EX-99.1 2 exhibit99-1.htm EXHIBIT 99.1 Points International Ltd.: Exhibit 99.1 - Filed by newsfilecorp.com

Contents

  Page
   
Condensed consolidated interim financial statements  
Condensed consolidated interim balance sheets 2
Condensed consolidated interim statements of comprehensive income 3
Condensed consolidated interim statements of changes in equity 4
Condensed consolidated interim statements of cash flows 5
Notes to the condensed consolidated interim financial statements 6

 
1 | P a g e

Points International Ltd.
Condensed Consolidated Interim Balance Sheets

Expressed in thousands of United States dollars
(Unaudited)

As at   Note     September 30,     December 31,  
          2013     2012  
                   
ASSETS                  
Current assets                  
       Cash and cash equivalents       $  50,875   $  45,108  
       Restricted cash         1,615     3,202  
       Funds receivable from payment processors         6,362     10,057  
       Security deposits         -     2,780  
       Accounts receivable         2,208     1,912  
       Prepaid expenses and other assets         878     940  
Total current assets       $  61,938   $  63,999  
                   
Non-current assets                  
       Property and equipment         2,056     2,207  
       Intangible assets         1,667     2,856  
       Goodwill         2,580     2,580  
       Deferred tax assets         6,444     6,485  
       Long-term investment   10     2,500     -  
       Other assets         551     617  
Total non-current assets       $  15,798   $  14,745  
Total assets       $  77,736   $  78,744  
                   
 LIABILITIES                  
 Current liabilities                  
       Accounts payables and accrued liabilities         3,782     4,673  
       Payable to loyalty program partners         42,684     44,912  
       Current portion of other liabilities         932     594  
 Total current liabilities       $  47,398   $  50,179  
                   
 Non-current liabilities                  
       Other liabilities         501     738  
 Total non-current liabilities       $  501   $  738  
                   
 Total liabilities       $  47,899   $  50,917  
                   
 SHAREHOLDERS’ EQUITY                  
       Share capital   4     58,513     57,564  
       Contributed surplus         9,991     10,105  
       Accumulated other comprehensive loss         (194 )   (54 )
       Accumulated deficit         (38,473 )   (39,788 )
 Total shareholders’ equity       $  29,837   $  27,827  
 Total liabilities and shareholders’ equity       $  77,736   $  78,744  
 Subsequent event   10              

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 
2 | P a g e

Points International Ltd.
Condensed Consolidated Interim Statements of Comprehensive Income

Expressed in thousands of United States dollars, except per share amounts
(Unaudited)

    Note     For the three months     For the nine months  
          ended     ended  
        September     September     September     September  
          30, 2013     30, 2012     30, 2013     30, 2012  
REVENUE                              
     Principal     $ 52,479   $  32,172   $  126,970   $  91,720  
     Other partner revenue         1,947     2,159     6,274     6,960  
     Interest         15     8     39     26  
Total Revenue     $ 54,441   $  34,339   $  133,283   $  98,706  
                               
EXPENSES                              
     Direct cost of principal revenue         45,707     27,300     110,481     78,124  
     Employment costs         4,864     3,791     13,733     10,995  
     Marketing & communications         267     419     843     1,119  
     Technology services         214     149     772     480  
     Depreciation and amortization         803     715     2,570     2,075  
     Foreign exchange gain         (50 )   (19 )   (46 )   (35 )
     Operating expenses         1,059     1,128     3,423     3,218  
Total Expenses     $ 52,864   $  33,483   $  131,776   $  95,976  
                               
OPERATING INCOME     $ 1,577   $  856   $  1,507   $  2,730  
     Interest and other Income         -     (8 )   -     (8 )
OPERATING INCOME BEFORE INCOME TAX     $ 1,577   $  864   $  1,507   $  2,738  
                               
     Income tax expense         432     118     192     114  
NET INCOME     $ 1,145   $  746   $  1,315   $  2,624  
                               
OTHER COMPREHENSIVE INCOME (LOSS)                              
Items that will subsequently be reclassified to profit or loss:                              
Gain (loss) on foreign exchange derivatives designated as cash flow hedges, net of income tax expense of $45 and income tax recovery of $111 respectively for the three and nine months ended September 30, 2013 (2012: expense of $78 and $93)       124     216     (308 )   257  
Reclassification to net income of loss (gain) on foreign ex- change derivatives designated as cash flow hedges, net of income tax recovery of $44 and $60, respectively, for the three and nine months ended September 30, 2013 (2012 – expense of $18 and $40)       123     (50 )   168     (113 )
Other comprehensive income (loss) for the period, net of income tax     $ 247   $  166   $  (140 ) $  144  
TOTAL COMPREHENSIVE INCOME     $ 1,392   $  912   $  1,175   $  2,768  
                               
