesting date.
The shares of common stock underlying this option vest and become exercisable over a four-year period as to 25% of the common stock underlying the
option on December 6, 2017 and as to 75% of the shares of common stock underlying the option in 36 equal monthly installments thereafter, subject to
the recipient’s continued service through each vesting date.
123
Table of Contents
(7)
The amounts in this column reflect grants of restricted securities units. The restricted securities units include a service-based vesting requirement that
requires the named executive officer to remain employed by us and a liquidity event-based vesting requirement, both of which were deemed satisfied
upon our IPO. The restricted securities units are denominated in shares of Series G’ redeemable convertible preferred stock, which converted into
shares of common stock upon our IPO. The market value set forth above is based on the IPO price of $13.00 per share.
In January 2018, we granted each of Messrs. Grimes and Evans and Ms. Laube performance-based restricted stock units, or PSUs, that will vest and settle as
to (i) 37,500 shares of our common stock as of the end of the first calendar month prior to January 26, 2021 in which we have more than 70.0 million FI
MAUs and (ii) 37,500 shares of our common stock as of the end of the first calendar month prior to January 26, 2023 in which we have more than
85.0 million FI MAUs.
See “—Potential Payments upon Termination or Change of Control” for a description of vesting acceleration applicable to stock options held by our named
executive officers.
We may in the future, on an annual basis or otherwise, grant additional equity awards to our executive officers pursuant to our 2018 Equity Incentive Plan, the
terms of which are described below under “—Employee Benefit Plans.”
Pension Benefits
Our named executive officers did not participate in, or otherwise receive any benefits under, any pension or retirement plan sponsored by us during the fiscal
year ended December 31, 2017.
Non-qualified Deferred Compensation
Our named executive officers did not participate in, or earn any benefits under, a non-qualified deferred compensation plan sponsored by us during the fiscal
year ended December 31, 2017.
Employment, Severance and Change in Control Agreements
Employment Arrangements
Each of our named executive officers’ employment is “at will” and may be terminated at any time, subject to the executive’s right to receive certain benefits
and payments, as described below under “Potential Payments Upon Termination or Change of Control.” We are not party to employment agreements or offer
letter agreements with Scott D. Grimes, our Chief Executive Officer or Lynne M. Laube, our Chief Operating Officer. Mr. Grimes’ and Ms. Laube’s current
annual base salaries are $300,000 and $280,000, respectively.
Offer Letters with Our Named Executive Officers
David T. Evans. We entered into an offer letter agreement with Mr. Evans effective June 11, 2014 for the position of Senior Vice President, Corporate
Development. In October 2016, Mr. Evans began serving as our Chief Financial Officer and Head of Corporate Development. Mr. Evans currently receives a
base salary of $300,000. Pursuant to his agreement, Mr. Evans was also entitled to a stock option grant as described under “—Outstanding Equity Awards as
of December 31, 2017” above. Mr. Evans is also eligible to participate in our employee benefit plans, subject to the terms of those plans.
2016 Bonus Plan
In 2016, each of our executive officers was eligible to participate in our 2016 Annual Bonus Target Incentive Program, or 2016 Bonus Plan. The 2016 Bonus
Plan was designed to motivate and reward executives for the attainment of company-wide performance goals. The annual cash targets for Messrs. Grimes and
Evans and Ms. Laube were $198,750, $182,250 and $185,500, respectively. Each of our executive officers was eligible to receive more than 100% of his or
her target bonus if our performance exceeded the target set forth in the 2016 Bonus Plan. The 2016 Bonus Plan cash targets were based on us achieving
certain billings, revenue, adjusted contribution and adjusted EBITDA targets.
124
Table of Contents
2017 Bonus Plan
In 2017, each of our executive officers was eligible to participate in our 2017 Annual Bonus Target Incentive Program, or 2017 Bonus Plan. The 2017 Bonus
Plan was designed to motivate and reward executives for the attainment of company-wide performance goals. The annual cash targets for Messrs. Grimes and
Evans and Ms. Laube were $225,000, $225,000 and $210,000, respectively. Each of our executive officers was eligible to receive more than 100% of his or
her target bonus if our performance exceeded the target set forth in the 2017 Bonus Plan. The 2017 Bonus Plan cash targets were based on us achieving
certain adjusted contribution and certain operating expense targets.
2018 Bonus Plan
In 2018, each of our executive officers is eligible to participate in our 2018 Annual Bonus Target Incentive Program, or 2018 Bonus Plan. The 2018 Bonus
Plan is designed to motivate and reward executives for the attainment of company-wide performance targets. The annual cash targets for Messrs. Grimes and
Evans and Ms. Laube are $225,000, $225,000 and $210,000, respectively. Each of our executive officers is eligible to receive more than 100% of his or her
target bonus if our performance exceeds the targets set forth in the 2018 Bonus Plan.
Potential Payments upon Termination or Change of Control
Regardless of the manner in which a named executive officer’s service terminates, the named executive officer is entitled to receive amounts earned during
his term of service, including salary.
Messrs. Grimes and Evans and Ms. Laube are each party to an amended and restated separation agreement with us. Pursuant to these agreements, if the
executive resigns for certain good reasons or is terminated by us other than for cause, then, subject to the execution of a release and compliance with any post-
termination obligations and covenants, the executive will receive (1) 12 months of then-current annual base salary, less applicable withholdings, paid in
installments over a period of 12 months, (2) a prorated portion of the executive’s annual bonus, if any, based on the amount that would have been earned had
the executive remained employed for the entire year, less applicable withholdings, paid on the same date that we pay all other such bonuses for the applicable
year and (3) continued payment of the employer portion of COBRA premiums for a period of 12 months, subject to the executive’s continued copayment of
premiums, if permitted under the terms of the plan and applicable law.
In addition, if we undergo a change of control and Messrs. Grimes’, Evans’ or Ms. Laube’s role, responsibilities or compensation are materially reduced or
such individual is terminated without cause in connection with such change of control, unvested stock options and restricted stock units held by such
executive will fully vest.
Employee Benefit Plans
2018 Equity Incentive Plan
Our board of directors has adopted and our stockholders have approved our 2018 Equity Incentive Plan, or 2018 Plan. Our 2018 Plan became effective on
February 8, 2018, the date our registration statement in connection with our IPO was declared effective. Since its effective date, we have granted 261,515
RSUs and 50,000 PSUs to receive shares of our common stock under our 2018 Plan to employees, members of our management and our non-employee
directors. The 261,515 RSUs have annual vesting periods ranging from one to four years. The unamortized stock-based compensation expense related to these
RSUs is $4.4 million, which will be recognized as stock-based compensation expense over the respective vesting periods of the awards. The vesting of the
50,000 PSUs is contingent upon performance-based conditions. The performance condition in the first tranche of 25,000 PSUs will be satisfied if we attain
70.0 million of FI monthly active users (or “FI MAUs”) within three years of the grant date. The performance condition in the second tranche of 25,000 will
be satisfied if we attain 85.0 million of FI MAUs within five years of the grant date. The definition of FI MAUs is included elsewhere in this document. The
unamortized stock-based compensation expense related to these PSUs is $0.8 million, which will be recognized as stock-based compensation expense over
the vesting periods of the awards.
Stock Awards. The 2018 Plan provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or the Code, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock
awards, and other forms of equity compensation, which are collectively referred to as stock awards. Additionally, the 2018 Plan provides for the grant of
performance cash awards. Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers, and
to non-employee directors and consultants.
125
Table of Contents
Share Reserve. Initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under the 2018 Plan is the sum of
(i) 1,875,000 shares plus (ii) 61,247 shares reserved, and remaining available for issuance, under our 2008 Plan at the time our 2018 Plan became effective
and (iii) the number of shares subject to stock options or other stock awards granted under our 2008 Plan that would have otherwise returned to our 2008 Plan
(such as upon the expiration or termination of a stock award prior to vesting). The number of shares of our common stock reserved for issuance under our
2018 Plan will automatically increase on January 1 of each year, beginning on January 1, 2019 and continuing through and including January 1, 2028, by 5%
of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our
board of directors. The maximum number of shares that may be issued upon the exercise of incentive stock options under our 2018 Plan is 17,500,000 shares.
If a stock award granted under the 2018 Plan expires or otherwise terminates without being exercised in full, or is settled in cash, the shares of our common
stock not acquired pursuant to the stock award again will become available for subsequent issuance under the 2018 Plan. In addition, the following types of
shares under the 2018 Plan may become available for the grant of new stock awards under the 2018 Plan: (1) shares that are forfeited to or repurchased by us
prior to becoming fully vested; (2) shares withheld to satisfy income or employment withholding taxes; or (3) shares used to pay the exercise or purchase
price of a stock award. Shares issued under the 2018 Plan may be previously unissued shares or reacquired shares bought by us on the open market.
