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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number: 001-38386
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12412496&doc=14
CARDLYTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
26-3039436
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
675 Ponce de Leon Ave. NE, Ste 6000, Atlanta, GA 30308
(888) 798-5802
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐  
Indicate by check mark whether the registrant has submitted electronically 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
☒  (Do not check if a small reporting company)
  
Small reporting company
 
Emerging growth company
 
 
 
 
 
 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of August 13, 2018, there were 21,297,150 shares outstanding of the registrant’s common stock, par value $0.0001.
 


Table of Contents

CARDLYTICS, INC.
QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS
 
 
Page
PART I.
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 6.



1

Table of Contents

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

 
December 31, 2017
 
June 30, 2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
21,262

 
$
50,468

Restricted cash

 
20,000

Accounts receivable, net
48,348

 
40,488

Other receivables
2,898

 
3,073

Prepaid expenses and other assets
2,121

 
3,430

Total current assets
$
74,629

 
$
117,459

PROPERTY AND EQUIPMENT, net
7,319

 
7,829

INTANGIBLE ASSETS, net
528

 
366

CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net
433

 
1,070

DEFERRED FI IMPLEMENTATION COSTS, net
13,625

 
12,425

OTHER LONG-TERM ASSETS
4,224

 
1,097

Total assets
$
100,758

 
$
140,246

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
1,554

 
$
918

Accrued liabilities:
 
 
 
Accrued compensation
4,638

 
4,305

Accrued expenses
4,615

 
4,510

FI Share liability
23,914

 
20,729

Consumer Incentive liability
7,242

 
5,834

Deferred billings
132

 
174

Short-term warrant liability

 
16,055

Current portion of long-term debt:
 
 
 
Capital leases
44

 
22

Total current liabilities
$
42,139

 
$
52,547

LONG-TERM LIABILITIES:
 
 
 
Deferred liabilities
$
3,670

 
$
3,437

Long-term warrant liability
10,230

 

Long-term debt, net of current portion:
 
 
 
Lines of credit
25,081

 
27,477

Term loans
31,830

 
19,972

Capital leases
57

 
47

Total long-term liabilities
$
70,868

 
$
50,933



2

Table of Contents

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

 
December 31, 2017
 
June 30, 2018
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)

 

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

 
$

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Total redeemable convertible preferred stock
$
196,437

 
$

STOCKHOLDERS’ (DEFICIT) EQUITY:
 
 
 
Common stock, $0.0001 par value—83,000 and 100,000 shares authorized and 3,439 and 20,316 shares issued and outstanding as of December 31, 2017 and June 30, 2018, respectively
$

 
$
7

Additional paid-in capital
58,693

 
336,874

Accumulated other comprehensive income
1,066

 
1,438

Accumulated deficit
(268,445
)
 
(301,553
)
Total stockholders’ (deficit) equity
(208,686
)
 
36,766

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

 
$
140,246



See notes to the condensed consolidated financial statements

3

Table of Contents

CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share amounts)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
REVENUE
$
32,812

 
$
35,570

 
$
59,693

 
$
68,283

COSTS AND EXPENSES:
 
 
 
 
 
 
 
FI Share and other third-party costs
19,680

 
19,747

 
36,357

 
41,167

Delivery costs
1,896

 
2,559

 
3,449

 
4,502

Sales and marketing expense
7,920

 
10,247

 
15,152

 
18,463

Research and development expense
3,093

 
4,888

 
6,106

 
8,347

General and administration expense
4,773

 
8,979

 
9,462

 
15,561

Depreciation and amortization expense
767

 
784

 
1,532

 
1,694

Total costs and expenses
38,129

 
47,204

 
72,058

 
89,734

OPERATING LOSS
(5,317
)
 
(11,634
)
 
(12,365
)
 
(21,451
)
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense, net
(2,020
)
 
(992
)
 
(4,664
)
 
(2,741
)
Change in fair value of warrant liabilities, net
(1,466
)
 
1,611

 
(1,793
)
 
(7,561
)
Change in fair value of convertible promissory notes
(861
)
 

 
(1,244
)
 

Change in fair value of convertible promissory notes—related parties
8,436

 

 
6,213

 

Other income (expense), net
580

 
(2,038
)
 
742

 
(1,355
)
Total other income (expense)
4,669

 
(1,419
)
 
(746
)
 
(11,657
)
LOSS BEFORE INCOME TAXES
(648
)
 
(13,053
)
 
(13,111
)
 
(33,108
)
INCOME TAX BENEFIT

 

 

 

NET LOSS
$
(648
)
 
$
(13,053
)
 
$
(13,111
)
 
$
(33,108
)
Adjustments to the carrying value of redeemable convertible preferred stock
(4,789
)
 

 
(5,033
)
 
(157
)
Net loss attributable to common stockholders
$
(5,437
)
 
$
(13,053
)
 
$
(18,144
)
 
$
(33,265
)
Net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
(1.69
)
 
$
(0.64
)
 
$
(6.18
)
 
$
(1.99
)
Diluted
$
(3.48
)
 
$
(0.64
)
 
$
(6.18
)
 
$
(1.99
)
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
3,221

 
20,300

 
2,935

 
16,716

Diluted
3,875

 
20,300

 
2,935

 
16,716


See notes to the condensed consolidated financial statements

4

Table of Contents

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
NET LOSS
$
(648
)
 
$
(13,053
)
 
$
(13,111
)
 
$
(33,108
)
OTHER COMPREHENSIVE (LOSS) INCOME:
 
 
 
 
 
 
 
  Foreign currency translation adjustments
(448
)
 
880

 
(568
)
 
372

TOTAL COMPREHENSIVE LOSS
$
(1,096
)
 
$
(12,173
)
 
$
(13,679
)
 
$
(32,736
)

See notes to the condensed consolidated financial statements

5

Table of Contents

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

 
 
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Total
 
Common Stock
 
 
Shares
 
Amount
 
BALANCE–December 31, 2017
3,439

 
$

 
$
58,693

 
$
1,066

 
$
(268,445
)
 
$
(208,686
)
Exercise of common stock options
64

 

 
144

 

 

 
144

Exercise of common stock warrants
349

 

 

 

 

 

Stock-based compensation

 

 
11,251

 

 

 
11,251

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

 
1

 
66,100

 

 

 
66,101

Vesting of performance-based common stock warrants

 

 
2,519

 

 

 
2,519

Conversion of preferred stock to common stock
10,643

 
6

 
196,588

 

 

 
196,594

Conversion of preferred stock warrants to common stock warrants

 

 
1,736

 

 

 
1,736

Accretion of redeemable convertible preferred stock to redemption value

 

 
(157
)
 

 

 
(157
)
Other comprehensive income

 

 

 
372

 

 
372

Net loss

 

 

 

 
(33,108
)
 