EARNINGS PER SHARE                              
     Basic earnings per share   5   $  0.08   $  0.05   $  0.09   $  0.17  
     Diluted earnings per share   5   $  0.07   $  0.05   $  0.08   $  0.17  

The accompanying notes are an integral part of these condensed consolidated interim financial statements

 
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Points International Ltd.
Condensed Consolidated Interim Statements of Changes in Equity

    Attributable to equity holders of the Company  
Expressed in thousands of United States dollars   Share Capital     Contributed     Total Capital     Unrealized     Accumulated     Accumulated     Total  
(Unaudited)         Surplus           gains (losses)     other com-     deficit     shareholders’  
                      on cash flow     prehensive           equity  
                      hedges     income (loss)              
                                           
Balance at December 31, 2012 $  57,564   $  10,105   $  67,669   $  (54 ) $  (54 ) $  (39,788 ) $  27,827  
Net lncome   -     -     -     -     -     1,315     1,315  
                                           
Other comprehensive loss   -     -     -     (140 )   (140 )   -     (140 )
Total comprehensive income   -     -     -     (140 )   (140 )   1,315     1,175  
Effect of share option compensation plan   -     462     462     -     -     -     462  
Effect of RSU compensation plan   -     358     358     -     -     -     358  
Share issuances   1,544     (934 )   610     -     -     -     610  
Share capital held in trust   (595 )   -     (595 )   -     -     -     (595 )
Balance at September 30, 2013 $  58,513   $  9,991   $  68,504   $  (194 ) $  (194 ) $  (38,473 ) $  29,837  
                                           
Balance at December 31, 2011 $  57,378   $  9,671   $  67,049   $  43   $  43   $  (48,050 ) $  19,042  
Net Income   -     -     -     -     -     2,624     2,624  
                                           
Other comprehensive income   -     -     -     144     144     -     144  
Total comprehensive income   -     -     -     144     144     2,624     2,768  
Effect of share option compensation plan   -     475     475     -     -     -     475  
Effect of RSU compensation plan   -     166     166     -     -     -     166  
Share issuances   1,138     (426 )   712     -     -     -     712  
Share capital held in trust   (960 )   -     (960 )   -     -     -     (960 )
Balance at September 30, 2012 $  57,556   $  9,886 $   67,442   $  187   $  187   $  (45,426 ) $  22,203  

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 
4 | P a g e

Points International Ltd.
Condensed Consolidated Interim Statements of Cash Flows

Expressed in thousands of United States dollars   Note     For the three months     For the nine months  
(Unaudited)         Ended     Ended  
          September     September     September     September  
          30, 2013     30, 2012     30, 2013     30, 2012  
                               
Cash flows from operating activities                              
Net income for the period       $  1,145   $  746   $  1,315   $ 2,624  
Adjustments for:                              
   Depreciation of property and equipment         229     155     892     424  
   Amortization of intangible assets         574     560     1,678     1,651  
   Unrealized foreign exchange loss         455     166     165     82  
   Equity-settled share-based payment transactions   6     292     222     820     641  
   Deferred income tax expense         415     110     92     100  
Unrealized net gain/loss on derivative contracts desig-         335     225     (191 )   196  
nated as cash flow hedges                              
Changes in non-cash balances related to operations   8     1,321     365     3,289     (4,790 )
Net cash provided by operating activities       $  4,766   $  2,549   $  8,060   $ 928  
                               
Cash flows from investing activities                              
Acquisition of property and equipment         (101 )   (203 )   (742 )   (531 )
Additions to intangible assets         (217 )   (216 )   (489 )   (509 )
Long-term Investment         -     -     (2,500 )   -  
Changes in restricted cash         -     -     1,575     -  
Purchase of convertible debenture         -     -     -     (255 )
Net cash used in investing activities       $  (318 ) $  (419 ) $  (2,156 ) $ (1,295 )
                               
Cash flows from financing activities                              
Proceeds from exercise of share options         240     25     610     712  
Payment for share purchases         -     (472 )   (595 )   (960 )
Net cash provided by (used in) financing activities       $  240   $  (447 ) $  15   $ (248 )
                               
