UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE
13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of |
November, 2014 |
Commission File Number | 001-35078 |
POINTS INTERNATIONAL LTD. |
(Translation of registrant's name into English) |
171 John Street, 5th Floor, Toronto, Ontario, M5T 1X3, Canada |
(Address of principal executive offices) |
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F [ ] Form 40-F [X]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________________.
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, thereunto duly authorized.
Points International Ltd. | |||
(Registrant) | |||
Date: |
November 5, 2014 | ||
|
By: |
/s/ Mr. Anthony Lam |
|
Mr. Anthony Lam |
|||
* Print the name and title under the signature of the signing officer. |
Chief Financial Officer |
NYC#: 108692.1 |
Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. |
SEC1815(04-09) |
EXHIBIT INDEX
Contents
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, | ||||
2014 | 2013 | ||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 55,832 | $ | 64,188 | |||
Restricted cash | 1,587 | 1,602 | |||||
Funds receivable from payment processors | 6,829 | 9,071 | |||||
Accounts receivable | 1,799 | 1,401 | |||||
Prepaid expenses and other assets | 2,574 | 2,210 | |||||
Total current assets | $ | 68,621 | $ | 78,472 | |||
Non-current assets | |||||||
Property and equipment | 1,838 | 2,092 | |||||
Intangible assets | 2,954 | 1,855 | |||||
Goodwill | 4,299 | 2,580 | |||||
Deferred tax assets | 4,395 | 5,966 | |||||
Long-term investment | 10 | 5,000 | 3,500 | ||||
Other assets | 711 | 547 | |||||
Total non-current assets | $ | 19,197 | $ | 16,540 | |||
Total assets | $ | 87,818 | $ | 95,012 | |||
LIABILITIES | |||||||
Current liabilities | |||||||
Accounts payables and accrued liabilities | $ | 5,160 | $ | 4,783 | |||
Payable to loyalty program partners | 44,394 | 56,111 | |||||
Current portion of other liabilities | 1,085 | 1,134 | |||||
Total current liabilities | $ | 50,639 | $ | 62,028 | |||
Non-current liabilities | |||||||
Deferred tax liabilities | 267 | - | |||||
Other liabilities | 325 | 437 | |||||
Total non-current liabilities | $ | 592 | $ | 437 | |||
Total liabilities | $ | 51,231 | $ | 62,465 | |||
SHAREHOLDERS EQUITY | |||||||
Share capital | 4 | 58,288 | 58,693 | ||||
Contributed surplus | 11,491 | 10,381 | |||||
Accumulated other comprehensive loss | (226 | ) | (345 | ) | |||
Accumulated deficit | (32,966 | ) | (36,182 | ) | |||
Total shareholders equity | $ | 36,587 | $ | 32,547 | |||
Total liabilities and shareholders equity | $ | 87,818 | $ | 95,012 |
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, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | ||||||||||
REVENUE | |||||||||||||
Principal | $ | 58,787 | $ | 52,479 | $ | 182,857 | $ | 126,970 | |||||
Other partner revenue | 2,640 | 1,947 | 7,232 | 6,274 | |||||||||
Interest | 19 | 15 | 59 | 39 | |||||||||
Total Revenue | $ | 61,446 | $ | 54,441 | $ | 190,148 | $ | 133,283 | |||||
EXPENSES | |||||||||||||
Direct cost of principal revenue | 51,259 | 45,707 | 160,886 | 110,481 | |||||||||
Employment costs | 5,584 | 4,864 | 17,240 | 13,733 | |||||||||
Marketing and communications | 523 | 267 | 1,049 | 843 | |||||||||
Technology services | 308 | 214 | 807 | 772 | |||||||||
Depreciation and amortization | 481 | 803 | 1,569 | 2,570 | |||||||||
Foreign exchange (gain) loss | 90 | (50 | ) | 84 | (46 | ) | |||||||
Operating expenses | 1,169 | 1,059 | 3,797 | 3,423 | |||||||||
Total Expenses | $ | 59,414 | $ | 52,864 | $ | 185,432 | $ | 131,776 | |||||
OPERATING INCOME | $ | 2,032 | $ | 1,577 | $ | 4,716 | $ | 1,507 | |||||
Interest and other income | - | - | (5 | ) | - | ||||||||
OPERATING INCOME BEFORE INCOME TAXES | $ | 2,032 | $ | 1,577 | $ | 4,721 | $ | 1,507 | |||||
Income tax expense | 479 | 432 | 1,505 | 192 | |||||||||
NET INCOME | $ | 1,553 | $ | 1,145 | $ | 3,216 | $ | 1,315 | |||||
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 recovery of $109 and $117, respectively, for the three and nine months ended Sep- tember 30, 2014 (2013: expense of $45 and recovery of $111) | (304 | ) | 124 | (325 | ) | (308 | ) | ||||||
Reclassification to net income of loss (gain) on foreign ex- change derivatives designated as cash flow hedges, net of income tax recovery of $37 and $160, respectively, for the three and nine months ended September 30, 2014 (2013 recovery of $44 and $60) | 102 | 123 | 444 | 168 | |||||||||
Other comprehensive income (loss) for the period, net of income tax | $ | (202 | ) | $ | 247 | $ | 119 | $ | (140 | ) | |||
TOTAL COMPREHENSIVE INCOME | $ | 1,351 | $ | 1,392 | $ | 3,335 | $ | 1,175 | |||||
EARNINGS PER SHARE | |||||||||||||
Basic earnings per share | 5 | $ | 0.10 | $ | 0.08 | $ | 0.21 | $ | 0.09 | ||||
Diluted earnings per share | 5 | $ | 0.10 | $ | 0.07 | $ | 0.21 | $ | 0.08 |
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
3 | P a g e |
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 | losses on cash | other com- | deficit | shareholders | ||||||||||||||||
flow hedges | prehensive | equity | |||||||||||||||||||
loss | |||||||||||||||||||||
Balance at December 31, 2013 | $ | 58,693 | $ | 10,381 | $ | 69,074 | $ | (345 | ) | $ | (345 | ) | $ | (36,182 | ) | $ | 32,547 | ||||
Net lncome | - | - | - | - | - | 3,216 | 3,216 | ||||||||||||||
Other comprehensive income | - | - | - | 119 | 119 | - | 119 | ||||||||||||||
Total comprehensive income | - | - | - | 119 | 119 | 3,216 | 3,335 | ||||||||||||||
Effect of share option compensation plan | - | 634 | 634 | - | - | - | 634 | ||||||||||||||
Effect of PSU and RSU compensation plan | - | 690 | 690 | - | - | - | 690 | ||||||||||||||
Share issuances | 326 | (214 | ) | 112 | - | - | - | 112 | |||||||||||||
Share capital held in trust | (731 | ) | - | (731 | ) | - | - | - | (731 | ) | |||||||||||
Balance at September 30, 2014 | $ | 58,288 | $ | 11,491 | $ | 69,779 | $ | (226 | ) | $ | (226 | ) | $ | (32,966 | ) | $ | 36,587 | ||||
Balance at December 31, 2012 | $ | 57,564 | $ | 10,105 | $ | 67,669 | $ | (54 | ) | $ | (54 | ) | $ | (39,788 | ) | $ | 27,827 | ||||
Net income | - | - | - | - | - | 1,315 | 1,315 | ||||||||||||||
Other comprehensive loss | - | - | - | (140 | ) | (140 | ) | - | (140 | ) | |||||||||||
Total comprehensive loss | - | - | - | (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 |
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
(Unaudited)
Note | For the three months | For the nine months | |||||||||||
ended | ended | ||||||||||||
September | September | September | September | ||||||||||
30, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | ||||||||||
Cash flows from operating activities | |||||||||||||
Net income for the period | $ | 1,553 | $ | 1,145 | $ | 3,216 | $ | 1,315 | |||||
Adjustments for: | |||||||||||||
Depreciation of property and equipment | 241 | 229 | 753 | 892 | |||||||||
Amortization of intangible assets | 240 | 574 | 816 | 1,678 | |||||||||
Unrealized foreign exchange (gain) loss | (532 | ) | 455 | (476 | ) | 165 | |||||||
Equity-settled share-based payment transactions | 6 | 513 | 292 | 1,324 | 820 | ||||||||
Deferred income tax expense | 529 | 415 | 1,474 | 92 | |||||||||
Unrealized net gain/loss on derivative contracts desig- nated as cash flow hedges | (275 | ) | 335 | 162 | (191 | ) | |||||||
Changes in non-cash balances related to operations, ex- clusive of effects of business combination | 8 | (6,060 | ) | 1,321 | (10,802 | ) | 3,289 | ||||||
Net cash (used in) provided by operating activities | $ | (3,791 | ) | $ | 4,766 | $ | (3,533 | ) | $ | 8,060 | |||
Cash flows from investing activities | |||||||||||||
Acquisition of property and equipment | (163 | ) | (101 | ) | (499 | ) | (742 | ) | |||||
Additions to intangible assets | (400 | ) | (217 | ) | (1,184 | ) | (489 | ) | |||||
Long-term investment | - | - | (1,500 | ) | (2,500 | ) | |||||||
Acquisition of business, net of cash acquired | 13 | - | - | (1,511 | ) | - | |||||||
Changes in restricted cash, net of unrealized foreign ex- change gain/loss | - | - | - | 1,575 | |||||||||
Net cash used in investing activities | $ | (563 | ) | $ | (318 | ) | $ | (4,694 | ) | $ | (2,156 | ) | |
Cash flows from financing activities | |||||||||||||
Proceeds from exercise of share options | 25 | 240 | 112 | 610 | |||||||||
Payment for share purchases | - | - | (731 | ) | (595 | ) | |||||||
Net cash provided by (used in) financing activities | $ | 25 | $ | 240 | $ | (619 | ) | $ | 15 | ||||
Net increase (decrease) in cash and cash equivalents | $ | (4,329 | ) | $ | 4,688 | $ | (8,846 | ) | $ | 5,919 | |||
Cash and cash equivalents at beginning of the period | $ | 59,614 | $ | 46,646 | $ | 64,188 | $ | 45,108 | |||||
Effect of exchange rate fluctuations on cash held | 547 | (459 | ) | 490 | (152 | ) | |||||||
Cash and cash equivalents at end of the period | $ | 55,832 | $ | 50,875 | $ | 55,832 | $ | 50,875 | |||||
Interest Received | $ | 19 | $ | 15 | $ | 64 | $ | 42 | |||||
Interest Paid | $ | - | $ | - | $ | - | $ | - | |||||
Taxes Received | $ | - | $ | - | $ | - | $ | - | |||||
Taxes Paid | $ | - | $ | 14 | $ | 3 | $ | 53 |
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.
5 | P a g e |
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, 2014 comprise the Corporation and its wholly-owned subsidiaries, Points International (US) Ltd., Points International (UK) Ltd., Points.com Inc., and Points Development (US) Ltd. (formerly Accruity Inc.). The Corporations’ shares are publicly traded on the Toronto Stock Exchange (TSX: PTS) and on the NASDAQ (PCOM).