The maximum number of shares of common stock subject to stock awards granted under the 2018 Plan or otherwise during any one calendar year to any
non-employee director, taken together with any cash fees paid by us to such non-employee director during such calendar year for service on the board of
directors, will not exceed $750,000 in total value (calculating the value of any such stock awards based on the grant date fair value of such stock awards for
financial reporting purposes), or, with respect to the calendar year in which a non-employee director is first appointed or elected to our board of directors,
$1,500,000.
Administration. Our board of directors, or a duly authorized committee thereof, has the authority to administer the 2018 Plan. Our board of directors may also
delegate to one or more of our officers the authority to (1) designate employees (other than other officers) to be recipients of certain stock awards,
(2) determine the number of shares of common stock to be subject to such stock awards and (3) specify the other terms and conditions, including the strike
price or purchase price and vesting schedule, applicable to such awards. Subject to the terms of the 2018 Plan, our board of directors or the authorized
committee, referred to as the plan administrator, determines recipients, dates of grant, the numbers and types of stock awards to be granted and the terms and
conditions of the stock awards, including the period of their exercisability and vesting schedule applicable to a stock award. Subject to the limitations set forth
below, the plan administrator will also determine the exercise price, strike price or purchase price of awards granted and the types of consideration to be paid
for the award.
The plan administrator has the authority to modify outstanding awards under our 2018 Plan. Subject to the terms of our 2018 Plan, the plan administrator has
the authority, without stockholder approval, to reduce the exercise, purchase or strike price of any outstanding stock award, cancel any outstanding stock
award in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under generally accepted
accounting principles, with the consent of any adversely affected participant.
Stock Options. Incentive and nonstatutory stock options are evidenced by stock option agreements adopted by the plan administrator. The plan administrator
determines the exercise price for a stock option, within the terms and conditions of the 2018 Plan, provided that the exercise price of a stock option generally
cannot be less than 100% of the fair market value of our common stock on the date of grant. Options granted under the 2018 Plan vest at the rate specified by
the plan administrator.
The plan administrator determines the term of stock options granted under the 2018 Plan, up to a maximum of ten years. Unless the terms of an option
holder’s stock option agreement provide otherwise, if an option holder’s service relationship with us, or any of our affiliates, ceases for any reason other than
disability, death or cause, the option holder may generally exercise any vested options for a period of three months following the cessation of service. The
option term will automatically be extended in the event that exercise of the option following such a termination of service is prohibited by applicable
securities laws or our insider trading policy. If an option holder’s service relationship with us or any of our affiliates ceases due to disability or death, or an
option holder dies within a certain period following cessation of service, the option holder or a beneficiary may generally exercise any vested options for a
period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, options generally terminate
immediately. In no event may an option be exercised beyond the expiration of its term.
126
Table of Contents
Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan administrator and may
include (1) cash, check, bank draft or money order, (2) a broker-assisted cashless exercise, (3) the tender of shares of our common stock previously owned by
the option holder, (4) a net exercise of the option if it is an nonqualified stock option and (5) other legal consideration approved by the plan administrator.
Unless the plan administrator provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a
domestic relations order. An option holder may designate a beneficiary, however, who may exercise the option following the option holder’s death.
Tax Limitations on Incentive Stock Options. The aggregate fair market value, determined at the time of grant, of our common stock with respect to incentive
stock options that are exercisable for the first time by an option holder during any calendar year under all of our stock plans may not exceed $100,000.
Options or portions thereof that exceed such limit will be treated as nonqualified stock options. No incentive stock option may be granted to any person who,
at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our affiliates unless
(1) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and (2) the term of the incentive
stock option does not exceed five years from the date of grant.
Restricted Stock Awards. Restricted stock awards are evidenced by restricted stock award agreements adopted by the plan administrator. Restricted stock
awards may be granted in consideration for (1) cash, check, bank draft or money order, (2) services rendered to us or our affiliates or (3) any other form of
legal consideration. Common stock acquired under a restricted stock award may, but need not, be subject to a share repurchase option in our favor in
accordance with a vesting schedule as determined by the plan administrator. Rights to acquire shares under a restricted stock award may be transferred only
upon such terms and conditions as set by the plan administrator. Except as otherwise provided in the applicable award agreement, restricted stock unit awards
that have not vested will be forfeited upon the participant’s cessation of continuous service for any reason.
Restricted Stock Unit Awards. Restricted stock unit awards evidenced by restricted stock unit award agreements adopted by the plan administrator. Restricted
stock unit awards may be granted in consideration for any form of legal consideration or for no consideration. A restricted stock unit award may be settled by
cash, delivery of stock, a combination of cash and stock as deemed appropriate by the plan administrator, or in any other form of consideration set forth in the
restricted stock unit award agreement. Additionally, dividend equivalents may be credited in respect of shares covered by a restricted stock unit award. Rights
under a restricted stock units award may be transferred only upon such terms and conditions as set by the plan administrator. Restricted stock unit awards may
be subject to vesting as determined by the plan administrator. Except as otherwise provided in the applicable award agreement, restricted stock units that have
not vested will be forfeited upon the participant’s cessation of continuous service for any reason.
Stock Appreciation Rights. Stock appreciation rights are evidenced by stock appreciation grant agreements adopted by the plan administrator. The plan
administrator determines the strike price for a stock appreciation right, which generally cannot be less than 100% of the fair market value of our common
stock on the date of grant. Upon the exercise of a stock appreciation right, we will pay the participant an amount in cash or stock equal to (1) the excess of the
per share fair market value of our common stock on the date of exercise over the strike price, multiplied by (2) the number of shares of common stock with
respect to which the stock appreciation right is exercised. A stock appreciation right granted under the 2018 Plan vests at the rate specified in the stock
appreciation right agreement as determined by the plan administrator.
The plan administrator determines the term of stock appreciation rights granted under the 2018 Plan, up to a maximum of ten years. Unless the terms of a
participant’s stock appreciation right agreement provides otherwise, if a participant’s service relationship with us or any of our affiliates ceases for any reason
other than cause, disability or death, the participant may generally exercise any vested stock appreciation right for a period of three months following the
cessation of service. The stock appreciation right term will be further extended in the event that exercise of the stock appreciation right following such a
termination of service is prohibited by applicable securities laws. If a participant’s service relationship with us, or any of our affiliates, ceases due to disability
or death, or a participant dies within a certain period following cessation of service, the participant or a beneficiary may generally exercise any vested stock
appreciation right for a period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, stock
appreciation rights generally terminate immediately upon the occurrence of the event giving rise to the termination of the individual for cause. In no event
may a stock appreciation right be exercised beyond the expiration of its term.
127
Table of Contents
Unless the plan administrator provides otherwise, stock appreciation rights generally are not transferable except by will, the laws of descent and distribution,
or pursuant to a domestic relations order. A stock appreciation right holder may designate a beneficiary, however, who may exercise the stock appreciation
right following the holder’s death.
Performance Awards. The 2018 Plan permits the grant of performance-based stock and cash awards. The performance goals that may be selected include one
or more of the following: (1) earnings (including earnings per share and net earnings); (2) earnings before interest, taxes and depreciation; (3) earnings before
interest, taxes, depreciation and amortization; (4) earnings before interest, taxes, depreciation, amortization and legal settlements; (5) earnings before interest,
taxes, depreciation, amortization, legal settlements and other income (expense); (6) earnings before interest, taxes, depreciation, amortization, legal
settlements, other income (expense) and stock-based compensation; (7) earnings before interest, taxes, depreciation, amortization, legal settlements, other
income (expense), stock-based compensation and changes in deferred revenue; (8) total stockholder return; (9) return on equity or average stockholder’s
stockholders’ equity; (10) return on assets, investment, or capital employed; (11) stock price; (12) margin (including gross margin); (13) income (before or
after taxes); (14) operating income; (15) operating income after taxes; (16) pre-tax profit; (17) operating cash flow; (18) sales or revenue targets;
(19) increases in revenue or product revenue; (20) expenses and cost reduction goals; (21) improvement in or attainment of working capital levels;
(22) economic value added (or an equivalent metric); (23) market share; (24) cash flow; (25) cash flow per share; (26) share price performance; (27) debt
reduction; (28) implementation or completion of projects or processes; (29) stockholders’ equity; (30) capital expenditures; (31) debt levels; (32) operating
profit or net operating profit; (33) workforce diversity; (34) growth of net income or operating income; (35) billings; (36) bookings; (37) employee retention;
(38) user satisfaction; (39) the number of users, including unique users; (40) budget management; (41) partner satisfaction; (42) entry into or completion of
strategic partnerships or transactions (including in-licensing and out-licensing of intellectual property); and (43) other measures of performance selected by
the Board or Committee.