Net increase (decrease) in cash and cash equivalents       $  4,688   $  1,683   $  5,919   $ (615 )
Cash and cash equivalents at beginning of the period         46,646     32,640     45,108     34,853  
Effect of exchange rate fluctuations on cash held         (459 )   (178 )   (152 )   (93 )
Cash and cash equivalents at end of the period       $  50,875   $  34,145   $  50,875   $ 34,145  
                               
                               
Interest Received       $  15   $  (2 ) $  42   $ 16  
Interest Paid       $  -   $  (9 ) $  -   $ (9 )
                               
Taxes Paid       $  14   $  1   $  53   $ 5  

Amounts paid and received for interest were reflected as operating cash flows in the condensed consolidated interim statements of cash flows.

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

 
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1. REPORTING ENTITY

Points International Ltd. (the “Corporation”) is a company domiciled in Canada. The address of the Corporation’s registered office is 171 John Street, 5th Floor, Toronto, ON, Canada M5T 1X3. The condensed consolidated interim financial statements of the Corporation as at and for the three and nine months ended September 30, 2013 comprise the Corporation and its wholly-owned subsidiaries, Points International (US) Ltd., Points International (UK) Ltd., and Points.com Inc.

The Corporation operates in one segment, providing web-based solutions to the loyalty program industry. The range of ecommerce services include the retailing and wholesaling of loyalty program currencies, a range of additional ecommerce products that enhance either the loyalty program’s consumer offering or its back-end operations, and management of an online consumer-focused loyalty points management web-portal. The Corporation’s operations are moderately influenced by seasonality. Historically, revenues are highest in the fourth quarter in each year as redemption volumes and promotional activity typically peak at this time.

The consolidated financial statements of the Corporation as at and for the year ended December 31, 2012 are available at www.sedar.com or www.sec.gov.

2. BASIS OF PREPARATION

(a) Statement of compliance

The condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting as issued by the International Accounting Standard Board (“IASB”). The condensed consolidated interim financial statements do not include all the information required for full annual financial statements.

The condensed consolidated interim financial statements were authorized for issue by the Board of Directors on November 6th, 2013.

(b) Basis of measurement

These condensed consolidated interim financial statements have been prepared on the historical cost basis except for derivative financial instruments and non-derivative financial instruments at fair value through profit or loss, which are measured at their fair value. In addition, these condensed consolidated interim financial statements have been prepared using the accrual basis of accounting, except for cash flow information.

3. SIGNIFICANT ACCOUNTING POLICIES

These unaudited condensed consolidated interim financial statements follow the same accounting policies and methods of application as the 2012 financial statements. In addition, the Corporation adopted the following accounting pronouncements, which are effective for the Corporation’s interim and annual consolidated financial statements commencing January 1, 2013.

IFRS 10, Consolidated Financial Statements

In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements ("IFRS 10"). IFRS 10, which replaces the consolidation requirements of SIC-12 Consolidation-Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements, establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. There was no impact to the unaudited condensed consolidated interim financial statements upon adoption.

IFRS 13, Fair Value Measurement

In May 2011, the IASB issued IFRS 13, Fair Value Measurement ("IFRS 13"). IFRS 13 replaces the fair value guidance contained in individual IFRS with a single source of fair value measurement guidance. The standard also requires disclosures that enable users to assess the methods and inputs used to develop fair value measurements. There was no measurement impact to the unaudited condensed consolidated interim financial statements upon adoption.

 
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IAS 1, Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income

In June 2011, the IASB published amendments to IAS 1, Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income, which requires that an entity present separately the items of OCI that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. The Company has reflected this in the Consolidated Statement of Comprehensive Income.

New standards and interpretations not yet adopted

International Financial Reporting Standard 9, Financial Instruments (“IFRS 9”), was issued in November 2009. It addresses classification and measurement of financial assets and replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement, on the classification and measurement of financial assets. The Standard eliminates the existing IAS 39 categories of held to maturity, available-for-sale and loans and receivables and financial assets will be classified into one of two categories on initial recognition: amortized cost or fair value. IFRS 9 (2010) supersedes IFRS 9 (2009). IFRS 9 (2010) added guidance to IFRS 9 (2009) on the classification and measurement of financial liabilities. IASB tentatively decided to defer the mandatory effective date of IFRS 9 and that the mandatory effective date should be left open pending the finalization of the impairment and classification and measurement requirements. The extent of the impact of adoption of IFRS 9 (2010) has not yet been determined.

