LOYALTY VENTURES INC. Management report and analysis of the financial situation and operating results. (Form 10-K)

Overview

We are 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

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and other consumer-facing businesses create and increase customer loyalty across
multiple touch points from traditional to digital to mobile and emerging
technologies. We own and operate the AIR MILES® Reward Program, Canada's most
recognized loyalty program, and BrandLoyalty, a leading global provider of
campaign-based loyalty solutions for grocers and other high-frequency retailers.

Spin off of the LoyaltyOne segment

On October 13, 2021, the Board of Directors of ADS approved the previously
announced Separation of its LoyaltyOne segment, consisting of the Canadian AIR
MILES® Reward Program and BrandLoyalty businesses, into an independent, publicly
traded company. 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. Additionally, Loyalty Ventures made a
cash distribution of $750.0 million to ADS on November 3, 2021, as part of
the
Separation.

Basis of presentation

Prior to the Separation, we have historically operated as part of ADS and not as
a standalone company. The combined financial statements for the periods prior to
the Separation date of November 5, 2021 have been derived from ADS' historical
accounting records and are presented on a carve-out basis. The financial
statements after the Separation date of November 5, 2021 represent the
consolidated financial statements of Loyalty Ventures. Our 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"). All revenues and expenses as well as assets and liabilities
directly associated with the business activity of the Loyalty Ventures business
are included in the consolidated and combined financial statements. The
consolidated and combined financial statements also include allocations of
certain general and administrative expenses from ADS. ADS corporate overhead
costs that directly or indirectly benefited Loyalty Ventures' business were
allocated through the date of the spinoff and for the years ended December 31,
2021, 2020 and 2019. The allocated amounts included in general and
administrative expense within our consolidated and combined statements of income
were $12.6 million, $14.3 million and $14.8 million for the years ended December
31, 2021, 2020 and 2019, respectively. These allocations 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 non-employee 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.

ADS' third-party long-term debt and the related interest expense have not been
allocated for any of the periods presented as Loyalty Ventures was not the legal
obligor of such debt. Refer to Note 1, "Description of Business, Spinoff and
Basis of Presentation," to our consolidated and combined financial statements
for additional information on the carve-out basis of accounting.

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 consolidated and combined financial statements may not be
indicative of future performance and 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 the periods
presented, particularly because of changes we expect to experience in the future
as a result of the Separation, including changes in the financing, cash
management, operations, cost structure and personnel needs of our business.

COVID-19[female[feminine

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 varying
degrees of restrictions on social and commercial activity in an effort to
improve health and safety. As the global

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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.

The effects of the COVID-19 pandemic continue to negatively impact our results
of operations and certain key metrics. AIR MILES reward miles issuances declined
6% due to the impact of related government restrictions and closures impacting
collector spend and the nonrenewal of certain sponsor contracts in the first
quarter of 2021. Redemptions increased 12% due to an increase in redemptions for
travel, including the reopening of the US border for non­essential travel prior
to the emergence of the omicron variant in the fourth quarter. Merchandise
redemptions continue to perform well in the current environment. With respect to
BrandLoyalty, the decline in revenue and adjusted EBITDA was mainly attributed
to a decline in programs in market across most regions due to the impact of
COVID-19 and supply chain disruptions. Shortages in production capacity in
Europe due to insufficient staff availability led to lower than estimated
campaign performance and revenue decline. As a result of the ongoing impact of
the COVID-19 pandemic, in the fourth quarter of 2021, we determined that it was
more likely than not that the fair value of the BrandLoyalty reporting unit was
below its carrying value, and performed an interim impairment test. Based on the
results, we recognized a non-cash, goodwill impairment charge of $50.0 million.

Despite the availability of vaccines, surges in COVID-19 cases, including
variants of the strain, may adversely impact the economic recovery and our
industry outlook. We continue 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 on our business and financial position. However, given the
dynamic nature of this situation, we cannot reasonably estimate the impacts of
COVID-19 on our future results of operations or cash flows at this time.

