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 June 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 July 29, 2022, 24,611,650 shares of common stock were outstanding.

LOYALTY VENTURES INC.

INDEX

		Page
Part I	Financial Information	3
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021	3
	Condensed Consolidated and Combined Statements of Operations for the three and six months ended June 30, 2022 and 2021	4
	Condensed Consolidated and Combined Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2022 and 2021	5
	Condensed Consolidated and Combined Statements of Equity (Deficiency) for the three and six months ended June 30, 2022 and 2021	6
	Condensed Consolidated and Combined Statements of Cash Flows for the six months ended June 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	39
Item 4.	Controls and Procedures	40
Part II	Other Information	40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
Signatures		45

2

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

LOYALTY VENTURES INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,		December 31,
	2022		2021
	(in thousands, except per share amounts)
ASSETS
Cash and cash equivalents	$	97,403	$	167,601
Accounts receivable, net, less allowance for doubtful accounts ($3.8 million and $4.7 million at June 30, 2022 and December 31, 2021, respectively)		255,000		288,251
Inventories, net		222,058		188,577
Redemption settlement assets, restricted		672,114		735,131
Other current assets		25,180		28,627
Total current assets		1,271,755		1,408,187
Property and equipment, net		70,081		79,959
Right of use assets - operating		91,810		99,515
Deferred tax asset, net		48,233		58,128
Intangible assets, net		2,316		3,095
Goodwill		191,189		649,958
Other non-current assets		24,553		24,885
Total assets	$	1,699,937	$	2,323,727
LIABILITIES AND EQUITY (DEFICIENCY)
Accounts payable	$	93,057	$	103,482
Accrued expenses		127,119		144,997
Deferred revenue		874,425		924,789
Current operating lease liabilities		8,881		10,055
Current portion of long-term debt		50,625		50,625
Other current liabilities		122,995		118,444
Total current liabilities		1,277,102		1,352,392
Deferred revenue		93,853		97,167
Long-term operating lease liabilities		95,935		103,242
Long-term debt		579,856		603,488
Other liabilities		19,978		20,874
Total liabilities		2,066,724		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 June 30, 2022 and December 31, 2021, respectively		246		246
Additional paid-in-capital		271,296		266,775
Accumulated deficit		(496,265)		(55,383)
Accumulated other comprehensive loss		(142,064)		(65,074)
Total (deficiency) equity		(366,787)		146,564
Total liabilities and (deficiency) equity	$	1,699,937	$	2,323,727

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

3

LOYALTY VENTURES INC.

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
	(in thousands, except per share amounts)
Revenues
Redemption, net	$	96,951	$	78,831	$	181,927	$	183,695
Services		65,290		67,215		129,073		133,438
Other		9,562		4,859		15,748		10,326
Total revenue		171,803		150,905		326,748		327,459
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		146,107		117,092		273,985		252,937
General and administrative		4,608		3,905		10,817		7,590
Depreciation and other amortization		8,612		8,977		17,737		17,571
Amortization of purchased intangibles		273		444		561		883
Goodwill impairment		422,922		—		422,922		—
Total operating expenses		582,522		130,418		726,022		278,981
Operating (loss) income		(410,719)		20,487		(399,274)		48,478
Interest expense (income), net		9,394		(113)		18,446		(182)
(Loss) income before income taxes and loss from investment in unconsolidated subsidiary		(420,113)		20,600		(417,720)		48,660
Provision for income taxes		21,787		6,090		23,162		15,074
Loss from investment in unconsolidated subsidiary – related party, net of tax		—		5		—		42
Net (loss) income	$	(441,900)	$	14,505	$	(440,882)	$	33,544
Net (loss) income per share (Note 3):
Basic	$	(17.95)	$	0.59	$	(17.92)	$	1.36
Diluted	$	(17.95)	$	0.59	$	(17.92)	$	1.36
Weighted average shares (Note 3):
Basic		24,612		24,585		24,605		24,585
Diluted		24,612		24,585		24,605		24,585

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

4

LOYALTY VENTURES INC.

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
	(in thousands)
Net (loss) income	$	(441,900)	$	14,505	$	(440,882)	$	33,544
Other comprehensive (loss) income:
Unrealized loss on securities available-for-sale		(10,431)		(2,076)		(31,232)		(8,476)
Tax benefit		—		693		—		693
Unrealized loss on securities available-for-sale, net of tax		(10,431)		(1,383)		(31,232)		(7,783)
Unrealized gain (loss) on cash flow hedges		301		(193)		303		928
Tax (expense) benefit		(101)		48		(67)		(156)
Unrealized gain (loss) on cash flow hedges, net of tax		200		(145)		236		772
Foreign currency translation adjustments		(28,771)		10,758		(45,994)		(18,941)
Other comprehensive (loss) income, net of tax		(39,002)		9,230		(76,990)		(25,952)
Total comprehensive (loss) income, net of tax	$	(480,902)	$	23,735	$	(517,872)	$	7,592