The performance goals may be based on company-wide performance or performance of one or more business units, divisions, affiliates, or business segments,
and may be either absolute or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. Unless
specified otherwise in the award agreement at the time the award is granted or in such other document setting forth the performance goals at the time the goals
are established, we will appropriately make adjustments in the method of calculating the attainment of performance goals as follows: (1) to exclude
restructuring and/or other nonrecurring charges; (2) to exclude exchange rate effects; (3) to exclude the effects of changes to generally accepted accounting
principles; (4) to exclude the effects of any statutory adjustments to corporate tax rates; (5) to exclude the effects of any items that are unusual in nature or
occur infrequently as determined under generally accepted accounting principles; (6) to exclude the dilutive effects of acquisitions or joint ventures; (7) to
assume that any business divested by the Company achieved performance objectives at targeted levels during the balance of a Performance Period following
such divestiture; (8) to exclude the effect of any change in the outstanding shares of common stock of the Company by reason of any stock dividend or split,
stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or
any distributions to common stockholders other than regular cash dividends; (9) to exclude the effects of stock based compensation and the award of bonuses
under the Company’s bonus plans; (10) to exclude costs incurred in connection with potential acquisitions or divestitures that are required to be expensed
under generally accepted accounting principles; (11) to exclude the goodwill and intangible asset impairment charges that are required to be recorded under
generally accepted accounting principles; and (12) to exclude the effect of any other unusual, nonrecurring gain or loss or other extraordinary item. In
addition, we retain the discretion to adjust or eliminate the compensation or economic benefit due upon attainment of the goals. The performance goals may
differ from participant to participant and from award to award.
Other Stock Awards. The plan administrator may grant other awards based in whole or in part by reference to our common stock. The plan administrator will
set the number of shares under the stock award and all other terms and conditions of such awards.
Changes to Capital Structure. In the event that there is a specified type of change in our capital structure, such as a stock split or recapitalization, appropriate
adjustments will be made to (1) the class and maximum number of shares reserved for issuance under the 2018 Plan, (2) the class and maximum number of
shares by which the share reserve may increase automatically each year, (3) the class and number of shares that may be issued upon the exercise of incentive
stock options and (4) the class and number of shares and exercise price, strike price, or purchase price, if applicable, of all outstanding stock awards.
128
Table of Contents
Corporate Transactions. In the event of certain specified significant corporate transactions, the plan administrator has the discretion to take any of the
following actions with respect to stock awards:
•
•
•
•
•
•
arrange for the assumption, continuation or substitution of a stock award by a surviving or acquiring entity or parent company;
arrange for the assignment of any reacquisition or repurchase rights held by us to the surviving or acquiring entity or parent company;
accelerate the vesting of the stock award and provide for its termination prior to the effective time of the corporate transaction;
arrange for the lapse of any reacquisition or repurchase right held by us;
cancel or arrange for the cancellation of the stock award in exchange for such cash consideration, if any, as our board of directors may deem
appropriate or for no consideration; or
make a payment equal to the excess of (1) the value of the property the participant would have received upon exercise of the stock award over
(2) the exercise price or strike price otherwise payable in connection with the stock award.
Our plan administrator is not obligated to treat all stock awards, even those that are of the same type, in the same manner.
Under the 2018 Plan, a significant corporate transaction is generally the consummation of (1) a sale or other disposition of all or substantially all of our
consolidated assets, (2) a sale or other disposition of at least 50% of our outstanding securities, (3) a merger, consolidation or similar transaction following
which we are not the surviving corporation or (4) a merger, consolidation or similar transaction following which we are the surviving corporation but the
shares of our common stock outstanding immediately prior to such transaction are converted or exchanged into other property by virtue of the transaction.
Change in Control. The plan administrator may provide, in an individual award agreement or in any other written agreement between a participant and us that
the stock award will be subject to additional acceleration of vesting and exercisability or settlement in the event of a change in control. Under the 2018 Plan, a
change in control is generally (1) the acquisition by a person or entity of more than 50% of our combined voting power other than by merger, consolidation or
similar transaction, (2) a consummated merger, consolidation or similar transaction immediately after which our stockholders cease to own more than 50% of
the combined voting power of the surviving entity, (3) a consummated sale, lease or exclusive license or other disposition of all or substantially all of our
consolidated assets and (4) certain dissolutions, liquidations and changes in the board of directors.
Amendment and Termination. Our board of directors has the authority to amend, suspend, or terminate our 2018 Plan, provided that such action does not
materially impair the existing rights of any participant without such participant’s written consent and provided further that certain types of amendments will
require the approval of our stockholders. No incentive stock options may be granted after the tenth anniversary of the date our board of directors adopts our
2018 Plan.
2008 Stock Plan
Our 2008 Stock Plan, or 2008 Plan, was initially adopted by our board of directors and approved by our stockholders on July 2, 2008 and was last amended
by our board of directors and approved by our stockholders on January 26, 2018. As of the date our registration statement in connection with our IPO was
declared effective and thus our 2018 Plan became effective, 575,947 shares of our common stock have been issued pursuant to the exercise of options granted
under our 2008 Plan, options to purchase 2,482,806 shares of our common stock were outstanding at a weighted average exercise price of $18.64 per share,
900,000 shares of common stock are issuable upon the settlement of restricted stock units, no shares of our common stock have been issued pursuant to rights
to acquire restricted stock and 61,247 shares remained available for future grant under our 2008 Plan.
We do not expect to grant any additional awards under the 2008 Plan. The 61,247 shares reserved, and remaining available for issuance, under our 2008 Plan
at the time our 2018 Plan became effective have been rolled into the initial reserve for the 2018 Plan, and any 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) will also be rolled into the 2018 Plan. Any awards granted under the 2008 Plan will remain subject to the terms of our 2008 Plan and applicable
award agreements.
Stock Awards. Our 2008 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock units and rights to acquire
restricted stock, referred to collectively as stock awards, to employees, non-employee directors and consultants providing services to us or our affiliates.
129
Table of Contents
Share Reserve. The aggregate number of shares of our common stock reserved for issuance pursuant to stock awards under the 2008 Plan is 4,020,000 shares,
subject to adjustment as provided in the 2008 Plan.
Changes to Capital Structure. In the event that there is a specified type of change in our capital structure, such as a stock split or recapitalization, appropriate
adjustments may be made to (1) the class and number of shares available for future grants under the 2008 Plan and (2) the class and number of shares covered
by; the exercise or purchase price of, each outstanding stock award; and the repurchase price applicable to any stock award.
Administration. Our board of directors, or a duly authorized committee thereof, each referred to as the plan administrator, has the authority to administer the
2008 Plan. Subject to the terms of the 2008 Plan, the plan administrator may determine recipients, dates of grant, the numbers and types of stock awards to be
granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting schedule applicable to a stock award. Subject
to the terms of the 2008 Plan, the plan administrator has full authority and discretion to interpret the 2008 Plan and to prescribe and rescind rules and
regulations related to it. Our board of directors may amend, terminate or discontinue the 2008 Plan at any time. The board of directors may also delegate
authority to one of our officers to designate certain non-officer employees to receive stock awards and to determine the number of shares subject to those
awards, subject to limits imposed by the board of directors.
Corporate Transactions. In the event of a sale of all or substantially all of the company’s assets, or a merger, consolidation or other capital reorganization or
business combination transaction of the company with or into another corporation, entity or person, which we refer to as a Corporate Transaction, the plan
administrator has the discretion to provide for the assumption of stock awards, the issuance of comparable securities under an incentive program, or, in the
case of options, settlement in cash or other property to the extent that the options are vested and have an exercise price less than the price paid per share in the
applicable Corporate Transaction. Notwithstanding the foregoing, in the event that the successor corporation does not agree to such assumption, substitution
or exchange of options, options shall terminate upon the consummation of such Corporate Transaction.
Amendment and Termination. As noted above, in connection with our IPO, our 2008 Plan was terminated and no further stock awards will be granted
thereunder. All outstanding stock awards under the 2008 Plan will continue to be governed by their existing terms.
2018 Employee Stock Purchase Plan
Our board has adopted and our stockholders have approved our 2018 Employee Stock Purchase Plan, or 2018 ESPP.