(33,108
)
BALANCE–June 30, 2018
20,316

 
$
7

 
$
336,874

 
$
1,438

 
$
(301,553
)
 
$
36,766


See notes to the condensed consolidated financial statements

6

Table of Contents

CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
 
Six Months Ended
June 30,
 
2017
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 Net loss
$
(13,111
)
 
$
(33,108
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Change in allowance for doubtful accounts
78

 
(16
)
Depreciation and amortization
1,532

 
1,694

Amortization and impairment of deferred FI implementation costs
745

 
758

Amortization of financing costs charged to interest expense
281

 
229

Accretion of debt discount and non-cash interest expense
4,012

 
2,326

Stock compensation expense
2,225

 
11,245

Change in the fair value of warrant liabilities, net
1,793

 
7,561

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

 

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

Other non-cash (income) expense, net
(612
)
 
3,873

Settlement of paid-in-kind interest

 
(8,311
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
6,100

 
7,701

Prepaid expenses and other assets
(370
)
 
(1,509
)
Deferred FI implementation costs
(3,000
)
 
(2,250
)
Recovery of deferred FI implementation costs
1,952

 
2,692

Accounts payable
(183
)
 
(839
)
Other accrued expenses
(1,521
)
 
(237
)
FI Share liability
(808
)
 
(3,185
)
Customer Incentive liability
(261
)
 
(1,409
)
Total adjustment
6,994

 
20,323

Net cash used in operating activities
$
(6,117
)
 
$
(12,785
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
  Acquisition of property and equipment
$
(488
)
 
$
(1,492
)
  Acquisition of patents
(23
)
 
(12
)
  Capitalized software development costs

 
(657
)
Net cash used in investing activities
$
(511
)
 
$
(2,161
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of debt
$
12,500

 
$
47,435

Principal payments of debt
(49
)
 
(51,811
)
Proceeds from issuance of common stock
564

 
70,527

Proceeds from issuance of Series G preferred stock
11,940

 

Equity issuance costs
(994
)
 
(1,897
)
Debt issuance costs
(142
)
 
(48
)
Net cash from financing activities
$
23,819

 
$
64,206

EFFECT OF EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
176

 
(54
)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
17,367

 
49,206

CASH, CASH EQUIVALENTS AND RESTRICTED CASH—beginning of period
22,968

 
21,262

CASH, CASH EQUIVALENTS AND RESTRICTED CASH—end of period
$
40,335

 
$
70,468

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Cash paid for interest
$
392

 
$
8,704

Amounts accrued for property and equipment
$
191

 
$
1,225

Amounts accrued for capitalized software development costs
$

 
$
86

Stock-based compensation capitalized for software development
$

 
$
6



See notes to the condensed consolidated financial statements

7

Table of Contents

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

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


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Table of Contents

Unaudited Interim Results
The accompanying unaudited interim condensed consolidated financial statements and information have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. The results for interim periods presented are not necessarily indicative of the results to be expected for the full year due to the seasonality of our business which has been historically impacted by higher consumer spending during the fourth quarter. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included on our Annual Report on Form 10-K ("Annual Report") for the fiscal year ended December 31, 2017.
There have been no material changes to our accounting policies from those disclosed in the audited consolidated financial statements and related notes thereto included in our Annual Report for year ended December 31, 2017.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Significant items subject to such estimates and assumptions include revenue recognition, internal-use software development costs, income taxes, stock-based compensation, derivative instruments, income tax valuation allowance, contingencies and changes in fair value of our convertible promissory notes. We base our estimates on historical experience and also on assumptions that we believe are reasonable. Changes in facts or circumstances may cause us to change our assumptions and estimates in future periods and it is possible that actual results could differ from our current or revised future estimates.
2.     SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING STANDARDS
Consumer Incentives
Our Cardlytics Direct solution is our proprietary native bank advertising channel that enables marketers to reach consumers via their trusted and frequently visited online and mobile banking channels as well as email. Working with the marketer, we design a campaign that targets customers based on their purchase history. The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that we collect from marketers to provide these consumer incentives to our FIs’ customers after they make qualifying purchases, which we refer to as Consumer Incentives.
We report our revenue on our condensed consolidated statements of operations net of Consumer Incentives. We generally pay Consumer Incentives only with respect to our Cardlytics Direct service. We do not provide the goods or services that are purchased by our FIs’ customers from the marketers to which the Consumer Incentives relate. Accordingly, the marketer is deemed to be the principal in the relationship with the customer and, therefore, the Consumer Incentive is deemed to be a reduction in the purchase price paid by the customer for the marketer’s goods or services. While we are responsible for remitting Consumer Incentives to our FI partners for further payment to their customers, we function solely as an agent of marketers in these arrangements.
Accounts receivable is recorded at the amount of gross billings to marketers, net of allowances, for the fees and Consumer Incentives that we are responsible to collect. Our accrued liabilities also include the amount of Consumer Incentives due to FI partners. As a result, accounts receivable and accrued liabilities may appear large in relation to revenue, which is reported on a net basis. Consumer Incentives totaled $14.8 million and $15.8 million during the three months ended June 30, 2017 and 2018 and totaled $28.0 million and $31.9 million during the six months ended June 30, 2017 and 2018, respectively.


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Table of Contents

Concentrations of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Our cash and cash equivalents are held with two financial institutions, which we believe are of high credit quality. We believe that our accounts receivable credit risk exposure is limited as a result of being diversified among a large number of marketers segregated by both geography and industry. Historically, we have not experienced significant write-downs of our accounts receivable. No marketer represented a significant concentration of our accounts receivable as of December 31, 2017 or June 30, 2018. During the six months ended June 30, 2017 and 2018, a marketer in the U.S. accounted for 7% and 10% of our revenue, respectively. No other marketer accounted for over 10% of revenue during the six months ended June 30, 2017 and 2018.
Our business is substantially dependent on a limited number of FI partners. We require participation from our FI partners in Cardlytics Direct and access to their purchase data in order to offer our solutions to marketers and their agencies. We must have FI partners with a sufficient number of customers and levels of customer engagement to ensure that we have robust purchase data and marketing space to support a broad array of incentive programs for marketers. Our agreements with a substantial majority of our FI partners have terms of three to five years but are 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 both the six months ended June 30, 2017 and 2018, our largest FI partner in the U.S. accounted for approximately 67% of FI Share. During the six months ended June 30, 2017 and 2018, an FI partner in the U.K. accounted for 9% and 10% of FI Share, respectively. No other FI partners accounted for over 10% of FI Share during the six months ended June 30, 2017 and 2018.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash held in checking accounts, upon which we earn up to a 1.0% annual rate of interest. Restricted cash as of June 30, 2018 represents deposits held in a blocked account in favor of the lender as additional security for our payment obligations under our 2018 Term Loan, upon which we earn a 0.9% annual rate of interest. See Note 3—Debt, for additional information regarding our 2018 Term Loan.
Cash, cash equivalents and restricted cash as presented on our condensed consolidated statements of cash flows consists of the following (in thousands):
 