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Consolidated and combined results of operations

                                                 Years Ended December 31,                 % Change
                                                                                     2021 to    2020 to
                                             2021          2020          2019         2020       2019

                                                        (in thousands, except percentages)
Revenues
Redemption, net                            $ 444,395    $  473,067    $   637,321        (6) %     (26) %
Services                                     269,073       264,050        367,647          2       (28)
Other                                         21,839        27,689         28,163       (21)        (2)
Total revenue                                735,307       764,806      1,033,131        (4)       (26)
Operating expenses
Cost of operations (exclusive of
depreciation and amortization disclosed
separately below)                            573,246       587,615        847,552        (2)       (31)
General and administrative                    20,011        14,315         14,823         40        (3)
Depreciation and other amortization           34,944        28,988         32,152         21       (10)
Amortization of purchased intangibles          1,740        48,953         48,027       (96)          2
Goodwill impairment                           50,000             -              -         nm *       nm *
Total operating expenses                     679,941       679,871        942,554          -       (28)
Operating income                              55,366        84,935         90,577       (35)        (6)
Gain on sale of a business                         -      (10,876)              -         nm *       nm *
Interest expense (income), net                 5,534         (834)          2,335      (764)      (136)
Income before income taxes and (income)
loss from investment in unconsolidated
subsidiaries                                  49,832        96,645         88,242       (48)         10
Provision for income taxes                    52,175        21,324         11,331        145         88
(Income) loss from investment in
unconsolidated subsidiaries - related
party, net of tax                            (4,067)           246          1,681    (1,753)       (85)
Net income                                 $   1,724    $   75,075    $    75,230       (98) %        - %

Key Operating Metrics (in millions):
AIR MILES reward miles issued                4,670.2       4,963.8        5,511.1        (6) %     (10) %
AIR MILES reward miles redeemed              3,507.3       3,127.8        4,415.7         12 %     (29) %
Supplemental Information:
Average CAD to USD foreign currency
exchange rate                                   0.80          0.75           0.75          7 %      (1) %
Average EUR to USD foreign currency
exchange rate                                   1.18          1.14           1.12          4 %        2 %


* not meaningful

Year ended December 31, 2021 compared to the year ended December 31, 2020

Revenue. Total revenue decreased $29.5 million, or 4%, to $735.3 million for the
year ended December 31, 2021 from $764.8 million for the year ended December 31,
2020. The net decrease in revenue was due to the following:

Redemption. Redemption income is recognized when the

customer exchanges for a reward. Revenues have gone down $28.7 millioni.e. 6%, to

$444.4 million for the year ended December 31, 2021 as redemption income from

? our campaign-based loyalty programs have decreased $29.5 million due to a decrease in

programs in the market in most regions due to the impact of COVID-19 and supply

chain disturbances. In response to COVID-19, some of our customers have delayed

their campaign-based loyalty programs.

Services. Service revenues are associated with the overall management of the

? loyalty programs and is generally recognized over time. Revenues have increased $5.0

million, or 2%, to $269.1 million for the year ended December 31, 2021 due to

   the favorable impact of foreign currency exchange rates.


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Other. Other income includes investment income and other ancillary income

? won. Revenues have gone down $5.9 millioni.e. 21%, at $21.8 million for the year

ended December 31, 2021due to a decline in ancillary revenue related to

excess inventory in our BrandLoyalty segment.


Cost of operations. Cost of operations decreased $14.4 million, or 2%, to $573.2
million for the year ended December 31, 2021 as compared to $587.6 million for
the year ended December 31, 2020. The decline in the cost of operations was a
result of a decrease in the cost of redemptions of $27.4 million resulting from
the decrease in redemption revenue noted above, offset in part by $13.2 million
in costs associated with the Separation.

General and administrative. General and administrative expenses increased $5.7
million, or 40%, to $20.0 million for the year ended December 31, 2021, as
compared to $14.3 million for the year ended December 31, 2020, due to an
increase in payroll and benefits and $4.5 million in certain costs associated
with the Separation, of which $4.0 million represented the write-off of an
indemnification asset established as part of the Tax Matters Agreement.

Depreciation and other amortization. Depreciation and other amortization
increased $6.0 million, or 21%, to $34.9 million for the year ended December 31,
2021, as compared to $29.0 million for the year ended December 31, 2020 due to
additional capitalized software assets placed into service for digital
investments for the AIR MILES Reward Program segment.

