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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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: 001-40776

Loyalty Ventures Inc.

(Exact name of registrant as specified in its charter)

Delaware

87-1353472

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

8235 Douglas Avenue, Suite 1200

Dallas, Texas 75225

(Address of principal executive offices, including zip code)

(972) 338-5170

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

    

Trading symbol

    

Name of Exchange on which registered

Common stock, par value $0.01 per share

LYLT

The Nasdaq Stock Market LLC

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

As of October 27, 2022, 24,611,933 shares of common stock were outstanding.

Table of Contents

LOYALTY VENTURES INC.

INDEX

    

    

Page

Part I

Financial Information

3

Item 1.

Financial Statements (unaudited)

3

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021

3

Condensed Consolidated and Combined Statements of Operations for the three and nine months ended September 30, 2022 and 2021

4

Condensed Consolidated and Combined Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021

5

Condensed Consolidated and Combined Statements of Equity (Deficiency) for the three and nine months ended September 30, 2022 and 2021

6

Condensed Consolidated and Combined Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

7

Notes to Condensed Consolidated and Combined Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4.

Controls and Procedures

40

Part II

Other Information

41

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults Upon Senior Securities

44

Item 4.

Mine Safety Disclosures

44

Item 5.

Other Information

44

Item 6.

Exhibits

45

Signatures

47

2

Table of Contents

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

LOYALTY VENTURES INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 

December 31, 

    

2022

    

2021

(in thousands, except per share amounts)

ASSETS

Cash and cash equivalents

$

73,307

$

167,601

Accounts receivable, net, less allowance for doubtful accounts ($3.9 million and $4.7 million at September 30, 2022 and December 31, 2021, respectively)

 

245,863

 

288,251

Inventories, net

 

236,776

 

188,577

Redemption settlement assets, restricted

 

609,711

 

735,131

Other current assets

 

23,415

 

28,627

Total current assets

 

1,189,072

 

1,408,187

Property and equipment, net

 

63,742

 

79,959

Right-of-use assets - operating

 

85,057

 

99,515

Deferred tax asset, net

 

48,388

 

58,128

Intangible assets, net

 

1,913

 

3,095

Goodwill

 

177,978

 

649,958

Other non-current assets

 

25,068

 

24,885

Total assets

$

1,591,218

$

2,323,727

LIABILITIES AND EQUITY (DEFICIENCY)

 

  

 

  

Accounts payable

$

116,766

$

103,482

Accrued expenses

 

131,242

 

144,997

Deferred revenue

 

791,208

 

924,789

Current operating lease liabilities

 

8,086

 

10,055

Current portion of long-term debt

50,625

50,625

Other current liabilities

 

120,651

 

118,444

Total current liabilities

 

1,218,578

 

1,352,392

Deferred revenue

 

87,793

 

97,167

Long-term operating lease liabilities

 

88,390

 

103,242

Long-term debt

567,720

603,488

Other liabilities

 

18,369

 

20,874

Total liabilities

 

1,980,850

 

2,177,163

Commitments and contingencies

 

  

 

  

Common stock, $0.01 par value; authorized, 200,000 shares; issued, 24,612 shares and 24,585 shares at September 30, 2022 and December 31, 2021, respectively

246

246

Additional paid-in-capital

272,487

266,775

Accumulated deficit

(496,390)

(55,383)

Accumulated other comprehensive loss

 

(165,975)

 

(65,074)

Total (deficiency) equity

 

(389,632)

 

146,564

Total liabilities and (deficiency) equity

$

1,591,218

$

2,323,727

See accompanying notes to unaudited condensed consolidated and combined financial statements.

3

Table of Contents

LOYALTY VENTURES INC.

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

Three Months Ended

Nine Months Ended

September 30, 

    

September 30, 

2022

2021

    

2022

2021

    

(in thousands, except per share amounts)

Revenues

 

  

 

  

  

 

  

Redemption, net

    

$

91,852

    

$

97,149

    

$

273,779

    

$

280,844

Services

 

62,757

 

65,806

 

191,830

 

199,244

Other

 

7,760

 

6,302

 

23,508

 

16,628

Total revenue

 

162,369

 

169,257

 

489,117

 

496,716

Operating expenses

 

  

 

  

 

  

 

  

Cost of operations (exclusive of depreciation and amortization disclosed separately below)

 

133,905

119,882

 

407,890

372,820

General and administrative

 

5,090

4,018

 

15,907

11,608

Depreciation and other amortization

 

7,409

8,665

 

25,146

26,237

Amortization of purchased intangibles

 