Share Reserve. The maximum number of shares of our common stock that may be issued under our 2018 ESPP is 375,000 shares. 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, beginning on January 1, 2019
and continuing through and including January 1, 2026, by the lesser of (1)1% of the total number of shares of our common stock outstanding on December 31
of the preceding calendar year, (2) 500,000 shares of our common stock or (3) such lesser number of shares of common stock as determined by our board of
directors. Shares subject to purchase rights granted under our 2018 ESPP that terminate without having been exercised in full will not reduce the number of
shares available for issuance under our 2018 ESPP.
Administration. Our board of directors, or a duly authorized committee thereof, will administer our 2018 ESPP. Our board of directors has delegated its
authority to administer our 2018 ESPP to our compensation committee under the terms of the compensation committee’s charter.
Limitations. Our employees, including executive officers, and the employees of any of our designated affiliates will be eligible to participate in our 2018
ESPP, provided they may have to satisfy one or more of the following service requirements before participating in our 2018 ESPP, as determined by the
administrator: (1) customary employment with us or one of our affiliates for more than 20 hours per week and five or more months per calendar year or
(2) continuous employment with us or one of our affiliates for a minimum period of time, not to exceed two years, prior to the first date of an offering. An
employee may not be granted rights to purchase stock under our 2018 ESPP (a) if such employee immediately after the grant would own stock possessing 5%
or more of the total combined voting power or value of all classes of our common stock or (b) to the extent that such rights would accrue at a rate that exceeds
$25,000 worth of our stock for each calendar year that the rights remain outstanding.
Our 2018 ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code. The administrator may specify offerings with a
duration of not more than 27 months, and may specify one or more shorter purchase periods within each offering. Each offering will have one or more
purchase dates on which shares of our common stock will be purchased for the employees who are participating in the offering. The administrator, in its
discretion, will determine the terms of offerings under our 2018 ESPP.
130
Table of Contents
A participant may not transfer purchase rights under our 2018 ESPP other than by will, the laws of descent and distribution or as otherwise provided under
our 2018 ESPP.
Payroll Deductions. Our 2018 ESPP permits participants to purchase shares of our common stock through payroll deductions up to 15% of their earnings.
Unless otherwise determined by the administrator, the purchase price of the shares will be 85% of the lower of the fair market value of our common stock on
the first day of an offering or on the date of purchase. Participants may end their participation at any time during an offering and will be paid their accrued
contributions that have not yet been used to purchase shares. Participation ends automatically upon termination of employment with us.
Corporate Transactions. In the event of certain specified significant corporate transactions, such as a merger or change in control, a successor corporation
may assume, continue or substitute each outstanding purchase right. If the successor corporation does not assume, continue or substitute for the outstanding
purchase rights, the offering in progress will be shortened and a new exercise date will be set. The participants’ purchase rights will be exercised on the new
exercise date and such purchase rights will terminate immediately thereafter.
Amendment and Termination. Our board of directors has the authority to amend, suspend or terminate our 2018 ESPP, at any time and for any reason,
provided certain types of amendments will require the approval of our stockholders. Our 2018 ESPP will remain in effect until terminated by our board of
directors in accordance with the terms of our 2018 ESPP.
401(k) Plan
We maintain a defined contribution retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis.
Eligible employees may defer eligible compensation on a pre-tax basis, up to the statutorily prescribed annual limits on contributions under the Code.
Contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to such participant’s
directions. Employees are immediately and fully vested in their contributions. The 401(k) plan is intended to be qualified under Section 401(a) of the Code
with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k)
plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan. We match 50% of the first 5% of each
participant’s contribution.
Director Compensation Table
The following table sets forth information regarding the compensation earned for service on our board of directors during the year ended December 31, 2017
by our directors who were not also our employees. Scott D. Grimes, our Chief Executive Officer, and Lynne M. Laube, our Chief Operating Officer, are also
members of our board of directors, but did not receive any additional compensation for service as a director. Mr. Grimes’ and Ms. Laube’s compensation as
executive officers are set forth above under “Executive Compensation— Summary Compensation Table.”
Name
David L. Adams
John V. Balen
Mark A. Johnson
Jack Klinck
Robert Legters
Bryce Youngren
Tony Weisman
Fees Earned or
Paid in Cash
$
140,000(3)
—
—
—
—
—
—
Option Awards(1)
(2)
$
—
—
—
—
—
—
—
Total
$140,000
—
—
—
—
—
—
(1)
This column reflects the aggregate grant date fair value for options granted during the fiscal year as computed in accordance with ASC Topic 718 as
stock-based compensation in our consolidated financial statements. Unlike the calculations contained in our consolidated financial statements, this
calculation does not give effect to any estimate of forfeitures related to service-based vesting, but assumes that directors will perform the requisite
service for the award to vest in full. The assumptions we used in valuing options are described in Note 6 to our consolidated financial statements
included in this Annual Report.
131
Table of Contents
(2)
The table below shows the aggregate number of option awards outstanding for each of our non-employee directors as of December 31, 2017:
Name
David L. Adams
John V. Balen
Mark A. Johnson
Jack Klinck
Robert Legters
Bryce Youngren
Tony Weisman
Option
Awards (#)
87,500(a)
—
—
25,000(b)
—
—
25,000(c)
a)
b)
c)
The shares of common stock underlying this option vest and become exercisable over a two-year period in 24 equal monthly installments
beginning on June 15, 2016, subject to Mr. Adams’ continued service through each vesting date. All unvested options were deemed vested
upon our IPO.
The shares of common stock underlying this option vest and become exercisable over a two-year period in 24 equal monthly installments
beginning on November 17, 2016, subject to Mr. Klinck’s continued service through each vesting date. All unvested options were deemed
vested upon our IPO.
The shares of common stock underlying this option vest and become exercisable over a two-year period in 24 equal monthly installments
beginning on March 20, 2014, subject to Mr. Weisman’s continued service through each vesting date.
(3) Mr. Adams receives $10,000 per quarter for his service as chairman of our audit committee and $25,000 per quarter for his service as chairman of our
board of director’s operating committee.
Non-Employee Director Compensation
Historically, we have provided cash and/or equity-based compensation to certain of our independent directors who are not employees or affiliated with our
largest investors for the time and effort necessary to serve as a member of our board of directors. In addition, all of our independent directors have been
entitled to reimbursement of direct expenses incurred in connection with attending meetings of the board or committees thereof.
Our board of directors has adopted a director compensation policy for non-employee directors. The policy provides for the compensation of non-employee
directors with cash and equity compensation. Under the policy, each non-employee director will receive an annual board service retainer of $30,000. The
non-executive chairperson will receive an additional service retainer of $15,000. The chairperson of each of our audit committee, our compensation
committee and our nominating and corporate governance committee will receive additional annual committee chair service retainers of $30,000, $15,000 and
$15,000, respectively. Additionally, the chairperson of our audit committee will receive $60,000 for the first year we are public. Other members of our audit
committee, our compensation committee and our nominating and corporate governance committee will receive additional annual cash retainers of $20,000,
$10,000 and $10,000, respectively, for each such committee of which they are a member. The annual cash compensation amounts set forth above are payable
in equal quarterly installments, payable in arrears following the end of each calendar quarter in which the board service occurs, prorated for any partial
months of service. We will also reimburse all reasonable out-of-pocket travel expenses incurred by non-employee directors in attending meetings of our board
of directors or any committee thereof.
In addition to cash compensation, each non-employee director is eligible to receive restricted stock unit awards. Each of our non-employee directors received
a one-time restricted stock unit award on the date 20 business days following the completion of our IPO with a grant date fair value of $150,000, which will
vest in full on the first anniversary of such grant date, provided that the applicable non-employee director is, as of such vesting date, then a director of our
company. Commencing on the next annual meeting of our stockholders, each continuing non-employee director as of the date of the annual meeting will
receive an annual grant of a restricted stock unit award with a grant date fair value of $150,000, which will vest in full on the first anniversary of such grant
date, provided that the applicable non-employee director is, as of such vesting date, then a director of our company and has served as a director for at least six
months. Further, each new non-employee director who joins our board of directors will receive a one-time restricted stock unit award upon the date of his or
her appointment or election to our board of directors with a grant date fair value of $150,000, which will vest in full on the first anniversary of such grant
date, provided that the applicable non-employee director is, as of such vesting date, then a director of our company.
