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, ~~2021~~2022
or

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

For the transition period from to

Commission File Number: 001-40776

Loyalty Ventures Inc.

(Exact name of registrant as specified in its charter)

Delaware

87-1353472

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

~~c/o Alliance Data Systems Corporation~~8235 Douglas Avenue, Suite 1200

~~7500~~ Dallas ~~Parkway, Suite 700~~

~~Plano~~, Texas ~~75024~~75225

(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, 24,585,237~~October 27, 2022, 24,611,933 shares of common stock were outstanding.

Table of Contents

LOYALTY VENTURES INC.

INDEX

		Page

Part I	Financial Information	3

Item 1.	Financial Statements (unaudited)	3

	Condensed ~~Combined~~Consolidated Balance Sheets as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021	3

	Condensed Consolidated and Combined Statements of ~~Income~~Operations for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021	4

	Condensed Consolidated and Combined Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021	5

	Condensed Consolidated and Combined Statements of Equity (Deficiency) for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021	6

	Condensed Consolidated and Combined Statements of Cash Flows for the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021	7

	Notes to Condensed Consolidated and Combined Financial Statements	8

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

Table of Contents

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

LOYALTY VENTURES INC.

UNAUDITED CONDENSED ~~COMBINED~~CONSOLIDATED 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.

Table of Contents

LOYALTY VENTURES INC.

UNAUDITED CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF ~~INCOME~~OPERATIONS

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.

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.

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.

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.

Table of Contents

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 service~~full-service outsourced coalition loyalty program for its sponsors who pay a fee per AIR MILES reward mile issued, in return for which the AIR MILES Reward Program provides all marketing, customer service, rewards and redemption management. BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made loyalty programs for high frequency retailers worldwide. These loyalty programs are designed to generate immediate changes in consumer behavior and are offered across Europe and Asia, as well as around the world. ~~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 of~~Separation, 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, 2021~~Company 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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~~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 ADS~~Parent and not as a standalone company. The unaudited condensed combined financial statements for the three and nine months ended September 30, 2021 have been derived from ~~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 ~~have~~was not ~~been~~ allocated for ~~any of~~ the ~~periods presented~~three 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 accompanying~~investment.”

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, ~~2020~~2021 included in ~~our registration statement~~the 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 ~~apply~~2020-04 can be applied anytime between the first quarter of fiscal 2020 and the fourth quarter of fiscal 2022. ASU 2020-04 applies only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The ~~expedients~~Company’s primary association with LIBOR is through interest rates applicable under its senior secured credit agreement (the “Credit Agreement”) that provides for the use of the Secured Overnight Financing Rate (SOFR) if LIBOR is no longer available. Accordingly, the impact of ASU 2020-04 on the Company’s consolidated financial statements and ~~exceptions provided by~~related disclosures is not expected to be material.

In October 2021, the ~~amendments do not apply~~FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires an acquirer in a business combination to recognize and measure contract ~~modifications made~~assets and ~~hedging relationships entered into or evaluated~~contract 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, “Liabilities—Supplier Finance Programs (Subtopic 405-50).” This standard requires disclosure of the key terms of outstanding supplier finance programs and a rollforward of the related obligations. The new standard does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. ASU ~~is elective and is~~2022-04 becomes effective ~~upon issuance~~January 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 ~~2020-04~~2022-04 will have on its ~~combined~~consolidated 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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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 CONDENSED~~CONSOLIDATED 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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	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 ~~solutions~~programs are recognized in other current liabilities in the Company’s unaudited condensed ~~combined~~consolidated balance sheets. The beginning balance as of January 1, ~~2021~~2022 was ~~$66.9~~$85.4 million and the closing balance as of September 30, ~~2021~~2022 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 a~~A total of 24,585,237 shares of Loyalty Ventures common stock were outstanding at November 5, 2021, the ~~time~~date of the ~~Separation. This~~Separation, 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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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, ~~2021~~2022 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

1413

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LOYALTY VENTURES INC.

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, ~~2021~~2022 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, ~~2021~~2022 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, ~~2021~~2022 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 million~~minimis 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-rated~~highly rated securities with expected low probabilities of default and has the intent and ability to hold the investments until ~~maturity, and the~~maturity. 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.