Amortization of purchased intangibles. Amortization of purchased intangibles
decreased $47.2 million, or 96%, to $1.7 million for the year ended December 31,
2021, as compared to $49.0 million for the year ended December 31, 2020, due to
the fully amortized customer contracts in our BrandLoyalty segment.

Goodwill impairment. As a result of the ongoing impact of the COVID-19 pandemic,
in the fourth quarter of 2021, we determined that it was more likely than not
that the fair value of the BrandLoyalty reporting unit was below its carrying
value, and performed an interim impairment test. Based on the results, we
recognized a non-cash, goodwill impairment charge of $50.0 million.

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 expense (income), net. Total interest expense, net increased $6.4
million to $5.5 million for the year ended December 31, 2021 as compared to
interest income of $(0.8) million for the year ended December 31, 2020. The
increase in interest expense is associated with our $675.0 million in senior
secured credit agreement entered in connection with the Separation in November
2021.

Taxes. Provision for income taxes increased $30.9 million, or 145%, to $52.2
million for the year ended December 31, 2021 from $21.3 million for the year
ended December 31, 2020. The provision for income taxes for 2021 was negatively
impacted by certain transactions associated with the Separation, including
Canadian withholding taxes associated with payments to the former parent,
non-deductible U.S. expenses and goodwill impairment.

(Income) loss from unconsolidated subsidiaries-related party. The income from
unconsolidated subsidiary - related party was $4.1 million for the year ended
December 31, 2021 as compared to a loss of $0.2 million for the year ended
December 31, 2020. Our investment in our unconsolidated subsidiary, Comenity
Canada, L.P., was sold to an affiliate of ADS in August 2021 for $4.1 million
and we recognized a gain on sale of unconsolidated subsidiary of $4.1 million.

Year ended December 31, 2020 compared to the year ended December 31, 2019

Refer to Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included in of our registration statement on Form
10, filed with SEC on October 13, 2021, for a discussion of our 2020 results
compared to 2019, which discussion is incorporated by reference herein.

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Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure equal to net income, the most
directly comparable financial measure based on accounting principles generally
accepted in the United States of America, or GAAP, plus (income) loss from
investment in unconsolidated subsidiaries - related party, provision for income
taxes, interest expense (income), net, depreciation and other amortization, the
amortization of purchased intangibles, and stock compensation expense. Adjusted
EBITDA excludes the gain on the sale of Precima in 2020, strategic transaction
costs, which represent costs for professional services and other costs
associated with strategic initiatives, including the spinoff and amounts
associated with the Tax Matters and Employee Matters agreement, goodwill
impairment, and restructuring and other charges for actions taken in 2019. These
costs, as well as stock compensation expense, 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. 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 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.

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                                                       Years Ended December 31,
                                                      2021        2020        2019

                                                             (in thousands)
Net income                                         $    1,724   $  75,075   $  75,230
(Income) loss from investment in unconsolidated
subsidiaries - related party, net of tax              (4,067)         246  

1,681

Provision for income taxes                             52,175      21,324  

11,331

Interest expense (income), net                          5,534       (834)  

2,335

Depreciation and other amortization                    34,944      28,988  

32 152

Amortization of purchased intangibles                   1,740      48,953  

48,027

Stock compensation expense                              6,259       7,017  

9,076

Gain on sale of a business, net of strategic
transaction costs (1)                                       -     (7,816)  

Goodwill impairment                                    50,000           -  

Strategic transaction costs (2)                        17,682         329  

981

Restructuring and other charges (3)                         -         108  
   50,780
Adjusted EBITDA                                    $  165,991   $ 173,390   $ 231,593

(1) Represents the gain on the sale of Precima in January 2020net of

transaction costs. Precima has been included in our AIR MILES reward program

segment. See note 5, “Disposal”, of the notes to the consolidated and combined financial statements

Financial statements for the year ended December 31, 2021 for more

information.

(2) Represents costs associated with strategic initiatives, including costs

related to the separation, which included consent fees, amounts

related to social and fiscal agreements, and professional

services.