4. SHARE CAPITAL

Authorized with no Par Value
Unlimited common shares
Unlimited preferred shares

Issued
The balance of capital stock is summarized as follows (all amounts in US dollars unless otherwise noted):

Common shares   Number     Amount  
Balance at December 31, 2012   15,168,239   $  57,564  
Exercise of share options(1)   167,170     1,451  
Share capital held in trust(2)   -     (502 )
             
Balance at September 30, 2013   15,335,409   $  58,513  

(1)

84 options previously issued to employees were exercised at CAD$3.70 per share.

500 options previously issued to employees were exercised at CAD$4.10 per share.
70,038 options previously issued to employees were exercised at CAD$4.60 per share.
500 options previously issued to employees were exercised at CAD$4.90 per share.
3,000 options previously issued to employees were exercised at CAD$5.00 per share.
333 options previously issued to employees were exercised at CAD$5.30 per share.
4,000 options previously issued to employees were exercised at CAD$6.00 per share.
7,500 options previously issued to employees were exercised at CAD$7.00 per share.
666 options previously issued to employees were exercised at CAD$7.80 per share
37,552 options previously issued to employees were exercised at CAD$9.00 per share
83 options previously issued to employees were exercised at CAD$9.02 per share
7,407 options previously issued to employees were exercised at CAD$9.74 per share.
166 options previously issued to employees were exercised at CAD$9.86per share.
1,250 options previously issued to employees were exercised at CAD$10.70 per share.

16,303 options previously issued to employees were exercised at CAD$11.04 per share.
1,238 options previously issued to employees were exercised at CAD$12.49 per share.
16,550 options previously issued to employees were exercised at CAD$18.10 per share.
   
(2) 11,788 common shares held in trust were issued to employees to fulfill the RSU issuance obligation for units vested on March 19, 2013.
   
34,000 common shares have been repurchased and held in trust to fulfill the RSU issuance obligation as the units vest to employees in 2013.
 
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At September 30, 2013 all issued shares are fully paid. The holders of common shares are entitled to receive dividends if any, and are entitled to one vote per share.

5. EARNINGS PER SHARE

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

For the three month period ended September 30,   2013     2012  
Net income for basic and diluted earnings per share available to common shareholders $  1,145   $  746  
Weighted average number of common shares outstanding – basic   15,244,208     15,162,456  
Effect of dilutive securities – share-based payments   345,963     196,061  
Weighted average number of common shares outstanding - diluted   15,590,171     15,358,517  
Earnings per share - reported            
Basic $  0.08   $  0.05  
Diluted $  0.07   $  0.05  

For the nine month period ended September 30,   2013     2012  
Net income for basic and diluted earnings per share available to common shareholders $  1,315   $  2,624  
Weighted average number of common shares outstanding – basic   15,209,908     15,120,345  
Effect of dilutive securities – share-based payments   293,122     175,686  
Weighted average number of common shares outstanding – diluted   15,503,030     15,296,031  
Earnings per share - reported            
Basic $  0.09   $  0.17  
Diluted $  0.08   $  0.17  

a)      Basic earnings per share

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period.

b)      Diluted earnings per share

Diluted earnings per share represents what the earnings per share would be if instruments convertible into common shares had been converted at the beginning of the period, or at the time of issuance, if later. In determining diluted earnings per share, the average number of common shares outstanding is increased by the number of shares that would have been issued if all share options with an exercise price below the average share price for the period had been exercised at the beginning of the period, or at the time of issuance, if later. The average number of common shares outstanding is also decreased by the number of common shares that could have been repurchased on the open market at the average share price for the period by using the proceeds from the exercise of share options. Share options with a strike price above the average share price for the period are not adjusted because including them would be anti-dilutive.

The average market value of the Corporation’s shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding.

 
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6. SHARE-BASED PAYMENT

At September 30, 2013, the Corporation had two share-based compensation plans for its employees: a share option plan and a share unit plan.

Share option plan

Under the share option plan, employees, directors and consultants are periodically granted share options to purchase common shares at prices not less than the market price of the common shares on the day prior to the date of grant. The options generally vest over a three-year period and expire at the end of five years from the grant date.