December 31,
 
June 30,
 
2016
 
2017
 
2017
 
2018
Cash and cash equivalents
$
22,838

 
$
21,262

 
$
40,335

 
$
50,468

Restricted cash
130

 

 

 
20,000

Cash, cash equivalents and restricted cash
$
22,968

 
$
21,262

 
$
40,335

 
$
70,468

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

 
$
3,144

Deferred costs
1,745

 
1,135

Recognized against offering proceeds

 
(4,279
)
Ending balance
$
1,745

 
$



10

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


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


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In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU requires equity investments to be measured at fair value with changes in fair values recognized in net earnings, (public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes), simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment and eliminates the requirement to disclose fair values, the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. This ASU also clarifies that management should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with other deferred tax assets. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods. For non-public business entities, this ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. We have made the election to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act, therefore we will be required to apply this ASU for annual reporting periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. We are currently evaluating the potential impact of this recently issued guidance on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes ASC Topic 840, Leases. The ASU does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. The ASU’s primary change is the requirement for lessee entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting under the ASU is largely unchanged from the previous accounting standard. In addition, the ASU expands the disclosure requirements of lease arrangements. 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 condensed consolidated financial statements, we expect that most of our operating lease commitments will be recognized as operating lease liabilities and right-of-use assets upon adoption of the new guidance.
3.     DEBT
Our debt consists of the following (in thousands):
 
December 31, 2017
 
June 30, 2018
Lines of credit
$
25,081

 
$
27,477

Term loans, net of unamortized discount and debt issuance costs of $1,058 and $28 at December 31, 2017 and June 30, 2018, respectively
31,830

 
19,972

Capital leases
101

 
69

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

 

Total debt
$
57,012

 
$
47,518

Less current portion of long-term debt
(44
)
 
(22
)
Long-term debt, net of current portion
$
56,968

 
$
47,496

Accrued interest included in debt totaled $6.2 million and less than $0.1 million as of December 31, 2017 and June 30, 2018, respectively.


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New Loan Facility
On May 21, 2018, we entered into a New Loan Facility consisting of a $30.0 million asset-based revolving line of credit ("2018 Line of Credit") and a $20.0 million term loan ("2018 Term Loan") maturing on May 21, 2020. We used the entire $20.0 million in proceeds from the 2018 Term Loan and an advance of $27.4 million under the 2018 Line of Credit to repay all outstanding obligations under our 2016 Line of Credit and 2016 Term Loan. Upon repayment, both the 2016 Line of Credit and the 2016 Term Loan were terminated. We deferred $0.1 million of debt issuance costs associated with obtaining the New Loan Facility and deferred $0.1 million of unamortized debt issuance costs attributed to our 2016 Line of Credit and 2016 Term Loan.
Under the terms of the New Loan Facility relating to the 2018 Line of Credit, we are able to borrow up to the lesser of $30.0 million or 85% of the amount of our eligible accounts receivable. Interest on advances under the 2018 Line of Credit varies depending on the amount of unrestricted cash deposits we maintain with the lender on the last day of the month. The interest rate is equal to the prime rate minus 0.75% if our unrestricted deposits exceed $40.0 million, the prime rate minus 0.50% if our unrestricted deposits are between $40.0 million and $20.0 million, and the prime rate if our unrestricted deposits are below $20.0 million. As of June 30, 2018, the indicative rate for advances on the 2018 Line of Credit was the prime rate minus 0.75%, or 4.25%. In addition, we are required to pay an unused line fee of 0.15% per annum on the average daily unused amount of the $30.0 million revolving commitment. We are also required to pay the lender a one-time success fee of $75,000 in the event that we achieve trailing twelve month revenue of $200.0 million or more at the end of any month after the closing date of the New Loan Facility. Interest accrues on the 2018 Term Loan at an annual rate of interest equal to the prime rate minus 2.75%, or 2.25%, as of June 30, 2018.
All of our obligations under the New Loan Facility are also secured by a first priority lien on substantially all of our assets. Under the terms of the New Loan Facility, we are required to maintain a deposit of $20.0 million in a blocked account in favor of the lender as additional security for our payment obligations. The New Loan Facility contains a moving minimum trailing twelve month revenue covenant, which was $127.0 million for the period ended June 30, 2018. The New Loan Facility also requires us to maintain a total cash balance plus liquidity under the 2018 Line of Credit of not less than $5.0 million.
The New Loan Facility includes customary representations, warranties and covenants (affirmative and negative), including restrictive covenants that include restrictions on mergers, acquisitions and dispositions of assets, incurrence of indebtedness and encumbrances on our assets and a prohibition from the payment or declaration of dividends; in each case subject to specified exceptions.
The New Loan Facility also includes standard events of default, including in the event of a material adverse change. Upon the occurrence of an event of default, the lender may declare all outstanding obligations immediately due and payable and take such other actions as are set forth in the New Loan Facility and increase the interest rate otherwise applicable to the 2018 Term Loan or advances under the 2018 Line of Credit by an additional 3.00%.
As of June 30, 2018, we had $2.5 million of unused available borrowings under our 2018 Line of Credit. We were in compliance with all financial covenants as of June 30, 2018.
2016 Line of Credit
In September 2016, we entered into a $50.0 million loan and security agreement ("2016 Line of Credit") maturing on March 14, 2019. The 2016 Line of Credit facility was repaid and terminated in May 2018 in connection with obtaining our New Loan Facility. We recognized a $0.1 million loss on extinguishment of debt related to the unamortized debt issuance costs. This expense is included within other income, net in our condensed consolidated statements of operations and is presented in other non-cash expenses on our condensed consolidated statement of statement of cash flows.
2016 Term Loan
In July 2016, we entered into a $24.0 million credit agreement ("2016 Term Loan") maturing on July 21, 2019. The 2016 Term Loan was repaid and terminated in May 2018 in connection with obtaining our New Loan Facility. We recognized a $0.8 million loss on extinguishment of debt related to the unamortized discount and unamortized debt issuance costs. This expense is included within other income, net in our condensed consolidated statements of operations and is presented in other non-cash expenses on our condensed consolidated statement of statement of cash flows.


