UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2022
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
| (Exact Name of Registrant as Specified in its Charter) | |||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices, including zip code) | |||||||||||
| (Registrant’s telephone number, including area code) | |||||||||||
| Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2022, there were 34,115,110 shares outstanding of the registrant’s common stock, par value $0.0001.
CARDLYTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
| PART I. | FINANCIAL INFORMATION | |||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. | OTHER INFORMATION | |||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
RISK FACTORS SUMMARY
Our business is subject to a number of risks and uncertainties, including those risks discussed at-length in the section below titled “Risk Factors.” These risks include, among others, the following:
Risks Related to our Business and Industry
•The ongoing COVID-19 pandemic could materially and adversely affect our business, results of operations and financial condition.
•Unfavorable conditions in the global economy or the industries we serve could limit our ability to grow our business and negatively affect our operating results.
•Our quarterly operating results have fluctuated and may continue to vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.
•We may not be able to sustain our revenue and billings growth rate in the future.
•We are dependent upon the Cardlytics platform.
•If we fail to identify and respond effectively to rapidly changing technology and industry needs, our solutions may become less competitive or obsolete.
•We are substantially dependent on Chase, Bank of America and a limited number of other FI partners.
•The market in which we participate is competitive, and we may not be able to compete successfully with our current or future competitors.
•If we are unable to successfully integrate Dosh’s, Bridg’s and Entertainment's businesses and employees, it could have an adverse effect on our future results and the market price of our common stock.
•We have identified a material weakness in our internal control over financial reporting, and if our remediation of such material weakness is not effective, or if we fail to develop and maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.
1
Risks Related to our Outstanding Convertible Senior Notes
•Servicing our debt may require a significant amount of cash. We may not have sufficient cash flow from our business to pay our indebtedness, and we may not have the ability to raise the funds necessary to settle for cash conversions of the Notes or to repurchase the Notes for cash upon a fundamental change, which could adversely affect our business and results of operations.
•We are subject to counterparty risk with respect to the Capped Calls.
Risks Related to Regulatory and Intellectual Property Matters
•Legislation and regulation of online businesses, including privacy and data protection regimes, is expansive, not clearly defined and rapidly evolving. Such regulation could create unexpected costs, subject us to enforcement actions for compliance failures, or restrict portions of our business or cause us to change our business model.
•Failure to protect our proprietary technology and intellectual property rights could substantially harm our business, financial condition and operating results.
Risks Related to Ownership of our Common Stock
•The market price of our common stock has been and is likely to continue to be volatile.
•Anti-takeover provisions in our charter documents and under Delaware law could make acquiring us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
CARDLYTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except par value amounts)
| December 31, 2021 | March 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts receivable and contract assets, net | |||||||||||
| Other receivables | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Total current assets | |||||||||||
| Long-term assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use assets under operating leases, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Capitalized software development costs, net | |||||||||||
| Other long-term assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders' equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities: | |||||||||||
| Accrued compensation | |||||||||||
| Accrued expenses | |||||||||||
| Partner Share liability | |||||||||||
| Consumer Incentive liability | |||||||||||
| Deferred revenue | |||||||||||
| Current operating lease liabilities | |||||||||||
| Current contingent consideration | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Convertible senior notes, net | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Deferred liabilities | |||||||||||
| Long-term contingent consideration | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | $ | $ | |||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | $ | $ | |||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See notes to the condensed consolidated financial statements
3
CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2022 | ||||||||||
| Revenue | $ | $ | |||||||||
| Costs and expenses: | |||||||||||
| Partner Share and other third-party costs | |||||||||||
| Delivery costs | |||||||||||
| Sales and marketing expense | |||||||||||
| Research and development expense | |||||||||||
| General and administration expense | |||||||||||
| Acquisition and integration costs (benefit) | ( | ||||||||||
| Change in fair value of contingent consideration | ( | ||||||||||
| Depreciation and amortization expense | |||||||||||
| Total costs and expenses | |||||||||||
| Operating (loss) income | ( | ||||||||||
| Other (expense) income: | |||||||||||
| Interest expense, net | ( | ( | |||||||||
| Foreign currency gain (loss) | ( | ||||||||||
| Total other expense | ( | ( | |||||||||
| (Loss) income before income taxes | ( | ||||||||||
| Income tax benefit | |||||||||||
| Net (loss) income | ( | ||||||||||
| Net (loss) income attributable to common stockholders | $ | ( | $ | ||||||||
| Net (loss) income per share attributable to common stockholders: | |||||||||||
| Basic | $ | ( | $ | ||||||||
| Diluted | $ | ( | $ | ||||||||
| Weighted-average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See notes to the condensed consolidated financial statements
4
CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(Amounts in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2022 | ||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Other comprehensive (loss) income: | |||||||||||
| Foreign currency translation adjustments | ( | ||||||||||
| Total comprehensive (loss) income | $ | ( | $ | ||||||||
See notes to the condensed consolidated financial statements
5
CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(Amounts in thousands)
Three Months Ended March 31, 2022:
| Additional Paid-In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance – December 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Cumulative effect upon adoption of ASU 2020-06 | — | — | (51,417) | — | 11,312 | (40,105) | |||||||||||||||||||||||||||||
| Exercise of common stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Settlement of restricted stock | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Common stock purchase consideration for the acquisition of Entertainment | — | — | — | ||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance – March 31, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
Three Months Ended March 31, 2021:
