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, 20212022

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)

c/o Alliance Data Systems Corporation8235 Douglas Avenue, Suite 1200

7500 Dallas Parkway, Suite 700

Plano, Texas 7502475225

(Address of Principal Executive Offices)principal executive offices, including zip code)

(972) 338-5170

(Registrant’s telephone number)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  

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

As of November 19, 2021, 24,585,237October 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 CombinedConsolidated Balance Sheets as of September 30, 20212022 and December 31, 20202021

3

Condensed Consolidated and Combined Statements of IncomeOperations for the three and nine months ended September 30, 20212022 and 20202021

4

Condensed Consolidated and Combined Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 20212022 and 20202021

5

Condensed Consolidated and Combined Statements of Equity (Deficiency) for the three and nine months ended September 30, 20212022 and 20202021

6

Condensed Consolidated and Combined Statements of Cash Flows for the nine months ended September 30, 20212022 and 20202021

7

Notes to Condensed Consolidated and Combined Financial Statements

8

Item 2.

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

2930

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

3740

Item 4.

Controls and Procedures

3740

Part II

Other Information

3841

Item 1.

Legal Proceedings

3841

Item 1A.

Risk Factors

3841

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3843

Item 3.

Defaults Upon Senior Securities

3944

Item 4.

Mine Safety Disclosures

3944

Item 5.

Other Information

3944

Item 6.

Exhibits

4045

Signatures

4247

2

Table of Contents

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

LOYALTY VENTURES INC.

UNAUDITED CONDENSED COMBINEDCONSOLIDATED BALANCE SHEETS

September 30, 

December 31, 

    

2021

    

2020

(in thousands)

ASSETS

Cash and cash equivalents

$

198,865

$

278,841

Accounts receivable, net, less allowance for doubtful accounts ($4.7 million and $4.0 million at September 30, 2021 and December 31, 2020, respectively)

 

290,652

 

270,559

Inventories

 

192,277

 

164,306

Redemption settlement assets, restricted

 

733,952

 

693,461

Other current assets

 

20,505

 

23,000

Total current assets

 

1,436,251

 

1,430,167

Property and equipment, net

 

83,720

 

97,916

Right of use assets - operating

 

103,060

 

113,870

Deferred tax asset, net

 

71,677

 

70,137

Intangible assets, net

 

3,580

 

5,097

Goodwill

 

709,006

 

735,898

Investment in unconsolidated subsidiary – related party

 

 

854

Other non-current assets

 

3,157

 

4,125

Total assets

$

2,410,451

$

2,458,064

LIABILITIES AND EQUITY

 

  

 

  

Accounts payable

$

74,584

$

74,818

Accrued expenses

 

49,612

 

67,056

Deferred revenue

 

924,295

 

898,475

Current operating lease liabilities

 

9,626

 

9,942

Other current liabilities

 

131,601

 

64,990

Total current liabilities

 

1,189,718

 

1,115,281

Deferred revenue

 

96,605

 

105,544

Long-term operating lease liabilities

 

106,675

 

117,648

Other liabilities

 

23,877

 

25,290

Total liabilities

 

1,416,875

 

1,363,763

Commitments and contingencies

 

  

 

  

Parent’s net investment

 

1,042,072

 

1,093,920

Accumulated other comprehensive (loss) income

 

(48,496)

 

381

Total equity

 

993,576

 

1,094,301

Total liabilities and equity

$

2,410,451

$

2,458,064

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 INCOMEOPERATIONS

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

(in thousands, except per share amounts)

Revenues

 

  

 

  

 

  

 

  

Redemption, net

$

97,149

$

113,073

$

280,844

$

318,620

Services

 

65,806

 

63,629

 

199,244

 

193,856

Other

 

6,302

 

8,054

 

16,628

 

21,456

Total revenue

 

169,257

 

184,756

 

496,716

 

533,932

Operating expenses

 

  

 

  

 

  

 

  

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

 

119,882

146,358

372,820

399,519

General and administrative

 

4,018

3,630

11,608

10,794

Depreciation and other amortization

 

8,665

7,735

26,237

20,690

Amortization of purchased intangibles

 

433

12,538

1,316

36,168

Total operating expenses

 

132,998

 

170,261

 

411,981

 

467,171

Operating income

 

36,259

14,495

 

84,735

 

66,761

Gain on sale of a business

 

(10,876)

Interest income, net

 

(136)

(167)

(318)

(516)

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

 

36,395

 

14,662

 

85,053

 

78,153

Provision for income taxes

 

16,542

3,534

31,616

17,382

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

 

(4,108)

148

(4,067)

205

Net income

$

23,961

$

10,980

$

57,504

$

60,566

Net income per share - Basic and Diluted (Note 3)

$

0.97

$

0.45

$

2.34

$

2.46

Number of Basic and Diluted Shares Outstanding (Note 3)

24,585

24,585

24,585

24,585

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

    

September 30, 

    

2021

    

2020

    

2021

    

2020

2022

2021

    

2022

2021

(in thousands)

    

(in thousands)

Net income

$

23,961

$

10,980

$

57,504

$

60,566

Net (loss) income

    

$

(125)

    

$

23,961

    

$

(441,007)

    

$

57,504

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Unrealized (loss) gain on securities available-for-sale

 

(2,769)

4,386

(11,245)

15,913

Other comprehensive (loss) income:

 

  

 

  

 

  

 

  

Unrealized loss on securities available-for-sale

 

(1,505)

(2,769)

 

(32,737)

(11,245)

Tax benefit

 

693

 

 

693

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

 

(2,769)

 

4,386

 

(10,552)

 

15,913

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

 

(1,505)

 

(2,769)

 

(32,737)

 

(10,552)

Unrealized gain (loss) on cash flow hedges

 

1,206

690

2,134

(1)

Tax expense

 

(298)

(212)

(454)

(41)

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

 

908

 

478

 

1,680

 

(42)

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

 

(21,064)

35,495

(40,005)

32,733

 

(21,417)

(21,064)

 

(67,411)

(40,005)

Other comprehensive (loss) income, net of tax

 

(22,925)

 

40,359

 

(48,877)

 

48,604

 

(23,911)

 

(22,925)

 

(100,901)

 

(48,877)

Total comprehensive income, net of tax

$

1,036

$

51,339

$

8,627

$

109,170

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)

Three Months Ended September 30, 2021

    

(in thousands)

Balance at July 1, 2021

$

987,015

Net income

 

23,961

Other comprehensive loss

 

(22,925)

Change in Parent’s net investment

 

5,525

Balance at September 30, 2021

$

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 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)

Three Months Ended September 30, 2020

    

 

(in thousands)

Balance at July 1, 2020

$

978,008

Net income

 

10,980

Other comprehensive income

 

40,359

Change in Parent’s net investment

 

3,364

Balance at September 30, 2020

$

1,032,711

    

    

    

    

    

    

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

Nine Months Ended September 30, 2021

    

 

(in thousands)

Balance at December 31, 2020

$

1,094,301

Net income

 

57,504

Other comprehensive loss

 

(48,877)

Change in Parent’s net investment

 

(109,352)

Balance at September 30, 2021

$

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)

Nine Months Ended September 30, 2020

    

 

(in thousands)

Balance at December 31, 2019

$

947,559

Net income

 

60,566

Other comprehensive income

 

48,604

Change in Parent’s net investment

 

(24,018)

Balance at September 30, 2020

$

1,032,711

    

    

    

    

    

    

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, 

    

2021

    

2020

(in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

57,504

$

60,566

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Depreciation and amortization

 

27,553

 

56,858

Deferred income taxes

 

(3,594)

 

3,610

Non-cash stock compensation

 

6,322

 

5,184

Gain on sale of a business

 

 

(10,876)

Gain on sale of investment in unconsolidated subsidiary – related party

(4,110)

Change in other operating assets and liabilities, net of sale of business:

 

 

Change in deferred revenue

 

12,775

 

37,648

Change in accounts receivable

 

(14,201)

 

29,546

Change in accounts payable and accrued expenses

 

(12,496)

 

(45,718)

Change in other assets

 

(28,982)

 

23,961

Change in other liabilities

 

62,415

 

(34,414)

Other

 

10,539

 

(4,686)

Net cash provided by operating activities

 

113,725

 

121,679

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Change in redemption settlement assets, restricted

 

(47,312)

(31,277)

Capital expenditures

 

(13,137)

(18,605)

Investments in unconsolidated subsidiary – related party

(736)

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

 

(55,599)

 

(50,618)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Dividends paid to Parent

 

(120,000)

Net transfers to Parent

 

(9,278)

(1,511)

Net cash used in financing activities

 

(129,278)

 

(1,511)

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

 

(4,000)

3,604

Change in cash, cash equivalents and restricted cash

 

(75,152)

 

73,154

Cash, cash equivalents and restricted cash at beginning of year

 

337,525

175,132

Cash, cash equivalents and restricted cash at end of year

$

262,373

$

248,286

SUPPLEMENTAL CASH FLOW INFORMATION:

 

  

 

  

Interest paid

$

200

$

209

Income taxes paid, net

$

30,781

$

61,684

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.

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LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS SPINOFF 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®MILES® Reward Program and BrandLoyalty Group B.V. (“BrandLoyalty”). The AIR MILES Reward Program is a full servicefull-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. The business represents

Basis of Presentation

Prior to the LoyaltyOne reportable segment previously owned by Alliance Data Systems Corporation (“ADS” or “Parent”) that was spun off into Loyalty Ventures Inc. on November 5, 2021.

Spinoff ofSeparation, the LoyaltyOne Segment

On October 13, 2021, the Board of Directors of ADS approved the previously announced separation (the “Separation”) of its LoyaltyOne segment, into an independent, publicly traded company, Loyalty Ventures Inc. The Separation was completed on November 5, 2021 through the pro rata distribution of 81% of the outstanding shares of Loyalty Ventures to holders of ADS common stock at the close of business on the record date of October 27, 2021, with ADS retaining the remaining 19% of the outstanding shares of Loyalty Ventures. ADS stockholders of record at the close of business on October 27, 2021 received one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADS common stock. Additionally, Loyalty Ventures made a cash distribution of $750.0 million to ADS on November 3, 2021Company had operated as part of the Separation. The distribution qualified as a tax-free reorganization and a tax-free distribution to ADS and its stockholders for U.S. federal income tax purposes. On November 8, 2021, “regular-way” trading of Loyalty Ventures’ common stock began on the Nasdaq Stock Market under the symbol “LYLT”.

In connection with the Separation, Loyalty Ventures entered into several agreements with ADS, including on November 3, 2021 the Separation and Distribution Agreement and on November 5, 2021 the remaining agreements described below, that, among other things, effect the Separation and provide a framework for its relationship with ADS after the Separation:

Separation and Distribution Agreement. Governs the overall terms of the Separation. Generally, the Separation and Distribution Agreement includes ADS’ and Loyalty Ventures’ agreements relating to the restructuring steps taken to complete the Separation, including the assets and rights transferred, liabilities assumed and related matters. The Separation and Distribution Agreement provides for ADS and Loyalty Ventures to transfer specified assets between the companies that operate the LoyaltyOne segment after the Distribution, on the one hand, and ADS’ remaining businesses, on the other hand.

Tax Matters Agreement. Governs ADS’ and Loyalty Ventures’ respective rights, responsibilities and obligations with respect to taxes, including taxes arising in the ordinary course of business, and taxes, if any, incurred as a result of the failure of the Distribution (and certain related transactions) to qualify for tax-free treatment for U.S. federal income tax purposes. The Tax Matters Agreement also sets forth the respective obligations of the parties with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters. Under the Tax Matters Agreement, ADS generally is responsible for all of the pre-Separation taxes of Loyalty Ventures and its subsidiaries (“Loyalty Ventures Group”) and is entitled to all the Loyalty Ventures Group’s pre-Separation refunds, and Loyalty Ventures is generally responsible for all post-Separation taxes with respect to the Loyalty Ventures Group.

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LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)

Transition Services Agreement. Sets forth the terms on which each of Loyalty Ventures and ADS will provide certain historically shared services to the other, on a transitional basis. Transition services will include various corporate, administrative and information technology services. Both parties are obligated, subject to certain customary exceptions, to provide such services in substantially the same manner as such services have been provided during the 12-month period prior to the distribution.

Employee Matters Agreement. Governs each company’s respective compensation and benefit obligations with respect to current and former employees, directors and consultants. The Employee Matters Agreement sets forth general principles relating to employee matters in connection with the Separation, such as the assignment of employees, the assumption and retention of liabilities and related assets, expense reimbursements, workers’ compensation, leaves of absence, the provision of comparable benefits, employee service credit, the sharing of employee information and duplication or acceleration of benefits.

Registration Rights Agreement. Provides ADS with certain customary demand registration, shelf takedown and piggyback registration rights with respect to its shares of Loyalty Ventures’ common stock, subject to certain customary limitations.

Basis of Presentation

The Company has historically operated as part of ADSParent 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 ADS’the former Parent’s historical accounting records and are presented on a carve-out“carve-out” basis. All revenues and expenses as well as assets and liabilities directly associated with the business activity of the Company are included in the unaudited condensed combined financial statements. 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 ADS.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 of ADS. Related-party allocations are discussed further in Note 18, “Related Party Transactions.”independently. The cash and cash equivalents held by ADS at the corporate level are not specifically identifiable and therefore have not been reflected in the combined balance sheets. ADS’former Parent’s third-party long-term debt and the related interest expense havewas not been allocated for any of the periods presentedthree and nine months ended September 30, 2021 as the Company was not athe legal obligor of such debt.

The former Parent’s net investment represents ADS’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 “Changes“Change in former Parent’s net investment” and in the accompanyinginvestment.”

The unaudited condensed combined balance sheets within “Parent’s net investment.”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 U.S. 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 indicative of the

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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, 20202021 included in our registration statementthe Company’s Annual Report on Form 10,10-K, filed with the Securities and Exchange Commission (“SEC”) on October 13, 2021.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.” This 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 this ASU apply2020-04 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 expedientsCompany’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 exceptions provided byrelated disclosures is not expected to be material.

In October 2021, the amendments do not applyFASB 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 modifications madeassets and hedging relationships entered into or evaluatedcontract liabilities in accordance with Accounting Standards Codification (“ASC”) 606. ASU 2021-08 is effective for fiscal years beginning after December 31, 2022.15, 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 is elective and is2022-04 becomes effective upon issuanceJanuary 1, 2023, except for all entities.the rollforward requirement, which becomes effective January 1, 2024. The Company is evaluating the impact that adoption of ASU 2020-042022-04 will have on its combinedconsolidated financial statements.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” ASU 2019-12 eliminated certain exceptions within ASC 740, “Income Taxes,” and clarified certain aspects of ASC 740 to promote consistency among reporting entities. Most amendments within the standard were required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company’s adoption of this standard on January 1, 2021 did not have a material impact on its unaudited condensed combined financial statements.

2. REVENUE

The Company’s products and services are reported under 2 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, 2021

Reward Program

BrandLoyalty

Total

(in thousands)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

$

68,580

$

$

68,580

Campaign-based loyalty solutions

 

 

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

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LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)

    

AIR MILES

    

    

Three Months Ended September 30, 2020

Reward Program

BrandLoyalty

Total

(in thousands)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

$

62,938

$

$

62,938

Campaign-based loyalty solutions

 

 

117,435

 

117,435

Other

 

(17)

 

1,123

 

1,106

Revenue from contracts with customers

$

62,921

$

118,558

$

181,479

Investment income

 

3,277

 

 

3,277

Total

$

66,198

$

118,558

$

184,756

    

AIR MILES

    

    

Nine Months Ended September 30, 2021

Reward Program

BrandLoyalty

Total

(in thousands)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

$

203,870

$

$

203,870

Campaign-based loyalty solutions

 

 

278,726

 

278,726

Other

 

12

 

3,867

 

3,879

Revenue from contracts with customers

$

203,882

$

282,593

$

486,475

Investment income

 

10,241

 

 

10,241

Total

$

214,123

$

282,593

$

496,716

    

AIR MILES

    

    

Nine Months Ended September 30, 2020

Reward Program

BrandLoyalty

Total

(in thousands)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

$

195,870

$

$

195,870

Campaign-based loyalty solutions

 

 

322,504

 

322,504

Other

 

1,903

(1)

 

4,077

 

5,980

Revenue from contracts with customers

$

197,773

$

326,581

$

524,354

Investment income

 

9,578

 

 

9,578

Total

$

207,351

$

326,581

$

533,932

(1)Includes revenues from Precima®, a provider of retail strategy and customer data applications and analytics, which was sold by the Parent on January 10, 2020, which comprised $1.9 million for the nine months ended September 30, 2020. See Note 4, “Dispositions,” for more information.