132
Table of Contents
Compensation Committee Interlocks and Insider Participation
None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving on our board of directors or compensation committee. None of the members of our compensation committee is
an officer or employee of our company, nor have they ever been an officer or employee of our company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following table sets forth the beneficial ownership of our common stock as of February 28, 2018 for:
•
•
•
•
each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our common stock;
each of our named executive officers;
each of our directors; and
all of our executive officers and directors as a group.
The percentage ownership information shown in the table below is based upon 19,995,657 shares of common stock outstanding as of February 28, 2018.
We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to
persons who possess sole or shared voting power or investment power with respect to those securities. In addition, these rules require that we include shares
of common stock issuable pursuant to the exercise of stock options and warrants that are either immediately exercisable or exercisable within 60 days of
February 28, 2018. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of
computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any
other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown
as beneficially owned by them, subject to applicable community property laws.
Except as otherwise noted below, the address for persons listed in the table is c/o Cardlytics, Inc., 675 Ponce de Leon Avenue NE, Suite 6000, Atlanta,
Georgia 30308.
Name of Beneficial Owner
5% or greater stockholders:
Canaan VIII L.P.(1)
Entities affiliated with Polaris Venture Partners(2)
Entities affiliated with Aimia Inc.(3)
Entities affiliated with Discovery Capital(4)
Fidelity Information Services, LLC(5)
Named executive officers and directors:
Scott D. Grimes(6)
Lynne M. Laube(7)
David T. Evans(8)
David L. Adams(9)
John V. Balen(1)
Mark A. Johnson(10)
Jack Klinck(11)
Tony Weisman(12)
Bryce Youngren(2)
All current executive officers and directors as a group
(10 persons)(13)
Number of Shares
Beneficially Owned
Percentage of
Shares
Beneficially Owned
3,245,364
2,636,262
2,978,014
1,504,753
1,041,880
868,296
607,966
122,026*
90,400*
—
326,159
30,801*
25,000*
2,636,262
4,776,789
16.2%
13.2
14.9
7.5
5.2
4.3
3.0
—
1.6
13.2
23.9%
*
Represents beneficial ownership of less than 1%.
133
Table of Contents
(1) Canaan Partners VIII LLC is the general partner of Canaan VIII L.P. and may be deemed to have sole investment and voting power over the shares held
by Canaan VIII L.P. Brenton K. Ahrens, John V. Balen, Stephen M. Bloch, Wende S. Hutton, Maha S. Ibrahim, Deepak Kamra, Guy M. Russo and Eric
A. Young are the managing members of Canaan Partners VIII LLC. Investment and voting decisions with respect to the shares held by Canaan VIII L.P.
are made by the managers of Canaan Partners VIII LLC, collectively. Mr. Balen, a member of our board of directors, is a managing member of Canaan
Partners VIII LLC. No manager or member of Canaan Partners VIII LLC has beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of any shares held by Canaan VIII L.P. The address for Canaan VIII L.P. and Mr. Balen is 2765 Sand Hill Road, Menlo Park,
California 94025.
(2) Consists of (a) 2,543,829 shares of common stock held by Polaris Venture Partners V, L.P. (“PVP V”); (b) 49,576 shares of common stock held by
Polaris Venture Partners Entrepreneurs’ Fund V, L.P. (“PVP EF V”); (c) 17,422 shares of common stock held by Polaris Venture Partners Founders’
Fund V, L.P. (“PVP FF V”) and (d) 25,435 shares of common stock held by Polaris Venture Partners Special Founders’ Fund V, L.P. (“PVP SFF V”).
Polaris Venture Management Co. V, L.L.C. (“PVM V”) is the general partner of each PVP V, PVP EF V, PVP FF V, and PVP SFF V (collectively, the
“Polaris Funds”). PVM V may be deemed to have sole power to vote and dispose of the shares held by each of the Polaris Funds. Each of Jonathan
Flint and Terrance McGuire (collectively, the “Managing Members”) are the managing members of PVM V and may be deemed to share voting and
dispositive power with respect to the shares held by the Polaris Funds. Bryce Youngren, a member of our board of directors, has a membership interest
in PVM V, and may be deemed to share voting and dispositive powers with respect to the shares held by the Polaris Funds by virtue of his relationship
to PVM V. Each of PVM V, the Managing Members and Mr. Youngren disclaim beneficial ownership of all of the shares owned by the Polaris Funds,
and this report shall not be deemed an admission that any of PVM V, the Managing Members or Mr. Youngren is the beneficial owner of the shares
owned by the Polaris Funds for purposes of Section 16 or for any other purpose, except to the extent of their respective and proportionate pecuniary
interests therein. The address of the Polaris Funds is One Marina Park Drive, 10th Floor, Boston, Massachusetts 02210.
(3) Consists of (a) 1,953,665 shares of common stock held by Aeroplan Holdings Europe Sàrl and (b) 1,024,349 shares of common stock held by Aimia
Holdings UK Limited. Aeroplan Holdings Europe Sàrl and Aimia Holdings UK Limited are affiliates of Aimia Inc. The address of the entities affiliated
with Aimia Inc. is 525 Viger Avenue West, Suite 1000, Montreal, Quebec H2Z 0B2, Canada.
(4) Consists of (a) 1,348,084 shares of common stock held by Discovery Global Opportunity Master Fund, LTD (“Discovery GO”); (b) 144,387 shares of
common stock held by Discovery Global Focus Master Fund, LTD (“Discovery GF”) and (c) 12,282 shares of common stock held by Discovery Global
Citizens Master Fund, LTD (“Discovery GC”). Discovery Capital Management, LLC is the manager of each of Discovery GO, Discovery Global GF
and Discovery Global GC and may be deemed to have the sole voting and dispositive power over the shares held by Discovery GO, Discovery GF and
Discovery GC. The address of the entities affiliated with Discovery is 20 Marshall, Suite 310, South Norwalk, Connecticut 06854.
(5) Consists of 397,515 shares of common stock held by Fidelity Information Services, LLC (“FIS”) and 644,365 shares of common stock issuable upon
(6)
(7)
the exercise of warrants held by FIS, which is an affiliate of Fidelity National Information Services, Inc. Robert Legters, a former member of our board
of directors, is the Senior Vice President of Products of Fidelity National Information Services, Inc. and may be deemed to share voting and dispositive
power over the shares held by FIS. The address of FIS is 601 Riverside Avenue, Jacksonville, Florida 32204
Includes (a) 194,112 shares of common stock held by the 2013 Scott Grimes GRAT UAD, for which Mr. Grimes is trustee and holds voting and
investment power and (b) 99,152 shares of common stock issuable upon the exercise of options.
Includes (a) 43,675 shares of common stock held by the 2013 Lynne Marie Laube GRAT fbo Hayley Marie Allbright, for which Ms. Laube is trustee
and holds voting power, (b) 43,675 shares of common stock held by the 2013 Lynne Marie Laube GRAT fbo Keegan George Allbright, for which
Ms. Laube is trustee and holds voting power and (c) 99,152 shares of common stock issuable upon the exercise of options.
Includes 116,667 shares of common stock issuable upon the exercise of options.
Includes 87,500 shares of common stock issuable upon the exercise of options.
(8)
(9)
(10) Consists of (a) 5,801 shares of common stock held by Mr. Johnson, (b) 291,353 shares of common stock held by TTP Fund II L.P. and (c) 29,005 shares
of common stock held by TTV Ivy Holdings, LLC. TTV Capital is the provider of management services to TTP GP II, LLC, which is a general partner
of TTP Fund II, L.P. TTV Capital is the manager of TTV Ivy Holdings Managers, LLC, which is the general partner of TTV Ivy Holdings, LLC. Mark
A. Johnson, a member of our board of directors, is a member of each of TTP GP II, LLC and TTV Ivy Holdings Managers, LLC and holds the title of
partner of TTV Capital, and may be deemed to share voting and dispositive power over the shares held by TTP Fund II L.P. and TTV Ivy Holdings,
LLC.
Includes 25,000 shares of common stock issuable upon the exercise of options
(11)
(12) Represents shares of common stock issuable upon the exercise of options.