| Additional Paid-In-Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance –December 31, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Exercise of common stock options | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Settlement of restricted stock | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | ||||||||||||||||||||||||||||||||
| Common stock purchase consideration for the acquisition of Dosh | — | — | — | — | |||||||||||||||||||||||||||||||
| Fair value of assumed Dosh options attributable to pre-combination service | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance – March 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
See notes to the condensed consolidated financial statements
6
CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2022 | ||||||||||
| Operating activities | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | |||||||||||
| Credit loss expense | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of financing costs charged to interest expense | |||||||||||
| Accretion of debt discount and non-cash interest expense | |||||||||||
| Amortization of right-of-use assets | |||||||||||
| Stock-based compensation expense | |||||||||||
| Change in fair value of contingent consideration | ( | ||||||||||
| Other non-cash (income) expense, net | ( | ||||||||||
| Deferred implementation costs | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Other accrued expenses | ( | ||||||||||
| Partner Share liability | ( | ( | |||||||||
| Consumer Incentive liability | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Investing activities | |||||||||||
| Acquisition of property and equipment | ( | ( | |||||||||
| Acquisition of patents | ( | ( | |||||||||
| Capitalized software development costs | ( | ( | |||||||||
| Business acquisition, net of cash acquired | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Principal payments of debt | ( | ( | |||||||||
| Proceeds from issuance of common stock | |||||||||||
| Debt issuance costs | ( | ||||||||||
| Net cash received from financing activities | |||||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | ( | ||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash — Beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash — End of period | $ | $ | |||||||||
See notes to the condensed consolidated financial statements
7
CARDLYTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2022 | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheet: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash — End of period | $ | $ | |||||||||
| Supplemental schedule of non-cash investing and financing activities: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Amounts accrued for issuance costs of equity | $ | $ | |||||||||
| Common stock purchase consideration for the acquisition of Dosh | $ | $ | |||||||||
| Common stock purchase consideration for acquisition of Entertainment | $ | — | $ | 11,937 | |||||||
| Amounts accrued for property and equipment and capitalized software development costs | $ | $ | |||||||||
See notes to the condensed consolidated financial statements
8
CARDLYTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.OVERVIEW OF BUSINESS AND BASIS OF PRESENTATION
Cardlytics, Inc. (“we,” “our,” “us,” the “Company,” or “Cardlytics”) is a Delaware corporation and was formed on June 26, 2008. We operate an advertising platform within our own and our partners' digital channels, which includes online, mobile applications, email, and various real-time notifications (the "Cardlytics platform"). We also operate a customer data platform which utilizes point-of-sale data, including product-level purchase data, to enable marketers, in a privacy-protective manner, to perform analytics and targeted loyalty marketing and to measure the impact of their marketing (the "Bridg platform"). The partners for the Cardlytics platform are predominantly financial institutions ("FI partners") who provide us with access to their anonymized purchase data and digital banking customers. The partners for the Bridg platform are merchants ("merchant data partners") who provide us with access to their point-of-sale data, including product-level purchase data. By applying advanced analytics to the purchase data we receive, we make it actionable, helping marketers identify, reach and influence likely buyers at scale, and measure the true sales impact of their marketing spend. We have strong relationships with leading marketers across a variety of industries, including retail, restaurant, travel and entertainment, direct-to-consumer, and grocery and gas. Using our purchase intelligence, we present customers with offers to save money at a time when they are thinking of their finances.
We also operate through (1) Dosh Holdings, LLC, a wholly owned and operated subsidiary in the United States, (2) HSP EPI Acquisition, LLC ("Entertainment"), a wholly owned and operated subsidiary in the United States, (3) Cardlytics UK Limited, a wholly owned and operated subsidiary registered as a private limited company in England and Wales, and (4) Cardlytics Services India Private Limited, a wholly owned and operated subsidiary registered as a private limited company in India.
Unaudited Interim Results
The accompanying unaudited interim condensed consolidated financial statements and information have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all normal and recurring adjustments considered necessary to present fairly the financial position, results of operations, and cash flows for the periods presented. The results for interim periods presented are not necessarily indicative of the results to be expected for the full year due to the seasonality of our business, which has been historically impacted by higher consumer spending during the fourth quarter. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included on our Annual Report on Form 10-K ("Annual Report") and Form 10-K/A for the fiscal year ended December 31, 2021.
Acquisitions
On January 7, 2022, we purchased Entertainment for $13.0 million in equity at an agreed-upon price of $66.52 per share, subject to $1.1 million of fair value adjustments based on the acquisition close date, and $2.3 million in cash, subject to $0.4 million of adjustments, for an acquisition date fair value of $14.6 million.
On May 5, 2021, we completed the acquisition of Bridg for purchase consideration of $578.9 million. The purchase consideration consisted of a $350.0 million cash purchase price, subject to $2.8 million of adjustments and escrows, and contingent consideration with a fair value of $230.9 million at the time of the acquisition related to additional potential future payments. At least 30% of the potential future payments will be in cash, with the remainder to be paid in cash or our common stock, at our option.
On March 5, 2021, we completed the acquisition of Dosh for purchase consideration of $277.6 million in a combination of cash and common stock. The total purchase consideration consisted of a $150.0 million cash purchase price, subject to $6.6 million of adjustments and escrows, and $125.0 million of shares of our common stock at an agreed-upon price of $136.33 per share, subject to $7.6 million of fair value adjustments based upon our close date, for an acquisition date fair value of $117.4 million.
Refer to Note 3 - Business Combinations for further information.
Public Offering of Common Stock
On March 5, 2021, we closed a public equity offering in which we sold 3,850,000 shares of common stock at a public offering price of $130.00 per share for total gross proceeds of $500.5 million. We received total net proceeds of $484.0 million after deducting underwriting discounts and commissions of $16.3 million and offering costs of $0.2 million.