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 annual consolidated financial statements of the Corporation as at and for the year ended December 31, 2013 are available at www.sedar.com or www.sec.gov.
2. BASIS OF PREPARATION
(a) Statement of compliance
The condensed consolidated interim financial statements for the three and nine months ended September 30, 2014 have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”) as issued by the International Accounting Standard Board (“IASB”) following the same accounting policies and methods of application as those disclosed in the annual audited consolidated financial statements for the year ended December 31, 2013. The condensed consolidated interim financial statements were authorized for issue by the Board of Directors on November 5th, 2014.
(b) Basis of measurement
These condensed consolidated interim financial statements have been prepared on a historical cost basis except for derivative financial instruments and non-derivative financial instruments which are recorded at fair value through profit or loss, and available-for-sale financial assets, 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.
The notes presented in these third quarter 2014 condensed consolidated interim financial statements include only significant changes and transactions occurring since December 31, 2013, and are not fully inclusive of all disclosures required by International Financial Reporting Standards (“IFRS”) for annual financial statements. These condensed consolidated interim financial statements should be read in conjunction with the Corporation’s annual consolidated financial statements for the year ended December 31, 2013. All amounts are expressed in thousands of United States dollars, except per share amount, or as otherwise indicated.
3. SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated interim financial statements follow the same accounting policies and methods of application as those disclosed in the Corporation’s annual audited consolidated financial statements for the year ended December 31, 2013.
New standards and interpretations not yet adopted
The IASB issued the following new standards and amendments to existing standards:
6 | P a g e |
|
IFRS 15, Revenue from Contracts with Customers (IFRS 15) - In May 2014, the IASB issued IFRS 15 which supersedes existing standards and interpretations including IAS 18, Revenue and IFRIC 13, Cus- tomer Loyalty Programmes. |
|
IFRS 15 introduces a single model for recognizing revenue from contracts with customers with the excep- tion of certain contracts under other IFRSs such as IAS 17, Leases. The standard requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to a customer and at an amount that reflects the expected consideration receivable in exchange for transferring those goods or ser- vices. This is achieved by applying the following five steps: |
1. |
Identify the contract with a customer; | |
2. |
Identify the performance obligations in the contract; | |
3. |
Determine the transaction price; | |
4. |
Allocate the transaction price to the performance obligations in the contract; and | |
5. |
Recognize revenue when (or as) the entity satisfies a performance obligation. |
IFRS 15 also provides guidance relating to the treatment of contract acquisition and contract fulfillment costs.
The standard is effective for annual periods beginning on or after January 1, 2017. | |
|
IFRS 9, Financial Instruments (IFRS 9) - In July 2014, the IASB issued the final publication of the IFRS 9 standard, superseding the current IAS 39 Financial Instruments standard. This standard establishes princi- ples for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entitys future cash flows. This new standard also includes a new general hedge accounting standard which will align hedge accounting more closely with risk management. It does not fully change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however, it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. The standard has a mandatorily ef- fective date for annual periods beginning on or after January 1, 2018 with early adoption permitted. |
|
Amendments to IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets - In May 2014, the IASB issued amendments to these standards to introduce a rebuttable presumption that the use of reve- nue-based amortization methods for intangible assets is inappropriate. The amendment is effective for an- nual periods beginning on or after January 1, 2016 with early adoption permitted. |
The Corporation is assessing the impact of these standards and amendments on its consolidated financial statements.
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, 2013 | 15,359,903 | $ | 58,693 | |||
Exercise of share options(1) | 48,965 | 233 | ||||
Share capital held in trust(2) | (638 | ) | ||||
Balance at September 30, 2014 | 15,408,868 | $ | 58,288 |
7 | P a g e |
(1) | 5,108 options previously issued to employees were exercised at CAD$3.70 per share. |
40,743 options previously issued to employees were
exercised at CAD$4.60 per share. However, only 35,819 common shares which
equaled the in-the-money value divided by the last closing price of the
common shares on the Toronto Stock Exchange, were issued. 1,000 options previously issued to employees were exercised at CAD$5.00 per share. | |
1,250 options previously issued to employees were
exercised at CAD$5.30 per share. 1,000 options previously issued to employees were exercised at CAD$7.80 per share | |
902 options previously issued to employees were exercised at CAD$9.74 per share. | |
84 options previously issued to employees were exercised at CAD$9.86 per share. | |
3,321 options previously issued to employees were exercised at CAD$11.04 per share. | |
481 options previously issued to employees were exercised at CAD$15.94 per share. |
(2) |
32,000 common shares have been repurchased and held in trust to fulfill the RSU issuance obligation as the units vest to employees in 2014. |
269 common shares held in trust were issued to employees to fulfill the RSU issuance obligation for units vested on January 07, 2014. | |
10,344 common shares held in trust were issued to employees to fulfill the RSU issuance obligation for units vested on March 19, 2014. | |
1,387 common shares held in trust were issued to employees to fulfill the RSU issuance obligation for units vested in September 2014. |
At September 30, 2014 all issued shares are fully paid. The holders of common shares are entitled to receive dividends, if any are declared, and are entitled to one vote per share.
5. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013:
For the three month period ended September 30, | 2014 | 2013 | ||||
Net income for the period | $ | 1,553 | $ | 1,145 | ||
Weighted average number of common shares outstanding basic | 15,405,587 | 15,244,208 | ||||
Effect of dilutive securities employee stock options | 200,094 | 345,963 | ||||
Weighted average number of common shares outstanding diluted | 15,605,681 | 15,590,171 | ||||
Earnings (loss) per share: | ||||||
Basic | $ | 0.10 | $ | 0.08 | ||
Diluted | $ | 0.10 | $ | 0.07 |
For the nine month period ended September 30, | 2014 | 2013 | ||||
Net income for the period | $ | 3,216 | $ | 1,315 | ||
Weighted average number of common shares outstanding basic | 15,391,644 | 15,209,908 | ||||
Effect of dilutive securities employee stock options | 248,124 | 293,122 | ||||
Weighted average number of common shares outstanding diluted | 15,639,768 | 15,503,030 | ||||
Earnings per share: | ||||||
Basic | $ | 0.21 | $ | 0.09 | ||
Diluted | $ | 0.21 | $ | 0.08 |
8 | P a g e |
A total of 127,720 and 127,551 options were out of the money for the three and nine months ended September 30, 2014 (2013 1,007; 143,872). These options were excluded from the calculation of the effect of dilutive securities since they were anti-dilutive.
6. SHARE-BASED PAYMENT
At September 30, 2014, the Corporation had two share-based compensation plans for its employees: a share option plan and a share unit plan.
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 Share Based Payments (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 share based compensation expense, which is included in employment costs on the statement of comprehensive income, is $513 and $1,324 for the three and nine month period ended September 30, 2014 (2013 - $292 and $820).
Share option plan
Under the share option plan, employees, directors and consultants are periodically granted share options to purchase common shares at prices not less than the market price of the common shares on the day prior to the date of grant. The options generally vest over a three-year period and expire at the end of five years from the grant date.
Fair value
The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. The fair value of options granted in the three and nine months ended September 2014 and 2013 were calculated using the following weighted assumptions:
Three month period | Nine month period | |||||||||||
For the period ended September 30 | 2014 | 2013 | 2014 | 2013 | ||||||||
Dividend yield | NIL | NIL | NIL | NIL | ||||||||
Risk free rate | 1.15% | - | 1.20% | 1.14% | ||||||||
Expected volatility | 36.84% | - | 36.63% | 39.64% | ||||||||
Expected life of options in years | 4.20 | - | 4.20 | 4.20 |
Share Options
The table below is a summary of the options outstanding as at September 30, 2014
Weighted Average Exercise Price | ||
Number of Options | (in CAD$) | |
Balance at January 1, 2014 | 478,593 | $10.13 |
Granted | 126,252 | $30.74 |
Exercised | 53,889 | $ 5.19 |
Expired and forfeited | 1,843 | $23.91 |
Balance at September 30, 2014 | 549,113 | $15.31 |
Exercisable at September 30, 2014 | 232,994 | $ 9.82 |
Options available to grant | 457,998 |
9 | P a g e |
Share unit plan
Under the share unit plan, employees are periodically granted Restricted Share Units (RSUs) and Performance Share Units (PSUs).
Share Units
The table below is a summary of the RSUs and PSUs outstanding as at September 30, 2014
Number of RSUs | Weighted Average Fair Value | |
and PSUs | (in CAD$) | |
Balance at January 1, 2014 | 126,438 | $13.92 |
Granted | 123,013 | $25.88 |
Vested | (12,000) | $10.32 |
Forfeited | (10,836) | $17.59 |
Balance at September 30, 2014 | 226,615 | $20.42 |
Included in the table above are 73,758 PSUs which were granted to certain employees during the nine months ended September 30, 2014. These PSUs vest on a graded basis over a five year period, provided that certain non-market performance metrics are met annually. The fair value of each PSU is 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.
Under the share unit plan, share units can be settled in cash or shares at the Corporations 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, 2014, 120,212 of the Corporations common shares were held in trust.
7. GUARANTEES, COMMITMENTS AND CONTINGENCIES
Total | Year 1 | (3) | Year 2 | Year 3 | Year 4 | Year 5+ | ||||||||||||
Operating leases(1) | $ | 2,189 | $ | 828 | $ | 779 | $ | 564 | $ | 18 | $ | - | ||||||
Principal revenue(2) | 192,715 | 31,690 | 104,410 | 56,365 | 250 | - | ||||||||||||
$ | 194,904 | $ | 32,518 | $ | 105,189 | $ | 56,929 | $ | 268 | $ | - |
(1) |
The Corporation is obligated under various non-cancellable operating leases for premises and equipment and service agreements for web hosting services. |
(2) |
The Corporation guarantees a minimum level purchase of points/miles, for each contract year, over the duration of the contract term between the Corporation and Loyalty Partner. Management evaluates each guarantee at the end of each contract year, to determine if the guarantee was met for that respective contract year. |
(3) |
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, | 2014 | 2013 | 2014 | 2013 | ||||||||
Decrease (increase) in funds receivable from payment processors | $ | 53 | $ | (282 | ) | $ | 2,242 | $ | 3,695 | |||
Decrease in security deposits | - | - | - | 2,780 | ||||||||
Decrease (increase) in accounts receivable | 87 | (502 | ) | (371 | ) | (296 | ) |
10 | P a g e |
Decrease (increase) in prepaid expenses and other assets | (155 | ) | 70 | (343 | ) | 62 | ||||||
Decrease (increase) in other assets | (102 | ) | 12 | (164 | ) | 66 | ||||||
(Decrease) increase in accounts payable and accrued liabilities | 60 | 591 | (288 | ) | (891 | ) | ||||||
(Decrease) increase in other liabilities | 319 | (361 | ) | (161 | ) | 101 | ||||||
(Decrease) increase in payable to loyalty program partners | (6,322 | ) | 1,793 | (11,717 | ) | (2,228 | ) | |||||
$ | 6,060 | $ | 1,321 | $ | (10,802 | ) | $ | 3,289 |
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, | 2014 | 2013 | 2014 | 2013 | ||||||||
Revenue | ||||||||||||
United States | $ | 55,237 | $ | 47,146 | $ | 165,748 | $ | 107,446 | ||||
Europe | 5,094 | 6,616 | 21,339 | 23,965 | ||||||||
Canada and other | 1,115 | 679 | 3,061 | 1,872 | ||||||||
$ | 61,446 | $ | 54,441 | $ | 190,148 | $ | 133,283 | |||||
Revenue | ||||||||||||
United States | 90 % | 87% | 87 % | 81% | ||||||||
Europe | 8 % | 12% | 11 % | 18% | ||||||||
Canada and other | 2 % | 1% | 2 % | 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 Corporations loyalty partners. At September 30, 2014, substantially all of the Corporation's assets were in Canada.