134
Table of Contents
(13) Consists of (a) 194,112 shares of common stock held by the 2013 Scott Grimes GRAT UAD, for which Mr. Grimes is trustee and holds voting and
investment power, (b) 573,432 shares of common stock held by Mr. Grimes, (c) 43,675 shares of common stock held by the 2013 Lynne Marie Laube
GRAT fbo Hayley Marie Allbright, for which Ms. Laube is trustee and holds voting power, (d) 43,675 shares of common stock held by the 2013 Lynne
Marie Laube GRAT fbo Keegan George Allbright, for which Ms. Laube is trustee and holds voting power, (e) 421,464 shares of common stock held by
Ms. Laube, (f) 3,859 shares of common stock held by Mr. Evans, (g) 3,870 shares of common stock held by Mr. Somers, (h) 2,900 shares of common
stock held by Mr. Adams, (i) 5,801 shares of common stock held by Mr. Johnson, (j) 291,353 shares of common stock held by TTP Fund II L.P. and (k)
29,005 shares of common stock held by TTV Ivy Holdings, LLC, (l) 5,801 shares of common stock held by Mr. Klinck, (m) 2,543,829 shares of
common stock held by Polaris Venture Partners V, L.P. (“PVP V”), (n) 49,576 shares of common stock held by Polaris Venture Partners Entrepreneurs’
Fund V, L.P. (“PVP EF V”), (o) 17,422 shares of common stock held by Polaris Venture Partners Founders’ Fund V, L.P. (“PVP FF V”), (p) 25,435
shares of common stock held by Polaris Venture Partners Special Founders’ Fund V, L.P. (“PVP SFF V”) and (q) 518,280 shares of common stock
issuable upon the exercise of options held by all current executive officers and directors as a group.
Equity Compensation Plan Information
The following table provides certain information with respect to our equity compensation plans in effect as of December 31, 2017:
Name
Plan Category
Equity compensation plans
approved by security holders (1)
Equity compensation plans
not approved by security holders
Total
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)
2,541,536(2)
—
2,541,536
$
$
$
18.49(2)
—
18.49
396,474(1)
—
396,474
(1)
(2)
Includes 2008 Stock Plan. Excludes 2018 Equity Incentive Plan and 2018 Employee Stock Purchase Plan which were approved in January 2018. See
“—Employee Benefit Plans” above for further details on these equity compensation plans.
Includes 2,512,788 stock options outstanding as of December 31, 2017, at a weighted-average exercise price of $18.42 per share, and 28,748 stock
options outstanding as of December 31, 2017, for which the exercise price was undetermined as of December 31, 2017, and subsequently determined
to be $24.24 in February 2018.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions With Related Persons; Indemnification
The following is a summary of transactions since January 1, 2017 to which we have been a participant in which the amount involved exceeded or will exceed
$120,000, and in which any of our then directors, executive officers or holders of more than 5% of any class of our capital stock at the time of such
transaction, or any members of their immediate family, had or will have a direct or indirect material interest, other than compensation arrangements which are
described in “Item 11: Executive Compensation” and “Director Compensation Table.”
135
Table of Contents
Series G Preferred Stock and Warrant Financing
In May 2017, we sold an aggregate of 346,334 shares of our Series G redeemable convertible preferred stock at a price of $34.4758 per share for aggregate
gross proceeds of approximately $11.9 million. In connection with the issuance of our Series G redeemable convertible preferred stock, (1) the principal and
accrued interest under the Existing Stockholder Notes converted into an aggregate of 1,295,746 shares of our Series G’ redeemable convertible preferred
stock, (2) the principal and accrued interest under the Aimia EMEA Notes converted into an aggregate of 801,329 shares of our common stock and (3) we
issued warrants to purchase an aggregate number of shares of our common stock equal to the product obtained by multiplying 346,334 by a fraction, the
numerator of which is the difference between $68.9516 and the volume weighted average closing price of our common stock over the 30 trading days prior to
the date on which such warrants become exercisable and the denominator of which is such volume weighted average closing price, which warrants are
exercisable upon the earlier to occur of the date (i) 180 days following the date of the prospectus for our IPO, dated February 8, 2018, and (ii) 10 days prior to
a sale of our company. The following table summarizes the participation in the foregoing transactions by our directors, executive officers and holders of more
than 5% of any class of our capital stock as of the date of such transactions:
Related Party
Entities affiliated with Aimia, Inc.(1)
Entities affiliated with Polaris Venture Partners(2)
Canaan VIII L.P.(3)
Entities affiliated with Discovery Capital(4)
Scott D. Grimes
Lynne M. Laube
Entities affiliated with Mark A. Johnson(5)
John Klinck.
David Adams
Shares of
Series G
Preferred
Stock
—
29,004
53,660
—
—
—
34,806
5,801
2,900
Shares of
Series G’
Preferred
Stock
382,227
212,469
260,097
106,344
25,969
13,983
15,045
—
—
Shares of
Common
Stock
801,329
—
—
—
—
—
—
—
—
Warrants to
Purchase
Common
Stock
—
(6)
(6)
—
—
—
(6)
(6)
(6)
(1)
(2)
(3)
(4)
Consists of 159,207 shares of Series G’ redeemable convertible preferred stock issued to Aeroplan Holdings Europe Sàrl, 223,020 shares of Series G’
redeemable convertible preferred stock issued to Aimia EMEA Limited and 801,329 shares of common stock issued to Aimia EMEA Limited. Shares
issued to Aimia EMEA Limited were transferred to Aimia Holdings UK Limited in January 2018.
Consists of 27,988 shares of Series G redeemable convertible preferred stock purchased by Polaris Venture Partners V, L.P. (“PVP V”), 205,020 shares
of Series G’ redeemable convertible preferred stock issued to PVP V, 545 shares of Series G redeemable convertible preferred stock purchased by
Polaris Venture Partners Entrepreneurs’ Fund V, L.L. (“PVP EF V”), 3,995 shares of Series G’ redeemable convertible preferred stock issued to PVP
EF V, 191 shares of Series G redeemable convertible preferred stock purchased by Polaris Venture Partners Founders’ Fund V, L.P. (“PVP FF V”),
1,404 shares of Series G’ redeemable convertible preferred stock issued to PVP FF V, 280 shares of Series G redeemable convertible preferred stock
purchased by Polaris Venture Partners Special Founders’ Fund V, L.P. (“PVP SFF V”) and 2,050 shares of Series G’ redeemable convertible preferred
stock issued to PVP SFF V. Polaris Venture Management Co. V, L.L.C. (“PVM V”) is the general partner of each PVP V, PVP EF V, PVP FF V, and
PVP SFF V (collectively, the “Polaris Funds”). PVM V may be deemed to have sole power to vote and dispose of the shares held by each of the Polaris
Funds. Each of Jonathan Flint and Terrance McGuire (collectively, the “Managing Members”) are the managing members of PVM V and may be
deemed to share voting and dispositive power with respect to the shares held by the Polaris Funds. Bryce Youngren, a member of our board of directors,
has a membership interest in PVM V, and may be deemed to share voting and dispositive powers with respect to the shares held by the Polaris Funds by
virtue of his relationship to PVM V. Each of PVM V, the Managing Members and Mr. Youngren disclaim beneficial ownership of all of the shares
owned by the Polaris Funds, and this report shall not be deemed an admission that any of PVM V, the Managing Members or Mr. Youngren is the
beneficial owner of the shares owned by the Polaris Funds for purposes of Section 16 or for any other purpose, except to the extent of their respective
and proportionate pecuniary interests therein.
John V. Balen, a member of our board of directors, is a managing member of Canaan Partners VIII LLC, the general partner of Canaan VIII L.P.
Mr. Balen does not have voting or investment power over any shares held directly by Canaan VIII L.P.
Consists of 95,272 shares of Series G’ redeemable convertible preferred stock issued to Discovery Opportunity Master Fund, Ltd. and 11,072 shares of
Series G’ redeemable convertible preferred stock issued to Discovery Global Focus Master Fund, Ltd.
136
Table of Contents
(5)
(6)
Consists of 15,045 shares of Series G’ redeemable convertible preferred stock issued to TTP Fund II, L.P., 29,005 shares of Series G redeemable
convertible preferred stock purchased by TTV Ivy Holdings, LLC and 5,801 shares of Series G redeemable convertible preferred stock purchased by
Mr. Johnson. TTV Capital is a provider of management services to TTP GP II, LLC, which is a general partner of TTP Fund II, L.P. TTV Capital is the
manager of TTV Ivy Holdings Manager, LLC, which is the general partner of TTV Ivy Holdings, LLC. Mark A. Johnson, a member of our board of
directors, is a member of each of TTP GP II, LLC and TTV Ivy Holdings Managers, LLC and holds the title of partner of TTV Capital, and may be
deemed to share voting and dispositive power over the shares held by TTP Fund II L.P. and TTV Ivy Holdings, LLC.
The number of shares issuable to each investor upon the exercise of such warrants is equal to the product obtained by multiplying the number of shares
of Series G redeemable convertible preferred stock set forth opposite such investor’s name in the table above by a fraction, the numerator of which is
the difference between $68.9516 and the volume weighted average closing price of our common stock over the 30 trading days prior to the date on
which such warrants become exercisable and the denominator of which is such volume weighted average closing price.
