Loyalty Ventures Inc. [LYLT] Filings

10-Q 1 lylt-20220930x10q.htm 10-Q

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

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.

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.

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.

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.

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.

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

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, “Liabilities—Supplier 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.

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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

Loyalty Ventures Inc. [LYLT] Filings

Loyalty Ventures Inc. [LYLTQ] Filings