9
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Significant items subject to such estimates and assumptions include revenue recognition, internal-use software development costs, stock-based compensation, allowance for doubtful accounts, valuation of acquired intangible assets, valuation of contingent consideration for Bridg, income tax including valuation allowance and contingencies. We base our estimates on historical experience and on assumptions that we believe are reasonable. Changes in facts or circumstances may cause us to change our assumptions and estimates in future periods and it is possible that actual results could differ from our current or revised future estimates.
Leases
We have various non-cancellable operating and finance leases for our office spaces, data centers and operational assets with lease periods expiring between 2022 and 2025.
Lease assets and liabilities, net, are as follows (in thousands):
| Lease Type | Consolidated Balance Sheets Location | December 31, 2021 | March 31, 2022 | ||||||||||||||
| Operating lease assets | Right-of-use assets under operating leases, net | $ | $ | ||||||||||||||
| Finance lease assets | Property and equipment, net | ||||||||||||||||
| Total lease assets | |||||||||||||||||
| Operating lease liabilities, current | Current operating lease liabilities | ||||||||||||||||
| Operating lease liabilities, long-term | Long-term operating lease liabilities | ||||||||||||||||
| Finance lease liabilities, current | Accrued expenses | ||||||||||||||||
| Finance lease liabilities, long-term | Other long-term liabilities | ||||||||||||||||
| Total lease liabilities | $ | $ | |||||||||||||||
Impacts of COVID-19 Pandemic
The COVID-19 pandemic resulted in a global slowdown of economic activity that disrupted supply and demand for a broad variety of goods and services and consumer discretionary spending, including spending by consumers with our marketers. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. Actual results could differ from those estimates and any such differences may be material to our financial statements. Due to continuing uncertainty regarding the severity and duration of the impacts of COVID-19 on the global economy, we will continue to monitor this situation and the potential impacts to our business.
10
2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING STANDARDS
Significant Accounting Policies
There have been no changes to our significant accounting policies, other than the standards adopted below. These unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare our audited annual consolidated financial statements for the year ended December 31, 2021, and include, in the opinion of management, all adjustments, consisting of normal recurring items, necessary for the fair statement of the condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion Options (“Subtopic 470-20”) and Derivatives and Hedging—Contracts in Entity’s Own Equity (“Subtopic 815-40”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. ASU 2020-06 also improves and amends the related Earnings Per Share guidance for both Subtopics. The ASU is part of the FASB's simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP, as it removes the requirement to bifurcate our Convertible Senior Notes (the "Notes") into a separate liability and equity component. As a result, it more closely aligns the effective interest rate with the coupon rate of the Notes. ASU 2020-06 is effective for annual reporting periods beginning after December 15, 2021. On January 1, 2022, we adopted this standard using the modified retrospective method which allowed for a cumulative-effect adjustment to the opening balance sheet without restating prior periods. As we did not elect the fair value option in the process, the Notes, net of issuance costs, are accounted for as a single liability measured at amortized cost. Upon adoption, we recorded a decrease in accumulated deficit of $11.3 million, an increase to convertible senior notes, net of $40.2 million and a decrease to additional paid in capital of $51.5 million. Refer to Note 6, “Debt and Financing Arrangements” for further information about the Notes.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which require an entity (acquirer) to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with Topic 606, at fair value on the acquisition date. ASU 2020-08 will be effective for annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendments is permitted, including adoption in an interim period. On January 1, 2022 we early adopted this standard with no material impact to our financial statements.
11
3. BUSINESS COMBINATIONS
Our acquisitions were accounted for as business combinations and the total purchase consideration of each was allocated to the net tangible and intangible assets and liabilities acquired based on their fair values on the acquisition dates with the remaining amounts recorded as goodwill. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Quarterly Report on Form 10-Q may be adjusted during the measurement period for each acquisition of up to 12 months from the dates of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.
During the three months ended March 31, 2021 and 2022, respectively, we incurred $7.0 million of costs and $4.6 million of benefit in connection with the acquisitions of Dosh, Bridg and Entertainment, respectively. These costs are included in acquisition and integration costs (benefit) on our condensed consolidated statements of operations and primarily represent legal fees. The results of Entertainment have been included in the consolidated financial statements since its date of acquisition. For the three months ended March 31, 2022, Entertainment's combined revenue included in the consolidated statement of operations was approximately 3 % of consolidated revenue. Due to the continued integration of the combined businesses, it was impractical to determine the earnings.
For the acquisitions of Dosh, Bridg and Entertainment, as applicable, the estimated fair values of merchant relationships, partner relationships, and the card-linked subscriber base was determined using the replacement cost method and lost profits, as applicable, which required us to estimate the costs to recreate an asset of equivalent utility at prices available at the time of the valuation analysis and the lost profits over the period of time to recreate the asset. Trade names were valued using the "relief-from-royalty" approach. This method assumes that trademarks and trade names have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method required us to estimate the future revenues for the related brands, the appropriate royalty rates and the weighted-average costs of capital. Developed technology for Entertainment was valued using the replacement cost method, which required us to estimate the costs to recreate an asset of equivalent utility at prices available at the time of the valuation analysis. Developed technology for Dosh and Bridg was valued using the excess earnings method, an income approach. Under the excess earnings method, the fair value of an intangible asset is equal to the present value of the asset’s projected incremental after-tax cash flows (excess earnings) remaining after deducting the market rates of return on the estimated value of contributory assets (contributory charge) over its remaining useful life.