(3) Represents costs associated with restructuring or other exit activities for

measures taken in 2019. See Note 13, “Restructuring and other charges”, of the

Notes to the consolidated and combined financial statements for the year ended

    December 31, 2021 for additional information.


                                            Years Ended December 31,                      % Change
                                        2021          2020          2019        2021 to 2020    2020 to 2019

                                                       (in thousands, except percentages)
Revenue:
AIR MILES Reward Program             $  284,744    $  277,121    $   384,021               3 %          (28) %
BrandLoyalty                            450,609       487,685        649,110             (8)            (25)
Eliminations                               (46)             -              -              nm *            nm *
Total                                $  735,307    $  764,806    $ 1,033,131             (4) %          (26) %
Adjusted EBITDA:
AIR MILES Reward Program             $  147,798    $  144,025    $   165,168               3 %          (13) %
BrandLoyalty                             32,112        42,161         79,376            (24)            (47)
Corporate/Other                        (13,919)      (12,796)       (12,951)               9             (1)
Total                                $  165,991    $  173,390    $   231,593             (4) %          (25) %


* not meaningful

Year ended December 31, 2021 compared to the year ended December 31, 2020

Revenue. Total revenue decreased $29.5 million, or 4%, to $735.3 million for the
year ended December 31, 2021 from $764.8 million for the year ended December 31,
2020. The net decrease was due to the following:

AIR MILES reward program. Revenues have increased $7.6 millioni.e. 3%, to $284.7

? million for the year ended December 31, 2021 as revenues were impacted by

favorable exchange rates. The sale of Precima in January 2020 resulted in a

   $1.9 million decrease in revenue.


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Brand loyalty. Revenues have gone down $37.1 millioni.e. 8%, to $450.6 million for the

? year ended December 31, 2021due to a decline in programs in the market across

most regions due to the impact of COVID-19 and the associated supply chain

disturbances.

Adjusted EBITDA. Adjusted EBITDA decreased $7.4 millioni.e. 4%, to $166.0 million for the year ended December 31, 2021 from $173.4 million for the year ended December 31, 2020. The net decrease is explained by the following items:

AIR MILES reward program. Adjusted EBITDA increased $3.8 millioni.e. 3%, to

$147.8 million for the year ended December 31, 2021due to certain costs

reductions impacted by COVID 19, such as employee occupancy and engagement

? costs. For the year ended December 31, 2021costs $3.8 million relative to

Separation have been excluded from Adjusted EBITDA. For the year ended December

31, 2020, the $7.8 million gain on the sale of Precima, net of transaction

costs, has been excluded from Adjusted EBITDA.

Brand loyalty. Adjusted EBITDA decreased $10.0 millioni.e. 24%, at $32.1 million

for the year ended December 31, 2021 mainly due to lower income

? as discussed above. For the year ended December 31, 2021, $50.0 million of

impairment of goodwill and costs of $9.4 million associated with separation

have been excluded from Adjusted EBITDA.

Business/Other. Adjusted EBITDA decreased $1.1 million for ($13.9) million for

the year has ended December 31, 2021 compared to ($12.8) million for the year

? ended December 31, 2019 due to an increase in payroll and benefits. For the

year ended December 31, 2021costs $4.5 million associated with the

The separation has been excluded from Adjusted EBITDA.

Year ended December 31, 2020 compared to the year ended December 31, 2019

Refer to Item 2, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included in of our registration statement on Form
10, filed with SEC on October 13, 2021, for a discussion of our 2020 results
compared to 2019, which discussion is incorporated by reference herein.

Cash 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 generated from operating activities, available
cash balances and available borrowings through the issuance of third-party debt.
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. In addition, the
continued volatility in the financial and capital markets due to COVID-19 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 requirements will depend on our future ability to continue to generate positive operating cash flow and obtain debt or equity financing on acceptable terms.

Cash activity for the years ended December 31, 20212020 and 2019

Operating Activities. We generated cash flow from operating activities of $179.6
million, $216.3 million, and $105.7 million for the years ended December 31,
2021, 2020, and 2019, respectively. The decrease in operating cash flows in 2021
of $36.7 million was impacted by lower profitability and a decrease of working
capital. In 2020, operating

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cash flow increased $110.6 million due to declining working capital due in large part to the market impacts of COVID-19.