Fair value

The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. There were no options granted for the three month period ended September 30, 2013. The fair value of options granted in the three and nine months ended September 30, 2013 and 2012 were calculated using the following weighted assumptions:

      Three month period     Nine month period  
  For the period ended September 30,   2013     2012     2013     2012  
  Dividend Yield   -     NIL     NIL     NIL  
  Risk free rate   -     1.18%     1.14%     1.42%  
  Expected volatility   -     47.07%     39.64%     64.21%  
  Expected life of options in years   -     4.20     4.20     4.20  

A summary of the status of the Corporation’s share option plan since January 1, 2013 is presented below:

      Weighted Average Exercise Price
    Number of Options (in CAD$)
  Balance at January 1, 2013 635,804 $              8.73
  Granted 154,158 $            15.97
  Exercised (234,825) $              9.25
  Expired and forfeited (51,550) $            16.55
  Balance at September 30, 2013 503,587 $              9.90
  Exercisable at September 30, 2013 222,858 $              6.92
       
  Options available to grant 581,907

Share unit plan

Under the share unit plan, employees are periodically granted Restricted Share Units (RSUs) and Performance Share Units (PSUs). The RSUs vest either over a period of three years or in full on the third anniversary of the grant date. As at September 30, 2013, 122,521 RSUs were outstanding. To date there have been no PSUs granted to employees, under the share unit plan and there were no PSUs outstanding as at September 30, 2013.

      Weighted Average Fair Value
    Number of RSUs (in CAD$)
  Balance at January 1, 2013 94,318 $            10.91
  Granted 58,380 $            16.83
  Vested (11,788) $              9.74
  Forfeited (18,389) $            12.73
  Balance at September 30, 2013 122,521 $            13.54
 
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The fair value of each RSU, determined at the date of grant using the volume weighted average trading price per share on the Stock Exchange during the immediately preceding five trading days, is recognized over the RSU’s vesting period and charged to profit or loss with a corresponding increase in contributed surplus.

Under the share unit plan, share units can be settled in cash or shares at the Corporation’s discretion. The Corporation intends to settle all share units in equity at the end of the vesting period. To fulfill this obligation, the Corporation has appointed a trustee to administer the program and will purchase shares from the open market through a share purchase trust on a periodic basis. As at September 30, 2013, 100,212 of the Corporation’s common shares were held in trust.

The Corporation accounts for the share-based awards granted under both plans in accordance with the fair value based method of accounting for equity settled share-based compensation arrangements under IFRS 2. The estimated fair value of the awards that are ultimately expected to vest is recorded over the vesting period as part of employment costs. The compensation cost for all share-based awards that has been charged against profit or loss and included in employment costs is $292 and $820 for the three and nine month period ended September 30, 2013 (2012 - $222 and $641).

7. GUARANTEES, COMMITMENTS AND CONTINGENCIES

    Total     Year 1 (4)     Year 2     Year 3     Year 4     Year 5+  
Operating leases(1) $  2,781   $  726   $  731   $  742   $  474   $  108  
Principal revenue(2)   218,633     48,530     93,527     76,576     -     -  
Investment                                    
commitment(3)   2,500     2,500     -     -     -     -  
$ 223,914   $  51,756   $  94,258   $  77,318   $  474   $  108  

  (1)

The Corporation is obligated under various non-cancellable operating leases for premises and equipment and service agreements for web hosting services.

  (2)

In relation to principal revenue, the Corporation has made contractual guarantees on the minimum value of transactions processed over the term of its agreements with certain loyalty program partners.

  (3)

The Corporation has a contractual obligation to make an investment in China Rewards. The obligation is contingent on specific performance milestones being met. Management anticipates the milestones to be met in year 1 (see Note 10).

  (4)

The guarantees, commitments and contingencies schedule is prepared on a rolling 12-month basis.

8. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash balances related to operations are as follows:

    Three months ended     Nine months ended  
For the period ended September 30,   2013     2012     2013     2012  
Decrease (increase) in funds receivable from payment processors $  (282 ) $  (367 ) $  3,695   $  3,711  
Decrease (increase) in security deposits   -     299     2,780     (182 )
                         
Decrease (Increase) in accounts receivable   (502 )   (67 )   (296 )   729  
Decrease (increase) in prepaid expenses and other assets   70     (155 )   62     (148 )
Decrease in other assets   12     24     66     64  
(Decrease) increase in accounts payable and accrued liabilities   591     173     (891 )   (502 )
(Decrease) increase in other liabilities   (361 )   67     101     (178 )
(Decrease) increase in payable to loyalty program partners   1,793     391     (2,228 )   (8,284 )
  $  1,321   $  365   $  3,289   $  (4,790 )
 
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9. OPERATING SEGMENT

The Corporation provides technology solutions to the loyalty program industry and is organized and managed as a single operating segment with its operating results reviewed by the Corporation's chief executive officer, the chief operating decision maker.