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LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSEDCONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)

    

AIR MILES

    

    

Three Months Ended September 30, 2021

Reward Program

BrandLoyalty

Total

(in thousands)

Disaggregation of Revenue by Geographic Region:

United States

$

$

95

$

95

Canada

 

71,928

 

3,894

 

75,822

Europe, Middle East and Africa

 

 

68,168

 

68,168

Asia Pacific

 

 

22,967

 

22,967

Other

 

 

2,205

 

2,205

Total

$

71,928

$

97,329

$

169,257

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

    

    

    

AIR MILES

    

    

    

Three Months Ended September 30, 2020

Reward Program

BrandLoyalty

Total

Three Months Ended September 30, 2022

Reward Program

BrandLoyalty

Eliminations

Total

(in thousands)

(in thousands)

Disaggregation of Revenue by Geographic Region:

Disaggregation of Revenue by Major Source:

United States

$

$

3,316

$

3,316

Canada

 

66,198

 

4,132

 

70,330

Europe, Middle East and Africa

 

 

76,876

 

76,876

Asia Pacific

 

 

12,549

 

12,549

Coalition loyalty program

$

63,971

$

$

$

63,971

Campaign-based loyalty programs

 

 

93,413

 

93,413

Other

 

 

21,685

 

21,685

 

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

$

66,198

$

118,558

$

184,756

$

67,387

$

95,024

$

(42)

$

162,369

    

AIR MILES

    

    

    

AIR MILES

    

    

    

    

Nine Months Ended September 30, 2021

Reward Program

BrandLoyalty

Total

Three Months Ended September 30, 2021

Reward Program

BrandLoyalty

Eliminations

Total

(in thousands)

(in thousands)

Disaggregation of Revenue by Geographic Region:

Disaggregation of Revenue by Major Source:

United States

$

$

2,637

$

2,637

Canada

 

214,123

 

15,163

 

229,286

Europe, Middle East and Africa

 

 

200,022

 

200,022

Asia Pacific

 

 

57,690

 

57,690

Coalition loyalty program

$

68,580

$

$

$

68,580

Campaign-based loyalty programs

 

 

95,799

 

95,799

Other

 

 

7,081

 

7,081

 

10

 

1,530

 

1,540

Revenue from contracts with customers

$

68,590

$

97,329

$

$

165,919

Investment income

 

3,338

 

 

3,338

Total

$

214,123

$

282,593

$

496,716

$

71,928

$

97,329

$

$

169,257

    

AIR MILES

    

    

    

AIR MILES

    

    

    

Nine Months Ended September 30, 2020

Reward Program

BrandLoyalty

Total

Nine Months Ended September 30, 2022

Reward Program

BrandLoyalty

Eliminations

Total

(in thousands)

(in thousands)

Disaggregation of Revenue by Geographic Region:

Disaggregation of Revenue by Major Source:

United States

$

1,028

$

8,562

$

9,590

Canada

 

206,055

 

8,065

 

214,120

Europe, Middle East and Africa

 

268

 

195,884

 

196,152

Asia Pacific

 

 

62,960

 

62,960

Coalition loyalty program

$

189,533

$

$

$

189,533

Campaign-based loyalty programs

 

 

284,943

 

284,943

Other

 

 

51,110

 

51,110

 

125

 

4,654

(129)

 

4,650

Revenue from contracts with customers

$

189,658

$

289,597

$

(129)

$

479,126

Investment income

 

9,991

 

 

9,991

Total

$

207,351

$

326,581

$

533,932

$

199,649

$

289,597

$

(129)

$

489,117

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LOYALTY VENTURES INC.

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

    

AIR MILES

    

    

    

    

Nine Months Ended September 30, 2021

Reward Program

BrandLoyalty

Eliminations

Total

(in thousands)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

$

203,870

$

$

$

203,870

Campaign-based loyalty programs

 

 

278,726

 

278,726

Other

 

12

 

3,867

 

3,879

Revenue from contracts with customers

$

203,882

$

282,593

$

$

486,475

Investment income

 

10,241

 

 

10,241

Total

$

214,123

$

282,593

$

$

496,716

    

AIR MILES

    

    

    

Three Months Ended September 30, 2022

Reward Program

BrandLoyalty

Eliminations

Total

(in thousands)

Disaggregation of Revenue by Geographic Region:

United States

$

$

$

$

Canada

 

67,387

 

4,742

(42)

 

72,087

Europe, Middle East and Africa

 

 

77,465

 

77,465

Asia Pacific

 

 

7,061

 

7,061

Other

 

 

5,756

 

5,756

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 Geographic Region:

United States

$

$

95

$

$

95

Canada

 

71,928

 

3,894

 

75,822

Europe, Middle East and Africa

 

 

68,168

 

68,168

Asia Pacific

 

 

22,967

 

22,967

Other

 

 

2,205

 

2,205

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 Geographic Region:

United States

$

$

$

$

Canada

 

199,649

 

12,426

(129)

 

211,946

Europe, Middle East and Africa

 

 

220,658

 

220,658

Asia Pacific

 

 

45,367

 

45,367

Other

 

 

11,146

 

11,146

Total

$

199,649

$

289,597

$

(129)

$

489,117

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LOYALTY VENTURES INC.

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

    

AIR MILES

    

    

    

Nine Months Ended September 30, 2021

Reward Program

BrandLoyalty

Eliminations

Total

(in thousands)

Disaggregation of Revenue by Geographic Region:

United States

$

$

2,637

$

$

2,637

Canada

 

214,123

 

15,163

 

229,286

Europe, Middle East and Africa

 

 

200,022

 

200,022

Asia Pacific

 

 

57,690

 

57,690

Other

 

 

7,081

 

7,081

Total

$

214,123

$

282,593

$

$

496,716

Contract Liabilities

The Company records a contract liability when cash payments are received in advance of its performance, which applies to the service and redemption of an AIR MILES reward mile and the reward products for its campaign-based loyalty solutions.programs.

A reconciliation of contract liabilities for the AIR MILES Reward Program is as follows:

Deferred Revenue

Deferred Revenue

    

Service

    

Redemption

    

Total

    

Service

    

Redemption

    

Total

(in thousands)

(in thousands)

Balance at January 1, 2021

$

247,186

$

756,833

$

1,004,019

Balance at January 1, 2022

$

230,492

$

791,464

$

1,021,956

Cash proceeds

 

128,988

206,715

 

335,703

 

131,316

202,961

 

334,277

Revenue recognized (1)

 

(148,373)

(175,696)

 

(324,069)

 

(138,858)

(254,938)

 

(393,796)

Other

 

1,182

 

1,182

 

423

 

423

Effects of foreign currency translation

 

1,290

2,775

 

4,065

 

(19,321)

(64,538)

 

(83,859)

Balance at September 30, 2021

$

229,091

$

791,809

$

1,020,900

Amounts recognized in the combined balance sheets:

 

  

 

  

 

  

Balance at September 30, 2022

$

203,629

$

675,372

$

879,001

Amounts recognized in the consolidated balance sheets:

 

  

 

  

 

  

Deferred revenue (current)

$

132,486

$

791,809

$

924,295

$

115,836

$

675,372

$

791,208

Deferred revenue (non-current)

$

96,605

$

$

96,605

$

87,793

$

$

87,793

(1)Reported on a gross basis herein.

The deferred redemption obligation associated with the AIR MILES Reward Program is effectively due on demand from the collector base, thus the timing of revenue recognition is based on the redemption by the collector. Service revenue is amortized over the expected life of a mile, with the deferred revenue balance expected to be recognized into revenue in the amount of $44.5 million in 2021, $109.5$39.8 million in 2022, $57.6$94.9 million in 2023, and $17.5$52.3 million in 2024, and $16.6 million in 2025.

The contract liabilities for BrandLoyalty’s campaign-based loyalty solutionsprograms are recognized in other current liabilities in the Company’s unaudited condensed combinedconsolidated balance sheets. The beginning balance as of January 1, 20212022 was $66.9$85.4 million and the closing balance as of September 30, 20212022 was $107.2$99.1 million, with the change due to cash payments received in advance of program performance, offset in part by revenue recognized of approximately $226.9$212.4 million and the effect of foreign currency translation of $14.7 million during the nine months ended September 30, 2021.2022.

3. EARNINGS PER SHARE

On November 5, 2021, the date of the Separation, 81% of the outstanding shares of Loyalty Ventures were distributed pro rata based on the outstanding shares of ADS common stock at the close of business on the record date of October 27, 2021, with ADS retaining the remaining 19% of the outstanding shares of Loyalty Ventures. ADS stockholders of record that did not sell their rights to receive Loyalty Ventures stock before the close of business on November 5, 2021 received one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADS common stock, which resulted in aA total of 24,585,237 shares of Loyalty Ventures common stock were outstanding at November 5, 2021, the timedate of the Separation. ThisSeparation, and this share amount iswas utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Separation. For the three and nine months ended September 30, 2021 and 2020, these shares are treated as issued and outstanding for purposes of calculating historical basic and diluted earnings per share. For all periods presented prior to the Separation, there are 0 dilutive equity instruments as there were 0 equity awards of Loyalty Ventures outstanding prior to the Separation.

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

periods presented prior to the Separation. For the three and nine months ended September 30, 2021, these shares are treated as issued and outstanding for purposes of calculating historical basic and diluted earnings per share.

For the three and nine months ended September 30, 2022, the calculation of basic and diluted earnings per share is based on the weighted average number of common shares outstanding. The dilutive effect of equity awards of Loyalty Ventures granted subsequent to the Separation is included in the diluted calculation.

The following table sets forth the computation of basic and diluted earnings per share of common stock:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

(in thousands, except per share amounts)

Numerator:

Net income

$

23,961

$

10,980

$

57,504

$

60,566

Denominator:

Number of Basic and Diluted Shares Outstanding

24,585

24,585

24,585

24,585

Net income per share - Basic and Diluted

$

0.97

$

0.45

$

2.34

$

2.46

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands, except per share amounts)

Numerator:

Net (loss) income

$

(125)

$

23,961

$

(441,007)

$

57,504

Denominator:

Weighted average shares, basic

24,612

24,585

24,607

24,585

Weighted average effect of dilutive securities:

Net effect of dilutive unvested restricted stock(1)

Denominator for diluted calculation

24,612

24,585

24,607

24,585

Basic net (loss) income per share:

$

(0.01)

$

0.97

$

(17.92)

$

2.34

Diluted net (loss) income per share:

$

(0.01)

$

0.97

$

(17.92)

$

2.34

(1)The dilutive calculation excludes 0.9 million and 0.6 million restricted stock units for the three and nine months ended September 30, 2022, respectively, as they were anti-dilutive for the respective periods. For the three and nine months ended September 30, 2021, there are no dilutive equity instruments as there were no equity awards of Loyalty Ventures outstanding prior to the Separation.

4. DISPOSITIONS

On January 10, 2020, the Parent sold Precima, a provider of retail strategy and customer data applications and analytics, to Nielsen Holdings plc for total consideration to the Parent of $43.8 million. The purchase and sale agreement provided for contingent consideration based upon the occurrence of specified events and performance of the business, of which $5.0 million was achieved in 2020. The assets and liabilities of Precima were included in the Company’s AIR MILES Reward Program segment. As a result of the transaction, the Company recorded a pre-tax gain of $10.9 million in January 2020. The Company incurred $3.1 million in transaction costs associated with the disposition.

5. INVENTORIES, NET

Inventories, net of $192.3$236.8 million and $164.3$188.6 million at September 30, 20212022 and December 31, 2020,2021, respectively, primarily consist of finished goods to be utilized as rewards in the Company’s loyalty programs. Inventories are stated at the lower of cost and net realizable value and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories if the cost of inventory exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future market conditions and an analysis of historical experience.

6. REDEMPTION SETTLEMENT ASSETS, RESTRICTED

Redemption settlement assets consist of restricted cash, mutual funds, and securities available-for-sale and are designated for settling redemptions by collectors of the AIR MILES Reward Program in Canada under certain contractual relationships with sponsors of the AIR MILES Reward Program. The principal components of redemption settlement assets, which are carried at fair value, are as follows:

September 30, 

December 31, 

2021

2020

    

Fair Value

    

Fair Value

(in thousands)

Restricted cash

$

58,196

$

55,427

Mutual funds

 

26,220

 

26,850

Corporate bonds

 

649,536

 

611,184

Total

$

733,952

$

693,461

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

5. REDEMPTION SETTLEMENT ASSETS, RESTRICTED

Redemption settlement assets consist of restricted cash, mutual funds, and securities available-for-sale and are designated for settling redemptions by collectors of the AIR MILES Reward Program under certain contractual relationships with sponsors of the AIR MILES Reward Program. The principal components of redemption settlement assets, which are carried at fair value, are as follows:

September 30, 

December 31, 

2022

2021

    

Fair Value

    

Fair Value

(in thousands)

Restricted cash

$

40,870

$

58,752

Mutual funds

 

20,696

 

25,990

Corporate bonds

 

548,145

 

650,389

Total

$

609,711

$

735,131

The following table shows the amortized cost, unrealized gains and losses, and fair value of securities available-for-sale as of September 30, 20212022 and December 31, 2020,2021, respectively:

September 30, 2021

December 31, 2020

September 30, 2022

December 31, 2021

Amortized

Unrealized

Unrealized

Amortized

Unrealized

Unrealized

Amortized

Unrealized

Unrealized

Amortized

Unrealized

Unrealized

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Cost

    

Gains

    

Losses

    

Fair Value

    

Cost

    

Gains

    

Losses

    

Fair Value

(in thousands)

(in thousands)

Corporate bonds

$

641,820

$

10,257

$

(2,541)

$

649,536

$

592,247

$

19,110

$

(173)

$

611,184

$

578,741

$

$

(30,596)

$

548,145

$

648,248

$

6,389

$

(4,248)

$

650,389

Total

$

641,820

$

10,257

$

(2,541)

$

649,536

$

592,247

$

19,110

$

(173)

$

611,184

$

578,741

$

$

(30,596)

$

548,145

$

648,248

$

6,389

$

(4,248)

$

650,389

The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of September 30, 20212022 and December 31, 2020,2021, respectively, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

September 30, 2021

September 30, 2022

Less than 12 months

12 Months or Greater

Total

Less than 12 months

12 Months or Greater

Total

Unrealized

Unrealized

Unrealized

Unrealized

Unrealized

Unrealized

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(in thousands)

(in thousands)

Corporate bonds

$

178,215

$

(2,367)

$

14,224

$

(174)

$

192,439

$

(2,541)

    

$

369,156

$

(13,710)

$

178,989

$

(16,886)

$

548,145

$

(30,596)

Total

$

178,215

$

(2,367)

$

14,224

$

(174)

$

192,439

$

(2,541)

$

369,156

$

(13,710)

$

178,989

$

(16,886)

$

548,145

$

(30,596)

December 31, 2020

December 31, 2021

Less than 12 months

12 Months or Greater

Total

Less than 12 months

12 Months or Greater

Total

Unrealized

Unrealized

Unrealized

Unrealized

Unrealized

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(in thousands)

(in thousands)

Corporate bonds

    

$

46,190

    

$

(86)

    

$

10,316

    

$

(87)

    

$

56,506

    

$

(173)

    

$

104,052

$

(1,341)

$

123,382

$

(2,907)

    

$

227,434

    

$

(4,248)

Total

$

46,190

$

(86)

$

10,316

$

(87)

$

56,506

$

(173)

$

104,052

$

(1,341)

$

123,382

$

(2,907)

$

227,434

$

(4,248)

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LOYALTY VENTURES INC.

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

The amortized cost and estimated fair value of the securities available-for-sale at September 30, 20212022 by contractual maturity are as follows:

    

Amortized

    

Estimated

Cost

Fair Value

(in thousands)

Due in one year or less

$

131,884

$

132,984

Due after one year through five years

 

505,989

 

512,567

Due after five years through ten years

 

3,947

 

3,985

Total

$

641,820

$

649,536

    

Amortized

    

Estimated

Cost

Fair Value

(in thousands)

Due in one year or less

$

122,736

$

121,720

Due after one year through five years

 

456,005

 

426,425

Total

$

578,741

$

548,145

Market values were determined for each individual security in the investment portfolio. The Company recorded losses associated with the change in fair value of mutual funds of $0.6 million and $3.1 million for the three and nine months ended September 30, 2021.2022, respectively. Losses associated with the change in fair value of mutual funds for the three months ended September 30, 2021 were de minimis. The Company recorded gains associated with the change in fair value of mutual funds of $0.3 millionminimis and $1.0$0.6 million for the three and nine months ended September 30, 2020,2021, respectively.

For available-for-sale debt securities in which fair value is less than cost, ASC 326, “Financial Instruments – Credit Losses,” requires that credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk. The Company typically invests in highly-ratedhighly rated securities with expected low probabilities of default and has the intent and ability to hold the investments until maturity, and thematurity. The Company performs an assessment each period for credit-related impairment. As of September 30, 2021,2022, the Company does not consider its investments to be impaired.

15

Table The Company believes unrealized losses on investments were caused by rising interest rates rather than changes in credit quality. The Company expects to recover, through collection of Contentsall of the contractual cash flows of each security, the amortized cost basis of these securities as it does not intend to sell, and does not anticipate being required to sell, these securities before recovery of the cost basis.

LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)

Losses from the sale of investment securities were $0.2 million for the nine months ended September 30, 2021. There were 0no realized gains or losses from the sale of investment securities for the three months ended September 30, 2022 and 2021, respectively. Losses from the sale of investment securities were de minimis and $0.2 million for the three and nine months ended September 30, 2020.2022 and 2021, respectively.

7.6. LEASES

The Company has operating leases for general office properties, warehouses, data centers, customer care centers, automobiles and certain equipment. As of September 30, 2021,2022, the Company’s leases have remaining lease terms of less than 1 year to 1211 years, some of which may include renewal options. For leases in which the implicit rate is not readily determinable, the Company uses its incremental borrowing rate as of the lease commencement date to determine the present value of the lease payments. The incremental borrowing rate is based on the Company’s specific rate of interest to borrow on a collateralized basis, over a similar term and in a similar economic environment as the lease.

Leases with an initial term of 12 months or less are not recognized on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Additionally, the Company accounts for lease and nonlease components as a single lease component for its identified asset classes.

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LOYALTY VENTURES INC.

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

The components of lease expense were as follows:

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

(in thousands)

(in thousands)

Operating lease cost

$

3,923

$

3,898

$

11,929

$

11,624

$

3,450

$

3,923

$

10,814

$

11,929

Short-term lease cost

 

84

 

107

 

255

 

354

 

99

 

84

 

243

 

255

Variable lease cost

 

922

 

949

 

3,134

 

3,143

 

1,070

 

922

 

2,859

 

3,134

Total

$

4,929

$

4,954

$

15,318

$

15,121

$

4,619

$

4,929

$

13,916

$

15,318

Sublease income was $1.4 million and $3.2 million for the three and nine months ended September 30, 2022, respectively, and $0.6 million and $1.6 million for the three and nine months ended September 30, 2021, respectively, and is presented net of lease expense.

The Company evaluates its right-of-use assets for impairment in accordance with ASC 360, “Property, Plant and Equipment,” when events or changes in circumstances indicate that a right-of-use asset’s carrying amount may not be recoverable. The Company performed an impairment assessment for the right-of-use assets associated with certain subleased office space. As a result, the Company recorded asset impairment charges within its AIR MILES Reward Program segment of $0.4 million and $1.0 million in the three and nine months ended September 30, 2022, respectively, which is included in cost of operations in its unaudited condensed consolidated statements of operations.