259

433

 

820

1,316

Goodwill impairment

422,922

Total operating expenses

 

146,663

 

132,998

 

872,685

 

411,981

Operating income (loss)

 

15,706

36,259

 

(383,568)

 

84,735

Interest expense (income), net

 

11,527

(136)

 

29,973

(318)

Income (loss) before income taxes and income from investment in unconsolidated subsidiary

 

4,179

 

36,395

 

(413,541)

 

85,053

Provision for income taxes

 

4,304

16,542

 

27,466

31,616

Income from investment in unconsolidated subsidiary – related party, net of tax

 

(4,108)

 

(4,067)

Net (loss) income

$

(125)

$

23,961

$

(441,007)

$

57,504

Net (loss) income per share (Note 3):

Basic

$

(0.01)

$

0.97

$

(17.92)

$

2.34

Diluted

$

(0.01)

$

0.97

$

(17.92)

$

2.34

Weighted average shares (Note 3):

Basic

24,612

24,585

24,607

24,585

Diluted

24,612

24,585

24,607

24,585

See accompanying notes to unaudited condensed consolidated and combined financial statements.

4

Table of Contents

LOYALTY VENTURES INC.

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended

Nine Months Ended

September 30, 

    

September 30, 

2022

2021

    

2022

2021

    

(in thousands)

Net (loss) income

    

$

(125)

    

$

23,961

    

$

(441,007)

    

$

57,504

Other comprehensive (loss) income:

 

  

 

  

 

  

 

  

Unrealized loss on securities available-for-sale

 

(1,505)

(2,769)

 

(32,737)

(11,245)

Tax benefit

 

 

693

Unrealized loss on securities available-for-sale, net of tax

 

(1,505)

 

(2,769)

 

(32,737)

 

(10,552)

Unrealized (loss) gain on cash flow hedges

 

(1,289)

1,206

 

(986)

2,134

Tax benefit (expense)

 

300

(298)

 

233

(454)

Unrealized (loss) gain on cash flow hedges, net of tax

 

(989)

 

908

 

(753)

 

1,680

Foreign currency translation adjustments

 

(21,417)

(21,064)

 

(67,411)

(40,005)

Other comprehensive (loss) income, net of tax

 

(23,911)

 

(22,925)

 

(100,901)

 

(48,877)

Total comprehensive (loss) income, net of tax

$

(24,036)

$

1,036

$

(541,908)

$

8,627

See accompanying notes to unaudited condensed consolidated and combined financial statements.

5

Table of Contents

LOYALTY VENTURES INC.

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY (DEFICIENCY)

    

    

    

    

    

    

Accumulated

    

Additional

Former

Other

Total

Common Stock

Paid-In

Accumulated

Parent's Net

Comprehensive

Equity

    

Shares

    

Amount

    

Capital

    

Deficit

    

Investment

    

Loss

    

(Deficiency)

(in thousands)

Balance as of July 1, 2022

24,612

$

246

$

271,296

$

(496,265)

$

$

(142,064)

$

(366,787)

Net loss

(125)

 

(125)

Other comprehensive loss

(23,911)

 

(23,911)

Stock-based compensation

1,339

1,339

Other

(148)

(148)

Balance as of September 30, 2022

24,612

$

246

$

272,487

$

(496,390)

$

$

(165,975)

$

(389,632)

    

    

    

    

    

    

Accumulated

    

Additional

Former

Other

Common Stock

Paid-In

Accumulated

Parent's Net

Comprehensive

Total

    

Shares

    

Amount

    

Capital

    

Deficit

    

Investment

    

Loss

    

Equity

(in thousands)

Balance as of July 1, 2021

$

$

$

$

1,012,586

$

(25,571)

$

987,015

Net income

23,961

 

23,961

Other comprehensive loss

(22,925)

 

(22,925)

Change in former Parent’s net investment

5,525

 

5,525

Balance as of September 30, 2021

$

$

$

$

1,042,072

$

(48,496)

$

993,576

    

    

    

    

    

    

Accumulated

    

Additional

Former

Other

Total

Common Stock

Paid-In

Accumulated

Parent's Net

Comprehensive

Equity

    

Shares

    

Amount

    

Capital

    

Deficit

    

Investment

    

Loss

    

(Deficiency)

(in thousands)

Balance as of January 1, 2022

24,585

$

246

$

266,775

$

(55,383)

$

$

(65,074)

$

146,564

Net loss

(441,007)

 

(441,007)

Other comprehensive loss

(100,901)