Enterprise-wide disclosures - Geographic information

    Three months ended     Nine months ended  
For the period ended September 30,   2013     2012     2013     2012  
                         
         Revenue                        
             United States $  47,146   $  25,102   $ 107,446   $  72,656  
             Europe   6,616     8,715     23,965     24,686  
             Canada and other   679     522     1,872     1,364  
  $ 54,441   $  34,339   $ 133,283   $  98,706  
                         
         Revenue                        
             United States   87%     73%     81%     74%  
             Europe   12%     25%     18%     25%  
             Canada and other   1%     2%     1%     1%  
    100%     100%     100%     100%  

Revenue earned by the Corporation is generated from sales to loyalty program partners directly or from sales directly to members of loyalty programs which the Corporation partners with. Revenues by geographic region are shown above and are based on the country of residence of each of the Corporation’s loyalty partners. At September 30, 2013, substantially all of the Corporation's assets were in Canada.

Dependence on loyalty program partners

For the three month period ended September 30, 2013, there were four (2012 – three) loyalty program partners for which sales to their members individually represented more than 10% of the Corporation’s total revenue. In aggregate these four partners represented 86% (2012 – 76%) of the Corporation’s total revenue.

For the nine month period ended September 30, 2013, there were four (2012 – three) loyalty program partners for which sales to their members individually represented more than 10% of the Corporation’s total revenue. In aggregate these three partners represented 80% (2012 – 75%) of the Corporation’s total revenue.

10. INVESTMENT IN CHINA REWARDS

In 2012, the Corporation entered into a binding agreement to make a minority investment, up to $5,000, in China Rewards, a domestic Chinese retail coalition loyalty program start-up based in Shanghai, People’s Republic of China. The investment will be made in a series of tranches, subject to certain milestones being met.

As at September 30 2013, the Corporation has made an investment of $2,500 in China Rewards. This investment is classified as an available-for-sale security and measured at fair value on the balance sheet with changes in fair value recorded in other comprehensive income.

Subsequent to September 30, 2013, the Corporation completed its second full tranche investment of $1,000 in China Rewards. The investment of the remaining investment tranche is conditional upon specific performance milestones being achieved by China Rewards.

 
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11. FINANCIAL INSTRUMENTS

Determination of fair value

For funds receivable from payment processors, security deposits, accounts receivable, accounts payable and accrued liabilities and payable to loyalty program partners, their fair values approximates their carrying values at September 30, 2013 due to their short-term maturities.

Fair value hierarchy

The Corporation has determined the estimated fair values of its financial instruments based on appropriate market inputs and valuation methodologies, as disclosed below. Considerable judgment is required to develop certain of these estimates. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. The methods and assumptions used to estimate the fair value of each class of financial instruments are discussed below.

The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

  • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
  • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
  • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Quoted market prices for an identical asset or liability represent a Level 1 valuation. When quoted market prices are not available, the Corporation maximizes the use of observable inputs within valuation models. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the use of significant unobservable inputs are considered Level 3. The fair value of financial assets and financial liabilities measured at fair value in the consolidated balance sheet as at September 30, 2013 and December 31, 2012 are as follows:

  As at September 30 2013   Level 1     Level 2     Level 3     Total  
  Assets:                        
     Foreign exchange contracts designated as
   cash flow hedges(i) 		$  -   $  -   $  -   $  -  
                           
       Investment in China Rewards   -     -     2,500     2,500  
                           
  Liabilities:                        
     Foreign exchange contracts designated as
   cash flow hedges(i) 		  -     (240 )   -     (240 )
    $  -   $  (240 ) $  2,500   $  2,260  

  As at December 31 2012   Level 1     Level 2     Level 3     Total  
  Assets:                        
     Foreign exchange contracts designated as
   cash flow hedges(i) 		$  -   $  41   $  -   $  41  
                           
  Liabilities:                        
     Foreign exchange contracts designated as
   cash flow hedges(i) 		  -     (90 )   -     (90 )
    $  -   $  (49 ) $  -   $  (49 )

  (i)

The carrying values of the Corporation’s forward contracts is included in prepaid expenses and other assets and current portion of other liabilities in the consolidated balance sheets.

 
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