Agreements with Fidelity Information Services, LLC
Reseller Agreement
In connection with the sale of our Series E redeemable convertible preferred stock, we entered into a reseller agreement with Fidelity Information Services
LLC, or FIS, a holder of more than 5% of our capital stock. 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. We are also obligated to make milestone payments to FIS related to the
integration and deployment of our solutions. Pursuant to the reseller agreement, we paid FIS approximately $0.1 million in 2014, $0 in 2015 and $1.1 million
in 2016, respectively.
Warrant to Purchase Shares of Series E Preferred Stock
In connection with the sale of our Series E redeemable convertible preferred stock and the reseller agreement described above, we granted FIS a warrant to
purchase shares of our Series E redeemable convertible preferred stock based on certain milestones relating to our business, which became exercisable for
shares of our common stock in connection with the exchange of redeemable convertible preferred stock in 2016. These warrants were deemed vested upon
our IPO and are exercisable for 644,365 shares of our common stock, for an aggregate exercise price of approximately $15.2 million.
Agreements with Aimia Inc. and Affiliated Entities
Commercial Partnership
In January 2014, we entered into a cooperation agreement in the United Kingdom, or U.K., with Aimia EMEA Limited, or Aimia EMEA, an affiliate of
Aimia Inc. Entities affiliated with Aimia Inc. hold more than 5% of our capital stock. The U.K. cooperation agreement generally provided for equal cost and
revenue sharing related to our business in the U.K., which was primarily run through our wholly-owned subsidiary, Cardlytics UK Limited. Pursuant to our
U.K. cooperation agreement, there were no payments to Aimia EMEA in 2014 and 2015 and we paid Aimia EMEA approximately $1.6 million in 2016.
In connection with the U.K. cooperation agreement, we also entered into a working capital loan agreement and security agreement with Aimia EMEA. The
largest aggregate amount of principal outstanding during the term of the loan was approximately $1.1 million in January 2014, which was paid in full in May
2014. During the term of the loan, we made interest payments of approximately $26,000 in 2014. Pursuant to the working capital loan agreement, interest
accrued daily at the rate of an amount equal to the three month LIBOR rate plus 5.25% per annum.
Termination of Joint Venture and Transfer of Joint UK Operations with Aimia Inc.
In June 2016, we entered into a termination and transition services agreement with Aimia, Inc., Aimia Holdings UK Limited and Aimia EMEA. Pursuant to
the termination and transition services agreement, control of our joint operations with the entities affiliated with Aimia Inc. in the U.K. were transitioned to
us, such that we are now solely operating our business in the U.K. In connection with the termination and transition services agreement, entities affiliated with
Aimia Inc. will continue to provide certain services to us, including use of their facilities and office space, information technology services and support and
hosting services, some of which will continue through June 2017. The entities affiliated with Aimia Inc. also transferred the employment contracts of certain
employees rendering services to us in connection with the joint U.K. operations.
137
Table of Contents
In June and September 2016, in consideration for entering into the termination and transition services agreement and the transfer to us of full control of our
U.K. operations, we issued convertible promissory notes in an aggregate principal amount of approximately $23.7 million. The following table summarizes
issuances of our convertible promissory notes to our directors, executive officers and holders of more than 5% of any class of our capital stock as of the date
of such transaction:
Related Party
Aimia EMEA Limited
Principal Amount of
Convertible Notes
$ 23,673,835.36
We issued to Aimia EMEA unsecured convertible promissory notes, or the Aimia EMEA Notes, in an aggregate principal amount of $18.0 million, which
accrued interest at a rate of 10% per year, compounded annually. In consideration for our outstanding obligations to Aimia Inc. at the time we terminated our
U.K. cooperation agreement, we issued to Aimia EMEA an unsecured convertible promissory note, or the Outstanding Obligation Note, in an aggregate
principal amount of approximately $5.7 million, at an interest rate of 10% per year, compounded annually. Both the Aimia EMEA Notes and the Outstanding
Obligation Note, which we collectively refer to as the Aimia Notes, were due and payable on the earliest to occur of: (a) a date after June 30, 2019, as
specified by the holder, (b) our liquidation, dissolution or wind up, including a sale of all or substantially all of our assets or a majority of our voting power or
(c) an event of default. The Aimia Notes were subordinate to our existing credit facilities with National Electrical Benefit Fund, Ally Bank and Pacific
Western Bank.
The Aimia Notes were convertible into shares of our capital stock, depending on certain triggering events. The Aimia Notes converted into shares of our
Series G’ redeemable convertible preferred stock and common stock in the Series G preferred stock and warrant financing described above.
Investors’ Rights Agreements
In connection with our preferred stock financings, we entered into investors’ rights agreement containing registration rights and information rights, among
other things, with certain holders of our redeemable convertible preferred stock and certain holders of our common stock, including entities affiliated with
Discovery Capital, entities affiliated with Polaris Venture Partners, Canaan VIII L.P., entities affiliated with Aimia Inc., Fidelity Information Services, LLC,
Scott D. Grimes, Lynne M. Laube and TTP Fund II, L.P., an entity affiliated with Mark A. Johnson.
Employment Arrangements
We have entered into employment agreements or offer letter agreements with certain of our executive officers. For more information regarding these
agreements with our named executive officers, see “Executive Compensation—Employment, Severance and Change in Control Agreements.”
Stock Option Grants to Directors and Executive Officers
We have granted stock options to certain of our directors and executive officers. For more information regarding the stock options and stock awards granted
to our directors and named executive officers, see “Executive Compensation—Outstanding Equity Awards as of December 31, 2017” and “Director
Compensation Table.”
Separation Pay Agreements
We have entered into separation pay agreements with certain of our executive officers. For more information regarding these arrangements with our named
executive officers, see “—Potential Payments upon Termination or Change of Control.”
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. The indemnification agreements and our amended and
restated certificate of incorporation and amended and restated bylaws require us to indemnify our directors and executive officers to the fullest extent
permitted by Delaware law.
138
Table of Contents
Related Person Transaction Policy
In February 2018, we adopted a related person transaction policy that sets forth our procedures for the identification, review, consideration and approval or
ratification of related person transactions. For purposes of our policy only, a related person transaction is a transaction, arrangement or relationship, or any
series of similar transactions, arrangements or relationships, in which we and any related person are, were or will be participants, in which the amount
involves exceeds $120,000. Transactions involving compensation for services provided to us as an employee or director are not covered by this policy. A
related person is any executive officer, director or beneficial owner of more than 5% of any class of our voting securities, including any of their immediate
family members and any entity owned or controlled by such persons.
Under the policy, if a transaction has been identified as a related person transaction, including any transaction that was not a related person transaction when
originally consummated or any transaction that was not initially identified as a related person transaction prior to consummation, our management must
present information regarding the related person transaction to our audit committee, or, if audit committee approval would be inappropriate, to another
independent body of our board of directors, for review, consideration and approval or ratification. The presentation must include a description of, among other
things, the material facts, the interests, direct and indirect, of the related persons, the benefits to us of the transaction and whether the transaction is on terms
that are comparable to the terms available to or from, as the case may be, an unrelated third party or to or from our employees generally. Under the policy, we
will collect information that we deem reasonably necessary from each director, executive officer and, to the extent feasible, significant stockholder to enable
us to identify any existing or potential related-person transactions and to effectuate the terms of the policy.
In addition, under our Code of Business Conduct and Ethics, our employees and directors have an affirmative responsibility to disclose any transaction or
relationship that reasonably could be expected to give rise to a conflict of interest.
In considering related person transactions, our audit committee, or other independent body of our board of directors, will take into account the relevant
available facts and circumstances including, but not limited to:
•
•
•
•
the risks, costs and benefits to us;
the impact on a director’s independence in the event that the related person is a director, immediate family member of a director or an entity with
which a director is affiliated;
the availability of other sources for comparable services or products; and
the terms available to or from, as the case may be, unrelated third parties or to or from employees generally.
The policy requires that, in determining whether to approve, ratify or reject a related person transaction, our audit committee, or other independent body of
our board of directors, must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, our best interests and those of
our stockholders, as our audit committee, or other independent body of our board of directors, determines in the good faith exercise of its discretion.
All of the transactions described above were entered into prior to the adoption of the written policy, but all were approved by our board of directors
considering similar factors to those described above.