Other information related to leases was as follows:

September 30, 

September 30, 

 

September 30, 

September 30, 

 

    

2021

    

2020

 

    

2022

    

2021

 

Weighted-average remaining lease term (in years):

 

  

 

  

 

  

 

  

Operating leases

 

10.9

 

11.6

 

10.0

 

10.9

Weighted-average discount rate:

 

  

 

  

 

 

  

Operating leases

 

4.7

%  

4.6

%

 

4.7

%  

4.7

%

Supplemental cash flow information related to leases was as follows:

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

(in thousands)

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

 

  

 

 

  

 

  

 

  

 

 

  

 

  

Operating cash flows from operating leases

$

4,062

$

5,441

$

13,871

$

13,527

$

4,294

$

4,062

$

12,068

$

13,871

Right of use assets obtained in exchange for lease obligations:

 

  

 

  

 

  

 

  

Right-of-use assets obtained in exchange for lease obligations:

 

  

 

  

 

  

 

  

Operating leases

$

16

$

462

$

200

$

3,021

$

1,434

$

16

$

4,171

$

200

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LOYALTY VENTURES INC.

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

Maturities of the lease liabilities as of September 30, 20212022 were as follows:

Operating

Operating

Year

    

Leases

    

Leases

(in thousands)

(in thousands)

2021 (excluding the nine months ended September 30, 2021)

$

2,798

2022

 

15,782

2022 (excluding the nine months ended September 30, 2022)

$

2,168

2023

 

14,375

 

13,560

2024

 

13,472

 

12,674

2025

 

12,935

 

12,081

2026

 

11,538

Thereafter

 

90,545

 

70,411

Total undiscounted lease liabilities

 

149,907

 

122,432

Less: Amount representing interest

 

(33,606)

 

(25,956)

Total present value of minimum lease payments

$

116,301

$

96,476

Amounts recognized in the September 30, 2021 combined balance sheet:

 

  

Amounts recognized in the September 30, 2022 consolidated balance sheet:

 

  

Current operating lease liabilities

$

9,626

$

8,086

Long-term operating lease liabilities

 

106,675

 

88,390

Total

$

116,301

$

96,476

8.7. INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

Intangible assets consist of the following:

September 30, 2021

 

September 30, 2022

 

Gross

Accumulated

 

Gross

Accumulated

 

    

Assets

    

Amortization

    

Net

    

Amortization Life and Method

    

Assets

    

Amortization

    

Net

    

Amortization Life and Method

(in thousands)

 

(in thousands)

 

Tradenames

$

32,895

$

(29,445)

$

3,450

 

8‑15 years—straight line

 

$

8,233

$

(6,320)

$

1,913

 

8‑15 years—straight line

Collector database

 

55,205

 

(55,075)

 

130

 

5 years—straight line

Total intangible assets

$

88,100

$

(84,520)

$

3,580

$

8,233

$

(6,320)

$

1,913

December 31, 2020

 

December 31, 2021

 

Gross

Accumulated

 

Gross

Accumulated

 

    

Assets

    

Amortization

    

Net

    

Amortization Life and Method

    

Assets

    

Amortization

    

Net

    

Amortization Life and Method

(in thousands)

 

(in thousands)

 

Customer contracts

 

$

354,242

 

$

(354,242)

 

$

7 years—straight line

Tradenames

34,691

(30,112)

4,579

8‑15 years—straight line

$

32,289

$

(29,194)

$

3,095

8‑15 years—straight line

Collector database

54,973

(54,455)

518

5 years—straight line

55,397

 

(55,397)

5 years—straight line

Total intangible assets

 

$

443,906

$

(438,809)

$

5,097

 

$

87,686

$

(84,591)

$

3,095

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LOYALTY VENTURES INC.

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

The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:

For the Years Ending

For the Years Ending

    

December 31, 

    

December 31, 

(in thousands)

(in thousands)

2021 (excluding the nine months ended September 30, 2021)

$

427

2022

 

1,189

2022 (excluding the nine months ended September 30, 2022)

$

252

2023

 

1,189

 

1,006

2024

 

610

 

516

2025

 

31

 

26

2026

 

26

Thereafter

 

134

 

87

Goodwill

The changes in the carrying amount of goodwill are as follows:

AIR MILES

AIR MILES

    

Reward Program

    

BrandLoyalty

    

Total

    

Reward Program

    

BrandLoyalty (1)

    

Total

 

(in thousands)

 

(in thousands)

Balance at January 1, 2021

$

193,276

$

542,622

$

735,898

Balance at January 1, 2022

$

194,767

$

455,191

$

649,958

Impairment

(422,922)

(422,922)

Effects of foreign currency translation

 

815

 

(27,707)

 

(26,892)

 

(16,789)

(32,269)

 

(49,058)

Balance at September 30, 2021

$

194,091

$

514,915

$

709,006

Balance at September 30, 2022

$

177,978

$

$

177,978

(1)The amount of goodwill as of January 1, 2022 is net of an accumulated goodwill impairment charge of $50.0 million within the BrandLoyalty segment incurred as of December 31, 2021. As of June 30, 2022, the Company recorded a goodwill impairment charge of $422.9 million within the BrandLoyalty segment. The goodwill as of September 30, 2022 is net of accumulated goodwill impairment charges of $472.9 million within the BrandLoyalty segment.

The ParentCompany tests goodwill for impairment annually, as of July 1, or when events and circumstances change that would indicate the carrying value may not be recoverable. AsDuring the second quarter of September 30, 2021,2022, macroeconomic factors, including Russia’s invasion of Ukraine and its negative impact on consumer confidence and consumer behavior in Europe, inflation, and continued supply chain pressures, led the Company does notto believe that it is more likely than not that the fair value of anyits BrandLoyalty reporting unit iswas less than its carrying amount. However,As a result, the economic disruption, coupled with increased uncertainty, indicated a material deterioration of the COVID-19 pandemic and current uncertaintysignificant inputs used to determine the fair value of the BrandLoyalty reporting unit, resulting in the macroeconomic environment, future deterioration inimpairment of the economy could adversely impact the Company’s reporting unitsgoodwill. See Note 15, “Financial Instruments and result in a goodwill impairment.Fair Value Measurements,” for more information.

9.8. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY – RELATED PARTY

At December 31, 2020, theThe Company previously owned a 99.9% interest in Comenity Canada L.P., a limited partnership, which is a consolidated subsidiary of the former Parent, and iswas accounted for using the equity method of accounting, as the Company exercisesexercised significant influence but doesdid not control the entity. The investment iswas included in the AIR MILES Reward Program segment. At December 31, 2020, the Company’s investment in Comenity Canada L.P. was $0.9 million. For the nine months ended September 30, 2020,In March 2021, the Company made capital contributions toreceived a partnership distribution from Comenity Canada L.P. of $0.7 million.$0.8 million, and the Company’s ownership interest declined from 99.9% to 98.0%.

Under the equity method, the Company’s share of its investee’s earnings or loss is recognized in the consolidated and combined statements of income.operations. The Company recognized income from investment in unconsolidated related party subsidiary of $4.1 million for each of the three and nine months ended September 30, 2021, respectively. Losses from investment in unconsolidated related party subsidiary were de minimis for the three and nine months ended September 30, 2020, respectively.

In March 2021, the Company received a partnership distribution from Comenity Canada L.P. of $0.8 million, and the Company’s ownership interest declined from 99.9% to 98.0%.

In August 2021, the Company’s investment in Comenity Canada L.P. was sold to an affiliate of ADSthe former Parent for $4.1 million and a gain on sale of investment in unconsolidated related party subsidiary of $4.1 million was recorded in (income) loss from investment in unconsolidated subsidiary within the Company’s unaudited condensed combined statements of income.

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LOYALTY VENTURES INC.

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

10. DEBTmillion and a gain on sale of investment in unconsolidated related party subsidiary of $4.1 million was recorded in income from investment in unconsolidated subsidiary within the Company’s unaudited condensed consolidated and combined statements of income.

BrandLoyalty Credit Agreement9. RESTRUCTURING AND OTHER CHARGES

In the firstsecond quarter of 2021, BrandLoyalty2022, executive management initiated a plan to simplify the organization, reduce its cost structure, and optimize its supply chain. The Company expects this plan will be implemented throughout fiscal year 2022. For the three and nine months ended September 30, 2022, the Company incurred restructuring and other charges related to reductions in force and asset impairments associated with certain leased office space as the Company reduces its real estate footprint, and other exit costs primarily related to third-party professional services. These charges were recorded to cost of operations in the Company’s unaudited condensed consolidated and combined statements of operations.

The following tables summarize the restructuring and other charges incurred by reportable segment for the three and nine months ended September 30, 2022:

Termination

Asset

Other

Three Months Ended September 30, 2022

    

Benefits

    

Impairments

    

Exit Costs

    

Total

(in thousands)

AIR MILES Reward Program

$

2,934

$

432

$

108

$

3,474

BrandLoyalty

 

1,881

 

 

 

1,881

Total

$

4,815

$

432

$

108

$

5,355

Termination

Asset

Other

Nine Months Ended September 30, 2022

    

Benefits

    

Impairments

    

Exit Costs

    

Total

(in thousands)

AIR MILES Reward Program

$

5,291

$

969

$

1,480

$

7,740

BrandLoyalty

 

1,881

 

 

 

1,881

Total

$

7,172

$

969

$

1,480

$

9,621

There were no restructuring and other charges incurred for the three and nine months ended September 30, 2021.

The Company’s liability for restructuring and other charges is recognized in accrued expenses in its consolidated balance sheets. The following table summarizes the activities related to the restructuring and other charges, as discussed above, for the periods presented:

Termination

Asset

Other

    

Benefits

    

Impairments

    

Exit Costs

    

Total

(in thousands)

Liability as of January 1, 2022

$

$

$

$

Charged to expense

 

7,172

 

969

 

1,480

 

9,621

Adjustments for non-cash charges

 

 

(969)

 

 

(969)

Cash payments

 

(1,471)

 

 

(1,465)

 

(2,936)

Effects of foreign currency translation

(165)

(15)

(180)

Liability as of September 30, 2022

$

5,536

$

$

$

5,536

The Company’s outstanding liability related to restructuring and other charges is expected to be settled in the next twelve months. Management is continuing to undergo an evaluation of its subsidiaries, as borrowersBrandLoyalty segment with additional restructuring and guarantors, amended its credit agreementother charges expected to extendbe incurred in the maturity date by one year from April 3, 2023 to April 3, 2024.fourth quarter of 2022.

19

Table of Contents

As of September 30, 2021 and December 31, 2020, there were 0 amounts outstanding under the BrandLoyalty Credit Agreement.LOYALTY VENTURES INC.

In November 2021, the BrandLoyalty Credit Agreement was terminated in connection with the executionNOTES TO UNAUDITED CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS – (CONTINUED)

10. DEBT

Debt consists of the Company’s senior secured credit agreement, as described more fully below.following:

September 30, 

December 31, 

 

Description

    

2022

    

2021

     

Maturity

(in thousands)

 

Revolving credit facility (1)

$

$

November 2026

Term loan A

 

165,156

 

175,000

November 2026

Term loan B

 

471,875

 

500,000

November 2027

Total long-term debt

$

637,031

$

675,000

Less: unamortized debt issuance costs

18,686

20,887

Less: current portion

50,625

50,625

Long-term portion

$

567,720

$

603,488

(1)As of September 30, 2022, availability under the revolving credit facility was $138.2 million as a result of $11.8 million in letters of credit outstanding under the Credit Agreement. As of December 31, 2021, availability under the revolving credit facility was $137.5 million as a result of $12.5 million in letters of credit outstanding under the Credit Agreement.

Credit Agreement

On November 3, 2021, theThe Company entered intohas a senior secured credit agreement (the “Credit Agreement”) with certain subsidiaries as additional borrowers and certain other subsidiaries as guarantors, Bank of America, N.A., as administrative agent and collateral agent, and the additional lenders party thereto. The Credit Agreement which provides for a $175.0 million term loan A facility, a $500.0 million term loan B facility, which was issued at 98.0% of the aggregate principal amount, and a revolving credit facility in the maximum amount of $150.0 million. The term loan A and revolving credit facility will mature November 3, 2026. The term loan B will maturematures November 3, 2027. The proceeds of the term loans were used to finance a portion of the $750.0 million distribution by

In July 2022, the Company entered into an amendment to ADS in connection withits Credit Agreement, which, among other things, provides for adjustments to the Separation.

The outstanding U.S. Dollar borrowings underfinancial maintenance covenant applicable to the term loan A bear interest at a rate elected byand revolving credit facility as follows:

Four Fiscal Quarters Ending

Maximum Consolidated Total Leverage Ratio

December 31, 2021 through June 30, 2022

5.00:1.00

September 30, 2022 through September 30, 2023

5.75:1.00

December 31, 2023

5.50:1.00

March 31, 2024 through September 30, 2024

5.25:1.00

December 31, 2024 through March 31, 2025

5.00:1.00

June 30, 2025 and each fiscal quarter thereafter

4.75:1.00

In addition, the relevant borrower that is based on (i)amendment reduces the Base Rate, subject to a floor of 1.00% per annum, plus an applicable margin that ranges from 2.00% per annum to 2.75% per annum depending on the Consolidated Total Leverage Ratio or (ii) the Eurocurrency Rate, subject to a floor of 0.00% per annum, plus an applicable margin that ranges from 3.00% per annum to 3.75% per annum depending on the Consolidated Total Leverage Ratio. The outstanding U.S. Dollar borrowings under the term loan B bear interest at a rate elected by the relevant borrower that is based on (i) the Base Rate, subject to a floor of 1.50% per annum, plus an applicable margin of 3.50% per annum or (ii) the Eurocurrency Rate, subject to a floor of 0.50% per annum, plus an applicable margin of 4.50% per annum. The Company is obligated to pay a commitment fee quarterly, which ranges from 0.40% to 0.50% per annum of the unused portion of the aggregate revolving commitment, which fee is also dependent on the Consolidated Total Leverage Ratio, as such terms are defined in the Credit Agreement.

The Company will be required to make quarterly principal amortization payments in equal installments in an aggregate amount of 7.5%revolving commitments by $2.8 million per annum ofquarter beginning September 30, 2022, for each quarter in which the initial aggregate principal amount of each of the term loan A and term loan B. Commencing with the fiscal year ending December 31, 2022, the Credit Agreement requires, on an annual basis, the prepayment of the term loan B with either 0%, 25% or 50% of Excess Cash Flow, depending on the Consolidated Secured Leverage Ratio,total leverage ratio as defined in the Credit Agreement.Agreement is in excess of 4.75 to 1. The total leverage ratio was 4.5 to 1 as of September 30, 2022.

For the nine months ended September 30, 2022, the Company made its quarterly principal amortization payments totaling $38.0 million applicable to the term loan A and term loan B.

As of September 30, 2022, the Company was in compliance with its financial covenants.

20

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LOYALTY VENTURES INC.

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

Uncommitted Overdraft Facility

The Credit Agreement contains customary representationsCompany was party to an uncommitted overdraft facility with Deutsche Bank AG that provided overdraft protection in several currencies, up to a maximum amount of €10.0 million ($9.8 million as of September 30, 2022). Interest is calculated on debit balances at a rate of 3.5% per annum plus a relevant benchmark, due and warrantiespayable at the end of each quarter. There were no amounts outstanding under the uncommitted overdraft facility as of September 30, 2022 and affirmative and negative covenants. These covenants, among other things, limit additional indebtedness, additional liens, sales of assets, mergers and consolidations, distributions and other restricted payments, and transactions with affiliates.December 31, 2021, respectively. In October 2022, the uncommitted overdraft facility was terminated.

11. DERIVATIVE INSTRUMENTS

The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in foreign currency exchange rates. Certain derivatives used to manage the Company’s exposure to foreign currency exchange rate movements are not designated as hedges and do not qualify for

19

Table hedge accounting. The Company generally hedges foreign currency exchange rate risks for periods of Contents

LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)

hedge accounting.12 months or less. The fair value of the Company’s derivative instruments as of September 30, 20212022 was $1.9$4.6 million included in other current assets and $0.8$1.3 million included in other current liabilities in the Company’s unaudited condensed combinedconsolidated balance sheets. The fair value of the Company’s derivative instruments as of December 31, 20202021 was $0.4$2.5 million included in other current assets and $1.5$0.5 million included in other current liabilities in the Company’s unaudited condensed combinedconsolidated balance sheets.

12. SHARE-BASED PAYMENTS

Prior to the Separation, certain employees participated in share-based compensation plans of ADS. Under these plans, shares are reserved for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants performing services for ADS or its affiliates. Terms of all awards are determined by ADS board of directors or the compensation committee of ADS board of directors or its designee at the time of award.Stock Compensation Expense

During the nine months ended September 30, 2021, ADS2022, the Company awarded both814,545 service-based and performance-based restricted stock units. For the service-based awards, the fair value of the restricted stock units is estimated using ADS closingwith a weighted average grant date fair value per share priceof $17.62 as determined on the date of grant andgrant. Service-based restricted stock unit awards typically vest ratably over a three-year period. period provided that the participant is employed by the Company on each such vesting date.

The Company also awarded 88,033 performance-based awards containrestricted stock units with a weighted average grant date fair value per share of $24.19 as determined on the date of grant with pre-defined vesting criteria that permit a range from 0% to 170%150% to be earned, subject to a market-based condition. The fair market value of these awards is $92.62 and was estimated utilizing Monte Carlo simulations of ADS’ stock price correlation, expected volatility and risk-free rate over a three-year time horizon matching the performance period.earned. If the performance targets are met, the restrictions will lapse with respect to 33% of the entire award on February 16,15, 2023, an additional 33% of the award on February 15, 2024 and the final 34% of the award on February 15, 2025, provided that the participant is employed by ADSthe Company on theeach such vesting date. As of September 30, 2022, the Company believes the probable achievement is 0% and thus did not recognize stock compensation expense for these awards for the three and nine months ended September 30, 2022.

In connection with the Separation and pursuant to the Employee Matters Agreement with ADS, service-based awards granted to Loyalty Ventures employees more than a year prior to the Separation were accelerated and vested on October 22, 2021. Service-based awards and performance-based awards granted to Loyalty Ventures employees less than one year prior to the Separation were forfeited at the time of the Separation and will be replaced with a combination of Loyalty Ventures service-based restricted stock awards and long-term cash incentive awards, to be determined by the Loyalty Ventures Compensation Committee, and a cash payment to be paid by ADS.

Stock-based compensation expense recognized in the Company’s unaudited condensed consolidated and combined statements of incomeoperations for the three and nine months ended September 30, 20212022 and 20202021 is as follows:

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

(in thousands)

(in thousands)

Cost of operations

$

1,725

$

1,482

$

5,009

$

3,993

$

724

$

1,725

$

3,054

$

5,009

General and administrative

 

418

 

344

 

1,313

 

1,191

 

615

 

418

 

2,194

 

1,313

Total

$

2,143

$

1,826

$

6,322

$

5,184

$

1,339

$

2,143

$

5,248

$

6,322

2021

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LOYALTY VENTURES INC.