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

 
$
12

 
$
12

2019

 
20

 
20

2020
47,477

 
24

 
47,501

2021

 
13

 
13

Total principal payments
$
47,477

 
$
69

 
$
47,546

Less unamortized debt issuance costs
(28
)
 

 
(28
)
Less unamortized debt discount

 

 

Total debt
$
47,449

 
$
69

 
$
47,518

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


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The 2018 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards and other forms of equity compensation, which are collectively referred to as stock awards. Additionally, the 2018 Plan provides for the grant of performance cash awards.
The following table summarizes the allocation of stock-based compensation in the consolidated statements of operations (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Delivery costs
$
43

 
$
183

 
$
84

 
$
268

Sales and marketing expense
522

 
2,668

 
866

 
3,611

Research and development expense
239

 
1,756

 
410

 
2,226

General and administration expense
438

 
3,738

 
865

 
5,140

Total stock-based compensation expense
$
1,242

 
$
8,345

 
$
2,225

 
$
11,245

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

 
$
15.00

Granted
468

 
21.13

Exercised
(148
)
 
3.80

Forfeited
(34
)
 
21.41

Cancelled
(81
)
 
11.31

Options outstanding — June 30, 2017
2,342

 
$
16.97

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

 
$
18.42

Granted
29

 
24.24

Exercised
(64
)
 
6.40

Forfeited
(128
)
 
24.95

Cancelled
(119
)
 
18.24

Options outstanding — June 30, 2018
2,232

 
$
18.48

The weighted-average grant-date fair value of options granted during the six months ended June 30, 2017 and 2018 was $13.61 and $10.00, respectively. The total fair value of options vested during the six months ended June 30, 2017 and 2018 was approximately $2.2 million and $4.0 million, respectively. As of June 30, 2018, $9.0 million of unrecognized compensation expense related to unvested options will be recognized over a weighted-average period of 2.5 years.


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Restricted Stock Units
A summary of restricted stock unit activity is as follows (in thousands, except per share amounts):
 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested — December 31, 2017

 
$

Granted
1,243

 
20.64

Vested

 

Forfeited
(11
)
 
16.77

Unvested — June 30, 2018
1,232

 
$
20.68

During the first quarter of 2018, we granted 335,562 restricted stock units ("RSUs") to employees and our non-employee directors, which have annual vesting periods ranging from one to four years.
We also granted two separate tranches of performance-based restricted share units ("PSUs"), each to receive 437,500 shares of common stock, to employees. The vesting of the 875,000 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 ("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. FI MAUs is a performance metric defined within "Management's Discussion and Analysis of Financial Condition and Results of Operations." As a result of entering into an agreement with JPMorgan Chase Bank, National Association, we refined the expected timing of achieving the performance conditions of the PSUs, resulting in a $5.6 million increase in stock compensation expense during the second quarter of 2018.
During the second quarter of 2018, we granted 32,070 RSUs to employees, which have annual vesting periods of four years. The unamortized stock-based compensation expense related to these RSUs is $0.5 million.
As of June 30, 2018, there was approximately $17.7 million of unrecognized compensation expense related to restricted stock units, which is expected to be recognized over a weighted-average period of 1.2 years.
Subsequent to June 30, 2018, we granted 26,590 RSUs to employees, which have annual vesting periods of four years. The unamortized stock-based compensation expense related to these RSUs is $0.5 million.
Restricted Securities Units
During 2016, we granted $1.0 million of restricted securities units to certain executives in lieu of cash bonuses. Upon issuance, the restricted securities units were indexed to the convertible promissory notes. As a result of the Series G Stock financing, the restricted securities units became indexed to our Series G’ Stock on the same terms as the Series G’ Stock issued upon conversion of the convertible promissory notes. Upon the completion of our IPO in February 2018, the restricted securities units became indexed to our common stock.
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 units 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 was recognized until one of these events occurred. These units vested upon the completion of our IPO in February 2018 resulting in a non-cash expense of $0.5 million.


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Employee Stock Purchase Plan
Our board of directors has adopted and our stockholders have approved our 2018 Employee Stock Purchase Plan ("2018 ESPP"). Our 2018 ESPP became effective on February 8, 2018, the date our registration statement in connection with our IPO was declared effective and enables eligible employees to purchase shares of our common stock at a discount. Purchases will be accomplished through participation in discrete offering periods. On each purchase date, eligible employees will purchase our common stock at a price per share equal to 85% of the lesser of the fair market value of our common stock on the first trading day of the offering period or the date of purchase. No shares of common stock have been purchased under the 2018 ESPP as the initial offering period has not yet ended.
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 (i) 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year, (ii) 500,000 shares of our common stock or (iii) such lesser number of shares of common stock as determined by our board of directors. 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.
5.     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 1—Overview of Business and Basis of Presentation 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):
 
Series G’ Stock
 
Series G Stock
 
Shares  
 
Amount  
 
Shares  
 
Amount  
Balance — December 31, 2017
1,296

 
$
44,672

 
346

 
$
5,110

Accretion of redeemable convertible preferred stock

 

 

 
108

Conversion of preferred stock to common stock
(1,296
)
 
(44,672
)
 
(346
)
 
(5,218
)
Balance — June 30, 2018

 
$

 

 
$

 
Series F-R Stock
 
Series E-R Stock
 
Series D-R Stock
 
Shares  
 
Amount  
 
Shares  
 
Amount  
 
Shares  
 
Amount  
Balance — December 31, 2017
1,199

 
$
58,449

 
795

 
$
29,972

 
1,396

 
$
32,728

Accretion of redeemable convertible preferred stock

 
38

 

 
1

 

 
7

Conversion of preferred stock to common stock
(1,199
)
 
(58,487
)
 
(795
)
 
(29,973
)
 
(1,396
)
 
(32,735
)
Balance — June 30, 2018

 
$

 

 
$

 

 
$

 
Series C-R Stock
 
Series B-R Stock
 
Series A-R Stock
 
Shares  
 
Amount  
 
Shares  
 
Amount  
 
Shares  
 
Amount  
Balance — December 31, 2017
1,508

 
$
18,366

 
2,247

 
$
5,288

 
1,857

 
$
1,852

Accretion of redeemable convertible preferred stock

 
3

 

 

 

 

Conversion of preferred stock to common stock
(1,508
)
 
(18,369
)
 
(2,247
)
 
(5,288
)
 
(1,857
)
 
(1,852
)
Balance — June 30, 2018

 
$

 

 
$

 

 
$



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During the second quarter of 2016, we issued 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 convertible promissory 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 Stock Financing
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. Issuance costs incurred in connection with the sale of Series G Stock totaled $0.1 million.
Conversion of Convertible Promissory Notes into Series G’ Stock
In connection with the Series G Stock financing in May 2017, certain convertible promissory notes 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.
Common Stock Warrants Issued in Connection with the Series G Stock Financing
In connection with the Series G Stock financing, we issued warrants to purchase 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) August 8, 2018, which is 180 days following the date of our IPO and (ii) 10 days prior to a sale of our company, at an exercise price of $0.0004 per share. See Note 6—Fair Value Measurements, for additional information regarding the valuation of the warrants issued in connection with the Series G Stock financing.
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 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.
6.     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):


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December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
Preferred stock warrants
$

 
$

 
$
2,285

 
$
2,285

Common stock warrants

 

 
7,945

 
7,945

Convertible promissory notes

 

 

 

Total liabilities
$

 
$

 
$
10,230

 
$
10,230

 
June 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
Preferred stock warrants
$