Investing Activities. Cash used in investing activities was $65.3 million, $65.7
million and $53.0 million for the years ended December 31, 2021, 2020 and 2019,
respectively. Significant components of investing activities are as follows:

Redemption settlement assets, restricted. The money used from the redemption

settlement assets, restricted was $51.9. million, $40.7 millionand $9.5

? million for the years ended December 31, 20212020 and 2019, respectively.

The increase in cash flow used is attributable to an increase in investments,

   AIR MILES reward miles issued were greater than AIR MILES reward miles
   redeemed.

Capital expenditure. Cash paid for capital expenditures was $18.2 million,

$24.3 millionand $41.5 million for the years ended December 31, 20212020,

? and 2019, respectively. In 2022, we plan to invest a $20.0 million

for $25.0 million capital expenditures to improve our

digital platforms, while enhancing our data and analytics capabilities to

we can better serve our customers.

Proceeds from disposal of interests in non-consolidated subsidiaries – related

? Party. In 2021, we sold our investment in Comenity Canada LP for $4.1

million. In 2019, we sold our investment in ICOM Information and Communication

LP (“ICOM”) to a subsidiary of ADS for $4.0 million.

Investments in unconsolidated subsidiaries – related party. We made investments

in unconsolidated subsidiaries – related party of $0.7 million and $6.1

? million, for the years ended December 31, 2020 and 2019, respectively. We have done

contributions to Comenity Canada LP of $0.7 million for the years ended

December 31, 2020, and 2019, respectively. In 2019, we also contributed

to ICOM of $5.3 million to finance certain losses.

Distributions from investments in an unconsolidated subsidiary – related party. We

? received distributions from Comenity Canada LP of $0.8 million for the year

ended December 31, 2021.

Financing Activities. Cash used in financing activities was $216.2 million, $2.6
million, and $42.9 million for the years ended December 31, 2021, 2020 and 2019,
respectively.

In connection with the Separation with ADS, we entered into a senior secured
credit facility in the amount of $675.0 million and paid $22.9 million in debt
issuance costs. In connection with the Separation, we made a distribution to ADS
of $750.0 million, and ADS made a contribution of $5.6 million. In the first
quarter of 2021, we also paid a dividend of $124.2 million to ADS, of which $4.2
million was withheld for taxes.

In 2019, a capital contribution of $288.7 million received from ADS was used to
repay existing amounts under BrandLoyalty's credit agreement and amounts owed
under certain note payable agreements to subsidiaries of ADS.

In addition, cash used in financing transactions reflecting transactions with ADS were $4.0 million, $2.6 millionand $28.4 million for the years ended
December 31, 20212020 and 2019 respectively.

Debt

credit agreement

On November 3, 2021, Loyalty Ventures entered into a senior secured 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,
collectively the Credit Agreement. The term loan A and revolving credit facility
will mature November 3, 2026. The term loan B will mature November 3,

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2027. The proceeds from the term loans were used to finance a portion
$750.0 million broadcast by Loyalty companies to 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, as defined in the Credit Agreement.

The Credit Agreement contains customary representations and warranties 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.

As of December 31, 2021, we had $175.0 million and $500.0 million outstanding
under the term loan A and B facility, respectively. Availability under the
revolving credit facility was $137.5 million, with no borrowings but with $12.5
million in letters of credit outstanding. Our consolidated total leverage ratio,
as defined in our Credit Agreement, was under 4 to 1 at December 31, 2021, as
compared to the maximum covenant ratio of 5 to 1.

From December 31, 2021we complied with our covenants.

Brand Loyalty Credit Agreement

In April 2020, BrandLoyalty entered into a new credit agreement that provided
for a committed revolving line of credit of €30.0 million, an uncommitted
revolving line of credit of €30.0 million, and an accordion feature permitting
BrandLoyalty to request an increase in either the committed or uncommitted line
of credit up to €80.0 million in aggregate.

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. During 2021, no amounts
were outstanding under the BrandLoyalty credit agreement, which was terminated
in connection with entering into the Credit Agreement.