~~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 ~~Contents~~all 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, ~~2021~~2022 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 ~~Parent~~Company 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 not~~to believe that it is more likely than not ~~that~~ the fair value of ~~any~~its 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 uncertainty~~significant inputs used to determine the fair value of the BrandLoyalty reporting unit, resulting in the ~~macroeconomic environment, future deterioration in~~impairment of the ~~economy could adversely impact the Company’s reporting units~~goodwill. 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, the~~The 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 ~~exercises~~exercised significant influence but ~~does~~did 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 to~~received 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 ~~ADS~~the 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. DEBT~~million 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 Agreement~~9. RESTRUCTURING AND OTHER CHARGES

In the ~~first~~second quarter of ~~2021, BrandLoyalty~~2022, 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 borrowers~~BrandLoyalty segment with additional restructuring and ~~guarantors, amended its credit agreement~~other charges expected to ~~extend~~be incurred in the ~~maturity date by one year from April 3, 2023 to April 3, 2024.~~fourth quarter of 2022.

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 execution~~NOTES 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, the~~The Company ~~entered into~~has 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 mature~~matures 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 with~~its Credit Agreement, which, among other things, provides for adjustments to the ~~Separation.~~

~~The outstanding U.S. Dollar borrowings under~~financial maintenance covenant applicable to the term loan A ~~bear interest at a rate elected by~~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 ~~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 of~~quarter 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.

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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 representations~~Company 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 ~~warranties~~payable 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

~~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, ~~2021~~2022 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 ~~combined~~consolidated balance sheets. The fair value of the Company’s derivative instruments as of December 31, ~~2020~~2021 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 ~~combined~~consolidated 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, ADS~~2022, the Company awarded ~~both~~814,545 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 closing~~with a weighted average grant date fair value per share ~~price~~of $17.62 as determined on the date of ~~grant and~~grant. 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 contain~~restricted 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 ~~ADS~~the Company on ~~the~~each 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 ~~income~~operations for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 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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~~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 ~~increase~~change in the effective tax rate for the three months ended September 30, ~~2021 as~~2022 compared to the ~~respective~~ prior year period was primarily a result of ~~an unfavorable adjustment in the current period related to~~increased 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 ~~increase~~change in the effective tax rate for the nine months ended September 30, ~~2021 as~~2022 compared to the ~~respective~~ prior year period was primarily a result of ~~an increase in~~non-deductibility of the ~~current year related to additional withholding taxes as well as an unfavorable adjustment related~~write-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 foreign~~new 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 rate~~Company 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 ~~combined~~consolidated 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

2223

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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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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 ~~combined~~consolidated balance sheets.

(2)	Amounts are included in other current assets in the unaudited condensed ~~combined~~consolidated balance sheets.

(3)	Amounts are included in other current assets and other current liabilities in the unaudited condensed ~~combined~~consolidated 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 service~~full-service outsourced coalition loyalty program for ~~our~~its sponsors, who pay usthe AIR MILES Reward Program a fee per AIR MILES reward mile issued, in return for which ~~we provide~~it 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 ~~any~~either 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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LOYALTY VENTURES INC.

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

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

~~Table of Contents~~

~~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) loss~~income 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

~~Transactions~~Prior to the Separation, transactions between the Company and ~~ADS~~its 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 ~~statements~~statement of cash ~~flows~~flow 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 million~~former 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 ~~are~~is 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 subsidiary~~respectively, 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 $124.2~~respectively, 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 results~~trading 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 expressed~~disruptions in ~~this report,~~the airline or travel industries; changes in geopolitical conditions, including the Russian invasion of Ukraine and ~~no assurances can~~related 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 that~~tax-free; new regulatory limitations related to consumer protection or data privacy limiting our ~~expectations will prove~~services; 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 or~~as 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, but~~that 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 initiatives~~most 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 ~~whether~~in 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.

~~Table of Contents~~

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 included~~2021, 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 statement~~these 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.