 
$

 
$

 
$

Common stock warrants

 

 
16,055

 
16,055

Convertible promissory notes

 

 

 

Total liabilities
$

 
$

 
$
16,055

 
$
16,055

Instruments Recorded at Fair Value Using Level 3 Inputs
Our redeemable convertible preferred stock warrants, common stock warrants issued in connection with the Series G Stock financing 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):
 
Preferred
Stock
Warrants
 
Common
Stock
Warrants
 
Convertible
Promissory
Notes
Balance at December 31, 2016
$
2,197

 
$

 
$
72,332

Conversion of convertible promissory notes to Series G’ preferred stock

 

 
(44,672
)
Conversion of convertible promissory notes to common stock

 

 
(24,392
)
Accrued interest on convertible promissory notes

 

 
1,701

Issuance of common stock warrants

 
7,452

 

Changes in fair value
97

 
1,696

 
(4,969
)
Balance at June 30, 2017
$
2,294

 
$
9,148

 
$

 
Preferred
Stock
Warrants
 
Common
Stock
Warrants
 
Convertible
Promissory
Notes
Balance at December 31, 2017
$
2,285

 
$
7,945

 
$

Changes in fair value
(549
)
 
8,110

 

Conversion of preferred stock warrants to common stock warrants
(1,736
)
 

 

Balance at June 30, 2018
$

 
$
16,055

 
$

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.


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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’ historical and forecasted 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 pricing method ("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 (i) guideline IPO transactions involving companies that were considered broadly comparable to us and (ii) our expectation of the pre-money valuation that we needed to achieve to consider an IPO as a viable exit strategy.
The following table summarizes key assumptions used in the PWERM for estimating the fair value of our redeemable convertible preferred stock warrant liability:
 
June 30, 2017
Weighted-average cost of capital applicable to preferred stock warrants
20%
Discount for lack of marketability
6% to 11%
Volatility
54%
Risk-free interest rate
0.9% to 1.2%
Preferred Stock Warrants
A summary of our preferred stock warrants is as follows (in thousands, except per share amounts):
 
 
 
 
 
 
 
 
Warrants outstanding
Preferred Series
 
Grant
date
 
Expiration
date
 
Exercise
price
 
December 31, 2017
 
June 30, 2018
Series B-R
 
2/26/2010
 
2/25/2020
 
$
2.36

 
59

 

Series D-R
 
9/21/2012
 
9/20/2022
 
$
23.64

 
38

 

Series D-R
 
9/21/2012
 
9/20/2022
 
$
23.64

 
13

 

Total
 
 
 
 
 
 
 
110

 



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The fair value of the warrants to purchase Series B-R Stock and Series D-R Stock decreased from $26.80 per share and $13.63 per share on December 31, 2017 to $20.18 per share and $10.57 per share on February 8, 2018, respectively, the date at which they converted to warrants to purchase shares of our common stock and were reclassified to additional paid-in capital on our condensed consolidated balance sheet. The decrease 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 Issued in Connection with the Series G Stock Financing
In connection with the Series G Stock financing, we issued warrants to purchase an aggregate 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) August, 8, 2018, which is 180 days following the date of our IPO and (ii) 10 days prior to a sale of our company, at an exercise price of $0.0004 per share.
To determine the fair value of our common stock warrant liability 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.
Subsequent to our IPO, the fair value of the common stock warrant liability is estimated based on the fair market value of our common stock at each reporting period, discounted from the date of settlement, which is expected to be 180 days following the date of our IPO. The valuation as of June 30, 2018 was determined to be $16.1 million. As a result, during the six months ended June 30, 2018, we recorded a non-cash loss of $8.1 million related to the change in fair value of our common stock warrant liability.
Convertible Promissory Notes
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 convertible promissory 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 through their conversion in May 2017, we utilized key assumptions from the PWERM, as shown above. Under this method, we considered the redemption features of the convertible promissory notes 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 will 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.
See Note 5—Redeemable Convertible Preferred Stock for a description of the Series G Stock financing in May 2017 that resulted in the conversion of the convertible promissory notes into shares of our Series G’ Stock.
Performance-based Warrants Issued to FIS
In May 2013, we 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 convertible promissory note financing, their warrants to purchase preferred stock were converted to warrants to purchase common stock. The warrants vested upon the completion of our IPO in February 2018 resulting in a non-cash expense of $2.5 million. We determined the fair value of these common warrants on the date of IPO using the Black-Scholes option pricing model, which is affected by the fair value of our common stock as well as the following significant inputs:


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Table of Contents

 
February 8, 2018
Weighted-average grant date fair value
$3.91
Significant inputs:
 
Value of common stock
$13.00
Expected term
5.3 years
Volatility
50%
Risk-free interest rate
2.0%
Dividend yield
—%
7.     RELATED PARTIES
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 convertible promissory notes converted into an aggregate of 1,295,746 shares of our Series G’ redeemable convertible preferred stock and 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
Shares of
Series G
Preferred
Stock
 
Shares of
Series G’
Preferred
Stock
 
Shares of
Common
Stock
 
Warrants to
Purchase
Common
Stock
Entities affiliated with Aimia, Inc.(1)

 
382

 
801

 

Entities affiliated with Polaris Venture Partners(2)
29

 
212

 

 
(6 
) 
Canaan VIII L.P.(3)
54

 
260

 

 
(6 
) 
Entities affiliated with Discovery Capital(4)

 
106

 

 

Scott D. Grimes

 
26

 

 

Lynne M. Laube

 
14

 

 

Entities affiliated with Mark A. Johnson(5)
35

 
15

 

 
(6 
) 
John Klinck
6

 

 

 
(6 
) 
David Adams
3

 

 

 
(6 
) 
 
(1)
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.
(2)
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. is a general partner of each of PVP V, PVP EF V, PVP FF V and PVP SFF V and may be deemed to have the sole voting and dispositive power over the shares held by PVP V, PVP EF V, PVP FF V and PVP SFF V. Bryce Youngren, a member of our board of directors, is a Managing Partner of Polaris Partners and may be deemed to share voting and dispositive power over the shares held by PVP V, PVP EF V, PVP FF V and PVP SFF V.
(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 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.
(5)
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.