Dependence on loyalty program partners
For the three month period ended September 30, 2014, there were four (2013 four) loyalty program partners for which sales to their members individually represented more than 10% of the Corporations total revenue. In aggregate, sales to the members of these four partners represented 79% (2013 86%) of the Corporations total revenue.
For the nine month period ended September 30, 2014, there were three (2013 four) loyalty program partners for which sales to their members individually represented more than 10% of the Corporations total revenue. In aggregate, sales to the members of these three partners represented 73% (2013 80%) of the Corporations total revenue.
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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, Peoples Republic of China.
In May 2014, the Corporation completed its final tranche investment of $1,500 in China Rewards.
As at September 30 2014, the Corporation has a $5,000 investment in China Rewards. This investment is classified as an available-for-sale security and measured at fair value on the condensed consolidated interim balance sheets with changes in fair value recorded in other comprehensive income. As at September 30, 2014, the Corporation has determined that there have been no changes in the fair value of the investment.
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, 2014 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:
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, 2014 and December 31, 2013 are as follows:
As at September 30, 2014 | Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | |||||||||||||
Foreign exchange
contracts designated as
cash flow hedges(i) |
$ | - | $ | 178 | $ | - | $ | 178 | |||||
Investment in China Rewards | - | - | 5,000 | 5,000 | |||||||||
Liabilities: | |||||||||||||
Foreign exchange contracts designated
as cash flow hedges(i) |
- | (461 | ) | - | (461 | ) | |||||||
$ | - | $ | (283 | ) | $ | 5,000 | $ | 4,717 |
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As at December 31, 2013 | Level 1 | Level 2 | Level 3 | Total | |||||||||
Assets: | |||||||||||||
Foreign exchange
contracts designated as
cash flow hedges(i) |
$ | - | $ | - | $ | - | $ | - | |||||
Investment in China Rewards | - | - | 3,500 | 3,500 | |||||||||
Liabilities: | |||||||||||||
Foreign exchange contracts designated
as cash flow hedges(i) |
- | (445 | ) | - | (445 | ) | |||||||
$ | - | $ | (445 | ) | $ | 3,500 | $ | 3,055 |
(i) The carrying values of the Corporations forward contracts are included in prepaid expenses and other assets and current portion of other liabilities in the consolidated balance sheets.
There were no transfers of fair value measurement between level 1, 2 and 3 of the fair value hierarchy in the periods ended September 30, 2014 and December 31, 2013.
12. RELATED PARTIES
A member of the Corporations Board of Directors is the President of Ariad Custom Publishing Limited (Ariad). The Corporation has entered into a twelve month agreement with Ariad whereby Ariad will provide, effective January 1, 2014, digital marketing software to the Corporation. The Corporation may terminate the agreement by providing 60 days written notice. For the nine months ended September 30, 2014, the Corporation has paid Ariad $109 for the use of the digital marketing software. The transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
13. ACQUISITION OF BUSINESS
On April 22, 2014, Points purchased 100% of the common and preferred shares of Accruity Inc. (Accruity) for cash consideration of $2,000 USD. The Corporation has withheld $100 USD in consideration of undisclosed liabilities at the date of acquisition. In addition, the Corporation is obligated to pay $375 of the purchase price within one year of the date of acquisition. Accruity is the San Francisco based start-up operator of the PointsHound loyalty-based hotel booking service. The Corporation anticipates building on the new relationships gained in the acquisition, which will help the Corporation progress on its long term growth objectives.
The acquisition has been accounted for using the acquisition method in accordance with IFRS 3, Business Combinations (IFRS 3) with the results of operations consolidated with those of the Corporation effective April 22, 2014 and has contributed incremental revenue of nil and an operating loss of $378 for the three months ended September 30, 2014, and incremental revenues of $21 and an operating loss of $657 (including acquisition transaction costs of $133) for the nine months ended September 30, 2014. If the acquisition had occurred on January 1, 2014, the Corporations revenue and operating loss would have been $48 and $101 higher, respectively.
The following table summarizes the acquisition-date fair value of each major class of consideration transferred.
Cash | $ | 1,525 | |
Holdback | 475 | ||
Total consideration | $ | 2,000 |
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The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition on a provisional basis.
Fair value of consideration transferred | $ | 2,000 | |
Current assets | $ | 62 | |
Intangible assets - Technology | 731 | ||
Current liabilities | (192 | ) | |
Deferred tax liabilities | (320 | ) | |
Fair value of net identifiable assets acquired and liabilities assumed | 281 | ||
Goodwill | $ | 1,719 |
Goodwill represents the expected operational synergies with Accruity to help broaden the Corporations customer facing product suite and/or intangible assets that do not qualify for separate recognition. The goodwill is not tax deductible. The technology asset is being amortized over 3 years.
Management will continue to review the estimation of working capital during the measurement period.
On May 9, 2014, a Certificate of Amendment of the Certificate of Incorporation was filed changing the name of Accruity Inc. to Points Development US Ltd.
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POINTS INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION
AND ANALYSIS
INTRODUCTION
The following managements discussion and analysis (MD&A) of the performance and financial condition of Points International Ltd. and its subsidiaries (which are also referred to herein as Points or the Corporation) should be read in conjunction with the Corporations unaudited consolidated interim financial statements (including the notes thereto) as at and for the three and nine months ended September 30, 2014, 2013 Annual MD&A and 2013 Audited Annual Consolidated Financial Statements and Notes thereto and other recent filings with Canadian and U.S. securities regulatory authorities, which may be accessed at www.sedar.com or www.sec.gov.
All financial data herein has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and all dollar amounts herein are in thousands of United States dollars unless otherwise specified. This MD&A is dated as of November 5, 2014 and was reviewed by the Audit Committee of the Corporations Board of Directors.
FORWARD-LOOKING STATEMENTS
This MD&A contains or incorporates forward-looking statements within the meaning of United States securities legislation and forward-looking information within the meaning of Canadian securities legislation (collectively, forward-looking statements). These forward-looking statements relate to, among other things, revenue, earnings, changes in costs and expenses, capital expenditures and other objectives, strategic plans and business development goals, and may also include other statements that are predictive in nature, or that depend upon or refer to future events or conditions, and can generally be identified by words such as may, will, expects, anticipates, intends, plans, believes, estimates or similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These statements are not historical facts but instead represent only the Corporations expectations, estimates and projections regarding future events. Certain significant forward-looking statements included in this MD&A include statements regarding: revenue growth and guidance; the size of the Corporations pipeline opportunities; evolving the Corporations open platform strategy; improving data and transactional capabilities; expected gross margin dollars and percent; the Corporations ability to generate cash through normal course operations to fund capital expenditure needs and current operating and working capital requirements, including under current operating leases; and the financial obligations with respect to revenue guarantees.
Although the Corporation believes the expectations reflected in such forward-looking statements are reasonable, such statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. Undue reliance
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should not be placed on such statements. Certain material assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. Known and unknown factors could cause actual results to differ materially from those expressed or implied in the forward-looking statements. In particular, the financial outlooks herein assume the Corporation will be able to maintain its existing contractual relationships and products, that such products continue to perform in a manner consistent with the Corporations past experience, that the Corporation will be able to generate new business from its pipeline at expected margins, in-market and newly launched products and services will perform in a manner consistent with the Corporations past experience and the Corporation will be able to contain costs. The Corporations ability to convert its pipeline of prospective partners and product launches is subject to significant risk and there can be no assurance that the Corporation will launch new partners or new products with existing partners as expected or planned nor can there be any assurance that the Corporation will be successful in maintaining its existing contractual relationships or maintaining existing products with existing partners. Other important assumptions, factors, risks and uncertainties are included in the press release announcing the Corporations third quarter 2014 financial results, and those described in Points' other filings with applicable securities regulators, including Points AIF, Form 40-F, annual and interim management's discussion and analysis, and annual and interim consolidated financial statements and the notes thereto. These documents are available at www.sedar.com and www.sec.gov.
The forward-looking statements contained in this MD&A are made as at the date of this MD&A and, accordingly, are subject to change after such date. Except as required by law, Points does not undertake any obligation to update or revise any forward-looking statements made or incorporated in this MD&A, whether as a result of new information, future events or otherwise.
USE OF NON-GAAP MEASURES
The Corporations financial statements are prepared in accordance with IFRS. Management uses certain non-GAAP measures, which are defined in the appropriate sections in the body of this MD&A, to better assess the Corporations underlying performance. These measures are reviewed regularly by management and the Corporations Board in assessing the Corporations performance and making decisions about ongoing operations. These measures are also used by investors, as an indicator of the Corporations operating performance. Readers are cautioned that these terms are not recognized GAAP measures and do not have a standardized GAAP meaning under IFRS and should not be construed as alternatives to IFRS terms, such as net income.
BUSINESS OVERVIEW
Points International Ltd.
Points International Ltd. is a global provider of leading e-commerce solutions for the loyalty rewards industry. The Corporations products help the worlds leading loyalty programs increase loyalty member engagement and leverage their online presence in innovative ways. The Corporation delivers e-commerce solutions to loyalty programs on both a privately branded and Points branded basis. In addition, the Corporation operates the consumer website www.points.com, where millions manage their loyalty memberships, learn about new promotions, and exchange points and miles between programs.
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Through leading proprietary technology, the Corporations e-commerce solutions are utilized by over 50 of the worlds leading loyalty programs, including:
| American Airlines AAdvantage | | Scandinavian Airlines EuroBonus |
| Southwest Airlines Rapid Rewards | | Hilton HHonors |
| British Airways Executive Club | | Alaska Airlines Mileage Plan |
| Virgin Atlantic Flying Club | | Saudi Arabian Airlines Alfursan |
| AF-KLM Flying Blue | | Delta Air Lines SkyMiles |
| Starwood Preferred Guest | | American Express Membership |
| Hyatt Gold Passport | Rewards | |
| US Airways Dividend Miles | | Lanpass |
| InterContinental Hotels Group |
In 2014, Points expects to deliver over $400 million annually in additional revenue for partners whose loyalty program members number over 500 million. The Corporations headquarters are located in Toronto, Canada and its shares are dually listed on the Toronto Stock Exchange (TSX: PTS) and on the NASDAQ Capital Market (NASDAQ: PCOM).