Director Independence
Our board of directors has undertaken a review of the independence of the directors and considered whether any director has a material relationship with us
that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Based upon information requested from
and provided by each director concerning such director’s background, employment and affiliations, including family relationships, our board of directors
determined that Messrs. Adams, Balen, Johnson, Youngren, Weisman and Klinck, representing six of our eight directors, are “independent directors” as
defined under current rules and regulations of the SEC and the listing standards of the Nasdaq Stock Market. In making these determinations, our board of
directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances that our
board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director
and the transactions involving them described above.
139
Table of Contents
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Independent Registered Public Accounting Firm Fees and Services
The following table sets forth the aggregate fees for professional service provided by our independent registered public accounting firm, Deloitte &
Touche LLP, for the years ended December 31, 2017 and 2016:
Audit Fees(1)
Audit-Related Fees
Tax Fees(2)
All Other Fees(3)
Total
Year Ended December 31,
2016
2017
(in thousands)
$
$
1,539
124
88
2
1,753
$
$
2,922
125
225
—
3,272
(1)
(2)
(3)
Audit fees consist of the fees for professional services rendered for the audit of our annual financial statements and review of our quarterly financial
statements, and services normally provided by the accountant in connection with statutory and regulatory filings or engagements. Audit Fees for 2017
include fees of $1,625,612 related to our IPO, consents, comfort letter and reviews of other documents filed with the SEC.
Tax fees consist of the fees for professional services rendered in connection with tax compliance, advice, and planning services.
All other fees consist of fees for licenses for accounting research software.
Pre-Approval Policies and Procedures
The audit committee has adopted a pre-approval policy under which the audit committee approves in advance all audit and permissible non-audit
services to be performed by the independent accountants (subject to a de minimis exception). These services may include audit services, audit-related
services, tax services, and other non-audit services. As part of its pre-approval policy, the audit committee considers whether the provision of any proposed
non-audit services is consistent with the SEC’s rules on auditor independence. In accordance with its pre-approval policy, the audit committee has
pre-approved certain specified audit and non-audit services to be provided by our independent auditor. If there are any additional services to be provided, a
request for pre-approval must be submitted to the audit committee for its consideration under the policy. The audit committee generally pre-approves
particular services or categories of services on a case-by-case basis. Finally, in accordance with the pre-approval policy, the audit committee has delegated
pre-approval authority to the chair of the audit committee. The chair must report any pre-approval decisions to the audit committee at its next meeting.
All of the services of Deloitte & Touche LLP for 2016 and 2017 described above were in accordance with the audit committee pre-approval policy.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report:
PART IV.
(1) Consolidated Financial Statements and Reports of Independent Registered Public Accounting Firm are shown in the Index to Financial Statements
included in Part II, Item 8 of this Annual Report on Form 10-K.
(2) All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or
notes thereto.
(3) Exhibits are incorporated herein by reference or are filed with this Annual Report as indicated below.
140
Table of Contents
(b) Exhibits
Exhibit
3.1
3.2
4.1
4.2
10.1
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
10.13
10.14
10.15#
Amended and Restated Certificate of Incorporation of the Registrant
Amended and Restated Bylaws of the Registrant
Form of Common Stock Certificate of the Registrant
Description
Amended and Restated Investors’ Rights Agreement by and among the Registrant
and certain of its stockholders, dated May 4, 2017
Office Lease Agreement, dated as of August 5, 2013, by and between the
Registrant and Jamestown Ponce City Market, L.P., as amended to date
2008 Stock Plan and Forms of Option Agreement, Notice of Stock Option Grant,
Exercise Notice, Restricted Stock Unit Notice and Restricted Stock Unit
Agreement thereunder, as amended to date
2018 Equity Incentive Plan and Forms of Stock Option Agreement, Notice of
Exercise and Stock Option Grant Notice thereunder
2018 Employee Stock Purchase Plan
Non-Employee Director Compensation Plan
2016 Bonus Plan of the Registrant
2017 Bonus Plan of the Registrant
2018 Bonus Plan of the Registrant
Form of restricted securities unit award of the Registrant
Form of Indemnity Agreement by and between the Registrant and each of its
directors and executive officers
Offer Letter Agreement, dated as of June 11, 2014, by and between the Registrant
and David T. Evans
Form of Amended and Restated Separation Pay Agreement by and between the
Registrant and each of Scott D. Grimes, Lynne M. Laube, David T. Evans and
Kirk L. Somers
Credit Agreement, dated as of July 21, 2016, by and among the Registrant,
Columbia Partners, L.L.C. Investment Management and National Electrical
Benefit Fund, as amended to date
Loan and Security Agreement, dated September 14, 2016 by and among the
Registrant, Ally Bank and Pacific Western Bank
General Services Agreement, dated as of November 5, 2010 by and between the
Registrant and Bank of America, N.A., as amended to date
141
Incorporated by Reference
Schedule /
Form
File Number
S-1 333-222531
S-1 333-222531
S-1/A 333-222531
S-1
Exhibit
3.2
3.4
4.1
File Date
01/12/2018
01/12/2018
01/29/2018
333-222531
4.2
01/12/2018
S-1
333-222531
10.12
01/12/2018
S-1/A
S-1/A
333-222531
10.1
01/29/2018
333-222531
S-1/A 333-222531
S-1/A 333-222531
S-1 333-222531
S-1 333-222531
S-1/A 333-222531
S-1 333-222531
S-1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
01/29/2018
01/29/2018
01/29/2018
01/12/2018
01/12/2018
01/29/2018
01/12/2018
333-222531
10.9
01/12/2018
S-1
333-222531
10.10
01/12/2018
S-1/A
333-222531
10.11
01/29/2018
S-1
333-222531
10.13
01/12/2018
S-1
333-222531
10.14
01/12/2018
S-1
333-222531
10.15
01/12/2018
Table of Contents
10.22#
21.1
23.1*
31.1*
31.2*
32.1**
Software License, Customization and Maintenance Agreement, dated as of November
4, 2010 by and between the Registrant and Bank of America, N.A., as amended to date S-1
S-1
Subsidiaries of the Registrant
Consent of Deloitte & Touche LLP, independent registered public accounting firm
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
333-222531
333-222531
10.16
21.1
01/12/2018
01/12/2018
Filed herewith.
Furnished herewith.
*
**
† Indicates management contract or compensatory plan.
# Confidential treatment has been granted from the Securities and Exchange Commission as to certain portions of this document.
ITEM 16. FORM 10-K SUMMARY
None.
142
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 19, 2018
Cardlytics, Inc.
By: /s/ Scott D. Grimes
Scott D. Grimes
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
/s/ Scott D. Grimes
Scott D. Grimes
/s/ David T. Evans
David T. Evans
/s/ Lynne M. Laube
Lynne M. Laube
/s/ David L. Adams
David L. Adams
/s/ John V. Balen
John V. Balen
/s/ Mark A. Johnson
Mark A. Johnson
/s/ Bryce Youngren
Bryce Youngren
/s/ Tony Weisman
Tony Weisman
/s/ John Klinck
John Klinck
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Director
Director
Date
March 19, 2018
March 19, 2018
March 19, 2018
March 19, 2018
Chairman of the Board of Directors
March 19, 2018
Director
Director
Director
Director
143
March 19, 2018
March 19, 2018
March 19, 2018
March 19, 2018
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-222965 on Form S-8 of our report dated March 19, 2018, relating to the
consolidated financial statements of Cardlytics, Inc. and its wholly-owned subsidiary appearing in this Annual Report on Form 10-K of Cardlytics, Inc. for
the year ended December 31, 2017.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 19, 2018
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott D. Grimes, certify that:
1. I have reviewed this Annual Report on Form 10-K of Cardlytics, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 19, 2018
/s/ Scott D. Grimes
Scott D. Grimes
Chief Executive Officer
(principal executive officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David T. Evans, certify that:
1. I have reviewed this Annual Report on Form 10-K of Cardlytics, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 19, 2018
/s/ David T. Evans
David T. Evans
Chief Financial Officer
(principal financial officer)
Exhibit 32.1
CERTIFICATIONS OF
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of
Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Scott D. Grimes, Chief Executive Officer of Cardlytics, Inc. (the “Company”), and David
T. Evans, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:
1.
2.
The Company’s Annual Report on Form 10-K for the period ended December 31, 2017, to which this Certification is attached as Exhibit 32.1 (the
“Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and
The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 19th day of March, 2018.
/s/ Scott D. Grimes
Scott D. Grimes
Chief Executive Officer
(principal executive officer)
/s/ David T. Evans
David T. Evans
Chief Financial Officer
(principal financial officer)
*
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or
after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.