~~Spinoff~~Basis of ~~the LoyaltyOne Segment~~Presentation

On ~~October 13,~~November 5, 2021, ~~the Board of Directors of~~Bread 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. Combined~~unaudited combined financial statements ~~representing~~reflected the ~~historical~~financial position, results of operations, ~~of Loyalty Ventures’ business have been~~and cash flows which were derived from the ~~historical~~consolidated financial statements and accounting records of ~~ADS and are presented on a carve-out basis. Our combined financial statements and accompanying notes have been prepared~~our 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 ~~may~~also 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 indicative~~allocated for the three and nine months ended September 30, 2021, as Loyalty Ventures was not the legal obligor of ~~future performance~~such 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 during~~company. The financial statements for the ~~periods presented, particularly because~~three and nine months ended September 30, 2022, represent the unaudited consolidated financial statements of ~~changes~~Loyalty 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 ~~experience~~negatively 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 ~~future~~prior 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, including~~invasion 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 needs~~impairment of ~~our business.~~

~~The combined financial statements also include allocations~~the 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 degrees~~September 30, 2022. See Note 7, “Intangible Assets and Goodwill,” of ~~restrictions on social~~the 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 to~~In 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 improvement~~which have been included in our ~~travel-related categories. Issuance for the quarter was down due to timing~~cost 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 variants~~Other Charges,” of the ~~strain, may adversely impact the economic recovery~~Notes to Unaudited Condensed Consolidated and ~~our industry outlook.~~Combined Financial Statements for additional information. We ~~continue~~expect to ~~evaluate the nature and extent of changes to the market and economic conditions related to the COVID-19 pandemic and current and potential impact~~execute on our ~~business and financial position. However, given the dynamic nature of this situation,~~operational efficiency plan throughout 2022.

While we ~~cannot reasonably estimate~~expect the impacts of COVID-19 on our ~~future results~~business 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 ~~operations~~vaccines 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

3032

Table of Contents

~~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, ~~2021~~2022 compared to the three months ended September 30, ~~2020~~2021

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, ~~2021~~2022 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. ~~Revenue~~Redemption 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 million~~increased by 13% due to ~~the number~~certain program performance in Europe. The timing and ~~timing~~size of programs can vary between quarters in ~~market due to~~ the ~~continuing impact of COVID-19.~~comparative years.

●

Services. ~~Revenue increased $2.2~~Services revenue decreased $3.0 million, or 3%5%, to ~~$65.8~~$62.8 million for the three months ended September 30, ~~2021~~2022 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 $1.8~~increased $1.5 million, or ~~22%~~23%, to ~~$6.3~~$7.8 million for the three months ended September 30, 2022, due to ~~a decline~~an 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.

~~Table of Contents~~

Cost of operations. Cost of operations ~~decreased $26.5~~increased $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 million~~for the three months ended September 30, 2021 due to a ~~$22.7~~$11.3 million ~~decrease~~increase in cost of redemptions due to ~~the decline in redemption revenue discussed above~~higher 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 compared~~due to ~~$3.6 million for the three months ended September 30, 2020, due~~ an increase in ~~payroll~~consulting and ~~benefits expense.~~legal expenses.

Depreciation and other amortization. Depreciation and other amortization ~~increased $0.9~~decreased $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 ~~compared~~a result of the decline in foreign currency exchange rates.

Interest expense (income), net. Total interest expense (income), net increased $11.7 million due to ~~$12.5~~the 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 to~~2022 from $16.5 million for the three months ended September 30, ~~2021 from $3.5 million~~2021. 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% for~~40.8% 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, 2020~~year period was primarily ~~due to an unfavorable adjustment in the current period related to~~ a ~~settlement~~result of increased U.S. corporate expenses for which a ~~foreign~~ tax ~~position.~~benefit cannot be currently realized.