The Corporations revenue is primarily generated by transacting points and miles online. Revenue is principally derived from the sale or transfer of loyalty currencies directly to program members. The Corporation categorizes its revenue in three ways: principal revenue, other partner revenue and interest income. Principal revenue includes all principal revenue derived from reseller sales, technology design, development and maintenance revenue, and hosting fees. Under a reseller arrangement, the Corporation takes on a principal role whereby it purchases points and miles from partners at wholesale rates and resells them directly to consumers. In addition, the Corporation may assume additional responsibility when assuming a principal role, such as credit and/or inventory risk. Other partner revenue includes transactional revenue that is realized when the Corporation assumes an agency role in the retailing and wholesaling of loyalty currency for loyalty program partners and other revenue received from partners which is not transactional in nature. Lastly, as part of its operating economics, the Corporation also earns interest income on the cash flows generated by its products and services.
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QUARTERLY HIGHLIGHTS
Highlights of operating results for the three months ended September 30, 2014 include:
Quarterly revenue of $61,446, an increase of $7,005 or 13% over the prior year quarter;
Quarterly gross margin of $10,187, an increase of $1,453 or 17% over the prior year quarter (please refer to Revenue, Direct Costs and Gross Margin on page 6 for definition and explanation);
Net income of $1,553, an increase of $408, or 36% over the prior year quarter;
Earnings before interest, taxes, depreciation, amortization and foreign exchange (Adjusted EBITDA) of $2,603, higher by $273 or 12% from the prior year quarter (please refer to Adjusted EBITDA on page 10 for definition and explanation); and
As at September 30, 2014, the Corporation has cash and cash equivalents of $55,832 and no debt.
SELECTED FINANCIAL INFORMATION
The following information is provided to give a context for the broader comments elsewhere in this report.
For the three months | For the nine months | |||||||||||
ended | ended | |||||||||||
(In thousands of US dollars, except per | September | September | September | September | ||||||||
share amounts) (unaudited) | 30, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | ||||||||
Revenue | $ | 61,446 | $ | 54,441 | $ | 190,148 | $ | 133,283 | ||||
Gross margin1 | 10,187 | 8,734 | 29,262 | 22,802 | ||||||||
Other operating costs | 7,584 | 6,404 | 22,893 | 18,771 | ||||||||
Adjusted EBITDA2 | 2,603 | 2,330 | 6,369 | 4,031 | ||||||||
Operating income3 | 2,032 | 1,577 | 4,716 | 1,507 | ||||||||
Net income | $ | 1,553 | $ | 1,145 | $ | 3,216 | $ | 1,315 | ||||
Earnings per share | ||||||||||||
Basic | $ | 0.10 | $ | 0.08 | $ | 0.21 | $ | 0.09 | ||||
Diluted | $ | 0.10 | $ | 0.07 | $ | 0.21 | $ | 0.08 | ||||
Weighted average shares outstanding | ||||||||||||
Basic | 15,405,587 | 15,244,208 | 15,391,644 | 15,209,908 | ||||||||
Diluted | 15,605,681 | 15,590,171 | 15,639,768 | 15,503,030 | ||||||||
Total assets | $ | 87,818 | $ | 77,736 | $ | 87,818 | $ | 77,736 | ||||
Shareholders' equity | $ | 36,587 | $ | 29,837 | $ | 36,587 | $ | 29,837 |
1 Gross margin is a non-GAAP financial measure.
Refer to page 6 for definition and explanation.
2 Adjusted EBITDA
is a non-GAAP financial measure. Refer to page 10 for definition and
explanation.
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3 Operating income is an additional GAAP measure presented in the financial statements, and is defined as Net income before Interest and Income tax expense. Management presents this additional GAAP measure to provide comparability of the Corporations operating income before the impact of interest and taxes.
BUSINESS RESULTS AND OUTLOOK
Financial results for the third quarter of 2014 demonstrate the Corporations ability to establish new partnerships with leading loyalty programs, build relationships with existing loyalty programs, and execute innovative marketing techniques to drive increases in revenues and profitability.
In the third quarter of 2014, the Corporation generated revenues of $61,446, which represented a 13% increase year-over-year. Similarly, gross margin increased to $10,187, up 17% from the third quarter of 2013. The growth in revenues and gross margin over the prior year is primarily the result of increased transactional activity from new partnerships and products introduced and deployed throughout 2013 and 2014.
In the first half of 2014, the Corporation added to its base of transactional activity with new partner and product deployments, including the launch of new partnerships with Hilton HHonours, Spirit Airlines, and the Etihad Guest program. Execution against the Corporation's new business pipeline continued in the third quarter of 2014. In July, the Corporation successfully launched its core Transfer product for Air France/KLM, allowing Flying Blue program members the ability to Transfer award miles across the Corporation's platform. In addition, the Corporation successfully added Cathay Pacific Asia Miles and Jet Blue TrueBlue to the PointsHound loyalty-based hotel booking service, which is proving to be a robust channel for increasing loyalty program member engagement and driving additional revenues to participating loyalty programs.
These new partner and product launches translated into increased loyalty consumer activity in the third quarter of 2014. On a year-over-year basis, both points and miles transacted and number of transactions increased 25% and 24%, respectively. This growth is a reflection of the Corporation's success in deepening its understanding of offers that appeal to loyalty program members and translating this into more meaningful consumer awareness and promotional activity throughout the year.
The Corporations recent success has allowed it to spend portions of its in-year profitability toward significant opportunities in the loyalty market. To this end, the Corporation has committed to an investment strategy in 2014. The strategy calls for investments that are focused on modernizing and advancing the Corporations core technology infrastructure and capabilities, renewing customer related products, including its proprietary portal www.points.com and the recently acquired PointsHound loyalty-based hotel booking service. As well, investments in 2014 targeted knowledge in the area of customer analytics and growing business development resources that are focused on expanding the Corporation's presence internationally and in business verticals outside of the travel sector.
Management is committed to executing on its investment initiative while balancing the need to demonstrate continued growth. In respect of this, the Corporation succeeded on both of these objectives in the third quarter of 2014. Third quarter Adjusted EBITDA was $2,603, a 12% increase over the third quarter of 2013. Similarly, net income increased 36% on a year over year basis to $1,553. Increases in Adjusted EBITDA and net income were largely due to gross margin growth outpacing investment levels.
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Revenue from new partner and product launches in 2014 continues to build on the foundation of activity from prior periods and will be an important driver of revenues and gross margin for the remainder of 2014. In addition, Management has maintained its focus on driving growth from existing partners and products. Year to date revenue from the Corporation's existing partners and products increased approximately 10% year-over-year through improved marketing and promotional activities. Notwithstanding this growth, the Corporation has experienced softness from the sale of certain European based loyalty partners reward currencies, largely due to the broader economic concerns of the region and increased competition in the European airline industry.
While Management remains cautious on the overall near-term performance of its existing business in Europe, the Corporation expects full year financial performance to meet its 2014 guidance and expects to generate growth in revenues, gross margin and Adjusted EBITDA. Additionally, Management remains focused on long term growth and will continue to reinvest a portion of its incremental profitability in key initiatives which are focused on broader opportunities in the loyalty industry.
RESULTS OF OPERATIONS
REVENUE, DIRECT COSTS AND GROSS MARGIN
Gross margin, defined by management as total revenues less direct costs of principal revenue, is a non-GAAP financial measure which does not have any standardized meaning prescribed by IFRS and is therefore unlikely to be comparable to similar measures presented by other issuers. Gross margin is viewed by management to be an integral measure of financial performance as it represents an internal measure of ongoing growth and the amount of revenues retained by the Corporation that are available to fund ongoing operating expenses, including incremental spending that is in line with the long term investment strategy of the Corporation. Management continues to drive a shift in the Corporations revenue mix toward reseller relationships (with higher partner engagement) that are expected to lead to sustained profitability for the Corporation. In general, the Corporation seeks to maximize the gross margin generated from each loyalty partner relationship. For this reason, these new deals and products are expected to be accretive to overall profitability.
Direct cost of principal revenue consists of variable direct costs incurred for principal revenues earned under the reseller model, which include the wholesale cost of loyalty currency paid to partners for the purchase and resale of such currency, and credit card processing fees.
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For the three months | For the nine months | |||||||||||
ended | ended | |||||||||||
(In thousands of US dollar) | September | September 30, | September | September | ||||||||
(unaudited) | 30, 2014 | 2013 | 30, 2014 | 30, 2013 | ||||||||
Principal revenue | $ | 58,787 | $ | 52,479 | $ | 182,857 | $ | 126,970 | ||||
Other partner revenue | 2,640 | 1,947 | 7,232 | 6,274 | ||||||||
Interest revenue | 19 | 15 | 59 | 39 | ||||||||
Total revenue | 61,446 | 54,441 | 190,148 | 133,283 | ||||||||
Direct cost of principal revenue | 51,259 | 45,707 | 160,886 | 110,481 | ||||||||
Gross margin1 | $ | 10,187 | $ | 8,734 | $ | 29,262 | $ | 22,802 | ||||
Gross margin %2 | 17% | 16% | 15% | 17% |
1 Gross margin is a non-GAAP financial measure and
is defined as Total revenue less Direct cost of principal revenue. Refer to
page 6 for definition and explanation.
2 Gross margin % is a
non-GAAP financial measure and is defined as Gross margin as a percentage of
Total revenue.
The Corporation generated revenue of $61,446 for the three months ended September 30, 2014, an increase of $7,005 or 13% over the same quarter of 2013. The increase in revenues over the prior year period is primarily attributable to the launch of new partnerships and products throughout the course of 2013 and 2014. Similarly, revenue for the nine month period ended September 30, 2014, increased $56,865 or 43% over the comparable prior year period, and was largely impacted by incremental revenues provided from new partners and products launched over the last twelve months, as well as organic growth from the Companys existing partnership base.
Principal revenue for the third quarter of 2014 was $58,787, an increase of $6,308 or 12% over the third quarter of 2013. Principal revenue for the nine month period ended September 30, 2014 increased $55,887 or 44% over the comparable prior year period. The increase in principal revenue over the prior year quarter is primarily a result of the new partners launched in 2013 and 2014. New partnerships launched over this period include the Corporation's core Buy, Gift, and Transfer programs with Southwests Rapid Rewards members in 2013 and with Hilton HHonors members in the second quarter of 2014. Revenue growth is dependent on various factors, including the timing of promotions that are sent by the Corporation to the loyalty programs membership base, growth in a partners membership base, and the effectiveness of other marketing campaigns and channels initiated by the Corporation to generate incremental revenues.
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Other partner revenue for the third quarter of 2014 was $2,640, higher by $693 or 36% from the third quarter of 2013. The year-over-year increase was largely due to increased activity with existing partnerships as well as an increase in revenues from new partnerships.
Gross margin for the third quarter of 2014 was $10,187, an increase of $1,453, or 17%, from the prior year quarter. The increase in gross margin dollars was largely driven by incremental transactions coming from principal partnerships launched during 2013 and 2014, as well as organic growth within the existing partnership base. Gross margin percentage moved from 16% in the third quarter of 2013 to 17% in the third quarter of 2014. The increase in gross margin percentage was impacted by the relative mix of principal and other partner revenues, as well as the Corporations marketing efforts which were more heavily weighted toward higher margin activities. On a year to date basis, gross margin for the nine months ended September 30, 2014 increased $6,460 or 28% over the comparable prior year period.