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

13. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in each component of accumulated other comprehensive income (loss), net of tax effects, are as follows:

Net

Net Unrealized

Foreign

Accumulated

Net

Net Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Currency

Other

Unrealized

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

Translation

Comprehensive

Gains (Losses)

on Cash

Translation

Comprehensive

Three Months Ended September 30, 2021

    

on Securities

    

Flow Hedges

    

Adjustments (1)

    

Loss

Three Months Ended September 30, 2022

    

on Securities

    

Flow Hedges

    

Adjustments (1)

    

Loss

(in thousands)

(in thousands)

Balance at June 30, 2021

$

10,484

$

72

$

(36,127)

$

(25,571)

Balance at July 1, 2022

$

(29,091)

$

1,506

$

(114,479)

$

(142,064)

Changes in other comprehensive income (loss)

 

(2,769)

 

908

 

(21,064)

 

(22,925)

 

(1,505)

 

(989)

 

(21,417)

 

(23,911)

Balance at September 30, 2021

$

7,715

$

980

$

(57,191)

$

(48,496)

Balance at September 30, 2022

$

(30,596)

$

517

$

(135,896)

$

(165,975)

Net

Net Unrealized

Foreign

Accumulated

Net

Net Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Currency

Other

Unrealized

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

Translation

Comprehensive

Gains (Losses)

on Cash

Translation

Comprehensive

Three Months Ended September 30, 2020

    

on Securities

    

Flow Hedges

    

Adjustments (1)

    

Loss

Three Months Ended September 30, 2021

    

on Securities

    

Flow Hedges

    

Adjustments (1)

    

Loss

(in thousands)

(in thousands)

Balance at June 30, 2020

$

11,913

$

(653)

$

(95,081)

$

(83,821)

Balance at July 1, 2021

$

10,484

$

72

$

(36,127)

$

(25,571)

Changes in other comprehensive income (loss)

 

4,386

 

478

 

35,495

 

40,359

 

(2,769)

 

908

 

(21,064)

 

(22,925)

Balance at September 30, 2020

$

16,299

$

(175)

$

(59,586)

$

(43,462)

Balance at September 30, 2021

$

7,715

$

980

$

(57,191)

$

(48,496)

Net

Net Unrealized

Foreign

Accumulated

Net

Net Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Currency

Other

Unrealized

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

Translation

Comprehensive

Gains (Losses)

on Cash

Translation

Comprehensive

Nine Months Ended September 30, 2021

    

on Securities

    

Flow Hedges

    

Adjustments (1)

    

Loss

Nine Months Ended September 30, 2022

    

on Securities

    

Flow Hedges

    

Adjustments (1)

    

Loss

(in thousands)

(in thousands)

Balance at December 31, 2020

$

18,267

$

(700)

$

(17,186)

$

381

Balance at January 1, 2022

$

2,141

$

1,270

$

(68,485)

$

(65,074)

Changes in other comprehensive income (loss)

 

(10,552)

 

1,680

 

(40,005)

 

(48,877)

 

(32,737)

 

(753)

 

(67,411)

 

(100,901)

Balance at September 30, 2021

$

7,715

$

980

$

(57,191)

$

(48,496)

Balance at September 30, 2022

$

(30,596)

$

517

$

(135,896)

$

(165,975)

Net

Net Unrealized

Foreign

Accumulated

Net

Net Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Currency

Other

Unrealized

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

Translation

Comprehensive

Gains (Losses)

on Cash

Translation

Comprehensive

Nine Months Ended September 30, 2020

    

on Securities

    

Flow Hedges

    

Adjustments (1)

    

Loss

Nine Months Ended September 30, 2021

    

on Securities

    

Flow Hedges

    

Adjustments (1)

    

Loss

(in thousands)

(in thousands)

Balance at December 31, 2019

$

386

$

(133)

$

(92,319)

$

(92,066)

Balance at January 1, 2021

$

18,267

$

(700)

$

(17,186)

$

381

Changes in other comprehensive income (loss)

 

15,913

 

(42)

 

28,846

 

44,717

 

(10,552)

 

1,680

 

(40,005)

 

(48,877)

Recognition resulting from the sale of Precima’s foreign subsidiaries

 

 

 

3,887

(2)  

 

3,887

Balance at September 30, 2020

$

16,299

$

(175)

$

(59,586)

$

(43,462)

Balance at September 30, 2021

$

7,715

$

980

$

(57,191)

$

(48,496)

(1)Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates.
(2)In accordance with ASC 830, upon the sale of Precima on January 10, 2020, $3.9 million of accumulated foreign currency translation adjustments attributable to Precima’s foreign subsidiaries sold were reclassified from accumulated other comprehensive income (loss) and included in the calculation of the gain on sale of Precima.

Gains on cash flow hedges that were recorded to accumulated other comprehensive income (loss) during the term of the hedging relationship and reclassified into net income (loss) were $2.4 million and $1.8 million in the three and nine months ended September 30, 2022, respectively, and de minimis in the three and nine months ended September 30, 2021, respectively. Other reclassifications from accumulated other comprehensive income (loss) into net income (loss) for each of the periods presented were not material.

14. INCOME TAXES

For the three months ended September 30, 2022 and 2021, the Company utilized an effective tax rate of 103.0% and 40.8%, respectively, to calculate its provision for income taxes. For the nine months ended September 30, 2022 and

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LOYALTY VENTURES INC.

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

14. INCOME TAXES

For the three months ended September 30, 2021, and 2020, the Company utilized an effective tax rate of 40.8%(6.6)% and 24.1%35.5%, respectively, to calculate its provision for income taxes. The increasechange in the effective tax rate for the three months ended September 30, 2021 as2022 compared to the respective prior year period was primarily a result of an unfavorable adjustment in the current period related toincreased U.S. corporate expenses for which a settlement of a foreign tax position.

For the nine months ended September 30, 2021 and 2020, the Company utilized an effective tax rate of 35.5% and 22.2%, respectively, to calculate its provision for income taxes.benefit cannot be currently realized. The increasechange in the effective tax rate for the nine months ended September 30, 2021 as2022 compared to the respective prior year period was primarily a result of an increase innon-deductibility of the current year related to additional withholding taxes as well as an unfavorable adjustment relatedwrite-off of goodwill, increased U.S. corporate expenses, and the write-down of certain deferred tax assets.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (the “IRA”). The IRA contains a number of tax provisions, including, but not limited to, a settlement of a foreignnew corporate alternative minimum tax, position. Additionally,an excise tax on stock buybacks, and incentives for energy and climate initiatives. These provisions are effective for taxable years beginning after December 31, 2022. Currently, the effective tax rateCompany does not qualify for the nine months ending September 30, 2020 included discrete tax benefits related to the expiration of statutes of limitation and the resolution of tax audits in various foreign jurisdictions.corporate alternative minimum tax.

15. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

In accordance with ASC 825, “Financial Instruments,” the Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

Fair Value of Financial Instruments—The estimated fair values of the Company’s financial instruments are as follows:

September 30, 2021

December 31, 2020

September 30, 2022

December 31, 2021

Carrying

Fair

Carrying

Fair

Carrying

Fair

Carrying

Fair

    

Amount

    

Value

    

Amount

    

Value

    

Amount

    

Value

    

Amount

    

Value

(in thousands)

(in thousands)

Financial assets

Redemption settlement assets, restricted

$

733,952

$

733,952

$

693,461

$

693,461

$

609,711

$

609,711

$

735,131

$

735,131

Other investments

 

254

 

254

 

253

 

253

 

353

 

353

 

471

 

471

Derivative instruments

 

1,890

 

1,890

 

353

 

353

 

4,639

 

4,639

 

2,465

 

2,465

Financial liabilities

 

 

 

  

 

  

 

 

 

  

 

  

Derivative instruments

 

847

 

847

 

1,505

 

1,505

 

1,287

 

1,287

 

487

 

487

Long-term debt

618,345

359,993

654,113

654,113

The following techniques and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Redemption settlement assets, restricted — Redemption settlement assets, restricted are recorded at fair value based on quoted market prices for the same or similar securities.

Other investments — Other investments consist of marketable securities and are included in other current assets in the combinedconsolidated balance sheets. Other investments are recorded at fair value based on quoted market prices for the same or similar securities.

Derivative instruments — The Company’s foreign currency cash flow hedges and foreign currency exchange forward contracts are recorded at fair value based on a discounted cash flow analysis on the expected cash flows of each

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LOYALTY VENTURES INC.

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

derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs.

Long-term debt —The fair value of the Company’s variable rate long-term debt is based upon recent trades, if available, or estimated using a discounted cash flow method based on the Company’s current borrowing rates for similar types of financing.

Financial Assets and Financial Liabilities Fair Value Hierarchy

ASC 820, “Fair Value Measurement,” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Level 1, defined as observable inputs such as quoted prices in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions.

Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The use of different techniques to determine fair value of these financial instruments could result in different estimates of fair value at the reporting date.

The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2022 and December 31, 2021:

Balance at

Fair Value Measurements at

September 30, 

September 30, 2022 Using

    

2022

    

Level 1

    

Level 2

    

Level 3

(in thousands)

Mutual funds (1)

$

20,696

$

20,696

$

$

Corporate bonds (1)

548,145

548,145

Marketable securities (2)

 

353

 

353

 

 

Derivative instruments (3)

 

4,639

 

 

4,639

 

Total assets measured at fair value

$

573,833

$

21,049

$

552,784

$

Derivative instruments (3)

$

1,287

$

$

1,287

$

Total liabilities measured at fair value

$

1,287

$

$

1,287

$

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LOYALTY VENTURES INC.

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

The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2021 and December 31, 2020:

Balance at

Fair Value Measurements at

September 30, 

September 30, 2021 Using

    

2021

    

Level 1

    

Level 2

    

Level 3

(in thousands)

Mutual funds (1)

$

26,220

$

26,220

$

$

Corporate bonds (1)

649,536

649,536

Marketable securities (2)

 

254

 

254

 

 

Derivative instruments (3)

 

1,890

 

 

1,890

 

Total assets measured at fair value

$

677,900

$

26,474

$

651,426

$

Derivative instruments (3)

$

847

$

$

847

$

Total liabilities measured at fair value

$

847

$

$

847

$

Balance at

Fair Value Measurements at

December 31, 

December 31, 2020 Using

    

2020

    

Level 1

    

Level 2

    

Level 3

(in thousands)

Mutual funds (1)

$

26,850

$

26,850

$

$

Corporate bonds (1)

611,184

611,184

Marketable securities (2)

 

253

 

253

 

 

Derivative instruments (3)

 

353

 

 

353

 

Total assets measured at fair value

$

638,640

$

27,103

$

611,537

$

Derivative instruments (3)

$

1,505

$

$

1,505

$

Total liabilities measured at fair value

$

1,505

$

$

1,505

$

Balance at

Fair Value Measurements at

December 31, 

December 31, 2021 Using

    

2021

    

Level 1

    

Level 2

    

Level 3

(in thousands)

Mutual funds (1)

$

25,990

$

25,990

$

$

Corporate bonds (1)

650,389

650,389

Marketable securities (2)

 

471

 

471

 

 

Derivative instruments (3)

 

2,465

 

 

2,465

 

Total assets measured at fair value

$

679,315

$

26,461

$

652,854

$

Derivative instruments (3)

$

487

$

$

487

$

Total liabilities measured at fair value

$

487

$

$

487

$

(1)Amounts are included in redemption settlement assets, restricted in the unaudited condensed combinedconsolidated balance sheets.
(2)Amounts are included in other current assets in the unaudited condensed combinedconsolidated balance sheets.
(3)Amounts are included in other current assets and other current liabilities in the unaudited condensed combinedconsolidated balance sheets.

Financial Instruments Disclosed but Not Carried at Fair Value

The following table provides assets and liabilities disclosed but not carried at fair value as of September 30, 2022 and December 31, 2021:

Balance at

Fair Value Measurements at

September 30, 

September 30, 2022 Using

    

2022

    

Level 1

    

Level 2

    

Level 3

(in thousands)

Long-term debt

$

359,993

$

$

359,993

$

Total liabilities measured at fair value

$

359,993

$

$

359,993

$

Balance at

Fair Value Measurements at

December 31, 

December 31, 2021 Using

    

2021

    

Level 1

    

Level 2

    

Level 3

(in thousands)

Long-term debt

$

654,113

$

$

654,113

$

Total liabilities measured at fair value

$

654,113

$

$

654,113

$

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property and equipment, right-of-use assets and goodwill. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, including when there is evidence of impairment. For the three and nine months ended September 30, 2022, as part of restructuring and other charges, the Company recorded asset impairment charges of $0.4 million and $1.0 million, respectively, related to certain fixed assets and right-of-use assets as a result of subleases associated with certain leased office space. The fair value was determined utilizing discounted cash flow models over the estimated life of each asset. The principal assumptions used in the Company’s impairment analysis were forecasted future cash flows and a discount rate, which is considered Level 3 inputs. See Note 6, “Leases,” and Note 9, “Restructuring and Other Charges,” for more information.

For the nine months ended September 30, 2022, the Company recognized a goodwill impairment charge of $422.9 million in the BrandLoyalty segment. To determine the fair value of the reporting unit, the Company used both income-

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LOYALTY VENTURES INC.

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

and market-based valuation techniques to determine the fair value of the reporting unit, as opposed to just an income approach, as it provided a better representation of fair value of the reporting unit. The income-based approach utilizes a discounted cash flow analysis based on management's estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. The valuation includes assumptions related to revenue growth and profit performance, capital expenditures, and the discount rate which are unobservable inputs. The market-based approach involves an analysis of market multiples of revenues and earnings to a group of comparable public companies and recent transactions, if any, involving comparable companies, with the unobservable input being the forecasted earnings of BrandLoyalty. The assumptions utilized in our quantitative analysis are unobservable inputs classified as Level 3 under the fair value hierarchy of ASC 820, “Fair Value Measurement.” See Note 7, “Intangible Assets and Goodwill,” for more information.

16. SEGMENT INFORMATION

Operating segments are defined by ASC 280, “Segment Reporting,” as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The operating segments are reviewed separately because each operating segment represents a strategic business unit that generally offers different products and services.

The AIR MILES Reward Program is a full servicefull-service outsourced coalition loyalty program for ourits sponsors, who pay usthe AIR MILES Reward Program a fee per AIR MILES reward mile issued, in return for which we provideit provides all marketing, customer service, rewards and redemption management.
BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made loyalty programs for grocers and other high-frequency retailers worldwide. These loyalty programs are designed to generate immediate changes in consumer behavior and are offered through leading grocers across Europe and Asia, as well as around the world.
Corporate and other consists of corporate overhead not allocated to anyeither of the Company’s segments.

Income taxes and equity in earnings (losses) from related party investments accounted for under the equity method are not included in the computation of segment operating profit for internal evaluation purposes.

    

AIR MILES

    

    

Corporate/

    

    

Three Months Ended September 30, 2022

Reward Program

BrandLoyalty

Other

Eliminations

Total

(in thousands)

Revenues

$

67,387

$

95,024

$

$

(42)

$

162,369

Income (loss) before income taxes

$

25,926

$

(4,622)

$

(17,125)

$

$

4,179

Interest (income) expense, net

 

(449)

 

(45)

 

12,021

 

11,527

Depreciation and amortization

 

5,586

 

2,067

 

15

 

7,668

Stock compensation expense

 

195

 

529

 

615

 

1,339

Strategic transaction costs

2

292

2,721

3,015

Restructuring and other charges

3,474

1,881

5,355

Adjusted EBITDA (1)

$

34,734

$

102

$

(1,753)

$

$

33,083

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

Income taxes and equity in earnings (losses) from related party investments accounted for under the equity method are not included in the computation of segment operating profit for internal evaluation purposes.

    

AIR MILES

    

    

Corporate/

    

Three Months Ended September 30, 2021

Reward Program

BrandLoyalty

Other

Total

(in thousands)

Revenues

$

71,928

$

97,329

$

$

169,257

Income (loss) before income taxes

$

33,889

$

6,524

$

(4,018)

$

36,395

Interest (income) expense, net

 

(206)

 

70

 

 

(136)

Depreciation and amortization

 

6,018

 

3,080

 

 

9,098

Stock compensation expense

 

777

 

948

 

418

 

2,143

Adjusted EBITDA (1)

$

40,478

$

10,622

$

(3,600)

$

47,500

    

AIR MILES

    

    

Corporate/

    

Three Months Ended September 30, 2020

Reward Program

BrandLoyalty

Other

Total

(in thousands)

Revenues

$

66,198

$

118,558

$

$

184,756

Income (loss) before income taxes

$

28,376

$

(10,084)

$

(3,630)

$

14,662

Interest (income) expense, net

 

(223)

 

56

 

 

(167)

Depreciation and amortization

 

4,730

 

15,543

 

 

20,273

Stock compensation expense

 

562

 

920

 

344

 

1,826

Gain on sale of business, net of strategic transaction costs

178

178

Strategic transaction costs

 

66

 

 

 

66

Restructuring and other charges

 

(5)

 

 

 

(5)

Adjusted EBITDA (1)

$

33,684

$

6,435

$

(3,286)

$

36,833

    

AIR MILES

    

    

Corporate/

    

Nine Months Ended September 30, 2021

Reward Program

BrandLoyalty

Other

Total

(in thousands)

Revenues

$

214,123

$

282,593

$

$

496,716

Income (loss) before income taxes

$

94,214

$

2,447

$

(11,608)

$

85,053

Interest (income) expense, net

 

(582)

 

264

 

 

(318)

Depreciation and amortization

 

17,927

 

9,626

 

 

27,553

Stock compensation expense

 

2,126

 

2,883

 

1,313

 

6,322

Adjusted EBITDA (1)

$

113,685

$

15,220

$

(10,295)

$

118,610

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LOYALTY VENTURES INC.

NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS – (CONTINUED)

    

AIR MILES

    

    

Corporate/

    

    

    

AIR MILES

    

    

Corporate/

    

Nine Months Ended September 30, 2020

Reward Program

BrandLoyalty

Other

Total

Three Months Ended September 30, 2021

Reward Program

BrandLoyalty

Other

Eliminations

Total

(in thousands)

(in thousands)

Revenues

$

207,351

$

326,581

$

$

533,932

$

71,928

$

97,329

$

$

$

169,257

Income (loss) before income taxes

$

107,509

$

(18,562)

$

(10,794)

$

78,153

$

33,889

$

6,524

$

(4,018)

$

$

36,395

Interest (income) expense, net

 

(826)

 

310

 

 

(516)

 

(206)

 

70

 

 

(136)

Depreciation and amortization

 

13,136

 

43,722

 

 

56,858

 

6,018

 

3,080

 

 

9,098

Stock compensation expense

 

1,515

 

2,478

 

1,191

 

5,184

 

777

 

948

 

418

 

2,143

Gain on sale of business, net of strategic transaction costs

 

(7,791)

 

 

 

(7,791)

Strategic transaction costs

 

229

 

 

 

229

Restructuring and other charges

 

174

 

(50)

 

 

124

Adjusted EBITDA (1)

$

113,946

$

27,898

$

(9,603)

$

132,241

$

40,478

$

10,622

$

(3,600)

$

$

47,500

    

AIR MILES

    

    

Corporate/

    

    

Nine Months Ended September 30, 2022

Reward Program

BrandLoyalty

Other

Eliminations

Total

(in thousands)

Revenues

$

199,649

$

289,597

$

$

(129)

$

489,117

Income (loss) before income taxes

$

68,274

$

(435,052)

$

(46,763)

$

$

(413,541)

Interest (income) expense, net

 

(833)

(27)

30,833

 

29,973

Depreciation and amortization

 

19,066

6,877

23

 

25,966

Stock compensation expense

 

1,168

1,886

2,194

 

5,248

Goodwill impairment

422,922

422,922

Strategic transaction costs

300

1,401

3,339

5,040

Restructuring and other charges

7,740

1,881

9,621

Adjusted EBITDA (1)

$

95,715

$

(112)

$

(10,374)

$

$

85,229

    

AIR MILES

    

    

Corporate/

    

    

Nine Months Ended September 30, 2021

Reward Program

BrandLoyalty

Other

Eliminations

Total

(in thousands)

Revenues

$

214,123

$

282,593

$

$

$

496,716

Income (loss) before income taxes

$

94,214

$

2,447

$

(11,608)

$

$

85,053

Interest (income) expense, net

 

(582)

 

264

 

 

(318)

Depreciation and amortization

 

17,927

 

9,626

 

 

27,553

Stock compensation expense

 

2,126

 

2,883

 

1,313

 

6,322

Adjusted EBITDA (1)

$

113,685

$

15,220

$

(10,295)

$

$

118,610

(1)Adjusted EBITDA is presented in accordance with ASC 280 as it is the primary performance metric utilized to assess performance of the segments and to determine the allocation of resources. Adjusted EBITDA is a non-GAAP financial measure equal to net (loss) income, the most directly comparable financial measure based on GAAP, plus (income) lossincome from investment in unconsolidated subsidiary – related party, provision for income taxes, interest expense (income) expense,, net, depreciation and other amortization, and amortization of purchased intangibles, and stock compensation expense. Adjusted EBITDA also excludes the gain on the sale of business,goodwill impairment, strategic transaction costs, which represent costs for professional services associated with strategic initiatives, and restructuring and other charges. Strategic transaction costs represent costs associated with the Separation, which were comprised of amounts associated with the Employee Matters Agreement and Tax Matters Agreement. Strategic transaction costs also include advisory services associated with modifying the Credit Agreement and the Company’s capital structure.

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LOYALTY VENTURES INC.

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

17. SUPPLEMENTAL CASH FLOW INFORMATION

The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the unaudited condensed consolidated and combined statements of cash flows:

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2022

    

2021

(in thousands)

(in thousands)

Cash and cash equivalents

$

198,865

$

198,761

$

73,307

$

198,865

Restricted cash included within other current assets (1)

 

5,312

 

4,154

 

9,132

 

5,312

Restricted cash included within redemption settlement assets, restricted (2)

 

58,196

 

45,371

 

40,870

 

58,196

Total cash, cash equivalents and restricted cash

$

262,373

$

248,286

$

123,309

$

262,373

(1)Includes cash restricted for travel deposits within the AIR MILES Reward Program.
(2)See Note 6,5, “Redemption Settlement Assets, Restricted,” for additional information regarding the nature of restrictions on redemption settlement assets.

18. RELATED PARTY TRANSACTIONS

TransactionsPrior to the Separation, transactions between the Company and ADSits former Parent were considered to be effectively settled at the time the transaction was recorded. The net effect of the settlement of these intercompany transactions is reflected in the unaudited condensed combined statementsstatement of cash flowsflow as a financing activity as net transfers to Parent and in the unaudited condensed combined balance sheets as Parent’s net investment.

ADS allocated $4.0 million and $3.6 million for the three months ended September 30, 2021 and 2020, respectively, and $11.6 million and $10.8 millionformer Parent for the nine months ended September 30, 2021. In January 2021, the Company paid cash dividends to the former Parent of $124.2 million, of which $4.2 million was withheld for taxes.

The former Parent allocated $4.0 million and 2020,$11.6 million for the three and nine months ended September 30, 2021, respectively, of corporate overhead costs that directly or indirectly benefit the Company that areis included in general and administrative expense within the Company’s unaudited condensed combined statements of income.operations. These assessments relate to information technology, finance, accounting, and tax services provided, as well as human resources, and other functional support. These allocations were determined based on management estimates on the number of employees and non-employee costs associated with the use of these functions by the Company and may not be indicative of the costs that the Company would otherwise incur on a standalone basis.

In addition, the Company had an investment in unconsolidated subsidiary that was a consolidated subsidiary of the former Parent, which was sold to a subsidiary of the former Parent in August 2021. See Note 8, “Investment in Unconsolidated Subsidiary - Related Party,” for additional information.

As part of the Separation, the Company entered into certain agreements with its former Parent, including a Transition Services Agreement, Employee Matters Agreement, and Tax Matters Agreement.

For the three and nine months ended September 30, 2022, the Company incurred $0.6 million and $1.8 million, respectively, of expenses in connection with the Transition Services Agreement for various corporate, administrative and information technology services provided by its former Parent, which have been included in general and administrative expenses in the Company’s unaudited condensed consolidated statements of operations.

Pursuant to the terms of the Employee Matters Agreement, the Company received a net cash payment of $1.6 million as final settlement of the estimated prorated bonus amounts established at the time of the Separation.

Additionally, the Company has certain assets and liabilities associated with the Tax Matters Agreement. The Company has $20.3 million and $20.1 million of accounts receivable as of September 30, 2022 and December 31, 2021,

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LOYALTY VENTURES INC.

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

In addition, the Company had an investment in unconsolidated subsidiary that was a consolidated subsidiaryrespectively, accrued expenses of the Parent. See Note 9, “Investment in Unconsolidated Subsidiary - Related Party,” for additional information.

In January$75.8 million and $80.0 million as of September 30, 2022 and December 31, 2021, the Company paid cash dividends to ADS of $124.2respectively, and $1.0 million of which $4.2 million was withheld for taxes.other liabilities as of September 30, 2022 and December 31, 2021 included in the Company’s consolidated balance sheets.

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Caution Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact, including statements regarding guidance, industry prospects, or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our expectations or forecasts of future events and can generally be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan,” “likely,” “may,” “should”“might,” “should,” “would” or other words or phrases of similar import. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding the spinoff of the LoyaltyOne segment, our expected operating results, future economic conditions including currency exchange rates, future stockholder returns and the guidance we give with respect to our anticipated financial performance. We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that could cause actual results to differ materially for a variety of reasons, including, among others, our high level of indebtedness; reductions in our credit ratings that limit our ability to access capital markets; increases in market interest rates; the potential for our common stock to be delisted from the projections, anticipated resultstrading on Nasdaq for failure to meet minimum continuing listing standards; continuing impacts related to COVID-19, including variants, labor shortages, reduction in demand from clients, supply chain disruption for our reward suppliers and capacity constraints, rising costs or other expectations expresseddisruptions in this report,the airline or travel industries; changes in geopolitical conditions, including the Russian invasion of Ukraine and no assurances canrelated global sanctions and Russian restrictions or actions with respect to local assets; fluctuation in foreign exchange rates; execution of restructuring plans and any resulting cost savings; loss of, or reduction in demand for services from, significant clients; loss of active AIR MILES® Reward Program collectors or greater than expected redemptions by the same; unfavorable resolution of pending or future litigation matters; disruption to operations due to the separation from our former Parent or failure of the separation to be given thattax-free; new regulatory limitations related to consumer protection or data privacy limiting our expectations will proveservices; and loss of consumer information due to have been correct.compromised physical or cyber security. These risks and uncertainties, include, but are not limited to, the following:

the spinoff may not be tax-free for U.S. federal income tax purposes;
the disruption to our business or a loss of synergies from separating the businesses that could negatively impact the balance sheet, profit margins or earnings or that we may not realize all of the expected benefits of the spinoff;
the market price and trading volume of our common stock may be volatile, making resale of Loyalty Ventures shares at or above the initial market price following the spinoff difficult;
high levels of indebtedness may restrict our ability to compete, react to changes in our business and incur additional indebtedness to fund future needs;
continuing impacts related to COVID-19, including government economic stimulus, labor shortages, reduction in demand from clients, supply chain disruption for our reward suppliers and disruptions in the airline or travel industries;
loss of, or reduction in demand for services from, significant clients;
failure to identify, complete or successfully integrate or disaggregate business acquisitions or divestitures;
increases in the cost of doing business, including market interest rates;
inability to access financial or capital markets;
loss of active AIR MILES® Reward Program collectors;
increased redemptions by AIR MILES Reward Program collectors;
unfavorable fluctuations in foreign currency exchange rates;
limitations on loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy;
loss or disruption, due to cyber attack oras well as other service failures, of data center operations or capacity;
loss of consumer information due to compromised physical or cyber security; and
those factors set forth in the Risk Factors section in our registration statement on Form 10, filed with the Securities and Exchange Commission (“SEC”), on October 13, 2021, as well as those factors discussed in Item 1A and elsewhere in this Form 10-Q and in the documents incorporated by reference in this Form 10-Q.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Further risks and uncertainties include, butthat could cause our actual results or outcomes to differ significantly from management’s expectations, are not limited to,described in greater detail in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the impact of strategic initiativesmost recently ended fiscal year as well as those factors discussed in Item 1A and elsewhere in this Quarterly Report on us or our business if any transactions are undertaken,Form 10-Q and whetherin the anticipated benefits of such transactions can be realized.

documents incorporated by reference in this Form 10-Q. Any forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date made, and we undertake no obligation, other than as required by applicable law, to update or revise any forward-looking statements, whether as a result of new information, subsequent events, anticipated or unanticipated circumstances or otherwise.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated and combined financial statements and related notes thereto presented in this quarterly report and the consolidated and combined financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020 included2021, filed with the Securities and Exchange Commission, or SEC, on February 28, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in our registration statementthese forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this Quarterly Report on Form 10,10-Q. See “Caution Regarding Forward-Looking Statements” and “Risk Factors” in this Quarterly Report on Form 10-Q, and the “Risk Factors” in Part 1, Item 1A, "Risk Factors" of our Annual Report on Form 10-K filed with the SEC on October 13, 2021.February 28, 2022.

SpinoffBasis of the LoyaltyOne SegmentPresentation

On October 13,November 5, 2021, the Board of Directors ofBread Financial Holdings, Inc., previously named Alliance Data Systems Corporation (“ADS” or “Parent”former Parent”) approved, completed the previously announced separation (the “Separation”)spinoff of its LoyaltyOne reportable segment consisting of its Canadian AIR MILES® Reward Program and Netherlands-based BrandLoyalty businesses,(the “Separation”) into an independent, publicly traded company, Loyalty Ventures Inc. (“Loyalty Ventures”Ventures,” “we,” or “our”). On November 5,

Prior to the Separation and for the three and nine months ended September 30, 2021, the date of the Separation, 81% of the outstanding shares of Loyalty Ventures were distributed pro rata based on the outstanding shares of ADS common stock at the close of business on the record date of October 27, 2021, with ADS retaining the remaining 19% of the outstanding shares of Loyalty Ventures. ADS stockholders of record that did not sell their rights to receive Loyalty Ventures stock before the close of business on November 5, 2021 received one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADS common stock. Additionally, Loyalty Ventures made a cash distribution of $750.0 million to ADS on November 3, 2021 as part of the Separation. The distribution qualified as a tax-free reorganization and a tax-free distribution to ADS and its stockholders for U.S. federal income tax purposes. On November 8, 2021, “regular-way” trading of Loyalty Ventures’ common stock began trading on the Nasdaq Stock Market under the symbol “LYLT”.

Basis of Presentation

We have historically operated as part of ADS and not as a standalone company, and we were a reportable segment of ADS. Combinedunaudited combined financial statements representingreflected the historicalfinancial position, results of operations, of Loyalty Ventures’ business have beenand cash flows which were derived from the historicalconsolidated financial statements and accounting records of ADS and are presented on a carve-out basis. Our combined financial statements and accompanying notes have been preparedour former Parent in accordance with accounting principles generally accepted in the United States, of America (“GAAP”).

The preparation of financial statements in conformity with U.S.or 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.were prepared on a “carve-out” basis. The combined financial statements mayalso include allocations of certain general and administrative expenses from our former Parent. These allocations relate to information technology, finance, accounting, tax services, human resources, and other functional support and were determined based on management estimates on the number of employees and non-employee costs associated with the use of these functions by us. We were allocated $4.0 million and $11.6 million for the three and nine

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months ended September 30, 2021, respectively, for such corporate expenses, which were included within general and administrative expenses in the combined statement of operations. Our former Parent’s third-party long-term debt and the related interest expense were not be indicativeallocated for the three and nine months ended September 30, 2021, as Loyalty Ventures was not the legal obligor of future performancesuch debt. The combined financial statements for the three and nine months ended September 30, 2021, do not necessarily reflect what the financial position, results of operations, and cash flows would have been had we operated as an independent, publicly traded company duringcompany. The financial statements for the periods presented, particularly becausethree and nine months ended September 30, 2022, represent the unaudited consolidated financial statements of changesLoyalty Ventures.

Overview

Loyalty Ventures is a leading provider of tech-enabled, data-driven consumer loyalty solutions. Our solutions are focused on helping partners achieve their strategic and financial objectives, from increased consumer basket size, shopper traffic and frequency and digital reach to enhanced program reporting and analytics. We help financial services providers, retailers and other consumer-facing businesses create and increase customer loyalty across multiple touch points from traditional to digital to mobile and emerging technologies. We manage our business in two segments, the AIR MILES® Reward Program and BrandLoyalty.

The AIR MILES Reward Program operates as a full-service coalition loyalty program for our sponsors. We provide marketing, customer service, rewards and redemption management for our sponsors. Recently, the AIR MILES Rewards Program introduced a series of improvements to the program as part of its commitment to providing collectors with an enhanced loyalty program that offers more choice, flexibility and value that will continue throughout 2022. The increase in value proposition for our AIR MILES reward miles has and will continue to have an impact on our redemption revenue, as the cost of redemptions is netted against redemption revenue in accordance with ASC 606, Revenue from Contracts with Customers. In June 2022, the AIR MILES Reward Program received notice from its sponsor, Sobeys Inc., of its intent to exit the program on a region-by-region basis, with the departure of Atlantic Canada in August 2022, Western Canada in September 2022, Ontario in November 2022 and continuing through the first quarter of 2023. Sobeys represented approximately 10% of Loyalty Ventures’ adjusted EBITDA in 2021. For 2022, we expect this development will primarily impact the number of AIR MILES reward miles issued and continue to experiencenegatively impact issuance thereafter. For the three and nine months ended September 30, 2022, redemptions increased 45% and 47%, respectively, as compared to the same periods in the futureprior year, due to the rebound of travel along with the launch of our new travel platform that provides more choices for collectors. However, redemption revenue for our AIR MILES Reward Program declined due to our investment in providing greater value to the collector. Issuance for each of the three and nine months ended September 30, 2022 increased 2%, respectively, as compared to the same periods in the prior year due to increased spend with our credit card and fuel sponsors, but growth was tempered by the grocery category after two regions transitioned in the third quarter of 2022.

BrandLoyalty is a leading global provider of campaign-based loyalty solutions for grocers and other high-frequency retailers. Revenue is significantly impacted by the number, type, and timing of programs in market, which can vary significantly year over year. BrandLoyalty’s original outlook for 2022 was based on a post-covid recovery after two years of pandemic and logistics-related disruptions to the segment’s operating environment. As a result of the Separation, includinginvasion of Ukraine by Russia and sanctions imposed in response to the conflict, we have taken steps to pause business in Russia, which we estimate will result in lost revenues of approximately $16 million (€15 million). The vast majority of products we use for our campaign-based loyalty solutions in Russian grocery stores are sourced internationally, and none of the rewards for loyalty campaigns outside of Russia are sourced from Russian suppliers. As of September 30, 2022, we have approximately $8.9 million in cash and cash equivalents and $4.5 million in inventory in our Russian subsidiary. The protracted war in Ukraine has created a greater negative impact on the macroeconomic environment as European consumers are now confronted with rising food and energy prices, which has resulted in a decline in consumer confidence and changes in consumer sentiment and behavior. The ongoing supply chain issues coupled with these other inflationary and recessionary concerns has resulted in negative pressure on BrandLoyalty’s adjusted EBITDA. Further, these factors resulted in the financing, cash management, operations, cost structure and personnel needsimpairment of our business.

The combined financial statements also include allocationsthe segment’s goodwill of certain general and administrative expenses from ADS. ADS allocated $4.0 million and $3.6 million of corporate overhead costs that directly or indirectly benefit Loyalty Ventures’ business for the three months ended September 30, 2021 and 2020, respectively, and $11.6 million and $10.8$422.9 million for the nine months ended September 30, 2021 and 2020, respectively, of corporate overhead costs that directly or indirectly benefit Loyalty Ventures’ business that are included in general and administrative expense within our combined statements of income. These assessments relate to information technology, finance, accounting, tax services, human resources, and other functional support. These allocations were determined based on management estimates on the number of employees and nonemployee costs associated with the use of these functions by us and may not be indicative of the costs that we would otherwise incur on a standalone basis or had we operated independently of ADS.