~~(Income) loss~~Income 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. Our~~income from our investment in our

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unconsolidated subsidiary, Comenity Canada, L.P., which was sold to an affiliate of ~~ADS~~our 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, ~~2021~~2022 compared to the nine months ended September 30, ~~2020~~2021

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. ~~Revenue~~Redemption revenue decreased ~~$37.8~~$7.1 million, or ~~12%~~3%, to ~~$280.8~~$273.8 million for the nine months ended September 30, ~~2021~~2022, 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 million~~of $2.0 million. In Euro, redemption revenue from our campaign-based loyalty programs increased by 13% due to ~~the number~~certain program performance in Europe. The timing and ~~timing~~size 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 $5.4~~Services revenue decreased $7.4 million, or 3%4%, to ~~$199.2~~$191.8 million for the nine months ended September 30, ~~2021~~2022 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~~revenue. ~~. Revenue decreased $4.8~~Other 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 decline~~an 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 $26.7~~increased $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 compared~~due to ~~$399.5~~a $34.5 million ~~for the nine months ended September 30, 2020, as a $35.3 million decrease~~increase in cost of redemptions due to the ~~decline~~increase in ~~redemption revenue was~~logistics 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 million~~a decrease in ~~payroll and benefits expense and an increase of $2.0 million in marketing expense.~~incentive compensation.

~~Table of Contents~~

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 $5.5~~decreased $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 ~~compared~~a 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 ~~$36.2~~the 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 to~~2022 from $31.6 million for the nine months ended September 30, ~~2021 from $17.4 million~~2021. 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% for~~35.5% in the prior ~~year. The~~year 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 ~~resolution~~write-down of certain deferred tax ~~audits in various foreign jurisdictions.~~assets.

~~(Income) loss~~Loss from investment in unconsolidated subsidiary – related party, net of tax. ~~The income~~Income 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. Our~~income from our investment in our unconsolidated subsidiary, Comenity Canada, L.P., which was sold to an affiliate of ~~ADS~~our 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) loss~~income 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

~~Table of Contents~~

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

Table of Contents


	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 sale~~costs associated with the Separation, which were comprised of ~~Precima in January 2020, net of strategic transaction costs. Precima was included in~~amounts 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.

~~Revenue~~Adjusted EBITDA. ~~Total revenue~~Adjusted EBITDA decreased ~~$15.5~~$14.4 million, or 8%30%, to ~~$169.3~~$33.1 million for the three months ended September 30, ~~2021~~2022 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 $5.7~~decreased $14.5 million, or 9%7%, to ~~$71.9~~$199.6 million for the ~~three~~nine 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 ~~increase~~decrease in ~~redemptions~~the 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 $21.2~~increased $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 number~~size 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 primarily~~2022 due to ~~an increase in marketing expense and consulting costs for additional promotional activity offset by~~ the ~~increase~~decrease in revenue ~~discussed~~noted 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, ~~2021~~2022 due to margin ~~loss from the decline in revenue noted above and~~pressure attributable to an increase in ~~payroll~~cost of redemptions from higher reward and ~~benefits due to certain severance~~logistics 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 ~~generated~~used cash flow from operating activities of ~~$113.7~~$51.6 million ~~and $121.7~~for 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 decrease~~changes in ~~operating cash flows was~~working capital, primarily ~~due~~from an increase in inventory in advance of programs scheduled in the fourth quarter of the year, in addition to ~~lower profitability~~inventory from underperforming campaigns in ~~part due to~~ the ~~continued impact~~first 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, ~~2021~~2022 and ~~2020,~~2021, respectively. Significant components of investing activities are as follows:

●

Redemption settlement assets, restricted. ~~The~~Cash 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 was~~of $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 ~~the~~our 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 ~~BrandLoyalty~~revolving 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 negative~~As 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

~~There~~Other 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 stat~~e~~ment~~Annual Report filed on Form ~~10, filed~~10-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 ~~SEC~~increased 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 ~~Pronouncements~~Standards 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 ~~certain~~new 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 includes~~risks include foreign currency exchange rate risk and interest rate risk.

There have been no material changes from our ~~registration statement~~Annual Report on Form ~~10, filed with~~10-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 ~~are~~were 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 ~~2021~~2022 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

~~There~~Other than as set forth below, there have been no material changes to the Risk Factors previously disclosed in our ~~registration statement~~Annual Report on Form ~~10, filed~~10-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 ~~SEC~~continued listing standards of the Nasdaq Global Select Market, including Nasdaq’s 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) ~~None~~Roger 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

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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Table of Contents

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, 2021~~8, 2022

	By:	/s/ JOHN J. CHESNUT
		John J. Chesnut
		Executive Vice President and Chief Financial Officer
Date: November ~~24, 2021~~8, 2022

4247


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

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).