ONGOING OPERATING COSTS
For the three months | For the nine months | |||||||||||
ended | ended | |||||||||||
(In thousands of US dollars) | September | September | September | September | ||||||||
(unaudited) | 30, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | ||||||||
$ | ||||||||||||
Employment costs | $ | 5,584 | $ | 4,864 | $ | 17,240 | 13,733 | |||||
Marketing and communications | 523 | 267 | 1,049 | 843 | ||||||||
Technology services | 308 | 214 | 807 | 772 | ||||||||
Operating expense | 1,169 | 1,059 | 3,797 | 3,423 | ||||||||
Total ongoing operating costs | $ | 7,584 | $ | 6,404 | $ | 22,893 | $ | 18,771 |
Ongoing operating costs are predominantly cash-based expenditures and include employment costs, marketing and communications expenditures, technology service costs and operating expenses. Ongoing operating costs are predominantly incurred in Canadian dollars, exposing the Corporation to foreign exchange risk. To mitigate this exposure, management enters into foreign exchange forward contracts extending out one year to fix the functional currency cost of predictable Canadian dollar expenditures. Ongoing operating costs for the third quarter of 2014 were $7,584, an increase of $1,180, or 18%, from the third quarter of 2013. For the nine months ended September 30, 2014, ongoing operating costs increased $4,122 or 22% versus the comparable prior year period.
The increase in ongoing operating costs over the prior year period was primarily attributable to the Corporations investment strategy. This strategy represents a departure from its historic pattern of spending to maintain and grow current business activity. Instead, this strategy involves spending to improve technological infrastructure and development of new products that are not anticipated to yield revenue and gross margin in 2014. The investment spend comprises an increase in employment costs related to increased product and technology headcount and higher operating expenses, as discussed below.
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Employment Costs
Employment costs include salaries and bonuses, employee share-based compensation expenses, contract labour charges, recruiting, benefits and other related taxes, are predominantly incurred in Canadian dollars. Employment costs of $5,584 in the third quarter of 2014 increased $720, or 15%, from the third quarter of 2013. For the nine months ended September 30, 2014, employment costs increased $3,507 or 26% from the comparable prior year period.
The increase in employment costs over the prior year periods was primarily attributable to an increase in full time equivalents (FTEs), which increased from 142 in the third quarter of 2013 to 178 in the third quarter of 2014. Headcount additions made over the last twelve months were focused on key areas of the business, and were largely in line with the Corporations investment strategy. The investments made throughout 2014 were primarily focused on increasing product and technical resources to develop and advance the Corporations core technology infrastructure, develop the Corporations consumer related products, better understand customer behaviour and the use of customer analytics, and increase revenues from new verticals and international markets. The Corporation will continue to make strategic headcount investments for the balance of 2014 in these areas as it executes its long term strategic objectives. Employment costs are expected to remain at third quarter levels to end the year.
Marketing and Communications
Marketing and communications expenditures consist of loyalty program marketing initiatives, placements on contracted loyalty program websites, public relations costs, and other online marketing and promotional activities. Marketing costs for the third quarter of 2014 increased $256 or 96% from the third quarter of 2013. For the nine months ended September 30, 2014, marketing and communications costs increased $206 or 24% versus the comparable prior year periods. This increase from the prior periods is primarily due to increased loyalty partner engagement activities in fiscal 2014, including a partner conference, increased marketing research costs, and higher advertising costs. The Corporation expects that the marketing and communications spend will increase marginally in the fourth quarter.
Technology Services
Technology services include online hosting and managed services, equipment rental and software license fees. Technology service costs for the third quarter of 2014 increased $94 or 44% from the third quarter of 2013. The increase from the prior quarter is primarily attributable to the timing of IT system maintenance activities as well as additional software license costs. For the nine months ended September 30, 2014, technology costs increased $35 or 5% from the comparable prior year period. Technology services expenditures are expected to remain at third quarter levels to the end of the year.
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Operating Expenses
Operating expenses include office overhead, travel expenses, professional fees and other costs associated with operations. Operating expenses for the third quarter of 2014 were $1,169, an increase of $110, or 10% from the third quarter of 2013. The increase from the third quarter of 2013 was primarily related to higher travel costs related to international business development activities. For the nine months ended September 30, 2014, operating expenses increased $374 or 11% from the prior year period. The increase from the prior year period was mainly driven by higher consulting and professional service costs attributable to the acquisition of Accruity Inc. in 2014, as well as higher travel costs that are mostly attributable to international business development activities. Operating expenses are expected to increase marginally in the fourth quarter.
ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AMORTIZATION, AND FOREIGN EXCHANGE (Adjusted EBITDA)
Adjusted EBITDA is a non-GAAP financial measure, which is defined as earnings before income tax expense, interest and other income, depreciation and amortization, and foreign exchange. Management excludes these items because they affect the comparability of the Corporations financial results and could potentially distort the analysis of trends in business performance.
Management believes that Adjusted EBITDA is an important indicator of the Corporations ability to generate liquidity through operating cash flow to fund future working capital needs and fund future capital expenditures and uses the metric for this purpose. Adjusted EBITDA is also used by investors and analysts for the purpose of valuing an issuer. The presentation of Adjusted EBITDA is to provide additional useful information to investors and analysts and the measure does not have any standardized meaning under IFRS. Adjusted EBITDA should therefore not be considered in isolation or used in substitute for measures of performance prepared in accordance with IFRS. Other issuers may calculate Adjusted EBITDA differently.
Reconciliation of Net Income to Adjusted EBITDA
For the three months | For the nine months | |||||||||||
ended | ended | |||||||||||
(In thousands of US | September | September | September | September | ||||||||
dollars)(unaudited) | 30, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | ||||||||
Net Income | $ | 1,553 | $ | 1,145 | $ | 3,216 | $ | 1,315 | ||||
Interest and other income | - | - | (5 | ) | - | |||||||
Income tax expense (recovery) | 479 | 432 | 1,505 | 192 | ||||||||
Depreciation and Amortization | 481 | 803 | 1,569 | 2,570 | ||||||||
Foreign exchange loss (gain) | 90 | (50 | ) | 84 | (46 | ) | ||||||
Adjusted EBITDA1 | $ | 2,603 | $ | 2,330 | $ | 6,369 | $ | 4,031 | ||||
$ | $ | |||||||||||
Gross Margin | $ | 10,187 | $ | 8,734 | 29,262 | 22,802 | ||||||
Adjusted EBITDA1 as a % of Gross Margin | 26% | 27% | 22% | 18% |
1 Adjusted EBITDA is a non-GAAP financial measure. Refer to page 10 for definition and explanation.
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For the quarter ended September 30, 2014, the Corporations Adjusted EBITDA was $2,603, an increase of $273 or 12% from the third quarter of 2013. For the nine months ended September 30, 2014, Adjusted EBITDA of $6,369 increased $2,338 or 58% over the comparable prior year period, largely due to the growth in gross margin from new partnerships launched in 2013 and 2014, and growth from existing partnerships being accretive to Adjusted EBITDA.
Additionally, in line with managements view that gross margin is an integral measure of financial performance, Adjusted EBITDA as a percentage of gross margin is viewed by Management as a key internal measure of operating efficiency. This measure demonstrates the Corporations ability to generate profitability after it has funded ongoing operating costs and made investments in key strategic areas.
For the three months ended September 30, 2014, Adjusted EBITDA as a percentage of gross margin was 26%, down slightly from 27% in the prior year quarter, and largely due to the additional investment spend by the Corporation in 2014. For the nine months ended September 30, 2014, Adjusted EBITDA as a percentage of gross margin was 22%, up from 18% in the comparable prior year period. The increase was largely due to increases in gross margin from the Corporation's core business outpacing incremental investment spend during the year, which is primarily focused on longer term growth not expected to yield revenue and gross margin growth in 2014.
DEPRECIATION, AMORTIZATION, INCOME TAX, INTEREST AND OTHER EXPENSES
For the three months | For the nine months | |||||||||||
ended | ended | |||||||||||
(In thousands of US dollars) | September | September | September | September | ||||||||
(unaudited) | 30, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | ||||||||
Depreciation and amortization | $ | 481 | $ | 803 | $ | 1,569 | $ | 2,570 | ||||
Foreign exchange loss (gain) | 90 | (50 | ) | 84 | (46 | ) | ||||||
Interest and other charges | - | - | (5 | ) | - | |||||||
Income tax expense (recovery) | 479 | 432 | 1,505 | 192 | ||||||||
$ | ||||||||||||
Total | $ | 1,050 | 1,185 | $ | 3,153 | $ | 2,716 |
Depreciation and Amortization Expense
Depreciation and amortization expense in the third quarter of 2014 decreased $322, or 40%, from the third quarter of 2013. For the nine months ended September 30, 2014, depreciation and amortization expense decreased $1,001 or 39% over the comparable prior year period. The decrease in expense from prior periods is due to certain assets being fully amortized during 2013.
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Foreign Exchange (FX) Gain / Loss
Foreign exchange gains and losses arise from the translation of the Corporations balance sheet and expenses. The Corporation holds balances in foreign currencies (e.g. non-US dollar denominated cash, accounts payables and accrued liabilities, and deposits) that give rise to exposure to foreign exchange risk. At period end, non-US dollar balance sheet accounts are translated in accordance with the period-end foreign exchange (FX) rate. The net effect after translating the balance sheet accounts is recorded in the consolidated interim statement of comprehensive income (loss) for the period.
The Corporation is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency, the US dollar. The majority of the Corporations revenues in the third quarter of 2014 were transacted in US dollars, EUROs and British Pounds. The direct cost of principal revenue is denominated in the same currency as the revenue earned, minimizing the FX exposure related to the EURO and British Pound. Ongoing operating costs are predominantly incurred in Canadian dollars, exposing the Corporation to foreign exchange risk.
As part of the risk management strategy of the Corporation, management enters into foreign exchange forward contracts extending out to one year to reduce the foreign exchange risk with respect to the Canadian dollar and EURO. These contracts have been designated as cash flow hedges. The Corporation does not use derivative instruments for speculative purposes.
For a derivative instrument designated as a cash flow hedge, the effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income and is subsequently recognized in income when the hedged exposure affects income. Any ineffective portion of the derivatives gain or loss is recognized in current income. For the quarter ended September 30, 2014, the Corporation reclassified a loss of $102, net of tax, from other comprehensive loss into net income. The cash flow hedges were effective for accounting purposes at September 30, 2014. Realized losses from the Corporations hedging activities, in 2014, were driven by the appreciation of the U.S. dollar.
For the quarter ended September 30, 2014, the Corporation recorded a foreign exchange loss of $90 compared with a foreign exchange gain of $50 in the third quarter of 2013, primarily driven by a depreciation of the US dollar resulting in realized FX losses.