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Table of Contents

(6)
The maximum number of shares issuable to each investor upon the exercise of such warrants is equal to the number of shares of Series G redeemable convertible preferred stock set forth opposite such investor’s name in the table above. 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 8—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 our IPO in February 2018.
In May 2013, FIS purchased 397,515 shares of our Series E Stock. 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. The warrants were exercisable subject to the attainment of certain milestones related to the number of active accounts for which our solutions have been enabled with accelerated vesting upon an IPO. Since FIS did not participate in the convertible promissory note financing, their warrants to purchase preferred stock were converted to warrants to purchase common stock. The warrants vested upon the completion of our IPO in February 2018, resulting in a non-cash expense of $2.5 million based on the vesting-date fair value of our common stock underlying these warrants. Since the performance conditions were directly related to revenue-producing activities, we recognized this expense in FI Share and other third-party costs on our condensed consolidated statement of operations. This expense is presented in other non-cash expenses on our condensed consolidated statement of statement of cash flows. See Note 6—Fair Value Measurements for additional information regarding the valuation of the performance-based warrants issued to FIS.
8.     COMMITMENTS AND CONTINGENCIES
FI Implementation Costs
Agreements with certain FI partners require us to fund the development of user interface enhancements, pay for certain implementation fees, or make milestone payments upon the deployment of our solution. Amounts paid to FI partners are included in deferred FI implementation costs on our condensed consolidated balance sheets the earlier of when paid or earned and are amortized over the remaining term of the related contractual arrangements. Amortization is included in FI Share and other third-party costs on our condensed consolidated statements of operations and is presented in amortization and impairment of deferred FI implementation costs on our condensed consolidated statement of cash flows. Certain of these agreements provide for future reductions in FI Share due to the FI partner. These reductions in FI Share are recorded as a reduction to deferred implementation costs and also result in a cumulative adjustment to accumulated amortization. Reductions to FI Share in the second half of 2018 and full year 2019 are expected to total $2.7 million and $4.6 million, respectively. Unearned amounts not yet paid to FI partners totaled $7.0 million as of June 30, 2018.
The following table presents changes in deferred FI implementation costs (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Beginning balance
$
7,097

 
$
12,119

 
$
8,451

 
$
13,625

Deferred costs
3,000

 
2,000

 
3,000

 
2,250

Recoveries through FI Share
(989
)
 
(1,348
)
 
(1,952
)
 
(2,692
)
Amortization
(354
)
 
(346
)
 
(745
)
 
(758
)
Ending balance
$
8,754

 
$
12,425

 
$
8,754

 
$
12,425

During the three and six months ended June 30, 2017, we accrued expenses totaling $1.5 million and $3.0 million, respectively, related to an expected shortfall in meeting a 2017 minimum FI Share commitment recorded in FI Share and other third-party costs on our consolidated statement of operations. In the third quarter of 2017, we amended the agreement with the FI partner and removed the 2017 minimum FI Share commitment, resulting in a reversal of our $3.0 million accrued shortfall recorded as of June 30, 2017.


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Table of Contents

We have an FI Share commitment to a certain FI partner totaling $10.0 million over a 12-month period following the completion of certain milestones, which were not met as of June 30, 2018.
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.
9.     EARNINGS PER SHARE
The computations of the numerators and denominators of diluted net loss per share attributable to common stockholders are as follows (in thousands, except per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Numerator:
 
 
 
 
 
 
 
Net loss attributable to common stockholders, basic
$
(5,437
)
 
$
(13,053
)
 
$
(18,144
)
 
$
(33,265
)
Plus: Interest expense on convertible promissory notes
388

 

 

 

Less: Change in fair value of convertible promissory notes-related parties
(8,436
)
 

 

 

Net loss attributable to common stockholders, diluted
$
(13,485
)
 
$
(13,053
)
 
$
(18,144
)
 
$
(33,265
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic
3,221

 
20,300

 
2,935

 
16,716

Plus: Dilutive convertible promissory notes
654

 

 

 

Weighted-average common shares outstanding, diluted
3,875

 
20,300

 
2,935

 
16,716

 
 
 
 
 
 
 
 
Net loss per share attributable to common stockholders, diluted
$
(3.48
)
 
$
(0.64
)
 
$
(6.18
)
 
$
(1.99
)
The following securities have been excluded from the calculation of diluted weighted-average common shares outstanding because the effect is anti-dilutive (in thousands):


25

Table of Contents

 
June 30,
 
2017
 
2018
Redeemable convertible preferred stock:
 
 
 
Series A-R
1,857

 

Series B-R
2,247

 

Series C-R
1,508

 

Series D-R
1,396

 

Series E-R
795

 

Series F-R
1,199

 

Series G
346

 

Series G’
1,296

 

Common stock options
2,342

 
2,232

Common stock warrants
1,245

 
868

Common stock warrants issuable pursuant to Series G Stock financing
628

 
751

Redeemable convertible preferred stock warrants
110

 

Restricted stock units

 
1,232

Restricted securities units
37

 

Common stock issuable pursuant to the ESPP

 
95

10.     SEGMENTS
We have three operating segments: our Cardlytics Direct solutions in the United States and United Kingdom 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 United States and United Kingdom 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 can be directly attributable to each segment. With the exception of non-cash equity expense and the amortization and impairment of deferred FI implementation costs, FI Share is also 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.
During the second quarter of 2018, we began a strategic shift to focus the majority of our efforts and resources to support the growth of Cardlytics Direct. At this time, we have not yet determined what impact this strategic change will have on our reportable segment structure.


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Table of Contents

The following table provides information regarding our reportable segments (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Cardlytics Direct:
 
 
 
 
 
 
 
Adjusted contribution
$
11,428

 
$
16,240

 
$
20,868

 
$
30,462

Plus: FI Share and other third-party costs (1)
17,519

 
18,858

 
32,533

 
36,757

Revenue
$
28,947

 
$
35,098

 
$
53,401

 
$
67,219

Other Platform Solutions:
 
 
 
 
 
 
 
Adjusted contribution
$
2,058

 
$
(71
)
 
$
3,213

 
$
(69
)
Plus: FI Share and other third-party costs (1)
1,807

 
543

 
3,079

 
1,133

Revenue
$
3,865

 
$
472

 
$
6,292

 
$
1,064

Total:
 
 
 
 
 
 
 
Adjusted contribution
$
13,486

 
$
16,169

 
$
24,081

 
$
30,393

Plus: FI Share and other third-party costs (1)
19,326

 
19,401

 
35,612

 
37,890

Revenue
$
32,812

 
$
35,570

 
$
59,693

 
$
68,283

(1)
FI Share and other third party costs presented above excludes non-cash equity expense and amortization and impairment of deferred FI implementation costs, which are detailed below in our reconciliation of loss before income taxes to adjusted contribution.