(100,901)

Net transfers from former Parent for Separation-related transactions

1,354

 

1,354

Stock-based compensation

5,248

 

5,248

Other

27

(890)

 

(890)

Balance as of September 30, 2022

24,612

$

246

$

272,487

$

(496,390)

$

$

(165,975)

$

(389,632)

    

    

    

    

    

    

Accumulated

    

Additional

Former

Other

Common Stock

Paid-In

Accumulated

Parent's Net

Comprehensive

Total

    

Shares

    

Amount

    

Capital

    

Deficit

    

Investment

    

Loss

    

Equity

(in thousands)

Balance as of January 1, 2021

$

$

$

$

1,093,920

$

381

$

1,094,301

Net income

57,504

 

57,504

Other comprehensive loss

(48,877)

 

(48,877)

Change in former Parent’s net investment

(109,352)

 

(109,352)

Balance as of September 30, 2021

$

$

$

$

1,042,072

$

(48,496)

$

993,576

See accompanying notes to unaudited condensed consolidated and combined financial statements.

6

Table of Contents

LOYALTY VENTURES INC.

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

Nine Months Ended

September 30, 

    

2022

    

2021

(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net (loss) income

$

(441,007)

$

57,504

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

Depreciation and amortization

 

25,966

 

27,553

Deferred income taxes

 

5,192

 

(3,594)

Non-cash stock compensation

 

5,248

 

6,322

Goodwill impairment

422,922

Gain on sale of investment in unconsolidated subsidiary – related party

(4,110)

Change in other operating assets and liabilities:

 

 

Change in deferred revenue

 

(59,035)

 

12,775

Change in accounts receivable

 

10,139

 

(14,201)

Change in accounts payable and accrued expenses

 

20,748

 

(12,496)

Change in other assets

 

(71,851)

 

(28,982)

Change in other liabilities

 

9,326

 

62,415

Other

 

20,798

 

10,539

Net cash (used in) provided by operating activities

 

(51,554)

 

113,725

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Change in redemption settlement assets, restricted

 

10,313

(47,312)

Capital expenditures

 

(15,936)

(13,137)

Distributions from investment in unconsolidated subsidiary – related party

 

795

Sale of investment in unconsolidated subsidiary – related party

4,055

Net cash used in investing activities

 

(5,623)

 

(55,599)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Borrowings under debt agreements

12,000

Repayments of borrowings

(49,969)

Payment of deferred financing costs

(1,964)

Dividends paid to former Parent

 

(120,000)

Net transfers to former Parent

 

(9,278)

Net transfers from former Parent for Separation-related transactions

1,569

Other

(557)

Net cash used in financing activities

 

(38,921)

 

(129,278)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(13,195)

(4,000)

Change in cash, cash equivalents and restricted cash

 

(109,293)

 

(75,152)

Cash, cash equivalents and restricted cash at beginning of year

 

232,602

337,525

Cash, cash equivalents and restricted cash at end of year

$

123,309

$

262,373

SUPPLEMENTAL CASH FLOW INFORMATION:

 

  

 

  

Interest paid

$

27,717

$

200

Income taxes paid, net

$

19,693

$

30,781

See accompanying notes to unaudited condensed consolidated and combined financial statements.

7

Table of Contents

LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of the Business

On November 5, 2021, Bread Financial Holdings, Inc., previously named Alliance Data Systems Corporation (“former Parent”), completed the spinoff of its LoyaltyOne reportable segment (the “Separation”) into an independent, publicly traded company, Loyalty Ventures Inc. (the “Company” or “Loyalty Ventures”).

Loyalty Ventures provides coalition and campaign-based loyalty solutions through the Canadian AIR MILES® Reward Program and BrandLoyalty Group B.V. (“BrandLoyalty”). The AIR MILES Reward Program is a full-service outsourced coalition loyalty program for its sponsors who pay a fee per AIR MILES reward mile issued, in return for which the AIR MILES Reward Program provides all marketing, customer service, rewards and redemption management. BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made loyalty programs for high frequency retailers worldwide. These loyalty programs are designed to generate immediate changes in consumer behavior and are offered across Europe and Asia, as well as around the world.