Income Tax Expense/Recovery
The Corporation is subject to tax in multiple jurisdictions and assesses its taxable income to ensure eligible tax deductions are fully utilized. In the second quarter of 2014, a deferred tax liability, of $321, associated with the intangible assets acquired in the Accruity Inc. acquisition, was recognized as at the acquisition date. The Corporation recorded an income tax expense of $479 for the quarter ended September 30, 2014. Income tax expense was $1,505 for the nine months ended September 30, 2014. This expense largely relates to the reduction of the deferred tax asset, as the Corporation generated taxable income in the third quarter of 2014 and for the first nine months of 2014. Income tax expense was slightly offset by a reduction of the deferred tax liability in the second and third quarter of 2014.
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NET INCOME AND EARNINGS PER SHARE
For the three months | For the nine months | |||||||||||
ended | ended | |||||||||||
(In thousands of US dollars, except | September | September | September | September | ||||||||
per share amounts) (unaudited) | 30, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | ||||||||
Net income | $ | 1,553 | $ | 1,145 | $ | 3,216 | $ | 1,315 | ||||
Earnings per share | ||||||||||||
Basic | $ | 0.10 | $ | 0.08 | $ | 0.21 | $ | 0.09 | ||||
Diluted | $ | 0.10 | $ | 0.07 | $ | 0.21 | $ | 0.08 |
The Corporation reported net income of $1,553 for the quarter ended September 30, 2014 compared with a net income of $ 1,145 for the quarter ended September 30, 2013. Net income for the nine months ended September 30, 2014 of $3,216, from $1,315 for the comparable prior year period. The increase from the prior periods was impacted by higher gross margin dollars from principal partnerships launched over the last twelve months, as well as incremental contributions to gross margin dollars from existing partnerships. These increases were partially offset by an increase in employment costs driven by an increase in FTEs as well as higher operating costs.
The Corporation's basic earnings per share is calculated on the basis of the weighted average number of outstanding common shares for the period, which amounted to 15,405,587 common shares for the quarter ended September 30, 2014, compared with 15,244,208 common shares for the quarter ended September 30, 2013. The Corporation reported basic earnings per share of $0.10 and diluted earnings per share of $0.10 for the third quarter of 2014 compared with basic earnings per share of $0.08 and diluted earnings per share of $0.07 for the third quarter of 2013.
BALANCE SHEET VARIANCES
Consolidated Balance Sheet Data as at | Sep 30, | Dec 31, | ||||
(In thousands of US dollars) | 2014 | 2013 | ||||
(unaudited) | ||||||
Cash and cash equivalents | $ | 55,832 | $ | 64,188 | ||
Restricted cash | 1,587 | 1,602 | ||||
Funds receivable from payment processors | 6,829 | 9,071 | ||||
Accounts receivable | 1,799 | 1,401 | ||||
Prepaid expenses and other assets | 2,574 | 2,210 | ||||
Total current assets | $ | 68,621 | $ | 78,472 | ||
Property and equipment | 1,838 | 2,092 | ||||
Intangible assets | 2,954 | 1,855 | ||||
Goodwill | 4,299 | 2,580 | ||||
Deferred tax assets | 4,395 | 5,966 | ||||
Long-term investment | 5,000 | 3,500 | ||||
Other assets | 711 | 547 | ||||
Total non-current assets | $ | 19,197 | $ | 16,540 | ||
Accounts payable and accrued liabilities | 5,160 | 4,783 | ||||
Payable to loyalty program partners | 44,394 | 56,111 | ||||
Current portion of other liabilities | 1,085 | 1,134 | ||||
Total current liabilities | $ | 50,639 | $ | 62,028 | ||
Total non-current liabilities | $ | 592 | $ | 437 | ||
Total shareholders equity | $ | 36,587 | $ | 32,547 |
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Cash and cash equivalents
The Corporations cash and cash equivalent balance decreased $8,356 primarily due to the Corporation completing its final tranche investment in China Rewards in the amount of $1,500, the acquisition of Accruity Inc. in the second quarter of 2014 with cash consideration of $1,511, an increase in capital expenditures throughout 2014, and changes in certain balances during the period which were mainly attributable to the timing of receipt of payments from select partners promotional activities and the timing of payments to loyalty partners related promotional activities.
Funds receivable from payment processors
The Corporations funds receivable from payment processors balance decreased $2,242, which is attributable to the timing of promotional activities. In general, the Corporation will experience a higher balance when promotions are timed towards the end of the fiscal period, and when the receivable balances have not been settled in cash by payment processors.
Intangible assets
The Corporations intangible assets balance increased $1,099, and was primarily driven by additional software development costs capitalized in 2014 and the intangible asset recognized on the acquisition of Accruity Inc. in the amount of $731.
Goodwill
The Corporations goodwill balance increased $1,719, and this was related to goodwill that arose on the acquisition of Accruity Inc. on April 22, 2014.
Deferred tax asset
The Corporations deferred tax asset balance decreased $1,571, which was primarily attributable to the Corporation generating taxable income in the first nine months of 2014.
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Long-term investment
The Corporations long-term investment balance increased $1,500 and this was related to the Corporations final tranche payment to China Rewards during the period. The Corporation has fully funded its commitment in China Rewards, and no further payments are required.
Payable to loyalty program partners
The Corporations payable to loyalty program partners balance decreased $11,717, which is attributable to the timing of payments made to loyalty partners. The Corporation may have up to approximately sixty days to pay loyalty partners based on its settlement cycle with loyalty partners. Revenues generated in the final two months of 2013, that are typically higher as a result of promotional activities at the end of the calendar year, are not payable until the beginning of 2014.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Balance Sheet Data as at | September 30 | December 31 | September 30 | ||||||
(In thousands of US dollars) | |||||||||
(unaudited) | 2014 | 2013 | 2013 | ||||||
Cash and cash equivalents | $ | 55,832 | $ | 64,188 | $ | 50,875 | |||
Restricted cash | 1,587 | 1,602 | 1,615 | ||||||
Funds receivable from payment processors | 6,829 | 9,071 | 6,362 | ||||||
Total funds available | 64,248 | 74,861 | 58,852 | ||||||
Payable to loyalty program partners | 44,394 | 56,111 | 42,684 | ||||||
NET OPERATING CASH1 | $ | 19,854 | $ | 18,750 | $ | 16,168 | |||
Total current assets | 68,621 | 78,472 | 61,938 | ||||||
Total current liabilities | 50,639 | 62,028 | 47,398 | ||||||
WORKING CAPITAL | $ | 17,982 | $ | 16,444 | $ | 14,540 |
1 Management defines Net Operating Cash as Total Funds Available (Cash and cash equivalents, Restricted cash, Funds receivable from payment processors, and Security deposits) less amounts Payable to loyalty program partners. Management believes that this non-GAAP financial measure provides a useful measure of the Corporations liquidity. Other issuers may include other items in their definition of Net Operating Cash. Therefore it is unlikely to be comparable to similar measures presented by other issuers.
The Corporations financial strength is reflected in its balance sheet. As at September 30, 2014, the Corporation continues to remain debt-free with $19,854 of net operating cash (December 31, 2013 $18,750). Net operating cash increased $1,104 from December 31, 2013 primarily due to Adjusted EBITDA of $6,369 generated in the related nine-month period ended September 30, 2014, and partially offset by the investment in China Rewards in the amount of $1,500, purchase of Accruity Inc. with cash consideration paid in the amount of $1,511, capital asset and intangible asset additions made during the period, and changes in other working capital balances.
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The Corporations working capital (defined as current assets minus current liabilities) was $17,982 at September 30, 2014 compared to working capital of $16,444 as at December 31, 2013. Working capital increased primarily due to Adjusted EBITDA generated during the year, offset by the investment in China Rewards, and purchase of Accruity Inc. Management believes the Corporation is able to generate sufficient cash through normal course operations to fund anticipated capital expenditure needs and current operating and working capital requirements, including the payment of amounts due under current operating leases. The change in cash and cash equivalents is primarily due to the timing of receipt of payments from customers and payments made to partners for transaction points and miles online.
Sources and Uses of Cash
For the three months | For the nine months | |||||||||||
ended | ended | |||||||||||
(In thousands of US dollars) | September | September | September | September | ||||||||
(unaudited) | 30, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | ||||||||
Operating activities | $ | (3,791 | ) | $ | 4,766 | $ | (3,533 | ) | $ | 8,060 | ||
Investing activities | (563 | ) | (318 | ) | (4,694 | ) | (2,156 | ) | ||||
Financing activities | 25 | 240 | (619 | ) | 15 | |||||||
Effects of exchange rates | 547 | (459 | ) | 490 | (152 | ) | ||||||
Change in cash and cash equivalents | $ | (3,782 | ) | $ | 4,229 | $ | (8,356 | ) | $ | 5,767 |
Operating Activities
Cash flows from operating activities are primarily generated from funds collected from miles and points transacted from the various products and services offered by the Corporation and are reduced by cash payments to loyalty partners and payment of operating expenses. Cash flows from operating activities can fluctuate depending on the timing of promotional activity and partner payments. In the third quarter of 2014, the Corporation experienced a decrease in cash inflows primarily due to the timing of payments to loyalty partners, which was partially offset by incremental Adjusted EBITDA earned during the current year.
Cash flows from operating activities decreased $8,557 from the prior year quarter, and decreased $11,593 on a year-to-date basis, and this was mainly due to the timing of payment to payments to loyalty partners, offset by the receipt of payments from payment processors and incremental Adjusted EBITDA earned during the current year.
Investing Activities
Cash used in investing activities increased $245 from the prior year quarter, and $2,538 on a year-to-date basis. In the third quarter of 2014, the Corporation continued to invest in the development of new products and its open platform strategy. On a year-to-date basis, cash flows used in investing activities increased $2,538, primarily due to the Corporations final tranche payment in China Rewards in the amount of $1,500, the purchase of Accruity Inc. with cash consideration paid in the amount of $1,511, as well as additions to intangible assets that were in line with the Corporations strategy to build its technological capabilities.
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As the Corporation continues to develop innovative loyalty products and advance its open platform strategy, it expects to add technology resources in this area, and will fund these expenditures as well as other capital expenditures and investments through working capital.
Financing Activities
Cash flows provided by financing activities for the three and nine month periods ended September 30, 2014, related to the issuance of capital stock from the exercise of employee stock options and purchases of the Corporations own common shares from the open market to fund the employee share unit plan. The change in cash flows from
financing activities is largely driven by the timing of stock option exercise, and head-count additions and departures which will impact the number of shares purchased from the open market. At present, the Corporation does not anticipate raising capital through the issuance of debt or equity.
Contractual Obligations and Commitments
Total | Year 1 | (3) | Year 2 | Year 3 | Year 4 | Year 5+ | ||||||||||||
Operating leases(1) | $ | 2,189 | $ | 828 | $ | 779 | $ | 564 | $ | 18 | $ | - | ||||||
Principal revenue(2) | 192,715 | 31,690 | 104,410 | 56,365 | 250 | - | ||||||||||||
$ | 194,904 | $ | 32,518 | $ | 105,189 | $ | 56,929 | $ | 268 | $ | - |
(1) The Corporation is obligated under various non-cancellable
operating leases for premises and equipment and service agreements for web
hosting services.