Acquisition of Entertainment
On January 7, 2022, we completed the acquisition of Entertainment for purchase consideration of $14.6 million, as presented below (in thousands):
| January 7, 2022 | |||||
| Fair value of common stock transferred | $ | ||||
| Cash paid to extinguish acquiree debt | |||||
| Cash paid to settle pre-acquisition liabilities and acquiree deal-related costs | |||||
| Cash paid to membership interest holders | 24 | ||||
| Total purchase consideration | $ | ||||
The following table presents the preliminary purchase consideration allocation recorded on our condensed consolidated balance sheet as of the acquisition date (in thousands):
| January 7, 2022 | |||||
| Cash and cash equivalents | $ | ||||
| Accounts receivable and other assets | |||||
| Intangible assets | |||||
| Goodwill | |||||
| Accounts payable and other liabilities | ( | ||||
| Total purchase consideration | $ | ||||
The goodwill was primarily attributed to the value of future synergies created with our current and future offerings. Goodwill is not expected to be deductible for income tax purposes.
12
The following table presents the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (dollars in thousands):
| Fair Value | Useful life (in years) | ||||||||||
| Trade name | $ | ||||||||||
| Developed technology | |||||||||||
| Merchant relationships | |||||||||||
Acquisition of Bridg
On May 5, 2021, we completed the acquisition of Bridg for purchase consideration of $578.9 million, as presented below (in thousands):
| May 5, 2021 | |||||
| Cash paid to common and preferred stockholders, warrant holders and vested option holders | $ | ||||
| Cash paid to extinguish acquiree debt | |||||
| Cash paid to settle pre-acquisition liabilities and acquiree deal-related costs | |||||
| Fair value of contingent consideration | |||||
| Fair value of assumed options attributable to pre-combination service | |||||
| Total purchase consideration | $ | ||||
The following table presents the preliminary purchase consideration allocation recorded on our condensed consolidated balance sheet as of the acquisition date (in thousands):
| May 5, 2021 | |||||
| Cash and cash equivalents | $ | ||||
| Accounts receivable and other assets | |||||
| Intangible assets | |||||
| Goodwill | |||||
| Accounts payable and other liabilities | ( | ||||
| Deferred tax liabilities | ( | ||||
| Total purchase consideration | $ | ||||
The goodwill was primarily attributed to the value of future growth expected for the Bridg platform and of synergies created with our current and future offerings. Goodwill is not expected to be deductible for income tax purposes.
As a part of this acquisition, we have agreed to make a First Anniversary Payment equal to 20 times the ARR based on the month preceding the anniversary, less $12.5 million, and a Second Anniversary Payment equal to 15 times the ARR for customers as of the first anniversary based on the month preceding the second anniversary, less the prior ARR at the first anniversary. The Second Anniversary Payment is subject to a specified cap. We have agreed to pay at least 30% of the First Anniversary Payment and the Second Anniversary Payment in cash, with the remainder to be paid in cash or our common stock, at our option. As of March 31, 2022, the brokerage fee of the First Anniversary Payment is expected to be $7.6 million, reflected in accrued expenses on our condensed consolidated balance sheet, and the brokerage fee of the Second Anniversary Payment is expected to be $4.0 million, reflected in other long-term liabilities on our condensed consolidated balance sheet.
The following table presents the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (dollars in thousands):
| Fair Value | Useful life (in years) | ||||||||||
| Trade name | $ | ||||||||||
| Developed technology | |||||||||||
| Merchant relationships | |||||||||||
13
Acquisition of Dosh
On March 5, 2021, we completed our acquisition of Dosh for purchase consideration of $277.6 million, as presented below (in thousands):
| March 5, 2021 | |||||
| Cash paid to common and preferred stockholders, warrant holders and vested option holders | $ | ||||
| Cash paid to extinguish acquiree debt | |||||
| Cash paid to settle pre-acquisition liabilities and acquiree deal-related costs | |||||
| Fair value of common stock transferred | |||||
| Fair value of assumed options attributable to pre-combination service | |||||
| Total purchase consideration | $ | ||||
The following table presents the purchase consideration allocation recorded on our condensed consolidated balance sheet as of the acquisition date (in thousands):
| March 5, 2021 | |||||
| Cash and cash equivalents | $ | ||||
| Accounts receivable and other assets | |||||
| Intangible assets | |||||
| Goodwill | |||||
| Accounts payable and other liabilities | ( | ||||
| Consumer Incentive liability | ( | ||||
| Deferred tax liabilities | ( | ||||
| Total purchase consideration | $ | ||||
The goodwill was primarily attributed to the value of synergies created with the Company’s current and future offerings and of future growth expected from the labor force of Dosh. Goodwill is not expected to be deductible for income tax purposes.
The following table presents the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (dollars in thousands):
| Fair Value | Useful life (in years) | ||||||||||
| Trade name | $ | ||||||||||
| Developed technology | |||||||||||
| Merchant relationships | |||||||||||
| Partner relationships | |||||||||||
| Card-linked subscriber user base | $ | ||||||||||
Pro forma consolidated results of operations
The following unaudited pro forma financial information presents combined results of operations for the period presented as if the acquisition of Entertainment had been completed on January 1, 2021 and the acquisitions of Dosh and Bridg had been completed on January 1, 2020. The pro forma information includes adjustments to depreciation expense for property and equipment acquired, to amortize expense for the intangible assets acquired, and to eliminate the acquisition transaction expenses recognized in the period. The pro forma financial information is for informational purposes only and is not necessarily indicative of the consolidated results of operations of the combined business had the acquisitions actually occurred on January 1, 2021 and January 1, 2020, respectively, or the results of future operations of the combined business. For instance, planned or expected operational synergies following the acquisition are not reflected in the pro forma information. Consequently, actual results will differ from the unaudited pro forma information presented below.