See Note 15, “Debt”, in the Notes to the Consolidated and Combined Financial Statements for additional information regarding our debt.

Contractual obligations

In the normal course of business, we enter into various contractual obligations
that may require future cash payments. Our future cash payments associated with
our contractual obligations and commitments to make future payments by type and
period as of December 31, 2021 are summarized below:

                             2022         2023         2024         2025         2026        Thereafter        Total

                                                                  (in thousands)
Long-term debt(1)          $  82,619    $  82,619    $  82,619    $  82,619    $ 190,829    $    333,333    $   854,638
Operating leases              15,073       14,250       13,369       12,841       12,429          77,427        145,389
ASC 740 obligations(2)             -            -            -            -            -               -              -
Purchase obligations(3)      158,389       39,409       32,956        8,065        7,678               -        246,497
Total                      $ 256,081    $ 136,278    $ 128,944    $ 103,525    $ 210,936    $    410,760    $ 1,246,524


(1) Long-term debt represents our estimated debt service obligations, including

both principal and interest. Interest was based on interest rates

effect from December 31, 2021applied to the contractual repayment period.

(2) Accounting Standards Codification (“ASC”) 740, “Income Taxes”, obligations do not

    not reflect unrecognized tax benefits of $19.8 million, of which the timing
    remains uncertain.


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(3) Purchase obligations are defined as an agreement to purchase goods or

enforceable and legally binding services and specifying all

significant terms, including the following: fixed or minimum quantities to be

bought; fixed, minimum or variable price provisions; and approximate

time of the transaction. The purchase obligation amounts disclosed above

represent estimates of the minimum for which we are obligated and the time

period during which the cash outflows will take place. Purchase orders and authorizations

for purchase that do not imply any firm commitment from either party are excluded

from the table above. Purchase obligations include inventory or reward

purchase commitments, referral commitments under our AIR MILES reward program,

minimum royalty guarantees under license agreements, minimum payments

under support and maintenance contracts and purchase agreements of other

goods and services.

We believe that we will have access to sufficient resources to meet these commitments.

Discussion of critical accounting estimates

Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated and combined financial statements, which have
been prepared in accordance with accounting policies that are described in the
Notes to Consolidated and Combined Financial Statements for the year ended
December 31, 2021. The preparation of the consolidated and combined financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We continually evaluate our
judgments and estimates in determination of our financial condition and
operating results. Estimates are based on information available as of the date
of the financial statements and, accordingly, actual results could differ from
these estimates, sometimes materially. Critical accounting estimates are defined
as those that are both most important to the portrayal of our financial
condition and operating results and require management's most subjective
judgments. The primary critical accounting estimates are described below.

Revenue recognition

AIR MILES Reward Program. The AIR MILES Reward Program collects fees, or
consideration, from its sponsors based on the number of AIR MILES reward miles
issued and, in limited circumstances, the number of AIR MILES reward miles
redeemed. Total consideration from the issuance of AIR MILES reward miles is
allocated to three performance obligations: redemption, service, and brand. As
the standalone selling price is not directly observable, we estimate the
standalone selling price for each performance obligation using either the
adjusted market assessment or cost plus a margin approach. The transaction price
is allocated to the separate performance obligations on a relative standalone
selling price basis.

The estimated standalone selling price for the redemption and the service
performance obligations are based on cost plus a reasonable margin. The
estimated standalone selling price of the brand performance obligation is
determined using a relief from royalty approach. Accordingly, management
determines the estimated standalone selling price by considering multiple inputs
and methods, including discounted cash flows and available market data in
consideration of applicable margins and royalty rates to utilize. The margins
and royalty rates used in the determination of the fair value have remained
relatively consistent for the years ended December 31, 2021, 2020, and 2019.

The number of AIR MILES reward miles issued and redeemed are factored into the
estimates, as management estimates the standalone selling prices and volumes
over the term of the respective agreements in order to determine the allocation
of consideration to each performance obligation delivered. The redemption
performance obligation incorporates the expected number of AIR MILES reward
miles to be redeemed, and therefore, the amount of redemption revenue recognized
is subject to management's estimate of breakage, or those AIR MILES reward miles
estimated to be unredeemed by the collector base. Our AIR MILES reward miles do
not expire with the exception of cases of inactivity, which occurs when a
collector account has had no transactional activity for 24 consecutive months.
Additionally, the estimated life of an AIR MILES reward mile impacts the timing
of revenue recognition.