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

5

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 April 1, 2022	24,612	$	246	$	269,847	$	(54,365)	$	—	$	(103,062)	$	112,666
Net loss	—		—		—		(441,900)		—		—		(441,900)
Other comprehensive loss	—		—		—		—		—		(39,002)		(39,002)
Stock-based compensation	—		—		1,581		—		—		—		1,581
Other	—		—		(132)		—		—		—		(132)
Balance as of June 30, 2022	24,612	$	246	$	271,296	$	(496,265)	$	—	$	(142,064)	$	(366,787)

										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 April 1, 2021	—	$	—	$	—	$	—	$	993,227	$	(34,801)	$	958,426
Net income	—		—		—		—		14,505		—		14,505
Other comprehensive income	—		—		—		—		—		9,230		9,230
Change in former Parent’s net investment	—		—		—		—		4,854		—		4,854
Balance as of June 30, 2021	—	$	—	$	—	$	—	$	1,012,586	$	(25,571)	$	987,015

										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	—		—		—		(440,882)		—		—		(440,882)
Other comprehensive loss	—		—		—		—		—		(76,990)		(76,990)
Net transfers from former Parent for Separation-related transactions	—		—		1,354		—		—		—		1,354
Stock-based compensation	—		—		3,909		—		—		—		3,909
Other	27		—		(742)		—		—		—		(742)
Balance as of June 30, 2022	24,612	$	246	$	271,296	$	(496,265)	$	—	$	(142,064)	$	(366,787)

										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	—		—		—		—		33,544		—		33,544
Other comprehensive loss	—		—		—		—		—		(25,952)		(25,952)
Change in former Parent’s net investment	—		—		—		—		(114,878)		—		(114,878)
Balance as of June 30, 2021	—	$	—	$	—	$	—	$	1,012,586	$	(25,571)	$	987,015

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

6

LOYALTY VENTURES INC.

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

	Six Months Ended
	June 30,
	2022		2021
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(440,882)	$	33,544
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		18,298		18,454
Deferred income tax expense		7,142		2,579
Non-cash stock compensation		3,909		4,179
Goodwill impairment		422,922		—
Change in other operating assets and liabilities:
Change in deferred revenue		(35,393)		11,240
Change in accounts receivable		21,846		5,672
Change in accounts payable and accrued expenses		(20,192)		(20,766)
Change in other assets		(46,161)		1,535
Change in other liabilities		6,895		34,135
Other		19,566		7,274
Net cash (used in) provided by operating activities		(42,050)		97,846
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in redemption settlement assets, restricted		12,040		(41,032)
Capital expenditures		(9,741)		(8,859)
Distributions from investment in unconsolidated subsidiary – related party		—		795
Net cash provided by (used in) investing activities		2,299		(49,096)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements		6,000		—
Repayments of borrowings		(31,313)		—
Dividends paid to former Parent		—		(120,000)
Net transfers from former Parent		—		192
Net transfers from former Parent for Separation-related transactions		1,569		—
Other		(693)		—
Net cash used in financing activities		(24,437)		(119,808)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(5,966)		781
Change in cash, cash equivalents and restricted cash		(70,154)		(70,277)
Cash, cash equivalents and restricted cash at beginning of year		232,602		337,525
Cash, cash equivalents and restricted cash at end of year	$	162,448	$	267,248
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	16,926	$	151
Income taxes paid, net	$	16,488	$	26,708

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

7

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 six months ended June 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 six months ended June 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 six months ended June 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 six months ended June 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

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

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU 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 this ASU apply 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 expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. This ASU is elective and is effective upon issuance for all entities. The Company is evaluating the impact that adoption of ASU 2020-04 will have on its consolidated financial statements.

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 this ASU to have a significant impact on its financial statements and related disclosures.

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 June 30, 2022	Reward Program		BrandLoyalty		Eliminations		Total
	(in thousands)
Disaggregation of Revenue by Major Source:
Coalition loyalty program	$	63,161	$	—	$	—	$	63,161
Campaign-based loyalty programs		—		103,930		—		103,930
Other		39		1,362		(43)		1,358
Revenue from contracts with customers	$	63,200	$	105,292	$	(43)	$	168,449
Investment income		3,354		—		—		3,354
Total	$	66,554	$	105,292	$	(43)	$	171,803

9

LOYALTY VENTURES INC.

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

	AIR MILES
Three Months Ended June 30, 2021	Reward Program		BrandLoyalty		Eliminations		Total
	(in thousands)
Disaggregation of Revenue by Major Source:
Coalition loyalty program	$	68,544	$	—	$	—	$	68,544
Campaign-based loyalty programs		—		76,630		—		76,630
Other		2		2,338		—		2,340
Revenue from contracts with customers	$	68,546	$	78,968	$	—	$	147,514
Investment income		3,391		—		—		3,391
Total	$	71,937	$	78,968	$	—	$	150,905

	AIR MILES
Six Months Ended June 30, 2022	Reward Program		BrandLoyalty		Eliminations		Total
	(in thousands)
Disaggregation of Revenue by Major Source:
Coalition loyalty program	$	125,562	$	—	$	—	$	125,562
Campaign-based loyalty programs		—		191,530		—		191,530
Other		80		3,043		(87)		3,036
Revenue from contracts with customers	$	125,642	$	194,573	$	(87)	$	320,128