(2) The Corporation guarantees a minimum level purchase of
points/miles, for each contract year, over the duration of the contract term
between the Corporation and Loyalty Partner. Management evaluates each guarantee
at the end of each contract year, to determine if the guarantee was met for that
respective contract year.
(3) The guarantees, commitments and contingencies
schedule is prepared on a rolling 12-month basis.
Operating lease and principal revenue obligations will continue to be funded through working capital. The Corporation has made contractual commitments on the minimum value of transactions processed over the term of its agreements with certain loyalty program operators. Under this type of guarantee, in the event that the sale of miles/points are less than the guaranteed amounts, the Corporation would be obligated to purchase mileage from the loyalty program partner equal to the value of the revenue commitment shortfall. The Corporation has recorded approximately $1,400 on the balance sheet representing mileage inventory as part of prepaid and other assets and related to one revenue guarantee that was not met in 2013. This inventory will be drawn down after the Corporation has met its 2014 revenue guarantee requirement.
Transactions with Related Parties
The Corporation has entered into an agreement with a company whose President is a member of the Corporations Board of Directors. This agreement relates to digital marketing software provided to the Corporation, and is an immaterial portion of the Corporations marketing and communications expenses. The total amount paid during the nine month period ending September 30, 2014 was $109. The Corporation records these transactions at the amount agreed to by the related parties. These transactions are reviewed by the Audit Committee of the Corporations Board of Directors.
Cash from Exercise of Options
Certain options are due to expire within 12 months from the date of this MD&A. If exercised in full, issued and outstanding common shares will increase by 108,435 shares.
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Securities with Near-Term Expiry Dates Outstanding Amounts as at November 4, 2014 (figures in CAD$).
Security Type | Month of Expiry | Number | Strike Price |
Options | February 11, 2015 | 31,521 | 5.00 |
Options | March 22, 2015 | 72,893 | 4.60 |
Options | May 21, 2015 | 4,021 | 5.30 |
Total | 108,435 |
OUTSTANDING SHARE DATA
As of November 4, 2014, the Corporation has 15,410,525 common shares outstanding.
As of the date hereof, the Corporation has outstanding options to acquire up to 547,456 common shares. The options have exercise prices ranging from $4.60 to $30.84 with a weighted average exercise price of $9.87. The expiration dates of the options range from February 11, 2015 to September 29, 2019.
The following table lists the common shares issued and outstanding as at November 4, 2014 and the securities that are currently convertible into common shares along with the maximum number of common shares issuable on conversion or exercise.
Common Shares | Proceeds | |||||
Common Shares Issued & Outstanding | 15,410,525 | |||||
Convertible Securities: Share options | 547,456 | CAD$ 8,398,571 | ||||
Common Shares Issued & Potentially Issuable | 15,957,981 | CAD$ 8,398,571 | ||||
Securities Excluded from Calculation: | ||||||
Options Available to grant from ESOP(1) | 457,998 |
(1) The number of options available to grant is calculated as the total share option pool less the number of share options exercised and the number of outstanding share options.
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SUMMARY OF QUARTERLY RESULTS
(in thousands of US dollars, except per share amounts)
Basic | Diluted | |||
Net income | earnings | earnings | ||
Three month period ended | Total | (loss) | (loss) per | (loss) per |
Revenue | share | share | ||
September 30, 2014 | $61,446 | $1,553 | $0.10 | $0.10 |
June 30, 2014 | 70,445 | 1,220 | 0.08 | 0.08 |
March 31, 2014 | 58,257 | 443 | 0.03 | 0.03 |
December 31,2013 | 69,087 | 2,291 | 0.15 | 0.15 |
September 30, 2013 | 54,441 | 1,145 | 0.08 | 0.07 |
June 30 , 2013 | 41,924 | 218 | 0.01 | 0.01 |
March 31, 2013 | 36,918 | (48) | (0.00) | (0.00) |
December 31, 2012 | 40,803 | 5,638 | 0.37 | 0.37 |
As a leader and global provider of e-commerce solutions for the loyalty rewards industry, the Corporation has been successful in working with loyalty partners around the world to provide growing value to loyalty program participants. Over the course of the last ten years, the Corporation has secured relationships with new loyalty programs, and has been continuously developing its understanding of loyalty membership needs to find new ways of growing transactional business activity. Through the use of direct marketing techniques, and becoming more knowledgeable about the timing of when loyalty program promotional activities are most beneficial to program members, the Corporation has been successful in experiencing year-over-year growth in transaction levels and revenues. The increase in these metrics is also driven by the addition of new partnerships, and if the Corporation continues to add new members to its network while also maintaining its relationships and performance with existing partners, it may see continued growth in transaction levels and revenues. Increases in both transaction levels as well as revenues could drive higher overall profitability, while decreases in both transaction levels as well as revenues could drive lower overall profitability. The Corporation will continue to focus on increasing revenues and transaction levels, as well as increase resources in the areas of business development, technology advancement, and marketing intelligence.
The Corporations revenues are primarily impacted by retention of existing partnerships and products, new partnerships and products launched during the year and the level of marketing activities held with members of loyalty programs during the year. Historically, in the absence of any new partner or products launched, and in the absence of marketing activities, the Corporation will typically generate lower revenues in the first quarter of a year as fewer partner promotions are held after the December holiday season. In the absence of any new partner or products launched, revenue in the second and third quarters will be impacted by the level of marketing activity carried out with loyalty program members. Revenues for the second quarter of 2014 were the highest in the Corporations history, and this was the outcome of partnerships launched in 2013 and 2014, as well as successful marketing techniques carried out with loyalty members that resulted in an increase in transactional levels.
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Net income of the Corporation is a result of revenues generated in each quarter and is dependent on the launch of new partners and products, marketing and promotional activity carried out with program members, as well as changes in on-going operating expenses. Over the last two fiscal years, the Corporation has been focussing on its objectives of developing its open-platform strategy, making additional investments in marketing, as well as increasing resources in the area of business development. The headcount additions in these related areas have increased employment expenses, and to some degree, have also translated to higher operating expenses. Beginning in the third quarter of 2013, the increased cost associated with head-count additions and operating expenses has been offset by increases in incremental gross margin primarily from the new partner launches. The first quarter of each year since 2013 has been lower than other quarters, and this is largely due to performance based payments made in this quarter. While the increase in net income compared to prior periods is not necessarily indicative of net income to be seen in future periods, it is a reflection of the Corporations return on investments made throughout 2013 and 2014.
For the quarter ended December 31, 2012, net income of $5,638 was higher than previous quarters due to the recognition of certain future tax benefits associated with previously unrecognized deferred tax assets in Canada. This tax asset recognition is not expected to repeat in future periods. Instead, the Corporation will begin to apply a corporate tax rate of approximately 26% on pre-tax income. This tax impact on earnings has been applied in 2013 and 2014, and is expected to appear in future periods.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
For the Corporations accounting policies and critical accounting estimates and judgments, refer to the Corporations MD&A and consolidated financial statements for the year ended December 31, 2013. The preparation of the consolidated financial statements in accordance with IFRSs, requires management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses.
Recent accounting pronouncements are listed below:
IFRS 15, Revenue from Contracts with Customers (IFRS 15) - In May 2014, the IASB issued IFRS 15 which supersedes existing standards and interpretations including IAS 18, Revenue and IFRIC 13, Customer Loyalty Programmes.
IFRS 15 introduces a single model for recognizing revenue from contracts with customers with the exception of certain contracts under other IFRSs such as IAS 17, Leases. The standard requires revenue to be recognized in a manner that depicts the transfer of promised goods or services to a customer and at an amount that reflects the expected consideration receivable in exchange for transferring those goods or services. This is achieved by applying the following five steps:
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1. |
Identify the contract with a customer; | |
2. |
Identify the performance obligations in the contract; | |
3. |
Determine the transaction price; | |
4. |
Allocate the transaction price to the performance obligations in the contract; and | |
5. |
Recognize revenue when (or as) the entity satisfies a performance obligation. |
IFRS 15 also provides guidance relating to the treatment of contract acquisition and contract fulfillment costs. The standard is effective for annual periods beginning on or after January 1, 2017.
IFRS 9, Financial Instruments (IFRS 9) - In July 2014, the IASB issued the final publication of the IFRS 9 standard, superseding the current IAS 39 Financial Instruments standard. This standard establishes principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entitys future cash flows. This new standard also includes a new general hedge accounting standard which will align hedge accounting more closely with risk management. It does not fully change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however, it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. The standard has a mandatorily effective date for annual periods beginning on or after January 1, 2018 with early adoption permitted.
Amendments to IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets - In May 2014, the IASB issued amendments to these standards to introduce a rebuttable presumption that the use of revenue-based amortization methods for intangible assets is inappropriate. The amendment is effective for annual periods beginning on or after January 1, 2016 with early adoption permitted.
The Corporation is assessing the impact of these standards and amendments on its consolidated financial statements.
RISKS AND UNCERTAINTIES
The results of operations and financial condition of the Corporation are subject to a number of risks and uncertainties, and are affected by a number of factors outside of the control of Management. For a detailed discussion regarding the relevant risks and uncertainties, see the Corporations annual MD&A for the year ended December 31, 2013. There have been no changes during the quarter ended September 30, 2014.
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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Corporation is responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting, as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings. There have been no changes in the Corporations internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Corporations internal control over financial reporting.
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FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
I, T. Robert MacLean, Chief Executive Officer of Points International Ltd., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of Points International Ltd. (the "issuer") for the interim period ended September 30, 2014.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer and I have, as at the end of the period covered by the interim filings:
(a) |
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that: | ||
(i) |
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and | ||
(ii) |
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and | ||
(b) |
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP. |
5.1 Control framework: The control framework the issuer's other certifying officer and I used to design the issuer's ICFR is the Internal Control Integrated Framework (COSO Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission.
5.2 ICFR -- material weakness relating to design: N/A.
5.3 Limitation on scope of design: N/A.
- 2 -
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer's ICFR that occurred during the period beginning on July 1, 2014 and ended on September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.
Date: November 5, 2014
/s/ Robert MacLean
___________________________________
Robert MacLean
Chief Executive
Officer
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
I, Anthony R. Lam, Chief Financial Officer of Points International Ltd., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of Points International Ltd. (the "issuer") for the interim period ended September 30, 2014.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
4. Responsibility: The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer's other certifying officer and I have, as at the end of the period covered by the interim filings:
(a) |
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that: | ||
(i) |
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and | ||
(ii) |
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and | ||
(b) |
designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP. |
5.1 Control framework: The control framework the issuer's other certifying officer and I used to design the issuer's ICFR is the Internal Control Integrated Framework (COSO Framework) published by The Committee of Sponsoring Organizations of the Treadway Commission.
5.2 ICFR -- material weakness relating to design: N/A.
5.3 Limitation on scope of design: N/A.
- 2 -
6. Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer's ICFR that occurred during the period beginning on July 1, 2014 and ended on September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the issuer's ICFR.