COVID-19 Update

Following the declaration by the WHO in the first quarter of 2020 of COVID-19 as a global pandemic and the rapid spread of COVID-19, international, provincial, federal, state and local government or other authorities have imposed

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varying degreesSeptember 30, 2022. See Note 7, “Intangible Assets and Goodwill,” of restrictions on socialthe Notes to Unaudited Condensed Consolidated and commercial activity in an effort to improve health and safety. As the global COVID-19 pandemic has continued to evolve, our priority has been and continues to be, the health and safety of our employees, with the vast majority of our employees continuing to work from home.Combined Financial Statements for additional information.

We continue to see sequential improvement in business conditions. AIR MILES Reward Program issuances and redemptions for the third quarter of 2021 increased 1% and 12%, respectively, as compared toIn the second quarter of 2021; however, issuance declined 7% but redemptions increased 30%,2022, executive management and the board of directors began a process to simplify the organization, reduce its cost structure, and optimize its supply chain. As a result, we incurred restructuring and other charges of $5.4 million and $9.6 million in the three and nine months ended September 30, 2022, respectively, as compared to the third quarter of 2020. The increase in redemptions can be attributed to the improvementwhich have been included in our travel-related categories. Issuance for the quarter was down due to timingcost of promotional activity. At BrandLoyalty, new program activity is increasing with consumers actively engaged in loyalty campaigns. However, both the varying degrees of restrictions impacting the U.K.operations. See Note 9, “Restructuring and many Asian and European countries, as well as recent disruptions to port services in southern China amid COVID-19 resurgences exacerbating already challenged global supply chain conditions, have impacted our third quarter results and could negatively impact our results of operations in the fourth quarter of 2021.

Despite the availability of vaccines, surges in COVID-19 cases, including variantsOther Charges,” of the strain, may adversely impact the economic recoveryNotes to Unaudited Condensed Consolidated and our industry outlook.Combined Financial Statements for additional information. We continueexpect to evaluate the nature and extent of changes to the market and economic conditions related to the COVID-19 pandemic and current and potential impactexecute on our business and financial position. However, given the dynamic nature of this situation,operational efficiency plan throughout 2022.

While we cannot reasonably estimateexpect the impacts of COVID-19 on our future resultsbusiness to continue to moderate, there still remains uncertainty around the pandemic, its effect on labor or other macroeconomic factors, the severity and duration, the continued availability and effectiveness of operationsvaccines and actions taken by government authorities, including restrictions, laws or cash flows at this time.regulations, and other third parties in response to the pandemic. We continue to actively monitor the impact of COVID-19 on all aspects of our business.

Consolidated and Combined Results of Operations

Three Months Ended September 30, 

Nine Months Ended September 30, 

 

    

2022

    

2021

    

% Change

    

2022

    

2021

    

% Change

 

(in thousands, except percentages)

 

Revenues

 

  

 

  

 

  

 

  

 

  

 

  

Redemption, net

$

91,852

$

97,149

 

(5)

%  

$

273,779

$

280,844

 

(3)

%

Services

 

62,757

 

65,806

 

(5)

 

191,830

 

199,244

 

(4)

Other

 

7,760

 

6,302

 

23

 

23,508

 

16,628

 

41

Total revenue

 

162,369

 

169,257

 

(4)

 

489,117

 

496,716

 

(2)

Operating expenses

 

  

 

  

 

  

 

  

 

  

 

  

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

 

133,905

 

119,882

 

12

 

407,890

 

372,820

 

9

General and administrative

 

5,090

 

4,018

 

27

 

15,907

 

11,608

 

37

Depreciation and other amortization

 

7,409

 

8,665

 

(14)

 

25,146

 

26,237

 

(4)

Amortization of purchased intangibles

 

259

 

433

 

(40)

 

820

 

1,316

 

(38)

Goodwill impairment

nm

*

422,922

nm

*

Total operating expenses

 

146,663

 

132,998

 

10

 

872,685

 

411,981

 

112

Operating income (loss)

 

15,706

 

36,259

 

(57)

 

(383,568)

 

84,735

 

(553)

Interest expense (income), net

 

11,527

 

(136)

 

nm

*

 

29,973

 

(318)

 

nm

*

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

 

4,179

 

36,395

 

(89)

 

(413,541)

 

85,053

 

(586)

Provision for income taxes

 

4,304

 

16,542

 

(74)

 

27,466

 

31,616

 

(13)

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

 

 

(4,108)

 

nm

*

 

 

(4,067)

 

nm

*

Net (loss) income

$

(125)

$

23,961

 

(101)

%  

$

(441,007)

$

57,504

 

(867)

%

Key Operating Metrics (in millions):

 

  

 

  

 

  

 

  

 

  

 

  

AIR MILES reward miles issued

 

1,176.8

1,155.2

 

2

%  

 

3,470.0

3,406.1

 

2

%

AIR MILES reward miles redeemed

 

1,294.9

895.8

 

45

%  

 

3,584.8

2,435.5

 

47

%

Supplemental information:

 

 

  

 

 

  

Average CAD to USD foreign currency exchange rate

 

0.77

0.79

 

(3)

%  

 

0.78

0.80

 

(3)

%

Average EUR to USD foreign currency exchange rate

 

1.01

1.18

 

(14)

%  

 

1.06

1.20

 

(12)

%

* not meaningful

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Combined Results of Operations

Three Months Ended September 30, 

Nine Months Ended September 30, 

 

    

2021

    

2020

    

% Change

    

2021

    

2020

    

% Change

 

(in thousands, except percentages)

 

Revenues

 

  

 

  

 

  

 

  

 

  

 

  

Redemption, net

$

97,149

$

113,073

 

(14)

%  

$

280,844

$

318,620

 

(12)

%

Services

 

65,806

 

63,629

 

3

 

199,244

 

193,856

 

3

Other

 

6,302

 

8,054

 

(22)

 

16,628

 

21,456

 

(23)

Total revenue

 

169,257

 

184,756

 

(8)

 

496,716

 

533,932

 

(7)

Operating expenses

 

  

 

  

 

  

 

  

 

  

 

  

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

 

119,882

 

146,358

 

(18)

 

372,820

 

399,519

 

(7)

General and administrative

 

4,018

 

3,630

 

11

 

11,608

 

10,794

 

8

Depreciation and other amortization

 

8,665

 

7,735

 

12

 

26,237

 

20,690

 

27

Amortization of purchased intangibles

 

433

 

12,538

 

(97)

 

1,316

 

36,168

 

(96)

Total operating expenses

 

132,998

 

170,261

 

(22)

 

411,981

 

467,171

 

(12)

Operating income

 

36,259

 

14,495

 

150

 

84,735

 

66,761

 

27

Gain on sale of a business

 

 

 

 

 

(10,876)

 

(100)

Interest income, net

 

(136)

 

(167)

 

(19)

 

(318)

 

(516)

 

(38)

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

 

36,395

 

14,662

 

148

 

85,053

 

78,153

 

9

Provision for income taxes

 

16,542

 

3,534

 

368

 

31,616

 

17,382

 

82

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

 

(4,108)

 

148

 

(2,876)

 

(4,067)

 

205

 

(2,084)

Net income

$

23,961

$

10,980

 

118

%  

$

57,504

$

60,566

 

(5)

%

Key Operating Metrics (in millions):

 

  

 

  

 

  

 

  

 

  

 

  

AIR MILES reward miles issued

 

1,155.2

1,239.7

 

(7)

%  

 

3,406.1

3,608.6

 

(6)

%

AIR MILES reward miles redeemed

 

895.8

687.2

 

30

%  

 

2,435.5

2,289.4

 

6

%

Supplemental information:

 

 

  

 

 

  

Average CAD to USD foreign currency exchange rate

 

0.79

0.75

 

5

%  

 

0.80

0.74

 

8

%

Average EUR to USD foreign currency exchange rate

 

1.18

1.17

 

1

%  

 

1.20

1.12

 

7

%

Three months ended September 30, 20212022 compared to the three months ended September 30, 20202021

Revenue. Total revenue decreased $15.5$6.9 million to $169.3$162.4 million, or 8%4%, for the three months ended September 30, 20212022 as compared to $184.8$169.3 million for the three months ended September 30, 2020.2021. The net decrease was due to the following:

Redemption, net. RevenueRedemption revenue decreased $15.9$5.3 million, or 14%5%, to $97.1$91.9 million for the three months ended September 30, 2021,2022, as redemption revenue from our coalition loyalty program decreased $2.5 million despite an increase in AIR MILES reward miles redeemed, resulting from an increase to our value proposition and cost of redemptions that are netted against revenue in accordance with ASC 606. Redemption revenue from our campaign-based loyalty programs decreased $2.8 million due to the decline in the Euro relative to the U.S. Dollar. In Euro, redemption revenue from our campaign-based loyalty programs decreased $18.8 millionincreased by 13% due to the numbercertain program performance in Europe. The timing and timingsize of programs can vary between quarters in market due to the continuing impact of COVID-19.comparative years.
Services. Revenue increased $2.2Services revenue decreased $3.0 million, or 3%5%, to $65.8$62.8 million for the three months ended September 30, 20212022 primarily due to the favorable impact of foreign currency exchange rates.the decline in AIR MILES reward miles issued in 2020 and 2021, as a portion of the consideration from those issuances is deferred and amortized into revenue over the estimated life of an AIR MILES reward mile.
Other revenue. Other revenue decreased $1.8increased $1.5 million, or 22%23%, to $6.3$7.8 million for the three months ended September 30, 2022, due to a declinean increase in ancillary revenue associated with surplus inventory in our BrandLoyalty segment.segment and ancillary revenue earned on travel bookings within our coalition loyalty program.

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Cost of operations. Cost of operations decreased $26.5increased $14.0 million, or 18%12%, to $133.9 million for the three months ended September 30, 2022 as compared to $119.9 million as compared to $146.4 millionfor the three months ended September 30, 2021 due to a $22.7$11.3 million decreaseincrease in cost of redemptions due to the decline in redemption revenue discussed abovehigher reward and a $4.5 million decrease in incentive compensation.logistics costs associated with our campaign-based loyalty programs, and restructuring and other charges incurred of $5.4 million.

General and administrative. General and administrative expenses increased $0.4$1.1 million, or 11%27%, to $5.1 million for the three months ended September 30, 2022 as compared to $4.0 million for the three months ended September 30, 2021, as compareddue to $3.6 million for the three months ended September 30, 2020, due an increase in payrollconsulting and benefits expense.legal expenses.

Depreciation and other amortization. Depreciation and other amortization increased $0.9decreased $1.3 million, or 12%14%, to $7.4 million for the three months ended September 30, 2022 as compared to $8.7 million for the three months ended September 30, 2021 as compared to $7.7 million for the three months ended September 30, 2020, primarily due to amortization associated with previous investments in digital technology within our AIR MILES Reward Program segment.certain fully depreciated property and equipment.

Amortization of purchased intangibles. Amortization of purchased intangibles decreased $12.1$0.2 million, or 97%40%, to $0.3 million for the three months ended September 30, 2022, as compared to $0.4 million for the three months ended September 30, 2021, as compareda result of the decline in foreign currency exchange rates.

Interest expense (income), net. Total interest expense (income), net increased $11.7 million due to $12.5the interest expense associated with the senior secured credit agreement, or the Credit Agreement, entered in connection with the Separation in November 2021.

Taxes. Provision for income taxes decreased $12.2 million to $4.3 million for the three months ended September 30, 2020, due to the fully amortized customer contracts in our BrandLoyalty segment.

Interest income, net. Total interest income, net decreased $0.1 million, or 19%, to $0.1 million for the three months ended September 30, 2021 as compared to $0.2 million for the three months ended September 30, 2020, due to lower interest rates.

Taxes. Provision for income taxes increased $13.0 million to2022 from $16.5 million for the three months ended September 30, 2021 from $3.5 million2021. The change in the effective tax rate to 103.0% for the three months ended September 30, 2020. The effective tax rate for the three months ended September 30, 2021 was 40.8%2022 as compared to 24.1% for40.8% in the prior year. The increase in the effective tax rate for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020year period was primarily due to an unfavorable adjustment in the current period related to a settlementresult of increased U.S. corporate expenses for which a foreign tax position.benefit cannot be currently realized.

(Income) lossIncome from investment in unconsolidated subsidiary – related party, net of tax. Income from unconsolidated subsidiary – related party was $4.1 million in 2021 represented our allocable share of the three months ended September 30, 2021 as compared to a loss of $0.1 million in the three months ended September 30, 2020. Ourincome from our investment in our

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unconsolidated subsidiary, Comenity Canada, L.P., which was sold to an affiliate of ADSour former Parent in August 2021 for $4.1 million and for which we recognized a gain on sale of unconsolidated subsidiary of $4.1 million.

Nine months ended September 30, 20212022 compared to the nine months ended September 30, 20202021

Revenue. Total revenue decreased $37.2$7.6 million or 7%,to $489.1 million for the nine months ended September 30, 2022 as compared to $496.7 million for the nine months ended September 30, 2021 from $533.9 million for the nine months ended September 30, 2020.2021. The net decrease was due to the following:

Redemption, net. RevenueRedemption revenue decreased $37.8$7.1 million, or 12%3%, to $280.8$273.8 million for the nine months ended September 30, 20212022, as revenue from our coalition loyalty program decreased $9.1 million despite an increase in AIR MILES reward miles redeemed because of an increase to our value proposition and cost of redemptions that are netted against revenue in accordance with ASC 606. This was partially offset by the increase in redemption revenue from our campaign-based loyalty programs decreased $38.3 millionof $2.0 million. In Euro, redemption revenue from our campaign-based loyalty programs increased by 13% due to the numbercertain program performance in Europe. The timing and timingsize of programs in market that continued to be impacted by COVID-19. The decrease in revenue was tempered by favorability in foreign currency exchange rates.can vary between the comparative periods.
Services. Revenue increased $5.4Services revenue decreased $7.4 million, or 3%4%, to $199.2$191.8 million for the nine months ended September 30, 20212022 due to the favorable impact of foreign currency exchange rates.the decline in AIR MILES reward miles issued in 2020 and 2021, as a portion of the consideration from those issuances is deferred and amortized into revenue over the estimated life of an AIR MILES reward mile.
Other revenuerevenue. . Revenue decreased $4.8Other revenue increased $6.9 million, or 23%41%, to $16.6$23.5 million for the nine months ended September 30, 2022, due to a declinean increase in ancillary revenue associated with surplus inventory in our BrandLoyalty segment and ancillary revenue earned on travel bookings within our BrandLoyalty segment.coalition loyalty program.

Cost of operations. Cost of operations decreased $26.7increased $35.1 million, or 7%9%, to $407.9 million for the nine months ended September 30, 2022 as compared to $372.8 million for the nine months ended September 30, 2021 as compareddue to $399.5a $34.5 million for the nine months ended September 30, 2020, as a $35.3 million decreaseincrease in cost of redemptions due to the declineincrease in redemption revenue waslogistics costs associated with our campaign-based loyalty programs, and restructuring and other charges incurred of $9.6 million. These increases were partially offset by an increase of $3.9 milliona decrease in payroll and benefits expense and an increase of $2.0 million in marketing expense.incentive compensation.

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General and administrative. General and administrative expenses increased $0.8$4.3 million, or 8%37%, to $15.9 million for the nine months ended September 30, 2022 as compared to $11.6 million for the nine months ended September 30, 2021, as compared to $10.8 million for the nine months ended September 30, 2020, due to an increase in payroll and benefits expense.expense, including stock compensation and other amounts associated with the Employee Matters Agreement, as well as additional consulting and legal expenses.

Depreciation and other amortization. Depreciation and other amortization increased $5.5decreased $1.1 million, or 27%4%, to $25.1 million for the nine months ended September 30, 2022 as compared to $26.2 million for the nine months ended September 30, 2021 as compared to $20.7 million for the nine months ended September 30, 2020, primarily due to additional capitalized software assets placed into service for digital investments for the AIR MILES Reward Program segment.certain fully depreciated property and equipment.

Amortization of purchased intangibles. Amortization of purchased intangibles decreased $34.9$0.5 million, or 96%38%, to $0.8 million for the nine months ended September 30, 2022, as compared to $1.3 million for the nine months ended September 30, 2021, as compareda result of the decline in foreign currency exchange rates.

Goodwill impairment. In the second quarter of 2022, we recognized a goodwill impairment charge of $422.9 million associated with the BrandLoyalty segment.

Interest expense (income), net. Total interest expense (income), net increased $30.3 million due to $36.2the interest expense associated with the Credit Agreement entered in connection with the Separation in November 2021.

Taxes. Provision for income taxes decreased $4.2 million to $27.5 million for the nine months ended September 30, 2020, due to the fully amortized customer contracts in our BrandLoyalty segment.

Gain on sale of a business. In January 2020, ADS sold Precima, a provider of retail strategy and customer data applications, resulting in a pre-tax gain of $10.9 million.

Interest income, net. Total interest income, net decreased $0.2 million, or 38%, to $0.3 million for the nine months ended September 30, 2021 as compared to $0.5 million for the nine months ended September 30, 2020, due to lower interest rates.

Taxes. Provision for income taxes increased $14.2 million to2022 from $31.6 million for the nine months ended September 30, 2021 from $17.4 million2021. The change in the effective tax rate to (6.6)% for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021 was 35.5%2022 as compared to 22.2% for35.5% in the prior year. Theyear period was primarily a result of

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non-deductibility of the write-off of goodwill, the increase in the effective tax rate for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to an increase in the current year related to additional withholding taxes as well as an unfavorable adjustment related to a settlement of a foreign tax position. Additionally, the effective tax rate for the nine months ending September 30, 2020 included discrete tax benefits related to the expiration of statutes of limitationU.S. corporate expenses currently non-deductible, and the resolutionwrite-down of certain deferred tax audits in various foreign jurisdictions.assets.

(Income) lossLoss from investment in unconsolidated subsidiary – related party, net of tax. The incomeIncome from unconsolidated subsidiary – related party was $4.1 million in 2021 represented our allocable share of the nine months ended September 30, 2021 as compared to a loss of $0.2 million in the nine months ended September 30, 2020. Ourincome from our investment in our unconsolidated subsidiary, Comenity Canada, L.P., which was sold to an affiliate of ADSour former Parent in August 2021 for $4.1 million and for which we recognized a gain on sale of unconsolidated subsidiary of $4.1 million.