The breakage and lifespan of an AIR MILES reward mile is based on management’s estimate after reviewing and analyzing various historical trends, including collector behavior, as well as account-related factors. a subscriber and the level of commitment which should be indicative of the likelihood of future redemptions. We use a statistical model

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to analyze our breakage estimate and update the model at least annually. We also
analyze vintage analysis, current run rates and other pertinent factors, such as
the impact of macroeconomic factors and changes in the program structure.

For the years ended December 31, 2021, 2020 and 2019, our estimated breakage
rate remained 20%. Our cumulative redemption rate, which represents program to
date redemptions divided by program to date issuance, is 69% as of December 31,
2021. We expect the ultimate redemption rate will approximate 80% based on our
historical redemption patterns, statistical regression models, and consideration
of enacted program changes, as applicable.

For the years ended December 31, 2021, 2020 and 2019, our estimated life of an
AIR MILES reward mile remained 38 months. We estimate that a change to the
estimated life of an AIR MILES reward mile of one month would impact revenue by
approximately $4 million. Any future changes in collector behavior could result
in further changes in our estimates of breakage or life of an AIR MILES reward
mile.

As of December 31, 2021, we had $1,022.0 million in deferred revenue related to
the AIR MILES Reward Program that will be recognized in the future. Further
information is provided in Note 3, "Revenue," of the Notes to Consolidated and
Combined Financial Statements for the year ended December 31, 2021.

Good will

We test goodwill for impairment annually or when events and circumstances change that indicate the carrying amount may not be recoverable.

For the 2021 annual impairment test, we performed a quantitative analysis for
the AIR MILES Reward Program and BrandLoyalty reporting units under ADS. The
fair value of the reporting units was estimated using 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, 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. As of the annual impairment test, goodwill for the AIR MILES Reward
Program and the BrandLoyalty reporting units was $198.5 million and $527.1
million, respectively, and it was determined there was no impairment of goodwill
on these reporting units, as the fair value of each of the AIR MILES Reward
Program and BrandLoyalty reporting unit exceeded its carrying value by more than
190% and less than 10%, respectively.

Due to the continued impact of the COVID-19 pandemic, including supply chain
disruptions in the fourth quarter of 2021 negatively impacting program
performance and issuing revised downward guidance in December 2021, we believed
it was more likely than not that the fair value of the BrandLoyalty reporting
unit was less than its carrying value, and performed an interim impairment test
on the BrandLoyalty reporting unit as of December 31, 2021. To determine the
fair value of the BrandLoyalty reporting unit, we utilized an income approach
and discounted cash flow model. The most significant estimates and assumptions
inherent in the discounted cash flow model were the forecasted revenue growth
rate, forecasted margin, the discount rate and the terminal growth rate. These
assumptions are unobservable inputs classified as Level 3 under the fair value
hierarchy of ASC 820, "Fair Value Measurement." The projections for revenue and
gross margin are based on a multiyear forecast, which reflects a recovery from
the COVID-19 pandemic during the forecast period and normalization of supply
chain constraints. The discount rate was based on an estimated weighted average
cost of capital and a specific risk premium for the BrandLoyalty reporting unit.
The components of weighted average cost of capital, which includes the cost of
equity and debt, and the specific risk premium, requires judgment by management
to estimate. Based on the results of the interim goodwill impairment test, we
recorded an impairment charge of $50.0 million, which reduced the goodwill
balance of the BrandLoyalty reporting unit by approximately 10%.

The goodwill balances as of December 31, 2021 for the AIR MILES Reward Program
and BrandLoyalty reporting units were $194.8 million and $455.2 million,
respectively. See Note 11, "Intangible Assets and Goodwill," of the Notes to
Consolidated and Combined Financial Statements for additional information.