Basis of Presentation

Prior to the Separation, the Company had operated as part of the former Parent and not as a standalone company. The unaudited condensed combined financial statements for the three and nine months ended September 30, 2021 have been derived from the former Parent’s historical accounting records and are presented on a “carve-out” basis. The unaudited condensed combined financial statements for the three and nine months ended September 30, 2021 also include allocations of certain general and administrative expenses from the former Parent that directly or indirectly benefited Loyalty Ventures. However, amounts recognized by the Company are not necessarily representative of the amounts that would have been reflected in the unaudited condensed combined financial statements had the Company operated independently. The former Parent’s third-party long-term debt and the related interest expense was not allocated for the three and nine months ended September 30, 2021 as the Company was not the legal obligor of such debt. The former Parent’s net investment represents its interest in the recorded net assets of the Company. All significant transactions between the Company and its former Parent have been included in the accompanying unaudited condensed combined financial statements. Transactions with the former Parent as contributions to the carve-out entity or distributions from the carve-out entity are reflected in the accompanying unaudited condensed consolidated and combined statements of equity (deficiency) as “Change in former Parent’s net investment.”

The unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2022 were based on the reported results of Loyalty Ventures as a standalone company and prepared on a consolidated basis.

All significant intercompany accounts and transactions between the businesses comprising the Company have been eliminated in the accompanying unaudited condensed consolidated and combined financial statements.

The Company’s unaudited condensed consolidated and combined financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s unaudited condensed consolidated and combined financial statements and accompanying notes are presented in U.S. Dollars (“USD”), the Company’s reporting currency.

The unaudited condensed consolidated and combined financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily

8

Table of Contents

LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)

indicative of the operating results to be expected for any subsequent interim period or for the fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated and combined financial statements should be read in conjunction with the consolidated and combined financial statements and the notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022.

Recently Issued Accounting Standards Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Facilitation of the Effects of Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 can be applied anytime between the first quarter of fiscal 2020 and the fourth quarter of fiscal 2022. ASU 2020-04 applies only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The Company’s primary association with LIBOR is through interest rates applicable under its senior secured credit agreement (the “Credit Agreement”) that provides for the use of the Secured Overnight Financing Rate (SOFR) if LIBOR is no longer available. Accordingly, the impact of ASU 2020-04 on the Company’s consolidated financial statements and related disclosures is not expected to be material.

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 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities in accordance with Accounting Standards Codification (“ASC”) 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. The Company expects to adopt ASU 2021-08 in the first quarter of 2023 on a prospective basis. While the impact of these amendments is dependent on the nature of any future transactions, the Company does not expect ASU 2021-08 to have a significant impact on its consolidated financial statements and related disclosures.

In September 2022, the FASB issued ASU 2022-04, “LiabilitiesSupplier Finance Programs (Subtopic 405-50).” This standard requires disclosure of the key terms of outstanding supplier finance programs and a rollforward of the related obligations. The new standard does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. ASU 2022-04 becomes effective January 1, 2023, except for the rollforward requirement, which becomes effective January 1, 2024. The Company is evaluating the impact that adoption of ASU 2022-04 will have on its consolidated financial statements.

9

Table of Contents

LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)

2. REVENUE

The Company’s products and services are reported under two segments—AIR MILES Reward Program and BrandLoyalty, as shown below. The following tables present revenue disaggregated by major source, as well as geographic region based on the location of the subsidiary that generally correlates with the location of the customer:

    

AIR MILES

    

    

    

Three Months Ended September 30, 2022

Reward Program

BrandLoyalty

Eliminations

Total

(in thousands)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

$

63,971

$

$

$

63,971

Campaign-based loyalty programs

 

 

93,413

 

93,413

Other

 

45

 

1,611

(42)

 

1,614

Revenue from contracts with customers

$

64,016

$

95,024

$

(42)

$

158,998

Investment income

 

3,371

 

 

3,371

Total

$

67,387

$

95,024

$

(42)

$

162,369

    

AIR MILES

    

    

    

    

Three Months Ended September 30, 2021

Reward Program

BrandLoyalty

Eliminations

Total

(in thousands)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

$

68,580

$

$

$

68,580

Campaign-based loyalty programs

 

 

95,799

 

95,799

Other

 

10

 

1,530

 

1,540

Revenue from contracts with customers

$

68,590

$

97,329

$

$

165,919

Investment income

 

3,338

 

 

3,338

Total

$

71,928

$

97,329

$

$

169,257

    

AIR MILES

    

    

    

Nine Months Ended September 30, 2022

Reward Program

BrandLoyalty

Eliminations

Total

(in thousands)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

$

189,533

$

$

$

189,533

Campaign-based loyalty programs

 

 

284,943

 

284,943

Other

 

125

 

4,654

(129)

 

4,650

Revenue from contracts with customers

$

189,658

$

289,597

$

(129)

$

479,126