14
| Three Months Ended March 31, | |||||||||||
| 2021 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Revenue | $ | $ | |||||||||
| Net loss | $ | ( | $ | ||||||||
4. GOODWILL AND ACQUIRED INTANGIBLES
The changes in the carrying amount of goodwill for the three months ended March 31, 2022 are as follows (in thousands):
| Cardlytics Platform | Bridg Platform | Consolidated | |||||||||||||||
Balance as of December 31, 2021 | $ | $ | $ | ||||||||||||||
| Goodwill additions | |||||||||||||||||
Balance as of March 31, 2022 | $ | $ | $ | ||||||||||||||
Acquired intangible assets subject to amortization as of March 31, 2022 were as follows:
| Cost | Accumulated Amortization | Net | Weighted Average Remaining Useful Life | |||||||||||||||||||||||
| (in thousands) | (in years) | |||||||||||||||||||||||||
| Trade name | $ | $ | ( | $ | ||||||||||||||||||||||
| Developed technology | ( | |||||||||||||||||||||||||
| Merchant relationships | ( | |||||||||||||||||||||||||
| Partner relationships | ( | |||||||||||||||||||||||||
| Card-linked subscriber user base | ( | |||||||||||||||||||||||||
| Total other intangible assets | $ | $ | ( | $ | ||||||||||||||||||||||
Amortization expense of acquired intangibles for the three months ended March 31, 2022 was $7.1 million.
As of March 31, 2022, we expect amortization expense in future periods to be as follows (in thousands):
| Amount | ||||||||
| 2022 (remainder of year) | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total expected future amortization expense | $ | |||||||
15
5. REVENUE
The Cardlytics Platform
The Cardlytics platform is our proprietary native bank advertising channel that enables marketers to reach consumers through the FIs' trusted and frequently visited digital banking channels. Working with the marketer, we design a campaign that targets customers based on their purchase history. The consumer is offered an incentive to make a purchase from the marketer within a specified period. We use a portion of the fees that we collect from marketers to provide these consumer incentives to our FIs’ customers after they make qualifying purchases ("Consumer Incentives"). Leveraging our powerful purchase intelligence platform, we are able to create compelling Consumer Incentives that have the potential to increase return on advertising spend for marketers and measure the effectiveness of the advertising. Consumer Incentives totaled $23.1 million and $30.3 million during the three months ended March 31, 2021 and 2022, respectively. We pay certain partners a negotiated and fixed percentage of our billings to marketers less any Consumer Incentives that we pay to partners’ customers and certain third-party data costs ("Partner Share"). Revenue on our consolidated statements of operation is presented net of Consumer Incentives and gross of Partner Share.
We price our advertising campaigns predominantly in two ways: (1) Cost per Served Sale (“CPS”), and (2) Cost per Redemption (“CPR”).
•CPS. Our primary pricing model is CPS, which we created to meet the media-buying preferences of marketers. We generate revenue by charging a percentage of all purchases from the marketer by consumers who (1) are served marketing, and (2) subsequently make a purchase from the marketer during the campaign period, regardless of whether consumers select the marketing and thereby becomes eligible to earn the applicable Consumer Incentive. We set CPS rates for marketers based on our expectation of the marketer’s return on advertising spend for the relevant campaign. Additionally, we set the amount of the Consumer Incentives payable for each campaign based on our estimation of our ability to drive incremental sales for the marketer.
•CPR. Under our CPR pricing model, marketers generally specify and fund the Consumer Incentive and pay us a separate negotiated, fixed marketing fee for each purchase that we generate. We generally generate revenue if the consumer (1) is served marketing, (2) selects the marketing and thereby becomes eligible to earn the applicable Consumer Incentive, and (3) makes a qualifying purchase from the marketer during the campaign period. We set the CPR fee for marketers based on our estimation of the marketers’ return on spend for the relevant campaign.
The following table summarizes revenue from the Cardlytics platform by pricing model (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2022 | ||||||||||
| Cost per Served Sale | $ | $ | |||||||||
| Cost per Redemption | |||||||||||
| Other | |||||||||||
| Cardlytics platform revenue | $ | $ | |||||||||
The Bridg platform generates revenue through the sale of subscriptions to our cloud-based customer-data platform and the delivery of professional services, such as implementation, onboarding and technical support in connection with each subscription. We recognize subscription revenue on a ratable basis over the contract term beginning on the date that our service is made available to the customer. For non-recurring services or transactional based fees dependent on system usage, revenue is recognized as services are delivered. Our subscription contracts are generally 6 to 36 months in duration and are generally billed in advance on a monthly, quarterly or annual basis.
16
The following table summarizes revenue from the Bridg platform (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2022 | ||||||||||
| Subscription revenue | $ | $ | |||||||||
| Other revenue | |||||||||||
Bridg platform revenue(1) | $ | $ | |||||||||
(1)Bridg was acquired May 5, 2021, Refer to Note 3 - Business Combinations for more information.
The following table summarizes contract balances from the Bridg platform (in thousands):
| Contract Balance Type | Consolidated Balance Sheets Location | December 31, 2021 | March 31, 2022 | |||||||||||||||||
| Contract assets, current | Accounts receivable and contract assets, net | $ | $ | |||||||||||||||||
| Contract assets, long-term | Other long-term assets, net | |||||||||||||||||||
| Total contract assets | $ | $ | ||||||||||||||||||
| Contract liabilities, current | Deferred revenue | $ | $ | |||||||||||||||||
| Contract liabilities, long-term | Long-term deferred revenue | |||||||||||||||||||
| Total contract liabilities | $ | $ | ||||||||||||||||||
During the three months ended March 31, 2022, we recognized $0.4 million of revenue related to amounts that were included in deferred revenue as of December 31, 2021.