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As with all assumptions, there is an inherent level of uncertainty and actual
results, to the extent they differ from those assumptions, could have a material
impact on fair value. For example, a reduction in customer demand would impact
our assumed growth rate resulting in a reduced fair value. The loss of a major
customer or program could have a significant impact on the future cash flows of
the reporting unit(s). Potential events or circumstances could have a negative
effect on the estimated fair value. In addition, the COVID-19 pandemic and
continuing uncertainty in the macroeconomic environment and future deterioration
in the economy could adversely impact our reporting units and result in an
additional goodwill impairment charge that could be material.

Allowance for inventory obsolescence

We use certain estimates and judgments to value inventory. Inventory is stated
at the lower of cost or net realizable value. We review our inventories for
excess or obsolete products. Based on an analysis of historical usage,
management's evaluation of estimated future demand, market conditions, and
alternative uses for possible excess or obsolete inventory, carrying values are
adjusted. The carrying value is reduced regularly to reflect the age and current
anticipated product demand. If actual demand differs from the estimates,
additional reductions would be necessary in the period such determination is
made. Excess and obsolete inventory is periodically disposed of through sale to
third parties, scrapping, or other means. A 10% increase or decrease in our
estimate of allowance for obsolescence at December 31, 2021 would impact our
cost of operations by approximately $1.4 million.

Income taxes

We account for uncertain tax positions in accordance with ASC 740, "Income
Taxes." The application of income tax law is inherently complex. Laws and
regulations in this area are voluminous and are often ambiguous. As such, we are
required to make many subjective assumptions and judgments regarding our income
tax exposures. Interpretations of, and guidance surrounding, income tax laws and
regulations change over time. Changes in our subjective assumptions and
judgments can materially affect amounts recognized in the consolidated and
combined balance sheets and statements of income. See Note 21, "Income Taxes,"
of the Notes to Consolidated and Combined Financial Statements for additional
detail on our uncertain tax positions and further information regarding ASC 740.

Recently issued and adopted accounting standards

See "Recently Issued Accounting Standards" under Note 2, "Summary of Significant
Accounting Policies," of the Notes to Consolidated and Combined Financial
Statements for the year ended December 31, 2021 for a discussion of certain
accounting standards that we have recently adopted and certain accounting
standards that we have not yet been required to adopt and may be applicable to
our future financial condition, results of operations or cash flows.

Item 7A. Quantitative and qualitative information on market risk.

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

Risk of change

We are exposed to fluctuations in the exchange rate between primarily the U.S.
and the Canadian dollar and between the U.S. dollar and the Euro. For the year
ended December 31, 2021, an additional 10% decrease in the strength of the
Canadian dollar versus the U.S. dollar and the Euro versus the U.S. dollar would
have resulted in an additional decrease in pre-tax income of approximately $12.3
million and $4.3 million, respectively. Conversely, a corresponding increase in
the strength of the Canadian dollar or the Euro versus the U.S. dollar would
result in a comparable increase to pre-tax income in these periods.

Interest rate risk

We have variable-rate debt under the Credit Agreement entered into in November
2021, more fully described in Note 15, "Debt," of the Notes to Consolidated and
Combined Financial Statements and are subject to interest rate risk in

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connection with amounts outstanding under the Credit Agreement. Our interest
expense, net was $5.5 million for 2021. Our Credit Agreement allows for the
London interbank offered rate (LIBOR) to be phased out and replaced with the
Secured Overnight Financing Rate and therefore we do not anticipate a material
impact by the expected upcoming LIBOR transition. To manage our risk from market
interest rates, we actively monitor interest rates and other interest sensitive
components to minimize the impact that changes in interest rates have on the
fair value of assets, net income and cash flow.

The approach we use to quantify interest rate risk is a sensitivity analysis,
which we believe best reflects the risk inherent in our business. This approach
calculates the impact on pre-tax income from an instantaneous and sustained
increase or decrease in interest rates of 1%. In 2021, a 1% increase or decrease
in interest rates on our variable-rate debt, which was outstanding for
approximately two months, would have resulted in a change to our interest
expense of approximately $1.1 million. Our use of this methodology to quantify
the market risk of financial instruments should not be construed as an
endorsement of its accuracy or the appropriateness of the related assumptions.

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