Use of Non-GAAP financial measures

Adjusted EBITDA is a non-GAAP financial measure equal to net (loss) income, the most directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP, plus (income) lossincome from investment in unconsolidated subsidiary – related party, provision for income taxes, interest income,expense (income), net, depreciation and other amortization, the amortization of purchased intangibles, and stock compensation expense. Adjusted EBITDA also excludes the gain on the sale of business,goodwill impairment, strategic transaction costs, which represent costs for professional services associated with strategic initiatives, and restructuring and other charges. Strategic transaction costs represent costs associated with the Separation, which were comprised of amounts associated with the Employee Matters Agreement and Tax Matters Agreement. Strategic transaction costs also include advisory services associated with modifying the Credit Agreement and our capital structure. These costs, as well as stock compensation expense,items were not included in the measurement of segment adjusted EBITDA as the chief operating decision maker did not factor these expenses for purposes of assessing segment performance and decision making with respect to resource allocations.

We use adjusted EBITDA as an integral part of our internal reporting to measure the performance of our reportable segments and to evaluate the performance of our senior management, and we believe it provides useful information to our investors regarding our performance and overall results of operations. Adjusted EBITDA is considered an important indicator of the operational strength of our businesses. Adjusted EBITDA eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets and amortization of intangible assets, including certain intangible assets that were recognized in business combinations.assets. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our

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businesses. Management evaluates the costs of such tangible and intangible assets, such as capital expenditures, investment spending and return on capital and therefore the effects are excluded from adjusted EBITDA. Adjusted EBITDA also eliminates the non-cash effect of stock compensation expense.

Adjusted EBITDA is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, net income as an indicator of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA is not intended to represent funds available for dividends, reinvestment or other discretionary uses, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Adjusted EBITDA presented herein may not be comparable to similarly titled measures presented by other companies and may not be identical to corresponding measures used in our various agreements.

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

2021

2020

2021

2020

(in thousands)

Net income

$

23,961

$

10,980

$

57,504

$

60,566

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

 

(4,108)

 

148

 

(4,067)

 

205

Provision for income taxes

 

16,542

 

3,534

 

31,616

 

17,382

Interest income, net

 

(136)

 

(167)

 

(318)

 

(516)

Depreciation and other amortization

 

8,665

 

7,735

 

26,237

 

20,690

Amortization of purchased intangibles

 

433

 

12,538

 

1,316

 

36,168

Stock compensation expense

 

2,143

 

1,826

 

6,322

 

5,184

Gain on sale of a business, net of strategic transaction costs (1)

 

 

178

 

 

(7,791)

Strategic transaction costs (2)

 

 

66

 

 

229

Restructuring and other charges

 

 

(5)

 

 

124

Adjusted EBITDA

$

47,500

$

36,833

$

118,610

$

132,241

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Three Months Ended September 30, 

    

Nine Months Ended September 30, 

2022

2021

2022

2021

(in thousands)

Net (loss) income

$

(125)

$

23,961

$

(441,007)

$

57,504

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

 

 

(4,108)

 

 

(4,067)

Provision for income taxes

 

4,304

 

16,542

 

27,466

 

31,616

Interest expense (income), net

 

11,527

 

(136)

 

29,973

 

(318)

Depreciation and other amortization

 

7,409

 

8,665

 

25,146

 

26,237

Amortization of purchased intangibles

 

259

 

433

 

820

 

1,316

Stock compensation expense

 

1,339

 

2,143

 

5,248

 

6,322

Goodwill impairment

422,922

Strategic transaction costs (1)

 

3,015

 

 

5,040

 

Restructuring and other charges (2)

 

5,355

 

 

9,621

 

Adjusted EBITDA

$

33,083

$

47,500

$

85,229

$

118,610

(1)Represents gain on salecosts associated with the Separation, which were comprised of Precima in January 2020, net of strategic transaction costs. Precima was included inamounts associated with the Employee Matters Agreement and Tax Matters Agreement, and modifying the Credit Agreement and our AIR MILES Reward Program segment. See Note 4, “Dispositions,” of the Notes to Unaudited Condensed Combined Financial Statements for more information.capital structure.
(2)Represents costs for professional services associated with strategic initiatives.termination benefits, assets impairments and other exit costs. See Note 9, “Restructuring and Other Charges,” of the Notes to Unaudited Condensed Consolidated and Combined Financial Statements for additional information.

Segment Revenue and Adjusted EBITDA

Three Months Ended September 30, 

Nine Months Ended September 30, 

 

Three Months Ended September 30, 

Nine Months Ended September 30, 

 

    

2021

    

2020

    

% Change

    

2021

    

2020

    

% Change

 

    

2022

    

2021

    

% Change

    

2022

    

2021

    

% Change

 

 

(in thousands, except percentages)

 

(in thousands, except percentages)

Revenue:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

AIR MILES Reward Program

$

71,928

$

66,198

 

9

%  

$

214,123

$

207,351

 

3

%

$

67,387

$

71,928

 

(6)

%  

$

199,649

$

214,123

 

(7)

%

BrandLoyalty

 

97,329

 

118,558

 

(18)

 

282,593

 

326,581

 

(13)

 

95,024

 

97,329

 

(2)

 

289,597

 

282,593

 

2

Corporate/Other

 

 

 

 

 

 

 

 

 

 

 

 

Eliminations

(42)

nm

*

(129)

nm

*

Total

$

169,257

$

184,756

 

(8)

%  

$

496,716

$

533,932

 

(7)

%

$

162,369

$

169,257

 

(4)

%  

$

489,117

$

496,716

 

(2)

%

Adjusted EBITDA

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

AIR MILES Reward Program

$

40,478

$

33,684

 

20

%  

$

113,685

$

113,946

 

%

$

34,734

$

40,478

 

(14)

%  

$

95,715

$

113,685

 

(16)

%

BrandLoyalty

 

10,622

 

6,435

 

65

 

15,220

 

27,898

 

(45)

 

102

 

10,622

 

(99)

 

(112)

 

15,220

 

(101)

Corporate/Other

 

(3,600)

 

(3,286)

 

10

 

(10,295)

 

(9,603)

 

7

 

(1,753)

 

(3,600)

 

(51)

 

(10,374)

 

(10,295)

 

1

Total

$

47,500

$

36,833

 

29

%  

$

118,610

$

132,241

 

(10)

%

$

33,083

$

47,500

 

(30)

%  

$

85,229

$

118,610

 

(28)

%

Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Revenue. Total revenue decreased $6.9 million, or 4%, to $162.4 million for the three months ended September 30, 2022 from $169.3 million for the three months ended September 30, 2021. The decrease was due to the following:

AIR MILES Reward Program. Revenue decreased $4.5 million, or 6%, to $67.4 million for the three months ended September 30, 2022, as revenue was impacted by a decline in issuance revenue, included in service revenue, of $2.6 million due to the decrease in the number of AIR MILES reward miles issued in 2020 and 2021, and a decline of $2.5 million in redemption revenue due to the increase in the value proposition that negatively impacts the cost of redemptions, which are netted against revenue in accordance with ASC 606.
BrandLoyalty. Revenue decreased $2.3 million, or 2%, to $95.0 million for the three months ended September 30, 2022, due to the decline in the Euro relative to the U.S. Dollar. In Euro, revenue from our campaign-based

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Three months ended September 30, 2021 compared to the three months ended September 30, 2020

loyalty programs increased by 14% primarily due to certain program performance in Europe. The timing and size of programs can vary between quarters in the comparative years.

RevenueAdjusted EBITDA. Total revenueAdjusted EBITDA decreased $15.5$14.4 million, or 8%30%, to $169.3$33.1 million for the three months ended September 30, 20212022 from $184.8$47.5 million for the three months ended September 30, 2020.2021. The net decrease was due to the following:

AIR MILES Reward Program. Adjusted EBITDA decreased $5.7 million, or 14%, to $34.7 million for the three months ended September 30, 2022 due to the decrease in revenue noted above.
BrandLoyalty. Adjusted EBITDA decreased $10.5 million, or 99%, to $0.1 million for the three months ended September 30, 2022 due to margin pressure attributable to an increase in cost of redemptions from higher reward and logistics costs.
Corporate/Other. Adjusted EBITDA increased $1.8 million to $(1.8) million for the three months ended September 30, 2022 primarily due to the favorable impact of foreign currency exchange rates on certain tax assets and liabilities.

Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

Revenue. Total revenue decreased $7.6 million to $489.1 million for the nine months ended September 30, 2022 from $496.7 million for the nine months ended September 30, 2021. The net decrease was due to the following:

AIR MILES Reward Program. Revenue increased $5.7decreased $14.5 million, or 9%7%, to $71.9$199.6 million for the threenine months ended September 30, 2021,2022, as revenue was positively impacted by a decline in issuance revenue, included in service revenue, of $9.1 million due to the increasedecrease in redemptionsthe number of AIR MILES reward miles issued in 2020 and 2021, and a decline of $9.1 million in redemption revenue due to the increase in the Canadian dollar exchange rate.value proposition that negatively impacts the cost of redemptions, which are netted against revenue in accordance with ASC 606, partially offset by an increase in ancillary revenue earned on travel bookings.
BrandLoyalty. Revenue decreased $21.2increased $7.0 million, or 18%2%, to $97.3 million for the three months ended September 30, 2021, due to the number and timing of programs in market with the continued impact of COVID-19.

Adjusted EBITDA. Adjusted EBITDA increased $10.7 million, or 29%, to $47.5 million for the three months ended September 30, 2021 from $36.8 million for the three months ended September 30, 2020. The net increase was due to the following:

AIR MILES Reward Program. Adjusted EBITDA increased $6.8 million, or 20%, to $40.5 million for the three months ended September 30, 2021 due to the increase in redemption revenue, the decrease in payroll and benefits expense, and the favorable impact of foreign currency exchange rates.
BrandLoyalty. Adjusted EBITDA increased $4.2 million, or 65%, to $10.6 million for the three months ended September 30, 2021 due to the decrease in cost of redemptions and incentive compensation, offset by the decline in revenue noted above.
Corporate/Other. Adjusted EBITDA decreased $0.3 million to $(3.6) million for the three months ended September 30, 2021 due to an increase in payroll and benefits expense.

Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020

Revenue. Total revenue decreased $37.2 million, or 7%, to $496.7 million for the nine months ended September 30, 2021 from $533.9 million for the nine months ended September 30, 2020. The net decrease was due to the following:

AIR MILES Reward Program. Revenue increased $6.8 million, or 3%, to $214.1$289.6 million for the nine months ended September 30, 2021 as revenue was positively impacted by the increase in the Canadian dollar exchange rate. In local currency, revenue declined 4%2022, due to the negative impact of lower AIR MILES issued.
BrandLoyalty. Revenue decreased $44.0 million, or 13%, to $282.6 million for the nine months ended September 30, 2021, due to the numbersize and timing of programs in market and an increase in ancillary revenue associated with surplus inventory. In Euro, revenue from our campaign-based loyalty programs increased by 15% primarily due to certain program performance in Europe. The timing and size of programs can vary between the continued impact of COVID-19. The decrease in revenue was tempered by favorability in foreign currency exchange rates.comparative periods.

Adjusted EBITDA. Adjusted EBITDA decreased $13.6$33.4 million, or 10%28%, to $85.2 million for the nine months ended September 30, 2022 from $118.6 million for the nine months ended September 30, 2021 from $132.2 million for the nine months ended September 30, 2020.2021. The decrease was due to the following:

AIR MILES Reward Program. Adjusted EBITDA decreased $0.3$18.0 million, or 16%, to $113.7$95.7 million for the nine months ended September 30, 2021. The decline in adjusted EBITDA was primarily2022 due to an increase in marketing expense and consulting costs for additional promotional activity offset by the increasedecrease in revenue discussednoted above.
BrandLoyalty. Adjusted EBITDA decreased $12.7$15.3 million, or 45%101%, to $15.2$(0.1) million for the nine months ended September 30, 20212022 due to margin loss from the decline in revenue noted above andpressure attributable to an increase in payrollcost of redemptions from higher reward and benefits due to certain severancelogistics costs.

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Corporate/Other. Adjusted EBITDA decreased $0.7$0.1 million to $(10.3)$(10.4) million for the nine months ended September 30, 2022 due to an increase in payroll and benefits expense.expense and consulting and legal costs, partially offset by the favorable impact of foreign currency exchange rates on certain tax assets and liabilities.

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Liquidity and Capital Resources

Historically, our primary source of liquidity has been cash generated from operating activities. We expanded this source with our new credit facility and may expand these sources with future issuances of debt or equity securities. Our primary uses of cash are for ongoing business operations, repayment of our debt, capital expenditures and investments.

We believe that internally generated funds and other sources of liquidity discussed below will be sufficient to meet working capital needs, capital expenditures, and other business requirements for at least the next 12 months. We believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances and available borrowings through the issuance of third-party debt.revolving credit facility. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of debt or equity securities; however, there can be no assurances that we will be able to obtain additional debt or equity financing on acceptable terms in the future. We have engaged certain advisors to assist in modifying our capital structure put in place at formation; further, the independent members of the board have been reviewing all circumstances related to our formation. During the third quarter of 2022, we received a downgrade of our corporate credit rating which could increase our future cost of financing or limit our ability to access capital. However, any downgrade of our credit rating(s) is not an event of default in our Credit Agreement. Further, both stock and bond markets in the United States are performing poorly in 2022 and our common stock has traded below the minimum bid price on the Nasdaq Global Select Market for a short period of time. See Item 1A Risk Factors for additional information about risks related to trading below the minimum bid price for 30 or more consecutive trading days. In addition, the continued volatility in the financial and capital markets due to COVID-19, or the ongoing invasion by Russia of Ukraine, may limit our access to, or increase our cost of, capital or make capital unavailable on terms acceptable to us or at all.

Our ability to fund our operating needs will depend on our future ability to continue to generate positive cash flow from operations and obtain debt or equity financing on acceptable terms.

Cash Flow Activity

Operating Activities. We generatedused cash flow from operating activities of $113.7$51.6 million and $121.7for the nine months ended September 30, 2022 as compared to cash flow generated from operating activities of $113.7 million for the nine months ended September 30, 2021, primarily as a result of a decline in net income and 2020, respectively. The year-over-year decreasechanges in operating cash flows wasworking capital, primarily duefrom an increase in inventory in advance of programs scheduled in the fourth quarter of the year, in addition to lower profitabilityinventory from underperforming campaigns in part due to the continued impactfirst half of COVID-19.the year, and a decline in deferred revenue associated with our AIR MILES Reward Program as a result of an increase in redemptions.

Investing Activities. Cash used in investing activities was $55.6$5.6 million and $50.6$55.6 million for the nine months ended September 30, 20212022 and 2020,2021, respectively. Significant components of investing activities are as follows:

Redemption settlement assets, restricted. TheCash provided by redemption settlement assets was $10.3 million for the nine months ended September 30, 2022 as compared to cash used in redemption settlement assets restricted wasof $47.3 million and $31.3 million for the nine months ended September 30, 2021 and 2020 respectively. The increase in cash used was attributable to an increase in investments, as AIR MILES reward miles issued were greater than AIR MILES reward miles redeemed.a result of lower investments.
Capital expenditures. Cash paid for capital expenditures was $13.1$15.9 million and $18.6$13.1 million for the nine months ended September 30, 2022 and 2021, and 2020, respectively. We anticipate that capital expenditures will be less than 5% of annual revenue.
Sale of investment in unconsolidated subsidiary – related party. In August 2021, we sold our investment in Comenity Canada L.P. to an affiliate of ADS for $4.1 million.

Financing Activities. Cash used in financing activities was $129.3$38.9 million and $1.5$129.3 million for the nine months ended September 30, 2022 and 2021, and 2020, respectively. In 2022, the cash used for financing was primarily attributable to principal payments on our term loans. In 2021, the Company paid a dividend to theour former Parent of $124.2 million, of which $4.2 million was withheld for taxes.

Debt

BrandLoyalty Credit Agreement

In the first quarter of 2021, BrandLoyalty and certain of its subsidiaries, as borrowers and guarantors, amended its credit agreement to extend the maturity date by one year from April 3, 2023 to April 3, 2024. As of September 30, 2021,

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Debt

Credit Agreement

In July 2022, we entered into an amendment to our Credit Agreement, which, among other things, provides for adjustments to the financial maintenance covenant applicable to the term loan A and revolving credit facility as follows:

Four Fiscal Quarters Ending

Maximum Consolidated Total Leverage Ratio

December 31, 2021 through June 30, 2022

5.00:1.00

September 30, 2022 through September 30, 2023

5.75:1.00

December 31, 2023

5.50:1.00

March 31, 2024 through September 30, 2024

5.25:1.00

December 31, 2024 through March 31, 2025

5.00:1.00

June 30, 2025 and each fiscal quarter thereafter

4.75:1.00

In addition, the amendment reduces the amount of revolving commitments by $2.8 million per quarter, beginning September 30, 2022, for each quarter in which the total leverage ratio as defined in the Credit Agreement is in excess of 4.75 to 1.

At September 30, 2022, we had $637.0 million in term loans outstanding and a $150.0 million revolving line of credit. As of September 30, 2022, we had no amounts outstanding under our BrandLoyaltyrevolving line of credit but a total availability of $138.2 million due to letters of credit outstanding under the Credit Agreement. The BrandLoyalty credit agreement was terminated in connection with the company entering into the senior secured credit agreement described more fully below.

Credit Agreement

On November 3, 2021, Loyalty Ventures entered into a senior secured credit agreement (the “Credit Agreement”) that provides a $175.0 million term loan A facility, a $500.0 million term loan B facility, which was issued at 98.0% of the aggregate principal amount, and a revolving credit facility in the maximum amount of $150.0 million. The term loan A and revolving credit facility will mature November 3, 2026. The term loan B will mature November 3, 2027.The proceeds of the term loans were used to finance a portion of the $750.0 million distribution by Loyalty Ventures on November 3, 2021 to ADS in connection with the Separation.

Loyalty Ventures will be required to make quarterly principal amortization payments in equal installments in an aggregate amount of 7.5% per annum of the initial aggregate principal amount of each of the term loan A and term loan B. Commencing with the fiscal year ending December 31, 2022, the Credit Agreement requires, on an annual basis, the prepayment of the term loan B with either 0%, 25% or 50% of Excess Cash Flow, depending on the Consolidated Secured Leverage Ratio,Our total leverage ratio, as defined in the Credit Agreement.Agreement, was 4.5 to 1 at September 30, 2022, as compared to the maximum covenant ratio of 5.75 to 1.