Adjusted Contribution
Adjusted contribution represents our revenue less FI Share and other third-party costs excluding non-cash equity expense included in FI Share and amortization and impairment of deferred FI implementation costs. During the first quarter of 2018, we refined our definition of adjusted contribution used by our chief operating decision makers to exclude the impact of non-cash charges related to the issuance of equity to our FI partners and the impact of amortization and impairment of deferred FI implementation costs. We believe these changes are warranted and appropriate since these investments are expected to yield meaningful long-term relationships with our FI partners and provide incentive for our FI partners to invest in the user interfaces that complement our platform. We have recast all historical disclosures of adjusted contribution for the periods presented.
The following table presents a reconciliation of loss before income taxes presented in accordance with U.S. GAAP to adjusted contribution (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Adjusted contribution
$
13,486

 
$
16,169

 
$
24,081

 
$
30,393

Minus:
 
 
 
 
 
 
 
Non-cash equity expense included in FI Share

 

 

 
2,519

Amortization of deferred FI implementation costs
354

 
346

 
745

 
758

Delivery costs
1,896

 
2,559

 
3,449

 
4,502

Sales and marketing expense
7,920

 
10,247

 
15,152

 
18,463

Research and development expense
3,093

 
4,888

 
6,106

 
8,347

General and administration expense
4,773

 
8,979

 
9,462

 
15,561

Depreciation and amortization expense
767

 
784

 
1,532

 
1,694

Total other income (expense)
(4,669
)
 
1,419

 
746

 
11,657

Loss before income taxes
$
(648
)
 
$
(13,053
)
 
$
(13,111
)
 
$
(33,108
)


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The following table provides geographical information (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
Revenue:
 
 
 
 
 
 
 
United States
$
29,080

 
$
30,735

 
$
53,765

 
$
59,722

United Kingdom
3,732

 
4,835

 
5,928

 
8,561

Total
$
32,812

 
$
35,570

 
$
59,693

 
$
68,283

 
December 31, 2017
 
June 30, 2018
Property and equipment:
 
 
 
United States
$
6,813

 
$
7,453

United Kingdom
506

 
376

Total
$
7,319

 
$
7,829

Capital expenditures within the United Kingdom was $0.3 million and less than $0.1 million during the six months ended June 30, 2017 and 2018, respectively.
11.     SUBSEQUENT EVENTS
On August 7, 2018, we entered into Hosted Technology Services Schedule Two (the “Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), pursuant to which we have agreed to a national roll-out of Cardlytics Direct to Wells Fargo customers. The initial term of the Agreement ends on July 1, 2022. Wells Fargo may terminate the Agreement at any time upon 180 days’ written notice. We will share revenue that we generate from the sale of advertising within the Wells Fargo digital channels with Wells Fargo.
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, which was determined based on the volume weighted average closing price of our common stock for the 30 trading days up to and including August 7, 2018. Based on this calculation, the warrants allow for the purchase of 792,434 shares of common stock at an exercise price of $0.0004 per share. All warrants were subsequently exercised, resulting in the issuance of 792,434 shares of our common stock.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10–Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2017 included in our Annual Report on Form 10-K, filed with the SEC on March 19, 2018.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations, and such forward-looking statements include, but are not limited to, statements with respect to our business strategy, plans and objectives for future operations, including our expectations regarding our expenses and tax position; continued enhancements of our platform and new product offerings; our future financial and business performance; anticipated reductions to FI Share payments and anticipated FI Share commitment shortfalls. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
Cardlytics makes marketing more relevant and measurable through our purchase intelligence platform. Our partnerships with financial institutions ("FIs") provide us with access to their anonymized purchase data and online banking customers. By applying advanced analytics to this purchase data, we make it actionable, helping marketers identify, reach and influence likely buyers at scale, and measure the true sales impact of their marketing spend. We are a partner to more than 2,000 FIs, including Bank of America, National Association ("Bank of America"); PNC Bank National Association ("PNC"); Branch Banking and Trust Company; SunTrust Banks, Inc.; Lloyds TSB Bank plc; Santander UK plc; and several of the largest bank processors and digital banking providers to reach customers of small and mid-sized FIs.
On May 3, 2018 and May 7, 2018, respectively, we entered into a Master Agreement and Schedule #1 to the Master Agreement (collectively, the “Agreement”) with JPMorgan Chase Bank, National Association (“Chase”), pursuant to which we have agreed to a national roll-out of Cardlytics Direct to Chase customers. Under the Agreement, we will provide Chase with access to Cardlytics Direct for an initial term beginning on the date Cardlytics Direct is made generally available to Chase’s customers and ending seven years from that date. Chase may terminate the Agreement at any time upon 90 days’ written notice. We will share billings that it generates from the sale of advertising within the Chase digital channels with Chase.
During the first quarter of 2018, we launched a pilot implementation of Cardlytics Direct with Wells Fargo & Company ("Wells Fargo"), directed at Wells Fargo customers located in Miami, Florida; Charlotte, North Carolina and San Francisco, California. This pilot ended in July 2018. On August 7, 2018, we entered into Hosted Technology Services Schedule Two (the “Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), pursuant to which we have agreed to a national roll-out of Cardlytics Direct to Wells Fargo customers. The initial term of the Agreement ends on July 1, 2022. Wells Fargo may terminate the Agreement at any time upon 180 days’ written notice. The Company will share revenue that it generates from the sale of advertising within the Wells Fargo digital channels with Wells Fargo.
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 ("FI MAUs") contributed by any FI partner is indicative of our level of dependence on such FI partner. During both the six months ended June 30, 2017 and 2018, our largest FI partner, Bank of America, contributed 50% and 51% of our total FI MAUs, Digital Insight Corporation, a subsidiary of NCR Corporation ("Digital Insight") contributed 11% and 10% of our total FI MAUs and PNC contributed 8% and 11% of our total FI MAUs, respectively.