The following information represents the total transaction price for the remaining performance obligations as of March 31, 2022 related to contracts expected to be recognized over future periods. This includes deferred revenue on our consolidated balance sheets and contracted amounts that will be invoiced and recognized as revenue in future periods. As of March 31, 2022, we had $18.0 million of remaining performance obligations, of which $10.2 million is expected to be recognized in the next twelve months , with the remaining amount recognized thereafter. The remaining performance obligations exclude future transaction revenue of variable consideration that are allocated to wholly unsatisfied distinct services that form part of a single performance obligation and meets certain variable allocation criteria.
6. DEBT AND FINANCING ARRANGEMENTS
2020 Convertible Senior Notes
On September 22, 2020, we issued convertible senior notes with an aggregate principal amount of $230.0 million bearing an interest rate of 1.00 % due in 2025 (the “Notes”), including the exercise in full of the initial purchasers’ option to purchase up to an additional $30.0 million principal amount of the Notes. The Notes were issued pursuant to an indenture, dated September 22, 2020 (the “Indenture”), between us and U.S. Bank National Association, as trustee.
The net proceeds from this offering were $222.7 million, after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by us. We used $26.5 million of the net proceeds to pay the cost of the capped call transactions described below.
17
The Notes are general senior, unsecured obligations and will mature on September 15, 2025, unless earlier converted, redeemed or repurchased. The Notes bear interest at a rate of 1.00 % per year, payable semiannually in arrears on March 15 and September 15 of each year, which began on March 15, 2021. The Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding June 15, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the Notes on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of common stock and the conversion rate for the Notes on each such trading day; (3) if we call such Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events as set forth in the Indenture. The closing trading price of our common stock was not in excess of 130 % of the conversion price for more than 20 trading days during the preceding 30 consecutive trading days as of March 31, 2022, thus the Notes are not convertible at the option of the holders during the quarter ending June 30, 2022. The Notes may be convertible thereafter if one or more of the conversion conditions is satisfied during future measurement periods. On or after June 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may convert all or any portion of their Notes at any time, regardless of the foregoing circumstances. Upon conversion, we may satisfy our conversion obligation by paying and/or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at our election, in the manner and subject to the terms and conditions provided in the Indenture. We currently intend to settle the principal amount of the Notes with cash.
The conversion rate for the Notes will initially be 11.7457 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $85.14 per share of common stock. The conversion rate for the Notes is subject to adjustment under certain circumstances in accordance with the terms of the Indenture. In addition, following certain corporate events that occur prior to the maturity date of the Notes or if we deliver a notice of redemption in respect of the Notes, we will, in certain circumstances, increase the conversion rate of the Notes for a holder who elects to convert its Notes in connection with such a corporate event or convert its notes called for redemption during the related redemption period (as defined in the Indenture), as the case may be.
We may not redeem the Notes prior to September 20, 2023. We may redeem for cash all or any portion of the Notes, at our option, on or after September 20, 2023 and prior to the 36 th scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common stock has been at least 130 % of the conversion price for the Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Notes. If we elect to redeem less than all of the Notes, at least $75.0 million aggregate principal amount of Notes must be outstanding and not subject to redemption as of the relevant redemption notice date.
If we undergo a Fundamental Change (as defined in the Indenture), then, except as set forth in the Indenture, holders may require, subject to certain exceptions, us to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Indenture includes customary covenants and sets forth certain events of default after which the Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving us after which the Notes become automatically due and payable. The following events are considered “events of default” under the Indenture:
•default in any payment of interest on any Note when due and payable and the default continues for a period of 30 days;
•default in the payment of principal of any Note when due and payable at its stated maturity, upon optional redemption, upon any required repurchase, upon declaration of acceleration or otherwise;
•failure by us to comply with our obligation to convert the Notes in accordance with the Indenture upon exercise of a holder’s conversion right, and such failure continues for business days;
•failure by us to give a fundamental change notice, notice of a make-whole fundamental change or notice of a specified corporate event, in each case when due and such failure continues for business day;
•failure by us to comply with its obligations in respect of any consolidation, merger or sale of assets;
18
•failure by us to comply with any of our other agreements in the Notes or the Indenture for 60 days after written notice of such failure from the trustee or the holders of at least 25 % in principal amount of the Notes then outstanding;
•default by us or any of our significant subsidiaries (as defined in the Indenture) with respect to any mortgage, agreement or other instrument under which there may be outstanding, or by which there may be secured or evidenced, any indebtedness for money borrowed in excess of $35,000,000 (or its foreign currency equivalent), in the aggregate of us and/or any such significant subsidiary, whether such indebtedness now exists or shall hereafter be created, (i) resulting in such indebtedness becoming or being declared due and payable prior to its stated maturity date or (ii) constituting a failure to pay the principal of any such indebtedness when due and payable (after the expiration of all applicable grace periods) at its stated maturity, upon required repurchase, upon declaration of acceleration or otherwise, and in the cases of clauses (i) and (ii), such acceleration shall not have been rescinded or annulled or such failure to pay or default shall not have been cured or waived, or such indebtedness is not paid or discharged, as the case may be, within 30 days after written notice to us by the trustee or to us and the trustee by holders of at least 25 % in aggregate principal amount of the Notes then outstanding in accordance with the Indenture; and
•certain events of bankruptcy, insolvency or reorganization of us or any of our significant subsidiaries.