The Credit Agreement contains customary representations and warranties and affirmative and negativeAs of September 30, 2022, we were in compliance with our debt covenants. These covenants, among other things, limit additional indebtedness, additional liens, sales of assets, mergers and consolidations, distributions and other restricted payments, and transactions with affiliates.

See Note 10, “Debt,” of the Notes to Unaudited Condensed Consolidated and Combined Financial Statements for additional information regarding our debt.

Critical Accounting Policies and Estimates

ThereOther than as set forth below, there have been no significant changes to our critical accounting policies and estimates from the information provided in Item 2,7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our registration statementAnnual Report filed on Form 10, filed10-K for the fiscal year ended December 31, 2021.

Goodwill

During the second quarter of 2022, we believed it was more likely than not that the fair value of the BrandLoyalty reporting unit was less than its carrying amount as a result of macroeconomic factors, including Russia’s invasion of Ukraine and its negative impact on consumer confidence and consumer behavior in Europe, inflation, and continued supply chain pressures. As such, the economic disruption coupled with SECincreased uncertainty indicated a material deterioration of the significant inputs used to determine the fair value of the BrandLoyalty reporting unit.

For our quantitative analysis, the fair value of the reporting units was estimated using both an income- and market-based approach. Our income-based approach utilized a discounted cash flow analysis based on October 13, 2021.management's estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. The valuation included assumptions related to revenue growth and profit performance, capital expenditures, the discount rate and other assumptions that are judgmental in nature. Changes in these estimates and assumptions could materially affect the results of our tests for goodwill impairment. The market-based approach involved an analysis of market multiples of revenues and earnings to a group of comparable public companies and recent transactions, if any, involving comparable companies. While the guideline companies in the market-based valuation

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method have comparability to the reporting units, they may not fully reflect the market share, product portfolio and operations of the reporting units. In addition, we also consulted independent valuation experts in applying these valuation techniques. We based our measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market-based valuation approach.

Based on the results of the goodwill impairment test, we recorded an impairment charge of $422.9 million, which reduced the goodwill balance of the BrandLoyalty reporting unit to zero. See Note 7, “Intangible Assets and Goodwill,” of the Notes to Unaudited Condensed Consolidated and Combined Financial Statements for additional information.

Recently Issued Accounting PronouncementsStandards Not Yet Adopted

See “Recently Issued Accounting Standards” under Note 1, “Description of Business Spinoff and Basis of Presentation,” of the Notes to Unaudited Condensed Consolidated and Combined Financial Statements for a discussion of certainnew accounting standards recently issued.issued but not yet adopted.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. Our primary market risk includesrisks include foreign currency exchange rate risk and interest rate risk.

There have been no material changes from our registration statementAnnual Report on Form 10, filed with10-K for the SEC on October 13,year ended December 31, 2021 related to our exposure to market risk from foreign currency exchange rate risk and interest rate risk.

Foreign currency exchange rate risk

Foreign currency fluctuations can affect our net investments, our operations in countries other than the U.S., and earnings denominated in foreign currencies. Our primary exchange rate exposure has been with the Canadian dollar and Euro against the United States dollar. In the nine months ended September 30, 2022, changes in foreign currency exchange rates decreased our reported revenues $41.0 million but had an immaterial effect on our income (loss) before income taxes.

Interest Rate Risk

Loans under the Credit Agreement bear interest at floating rates tied to London interbank offered rate (LIBOR), or, if LIBOR is no longer available, the Secured Overnight Financing Rate (SOFR). As a result, changes in LIBOR, or in the future SOFR, can affect our operating results and liquidity to the extent we do not have effective interest rate swap arrangements in place. We have not used interest rate swap arrangements to hedge the variable interest rates under our Credit Agreement. A one percentage point increase in LIBOR for the nine months ended September 30, 2022 would have resulted in approximately $4.9 million of additional interest expense. A description of our Credit Agreement is contained in Note 10, “Debt,” to the Unaudited Condensed Consolidated and Combined Financial Statements.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of September 30, 2021,2022, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that as of September 30,

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2021 2022 (the end of our third fiscal quarter), our disclosure controls and procedures arewere effective. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief

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Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our third quarter 20212022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are involved, from time to time, in litigation, other legal claims, regulatory actions or other proceedings or actions by governmental authorities involving matters associated with or incidental to our business in the ordinary course, including, among other things, matters involving customer or vendor disputes, breaches of contractual obligations, class actions or purported class actions, trademark and other intellectual property protection and licensing disputes, import/export regulations, taxation, and employment matters. We believe the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our business or financial condition. However, our current assessment of these matters may change upon discovery of facts not presently known or determinations by judges, juries, or other finders of fact not in accord with management’s evaluation of the possible outcome or liability resulting therefrom.

Item 1A. Risk Factors

ThereOther than as set forth below, there have been no material changes to the Risk Factors previously disclosed in our registration statementAnnual Report on Form 10, filed10-K for the year ended December 31, 2021.

The invasion by Russia of Ukraine and the related global disruptions has and may continue to negatively impact our results of operations.

As a result of the invasion by Russia of Ukraine, the U.S. and certain other countries have imposed sanctions on conducting business with or in Russia and Russia has responded with similar measures, including restrictions on cash exports and regulations to nationalize the assets of foreign businesses; these parties could impose further sanctions that could damage or disrupt international commerce and the global economy. It is not possible to predict the broader or longer-term consequences of this conflict or the sanctions imposed to date, which could include further sanctions, efforts to nationalize foreign assets, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. Such geopolitical instability and uncertainty could have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions that could increase the costs, risks and adverse impacts from additional supply chain and logistics challenges. We may also be the subject of increased cyber-attacks. The potential effects of the invasion by Russia of Ukraine also could impact many of the other risk factors described in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2021. These potential effects include, but are not limited to, variations in the level of our profitability, fluctuations in foreign currency markets, the availability of future borrowings, the cost of borrowings, and the impairment of goodwill. See Note 7, “Intangible Assets and Goodwill,” of the Notes to the Unaudited Condensed Consolidated and Combined Financial Statements. Given the evolving nature of this conflict, the related sanctions, potential governmental actions and global economic fallout, such potential impacts remain uncertain. While Russia does not constitute a material portion of our business, a significant escalation of the conflict’s current scope or related expansion of economic disruption to a portion or all of the global economy could have a material adverse effect on our results of operations.

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We may be unable to realize some or all of the anticipated benefits of any restructuring, and the restructuring may adversely affect our business.

In response to changes in industry and market conditions, we have and may continue to undertake restructuring, reorganization, or other strategic changes to operate more efficiently, control costs and adapt our business to serve clients more effectively. The successful implementation of these changes may require us to effect business and asset dispositions, workforce reductions, management restructurings, decisions to limit investments in or otherwise exit businesses, office consolidations and closures, and other actions, each of which depend on a number of factors that may not be within our control.

These changes have and may continue to result in the recording of restructuring or other charges, such as asset impairment charges, contract and lease termination costs, inventory write-offs, exit costs, termination benefits, and other restructuring costs. Further, we may experience a loss of continuity, accumulated knowledge and/or efficiency; adverse effects on employee morale; and/or key employee retention issues. Reorganization and restructuring can impact a significant amount of management and other employees’ time and focus, which may divert attention from operating our business.

Our restructuring activities, including any related charges, could present significant risks that may impair our ability to achieve operating efficiencies and effectiveness, or otherwise have a material adverse effect on our business, competitive position, operating results, and financial condition. For more information about our restructuring initiatives, see Note 9, “Restructuring and Other Charges” of the Notes to the Unaudited Condensed Consolidated and Combined Financial Statements.

There can be no assurance that we will be able to comply with the SECcontinued listing standards of the Nasdaq Global Select Market, including Nasdaqs minimum bid price, and our common stock may be subject to delisting from Nasdaq.

On November 8, 2021, our common stock began trading regular way on the Nasdaq Global Select Market under the symbol “LYLT”. The Nasdaq Stock Market has qualitative and quantitative listing criteria. If we are unable to meet any of the Nasdaq continued listing requirements in the future, Nasdaq could determine to delist our common stock. For example, if the minimum bid price for our common stock falls below $1.00 per share for 30 consecutive trading days, Nasdaq could issue a deficiency notice and begin delisting procedures. If in the future Nasdaq delists our common stock from trading on its exchange for failure to meet continued listing standards, we and our securityholders could face significant material adverse consequences, including:

a limited availability of market quotations for our securities;
reduced liquidity for our securities;
a deterrent for broker-dealers making a market in or otherwise seeking or generating interest in our securities;
a deterrent for certain institutions and persons from investing in our securities at all;
a determination that our common shares are “penny stock” which will require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
a limited amount of news and analyst coverage; and
a decreased ability to issue additional securities or obtain additional financing in the future.

The minimum bid price of our common stock was below the minimum $1.00 per share beginning on October 13, 2021.12, 2022 and began trading above $1.00 again on October 26, 2022. The minimum bid price of our common stock on October 27, 2022 was $1.31 per share. If the minimum bid price of our common stock falls below $1.00 again and stays below $1.00 for 30 consecutive trading days, we would expect to receive a deficiency notification from the Nasdaq Stock Market that for the preceding 30 consecutive trading days, the minimum bid price of our common shares was below $1.00 per share. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we would expect to have 180 calendar days from the notice date to regain compliance. To regain compliance, the minimum bid price of our common shares must be at least $1.00 per share for a minimum of 10 consecutive trading days.

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If we did not reestablish compliance in the requisite 180-day period, we may qualify to transfer to the Nasdaq Capital Market, and be eligible for additional time to regain compliance. To qualify, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market with the exception of the minimum bid price requirement. Further, we would be required to notify Nasdaq of our intent to cure the minimum bid price deficiency.

If we do not regain compliance within the allotted timeframes, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that our common stock will be subject to delisting. We would then be entitled to appeal Nasdaq’s determination, but there can be no assurance that Nasdaq would grant our request for continued listing. We intend to monitor the minimum bid price of our common stock and consider options if necessary to resolve the noncompliance with the minimum bid price requirement. There can be no assurance that we will be able to maintain compliance with the minimum bid price requirement or the other Nasdaq listing criteria.

In the event that our common stock is delisted from Nasdaq and is not eligible for quotation or listing on another market or exchange, trading of our common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further.

Changes in our credit ratings may limit our access to capital markets and adversely affect our liquidity.

The credit rating agencies periodically review our capital structure and the quality and stability of our earnings. In the third quarter of 2022, Moody’s and S&P Global Ratings downgraded our long-term credit rating. Adverse changes by the rating agencies to our credit ratings has and may continue to negatively impact the value and liquidity of both our debt and equity securities, as well as the potential costs associated with a refinancing of our debt. Downgrades in our credit ratings could also affect the terms of any such refinancing or future financing or restrict our ability to obtain additional financing in the future which could have a material adverse effect on our business, financial condition, results of operations and liquidity.

Information available in public media that is published by third parties, including blogs, articles, message boards and social and other media may include statements not attributable to Loyalty Ventures and may not be reliable or accurate.

We have received, and may continue to receive, media coverage that is published or otherwise disseminated by third parties, including blogs, articles, message boards and social and other media. This includes coverage that is not attributable to statements made by our officers or employees. Information provided by third parties may not be reliable or accurate and could materially impact the trading price of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to purchases of our common stock made during the three months ended September 30, 2021:2022:

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

(Dollars in thousands)

During 2021:2022:

July 1-31

$

$

August 1-31

September 1-30

Total

$

$

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Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

(a) NoneRoger H. Ballou resigned from his position as chair of the Loyalty Ventures’ board of directors as well as all committee appointments effective November 5, 2022. Mr. Ballou did not resign due to any disagreement with the Company, its board of directors or its management. Effective upon Mr. Ballou’s resignation as a director, the size of our board of directors was reduced from five to four directors. Also effective November 5, 2022, pursuant to our Corporate Governance Guidelines and in exercise of its business judgment, our board of directors appointed Charles L. Horn to serve as chair of the Board, and appointed Richard A. Genovese as a member of the board’s corporate governance and nominating committee and Barbara L. Rayner as a member of the board’s compensation committee, each until their successor is duly appointed and qualified or their earlier resignation or removal.

(b) None

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Item 6. Exhibits

(a) Exhibits:

EXHIBIT INDEX

Description

Description

Incorporated by Reference

Incorporated by Reference

Exhibit
No.

    

Description

    

Form

    

Exhibit

    

Filing Date

    

Description

    

Form

    

Exhibit

    

Filing Date

2.1%

Separation and Distribution Agreement between Alliance Data Systems Corporation and Loyalty Ventures Inc., dated November 3, 2021.

8-K

2.1

11/8/2021

3.1

Amended and Restated Certificate of Incorporation of Loyalty Ventures Inc.

8-K

3.1

11/8/2021

10.1%+

Fifth Amendment to Amended and Restated Program Participation Agreement by and between LoyaltyOne, Co. and Bank of Montreal, dated as of July 4, 2022.

10-Q

10.1

8/11/2022

3.2

Amended and Restated Bylaws of Loyalty Ventures Inc.

8-K

3.2

11/8/2021

10.2%+

Sixth Amendment to Amended and Restated Program Participation Agreement by and between LoyaltyOne, Co. and Bank of Montreal, dated as of July 5, 2022.

10-Q

10.2

8/11/2022

10.1%

Transition Services Agreement between Alliance Data Systems Corporation and Loyalty Ventures Inc., dated November 5, 2021.

8-K

10.1

11/8/2021

10.2%

Tax Matters Agreement between Alliance Data Systems Corporation and Loyalty Ventures Inc., dated November 5, 2021.

8-K

10.2

11/8/2021

10.3%

Employee Matters Agreement between Alliance Data Systems Corporation and Loyalty Ventures Inc., dated November 5, 2021.

8-K

10.3

11/8/2021

10.3+

Seventh Amendment to Amended and Restated Program Participation Agreement by and between LoyaltyOne, Co. and Bank of Montreal, dated as of October 27, 2022

8-K

10.1

11/2/2022

10.4

Registration Rights Agreement between Alliance Data Systems Corporation and Loyalty Ventures Inc., dated November 5, 2021.

8-K

10.4

11/8/2021

Amendment No. 1 to Credit Agreement (Financial Covenant), dated as of July 29, 2022, by and among Loyalty Ventures Inc., Brand Loyalty Group B.V. and Brand Loyalty International B.V., as borrowers, certain other subsidiaries as guarantors, Bank of America N.A., as administrative agent, and certain other lenders party thereto.

8-K

10.1

8/4/2022

10.5%

Credit Agreement, dated as of November 3, 2021, by and among Loyalty Ventures Inc., Brand Loyalty Group B.V., Brand Loyalty Holding B.V. and Brand Loyalty International B.V., as borrowers, certain other subsidiaries as guarantors, Bank of America N.A., as administrative agent and collateral agent, and certain other lenders party thereto.

8-K

10.1

11/4/2021

31.1*

Certification of Chief Executive Officer of Loyalty Ventures Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

10.6%

Amended and Restated License to Use the AIR MILES Trade Marks in Canada, dated as of July 24, 1998, by and between Air Miles International Holdings N.V. and Loyalty Management Group Canada Inc. (assigned by Air Miles International Holdings N.V. to Air Miles International Trading B.V. by a novation agreement dated as of July 18, 2001 and further assigned to AM Royalties Limited Partnership, a wholly owned subsidiary of Diversified Royalty Corp., in connection with an asset purchase agreement dated August 25, 2017).

8-K

10.2

11/4/2021

31.2*

Certification of Chief Financial Officer of Loyalty Ventures Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

32.1**

Certification of Chief Executive Officer of Loyalty Ventures Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

10.7%

Amended and Restated License to Use and Exploit the AIR MILES Scheme in Canada, dated July 24, 1998, by and between Air Miles International Trading B.V. and Loyalty Management Group Canada Inc. as assigned by Air Miles International Trading B.V. to AM Royalties Limited Partnership, a wholly owned subsidiary of Diversified Royalty Corp., in connection with an asset purchase agreement dated August 25, 2017.

8-K

10.3

11/4/2021

32.2**

Certification of Chief Financial Officer of Loyalty Ventures Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

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10.8+

Amended and Restated Program Participation Agreement by and between LoyaltyOne, Co. and Bank of Montreal, dated as of November 1, 2017, as amended.

Form 10

10.8

9/24/2021

10.9

Loyalty Ventures Inc. 2021 Omnibus Incentive Plan.

Form S-8

99.1

11/9/2021

10.10

Loyalty Ventures Inc. 2021 Employee Stock Purchase Plan.

Form S-8

99.2

11/9/2021

10.11

Form of Indemnification Agreement for Officers and Directors.

Form 10

10.5

9/1/2021

31.1*

Certification of Chief Executive Officer of Loyalty Ventures Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

31.2*

Certification of Chief Financial Officer of Loyalty Ventures Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

32.1**

Certification of Chief Executive Officer of Loyalty Ventures Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

32.2**

Certification of Chief Financial Officer of Loyalty Ventures Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

101*

The following financial information from Loyalty Ventures Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Condensed Combined Balance Sheets, (ii) Condensed Combined Statements of Income, (iii) Condensed Combined Statements of Comprehensive Income, (iv) Condensed Combined Statements of Equity, (v) Condensed Combined Statements of Cash Flows and (vi) Notes to Condensed Combined Financial Statements.

104*

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

101*

The following financial information from Loyalty Ventures Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated and Combined Statements of Operations, (iii) Condensed Consolidated and Combined Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated and Combined Statements of Equity (Deficiency), (v) Condensed Consolidated and Combined Statements of Cash Flows and (vi) Notes to Condensed Consolidated and Combined Financial Statements.

104*

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

*Filed herewith

**Furnished herewith

+

Pursuant to Item 601(b)(10)(iv) of Regulation S-K, certain identified information has been excluded from this exhibit.

%

Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Loyalty Ventures hereby undertakes to furnish supplementally copies of any of the omitted exhibits and schedules upon request by the U.S. Securities and Exchange Commission.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.

LOYALTY VENTURES INC.

By:

/s/ CHARLES L. HORN

Charles L. Horn

President and Chief Executive Officer

Date: November 24, 20218, 2022

By:

/s/ JOHN J. CHESNUT

John J. Chesnut

Executive Vice President and Chief Financial Officer

Date: November 24, 20218, 2022

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