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We have experienced rapid growth in our revenue since inception. Revenue from sales of Cardlytics Direct, which excludes consumer incentives, was $53.4 million and $67.2 million for the six months ended June 30, 2017 and 2018, respectively, representing a growth rate of 26%. Net loss for the six months ended June 30, 2017 and 2018 totaled $13.1 million and $33.1 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. Our net loss for the six months ended June 30, 2017 includes a $5.0 million non-cash gain related to the change in fair value of our convertible promissory notes and a $1.8 million non-cash charge on the change in fair value of our warrant liabilities. Our net loss for the six months ended June 30, 2018 includes a $7.6 million non-cash charge related to the change in fair value of our warrant liabilities, a $2.5 million non-cash expense related to the vesting of warrants issued to an FI partner that accelerated upon our initial public offering ("IPO") and $6.9 million of stock-based compensation expense related to performance-based restricted share units granted in 2018.
FI Partner Commitments
Agreements with certain FI partners require us to fund the development of user interface enhancements, pay for certain implementation fees, or make milestone payments upon the deployment of our solution. Unearned amounts not yet paid to FI partners totaled $7.0 million as of June 30, 2018. Certain of these agreements provide for future reductions in FI Share due to the FI partner. Reductions to FI Share payments in the second half of 2018 and full year 2019 are expected to total $2.7 million and $4.6 million, respectively.
We have a minimum FI Share commitment with a certain FI partner totaling $10.0 million over a 12-month period following the completion of certain milestones, which were not met as of June 30, 2018. We currently expect the milestones to be met within the next 3 to 9 months and expect a FI Share commitment shortfall of between $4.0 million and $6.0 million. Since the expected shortfall will be accrued during the 12-month commitment period, we estimate that a majority of the expense will be recognized during 2019.
During the three and six months ended June 30, 2017, we accrued expenses totaling $1.5 million and $3.0 million, respectively, related to an expected shortfall in meeting a 2017 minimum FI Share commitment recorded in FI Share and other third-party costs on our consolidated statement of operations. In the third quarter of 2017, we amended the agreement with the FI partner and removed the 2017 minimum FI Share commitment, resulting in a reversal of our $3.0 million accrued shortfall recorded as of June 30, 2017.
Common Stock Warrants Issued in Connection with the Series G Stock Financing
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, which was determined based on the volume weighted average closing price of our common stock for the 30 trading days up to and including August 7, 2018. Based on this calculation, the warrants allow for the purchase of 792,434 shares of common stock at an exercise price of $0.0004 per share. All warrants were subsequently exercised, resulting in the issuance of 792,434 shares of our common stock.
Reverse Stock Split
On January 26, 2018, our board of directors approved an amended and restated certificate of incorporation to (1) effect a reverse split on outstanding shares of our common stock and redeemable convertible preferred stock on a one-for-four basis (the “Reverse Stock Split”), (2) modify the threshold for automatic conversion of our preferred stock into shares of our common stock in connection with an initial public offering to eliminate the requirement of gross proceeds to the Company of not less than $70.0 million and (3) authorize us to issue up to 100,000,000 shares of common stock, $0.0001 par value per share and 25,000,000 shares of redeemable convertible preferred stock, $0.0001 par value per share (collectively, the “Charter Amendment”). The authorized shares and par values of our common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. The Charter Amendment was approved by the Company’s stockholders on January 26, 2018 and became effective upon the filing of the Charter Amendment with the State of Delaware on January 26, 2018. All issued and outstanding common stock and preferred stock and related share and per share amounts contained in these financial statements have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented.


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Our Business Model
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 ("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 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 ("CPS") and (2) Cost per Redemption ("CPR"). 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.

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 (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 (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.
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.
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. 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 ("CPM") basis. For the six months ended June 30, 2017 and 2018, our Other Platform Solutions revenue was $6.3 million and $1.1 million, respectively. Revenue from Other Platform Solutions delivered as a managed service represented a significant majority of our total Other Platform Solutions revenue until it was discontinued on July 31, 2017.


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During the second quarter of 2018, we began a strategic shift to focus the majority of our efforts and resources to support the growth of Cardlytics Direct. As a result, 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.
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 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 innovation within our core technology.
Non-GAAP Measures and Other Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate our future performance. Our metrics may be calculated in a manner different than similar metrics used by other companies.


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Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
 
(in thousands, except ARPU)
FI MAUs
53,734

 
58,808

 
52,824

 
58,746

ARPU
$
0.54

 
$
0.60

 
$
1.01

 
$
1.14

Adjusted contribution(1)
$
13,486

 
$
16,169

 
$
24,081

 
$
30,393

Adjusted EBITDA(1)
$
(2,824
)
 
$
(2,164
)
 
$
(7,736
)
 
$
(5,240
)
(1)
Adjusted contribution and Adjusted EBITDA includes the impact of an accrued expense totaling $1.5 million and $3.0 million during the three and six months ended June 30, 2017, respectively, related to an expected shortfall in meeting a minimum FI Share commitment. There was no corresponding accrued expense during the three and six months ended June 30, 2018

Monthly Active Users
We define FI monthly active users ("FI MAUs"), as customers or accounts 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 ("ARPU"), as the total Cardlytics Direct revenue generated in the applicable period calculated in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), divided by the average number of FI MAUs in the applicable period. We believe that ARPU is an indicator of the value of our relationships with our FI partners with respect to Cardlytics Direct.
Adjusted Contribution
Adjusted contribution represents our revenue less our FI Share and other third-party costs excluding non-cash equity expense included in FI Share and amortization and impairment of deferred FI implementation costs. During the first quarter of 2018, we refined our definition of adjusted contribution to exclude the impact of non–cash charges related to the issuance of equity to our FI partners and the impact of amortization and impairment of deferred FI implementation costs. We believe these changes are warranted and appropriate since these investments are expected to yield meaningful long-term relationships with our FI partners and provide incentive for our FI partners to invest in the user interfaces that complement our platform. We have recast all historical disclosures of adjusted contribution for the periods presented.
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, exclusive of exclusive of non-cash equity expense included in FI Share and amortization and impairment of deferred FI implementation 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 10—Segments  to our condensed consolidated financial statements appearing elsewhere in this Quarterly 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:


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Table of Contents

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
 
(in thousands)
Revenue
$
32,812

 
$
35,570

 
$
59,693

 
$
68,283

Minus:
 
 
 
 
 
 
 
FI Share and other third-party costs(1)
19,326

 
19,401

 
35,612

 
37,890

Adjusted contribution(2)
$
13,486

 
$
16,169

 
$
24,081

 
$
30,393

(1)
FI Share and other third-party costs presented above excludes non-cash equity expense included in FI Share and amortization and impairment of deferred FI implementation costs, which are detailed below in our reconciliation of GAAP net loss to non-GAAP adjusted EBITDA.
(2)
Adjusted contribution includes the impact of an accrued expense totaling $1.5 million and $3.0 million during the three and six months ended June 30, 2017, respectively, related to an expected shortfall in meeting a minimum FI Share commitment. There was no corresponding accrued expense during the three and six months ended June 30, 2018

Adjusted EBITDA
Adjusted EBITDA represents our net loss before income tax benefit; interest expense, net; depreciation and amortization expense; stock-based compensation expense; change in fair value of warrant liabilities; 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; and non-cash equity expense recognized in FI Share. 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 liabilities, change in fair value of convertible promissory notes, foreign currency (gain) loss, amortization and impairment of FI implementation costs, depreciation and amortization expense, stock-based compensation expense and non-cash equity expense included in FI Share. Notably, any expense we accrue related to minimum FI Share commitments in connection with agreements with certain FI partners we do not add back to net loss in order to calculate adjusted EBITDA. Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends and to generate future operating plans, make strategic decisions regarding the allocation of capital and invest in initiatives that are focused on cultivating new markets for our solution. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Adjusted EBITDA is not a measure calculated in accordance with GAAP.
We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Nevertheless, use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (1) adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (2) adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation and equity instruments issued to our FI partners; (3) adjusted EBITDA does not reflect tax payments or receipts that may represent a reduction or increase in cash available to us and (4) other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of the metric as a comparative measure. Because of these and other limitations, you should consider adjusted EBITDA alongside our net loss and other GAAP financial results.


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The following table presents a reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP measure, for each of the periods indicated:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2018
 
2017
 
2018
 
(in thousands)
Net loss
$
(648
)
 
$
(13,053
)
 
$
(13,111
)
 
$
(33,108
)
Plus:
 
 
 
 
 
 
 
Interest expense, net
2,020