If certain bankruptcy and insolvency-related events of default with respect to us occur, the principal of, and accrued and unpaid interest on, all of the then outstanding Notes shall automatically become due and payable. If an event of default with respect to the Notes, other than certain bankruptcy and insolvency-related events of default with respect to us, occurs and is continuing, the trustee by notice to us or the holders of at least 25 % in principal amount of the outstanding Notes by notice to us and the trustee, may, and the trustee at the request of such holders shall, declare the principal of, and accrued and unpaid interest on, all of the then-outstanding Notes to be due and payable. Notwithstanding the foregoing, the Indenture provides that, to the extent we so elect, the sole remedy for an event of default relating to certain failures by us to comply with certain reporting covenants in the Indenture will, for the first 365 days after the occurrence of such event of default, consist exclusively of the right to receive additional interest on the Notes at a rate equal to 0.25 % per annum of the principal amount of the Notes outstanding for each day during the first 180 days after the occurrence of such an event of default and 0.50 % per annum of the principal amount of the Notes outstanding from the 181 st day to, and including, the 365 th day following the occurrence of such event of default, as long as such event of default is continuing (in addition to any additional interest that may accrue as a result of a registration default (as set forth in the Indenture).
The Indenture provides that we shall not consolidate with or merge with or into, or sell, convey, transfer or lease all or substantially all of the consolidated properties and assets of our subsidiaries, taken as a whole, to, another person (other than any such sale, conveyance, transfer or lease to one or more of our direct or indirect wholly owned subsidiaries), unless: (i) the resulting, surviving or transferee person (if not us) is a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia, and such corporation (if not us) expressly assumes by supplemental indenture all of our obligations under the Notes and the Indenture; and (ii) immediately after giving effect to such transaction, no default or event of default has occurred and is continuing under the Indenture.
The Notes were historically accounted for in accordance with FASB ASC Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument was computed using a discount rate of 6.50 %, which was determined by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values.
On January 1, 2022, we adopted ASU 2020-06, Debt—Debt with Conversion Options (“Subtopic 470-20”) and Derivatives and Hedging—Contracts in Entity’s Own Equity (“Subtopic 815-40”), which removes the requirement to bifurcate the Notes into a separate liability and equity component, using the modified retrospective method which allowed for a cumulative-effect adjustment to the opening balance sheet without restating prior periods. As we did not elect the fair value option in the process, the Notes, net of issuance costs, are accounted for as a single liability measured at amortized cost. Upon adoption, we recorded a decrease in accumulated deficit of $11.3 million, an increase to convertible senior notes of $40.2 million and a decrease to additional paid in capital of $51.5 million.
19
The net carrying amount of the liability component of the Notes was as follows (in thousands), giving effect to the adoption of ASU 2020-06 on January 1, 2022:
| December 31, 2021 | March 31, 2022 | ||||||||||
| Principal | $ | $ | |||||||||
| Minus: Unamortized debt discount | ( | ||||||||||
| Minus: Unamortized issuance costs | ( | ( | |||||||||
| Net carrying amount of the liability component | $ | $ | |||||||||
Prior to the adoption of ASU 2020-06, the net carrying amount of the equity component of the Notes was as follows (in thousands):
| December 31, 2021 | |||||
| Proceeds allocated to the conversion options (debt discount) | $ | 53,096 | |||
| Minus: Issuance costs | (1,680) | ||||
| Net carrying amount of the equity component | $ | 51,416 | |||
Interest expense recognized related to the Notes is as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2022 | ||||||||||
| Contractual interest expense (due in cash) | $ | $ | |||||||||
| Amortization of debt discount | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Total interest expense related to the Notes | $ | $ | |||||||||
| Effective interest rate | 5.40 | % | 1.64 | % | |||||||
Capped Call Transactions
In connection with the issuance of the Notes, we entered into privately negotiated capped call transactions (the "Capped Calls") with an affiliate of one of the initial Note purchasers and certain other financial institutions. The Capped Calls are intended to reduce potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be. The Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $26.5 million incurred to purchase the Capped Calls was recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheet.
The Capped Calls each have an initial strike price of $85.14 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have an initial cap price of $128.51 per share, subject to certain adjustments.
2018 Loan Facility
In April 2022, we amended our loan facility with Pacific Western Bank (the "2018 Loan Facility") to increase the capacity of our asset-backed revolving line of credit (the "2018 Line of Credit") from $50.0 million to $60.0 million upon the completion of the bank's audit and an option to increase to $75.0 million upon syndication. This amendment also extended the maturity date of the 2018 Loan Facility from December 31, 2022 to April 29, 2024. As part of this amendment, the former cash covenant, as described below, was removed and was replaced with a requirement to maintain a minimum level of adjusted contribution and a $25.0 million adjusted cash minimum.
20
In December 2020, we amended our 2018 Loan Facility to increase the capacity of our 2018 Line of Credit from $40.0 million to $50.0 million. This amendment also extended the maturity date of the 2018 Loan Facility from May 14, 2021 to December 31, 2022. Prior to the December 2020 amendment, the 2018 Loan Facility contained moving trailing 12-month billing covenants, which ranged from $210.0 million to $255.0 million, during the term of the facility. The former terms of the 2018 Loan Facility also required us to maintain a total cash balance plus liquidity under the 2018 Line of Credit of not less than $5.0 million. Effective with the December 2020 amendment, the former billings and liquidity covenants were removed and were replaced with a requirement to maintain a cash to funded senior debt ratio under the 2018 Line of Credit of 1.25 :1.00.
We have made no borrowings or repayments on the 2018 Line of Credit during the three months ended March 31, 2022. As of March 31, 2022, we had no outstanding borrowings on our 2018 Line of Credit and had $50.0 million of unused borrowings available. Under the terms of the 2018 Line of Credit, we are able to borrow up to the lesser of $50.0 million or 85 % of the amount of our eligible accounts receivable. Interest on advances bears an interest rate equal to the prime rate minus 0.50 %, or 3.00 % as of March 31, 2022. In addition, we are required to pay an unused line fee of 0.15 % per annum on the average daily unused amount of the $50.0 million revolving commitment. We believe that we are compliant with all financial covenants as of March 31, 2022.
7. STOCK-BASED COMPENSATION
Our 2018 Equity Incentive Plan ("2018 Plan") became effective in February 2018. Prior to the 2018 Plan, we granted awards under our 2008 Stock Plan ("2008 Plan"). Any awards granted under the 2008 Plan remain subject to the terms of our 2008 Plan and applicable award agreements, and shares subject to awards granted under our 2008 Plan that are forfeited, canceled or expired prior to vesting become available for use under our 2018 Plan. As of December 31, 2021, there were 2,033,227 shares of our common stock reserved for issuance under our 2018 Plan. The number of shares of our common stock reserved for issuance under our 2018 Plan will automatically increase on January 1 of each year, beginning on January 1, 2019 and continuing through and including January 1, 2028, by 5 % of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year or a lesser number of shares determined by our board of directors. Accordingly, the number of shares of our common stock reserved for issuance under our 2018 Plan increased by 1,676,682 shares on January 1, 2022.
The following table summarizes the allocation of stock-based compensation in the condensed consolidated statements of operations (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2021 | 2022 | ||||||||||
| Delivery costs | $ | $ | |||||||||
| Sales and marketing expense | |||||||||||
| Research and development expense | |||||||||||
| General and administration expense | |||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||
During the three months ended March 31, 2021 and 2022, we capitalized $0.1 million and $0.2 million of stock-based compensation expense for software development, respectively.
Common Stock Options
Options to purchase shares of common stock generally vest over four years and expire 10 years following the date of grant. The following table summarizes changes in common stock options:
| Shares (in thousands) | Weighted-Average Exercise Price | Weighted Average Contractual Life (in years) | Aggregate Intrinsic Value(1) (in thousands) | ||||||||||||||||||||
| Options outstanding — December 31, 2021 | $ | ||||||||||||||||||||||
| Exercised | ( | $ | |||||||||||||||||||||
| Options outstanding and exercisable — March 31, 2022 | $ | $ | |||||||||||||||||||||
(1)For options exercised during the period, the aggregate intrinsic value represents the total pre-tax intrinsic value received by option holders based on the closing price of our common stock as reported on the Nasdaq Global Market on the exercise date. For options outstanding and exercisable at March 31, 2022, the aggregate intrinsic value represents the total pre-tax intrinsic value based on the $54.98 per share closing price of our common stock as reported on the Nasdaq Global Market on March 31, 2022, that would have been received by option holders had all in-the-money options been exercised on that date.
21
As of March 31, 2022, all options were fully vested, and there is no unamortized stock-based compensation expense.
Common Stock Options from Bridg Acquisition
In connection with the acquisition of Bridg, each unvested option to purchase shares of Bridg common stock outstanding as of the acquisition date was converted to unvested options to purchase shares of our common stock. These awards were granted under the Ecinity, Inc. 2012 Equity Incentive Plan ("Bridg Plan") and were separately registered with the Securities and Exchange Commission on Form S-8 on August 3, 2021. The maximum aggregate number of shares of our common stock that may be issued upon exercise of these awards is 21,797 shares, and we do not expect to grant any additional awards under the Bridg Plan. The converted awards retain the same terms and conditions as the awards granted by Bridg prior to the acquisition. The awards have remaining vesting periods ranging from less than one year to four years .
The following table summarizes changes in common stock options from the Bridg acquisition:
| Shares (in thousands) | Weighted-Average Exercise Price | Weighted Average Contractual Life (in years) | Aggregate Intrinsic Value (in thousands)(1) | ||||||||||||||||||||
| Options outstanding — December 31, 2021 | $ | ||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited | ( | ||||||||||||||||||||||
| Options outstanding — March 31, 2022 | |||||||||||||||||||||||
| Exercisable — March 31, 2022 | $ | ||||||||||||||||||||||
(1)For options exercised during the period, the aggregate intrinsic value represents the total pre-tax intrinsic value received by option holders based on the closing price of our common stock as reported on the Nasdaq Global Market on the exercise date. For options outstanding and exercisable at March 31, 2022, the aggregate intrinsic value represents the total pre-tax intrinsic value based on the $54.98 per share closing price of our common stock as reported on the Nasdaq Global Market on March 31, 2022, that would have been received by option holders had all in-the-money options been exercised on that date.
The total fair value of options vested during the three months ended March 31, 2022 was less than $0.1 million. As of March 31, 2022, unamortized stock-based compensation expense related to unvested common stock options was $0.1 million, and the weighted-average period over which such stock-based compensation expense will be recognized was 1.8 years.
Common Stock Options from Dosh Acquisition
In connection with the acquisition of Dosh, each unvested option to purchase shares of Dosh common stock outstanding as of the acquisition date was converted to unvested options to purchase shares of our common stock. These awards were granted under the Dosh Holdings, Inc. 2017 Stock Incentive Plan ("Dosh Plan") and were separately registered with the Securities and Exchange Commission on Form S-8 on April 9, 2021. The maximum aggregate number of shares of our common stock that may be issued upon exercise of these awards is 104,098 shares, and we do not expect to grant any additional awards under the Dosh Plan. The converted awards retain the same terms and conditions as the awards granted by Dosh prior to the acquisition. The awards have remaining vesting periods ranging from less than one year to four years .
The following table summarizes changes in common stock options from the Dosh acquisition:
| Shares (in thousands) | Weighted-Average Exercise Price | Weighted Average Contractual Life (in years) | Aggregate Intrinsic Value (in thousands)(1) | ||||||||||||||||||||
| Options outstanding — December 31, 2021 | $ | ||||||||||||||||||||||
| Assumed | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||