Date: November 5, 2014
/s/ Anthony Lam
___________________________________
Anthony Lam
Chief Financial
Officer
Points International Ltd. Reports Third Quarter 2014 Financial Results
Revenues of $61.4 million, an increase of 13%
year-over-year
Adjusted EBITDA1 of $2.6
million, an increase of 12% year-over-year
Net Income of $1.6
million, an increase of 36% year-over-year
Toronto, Canada, November 5, 2014 Points (TSX: PTS; NASDAQ: PCOM), global leader in loyalty currency management, today announced results for the third quarter ended September 30, 2014.
Points business is as strong as its ever been, the broader loyalty industry is healthy, and our outlook for the future is optimistic, said Rob MacLean, CEO of Points. Year-to-date revenues were up 43% driven by healthy organic growth and successful onboarding of new loyalty partners over the past 12 months. We have also become increasingly efficient at driving Adjusted EBITDA profitability. Year-to-date, Adjusted EBITDA expanded 58%, led by revenue and gross margin dollar growth.
Mr. MacLean continued, Since the start of 2014, we have launched 30 products and added 8 new partners to our loyalty commerce platform. We continue to deliver solid growth and are working on several exciting opportunities to further our successful track record of executing against our new partner and product pipeline. Despite this significant progress, our pipeline remains robust, and we are in advanced discussions with several potential new meaningful partners.
We are working hard to capture the massive long-term potential of the business, by developing our platform, onboarding new partners, and innovating the way in which the loyalty industry conducts business. In particular, we are pleased by the progress we have made to strengthen our loyalty commerce platform and to drive innovation in our core business. We are currently in the process of transitioning our core retailing products, and once migrated we expect to see a meaningful impact on the business as we leverage these new capabilities. In addition, we are enthused by our progress on the consumer side of the business. We will soon be re-launching our Points.com Loyalty Wallet on our new platform. While loyalty programs, financial services, digital wallets and online travel will be our initial focus, the green-field opportunity is tremendous. We will keep our investors posted on our progress, Mr. MacLean concluded.
Third Quarter 2014 Financial Results
(Unless
otherwise stated, all comparisons for the Third Quarter of 2014 are on a
year-over-year basis)
Revenues totaled $61.4 million up 13% from $54.4 million. Principal revenues totaled $58.8 million, up 12% from $52.5 million. The year-over-year increase in principal revenues was largely due to the impact of new partners which have launched over the last twelve months.
Gross margin2 dollars totaled $10.2 million, or 17% of total revenue, compared to $8.7 million, or 16% of total revenue. The increase in gross margin dollars was driven by growth from existing partners and the impact of new partnerships launched over the last twelve months. As a percentage of revenue, gross margin reflects the relative mix of partner and product activity during the quarter. Year to date, and on a year-over-year basis, growth in gross margin dollars has been 28%.
________________________________________
1
Adjusted EBITDA (Earnings before interest, taxes, depreciation and amortization,
and foreign exchange) is considered by Management to be a useful supplemental
measure when assessing financial performance. Management believes that Adjusted
EBITDA is an important indicator of the Corporation's ability to generate
liquidity through operating cash flow to fund future capital expenditures and
working capital needs. However, Adjusted EBITDA is not a measure of financial
performance under IFRS and should not be considered a substitute for Net Income,
which Points believes to be the most directly comparable IFRS measure.
2 Gross Margin is defined as total revenues less the direct cost of principal revenues. Gross Margin is considered by Management to be an integral measure of financial performance and represents the amount of revenues retained by the Corporation after incurring direct costs. However, gross margin is not a recognized measure of profitability under IFRS.
1 | P a g e |
Adjusted EBITDA totaled $2.6 million up 12% from $2.3 million in the third quarter of 2013. Revenue and gross margin growth outpaced that of operating expenses, contributing to the strong year-over-year increase in Adjusted EBITDA.
Net income totaled $1.6 million, or $0.10 per diluted share, compared to a net income of $1.1 million or $0.07 per diluted share.
As of September 30, 2014, total funds available, comprised of cash and cash equivalents together with restricted cash and amounts with payment processors was $64.2 million. Net operating cash, which is defined as total funds available less amounts payable to loyalty program partners, was $19.9 million as of September 30, 2014. The Company remains debt free and is pleased with its overall financial position.
Third Quarter 2014 Business Metrics
Q3/14 | Q3/13 | Q3/14 vs.
Q3/13 |
Q2/14 | Q3/14 vs.
Q2/14 | |
Total All Channels | |||||
Points/Miles Transacted (in 000s) | 5,296,466 | 4,249,170 | 24.6% | 5,811,085 | -8.9% |
No. of Points/Miles Transactions | 617,952 | 500,204 | 23.5% | 596,715 | 3.6% |
Outlook
Taking into account the Companys year-to-date performance and robust partner and product pipeline, while also considering the ongoing softness in Europe, Points is maintaining its financial guidance for the year ending December 31, 2014, as follows:
Upcoming Investor Conferences
Management will be participating in one-on-one meetings at two upcoming investor conferences:
Investor Conference Call
Points' conference call with investors will be held today at 4:30 p.m. Eastern Time. To participate, investors from the US and Canada should dial (877) 407-0784 ten minutes prior to the start time. International dialers should call (201) 689-8560.
In addition, the call is being webcast and can be accessed at the Company's web site: www.pointsinternational.com and will be archived online upon completion of the call. A telephonic replay of the conference call will be available through November 19, 2014 by dialing (877) 870-5176 in the U.S. or Canada or (858) 384-5517 internationally and entering the conference ID 13591821.
2 | P a g e |
About Points
Points, publicly traded as Points International Ltd. (TSX: PTS; NASDAQ: PCOM), is the global leader in loyalty currency management. Via a state-of-the-art loyalty commerce platform, Points provides loyalty eCommerce and technology solutions to the world's top brands to enhance their consumer offerings and streamline their back-end operations.
Points solutions enhance the management and monetization of loyalty currencies ranging from frequent flyer miles and hotel points to retailer and credit card rewards, for more than 50 partners worldwide. Points also manages Points.com, where almost 4 million consumers use the only industry sanctioned loyalty wallet to not only track all of their loyalty programs but also trade, exchange and redeem their miles and points. In addition to these services, Points unique SaaS products allow merchants and businesses to reward their customers with points and miles from the worlds largest loyalty brands.
In 2014, Points acquired PointsHound, a hotel booking engine and loyalty currency aggregator built specifically for frequent travelers. PointsHound enables loyalty program members to earn loyalty points for staying in their favorite hotels and also to earn bonus rewards in the form of airline miles. Members of the free-to-use site have access to over 150,000 hotels worldwide, including boutique and non-chain properties.
Points has been widely recognized among the loyalty and technology communities alike. The Company was named the 4th largest Canadian software company and the 36th largest Canadian technology company by the 2014 Branham300 list. For more information on Points, please visit www.Points.com, follow us on Twitter (@PointsBiz) or read the Points company blog. For more information on PointsHound, please visit www.PointsHound.com.
Caution Regarding Forward-Looking Statements
This press release contains or incorporates forward-looking statements within the meaning of United States securities legislation, and forward-looking information within the meaning of Canadian securities legislation (collectively "forward-looking statements"). These forward-looking statements include, among other things, opportunities for new products and partners and incremental revenue, our guidance for 2014 with respect to revenue growth, Adjusted EBITDA expectations and reinvestment plans. These statements are not historical facts but instead represent only Points' expectations, estimates and projections regarding future events.
Although Points believes the expectations reflected in such forward-looking statements are reasonable, such statements are not guarantees of future performance and are subject to important risks and uncertainties that are difficult to predict. Certain material assumptions or estimates are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. Undue reliance should not be placed on such statements. In particular, the financial outlooks herein assume Points will be able to maintain its existing contractual relationships and products, that such products continue to perform in a manner consistent with Points' past experience, that Points we will be able to generate new business from our pipeline at expected margins, our in-market and newly launched products and services will perform in a manner consistent with the Company's past experience and we will be able to contain costs. Our ability to convert our pipeline of prospective partners and product launches is subject to significant risk and there can be no assurance that we will launch new partners or new products with existing partners as expected or planned nor can there be any assurance that Points will be successful in maintaining its existing contractual relationships or maintaining existing products with existing partners. Other important risk factors that could cause actual results to differ materially include the risk factors discussed in Points' annual information form, Form-40-F, annual and interim management's discussion and analysis, and annual and interim financial statements and the notes thereto. These documents are available at www.sedar.com and www.sec.gov.
3 | P a g e |
The forward-looking statements contained in this press release are made as at the date of this release and, accordingly, are subject to change after such date. Except as required by law, Points does not undertake any obligation to update or revise any forward-looking statements made or incorporated in this press release, whether as a result of new information, future events or otherwise.
Contact:
Addo Communications
Laura
Bainbridge/Kimberly Esterkin
laurab@addocommunications.com;
kimberlye@addocommunications.com
(310) 829-5400
4 | P a g e |
Points International Ltd.
Key Financial Measures and Schedule of Non-GAAP Reconciliations
Reconciliation of Net Income to Adjusted
EBITDA1
Expressed in thousands of United
States
dollars
For the 3 months ended | For the nine months ended | |||||||||||
September 30, 2014 | September 30, 2013 | September 30, | September 30, | |||||||||
2014 | 2013 | |||||||||||
Net Income | $ | 1,553 | $ | 1,145 | $ | 3,216 | $ | 1,315 | ||||
Interest and other income | - | - | (5 | ) | - | |||||||
Income tax expense (recovery) | 479 | 432 | 1,505 | 192 | ||||||||
Depreciation and Amortization | 481 | 803 | 1,569 | 2,570 | ||||||||
Foreign Exchange loss (gain) | 90 | (50 | ) | 84 | (46 | ) | ||||||
Adjusted EBITDA | $ | 2,603 | $ | 2,330 | $ | 6,369 | $ | 4,031 |
Gross Margin2 Information
Expressed in
thousands of United States
dollars
For the 3 months ended | For the nine months ended | |||||||||||
September 30, 2014 | September 30, 2013 | September 30, 2014 | September 30, 2013 | |||||||||
Total Revenue | $ | 61,446 | $ | 54,441 | $ | 190,148 | $ | 133,283 | ||||
Direct cost of principal revenue | 51,259 | 45,707 | 160,886 | 110,481 | ||||||||
Gross Margin | $ | 10,187 | $ | 8,734 | $ | 29,262 | $ | 22,802 | ||||
Gross Margin % | 17% | 16% | 15% | 17% |
1 Adjusted EBITDA (Earnings before interest, taxes, depreciation and amortization, and foreign exchange) is considered by Management to be a useful supplemental measure when assessing financial performance. Management believes that Adjusted EBITDA is an important indicator of the Corporation's ability to generate liquidity through operating cash flow to fund future capital expenditures and working capital needs. However, Adjusted EBITDA is not a measure of financial performance under IFRS and should not be considered a substitute for Net Income, which Points believes to be the most directly comparable IFRS measure.
2 Gross Margin is defined as total revenues less the direct cost of principal revenues. Gross Margin is considered by Management to be an integral measure of financial performance and represents the amount of revenues retained by the Corporation after incurring direct costs. However, gross margin is not a recognized measure of profitability under IFRS.
5 | P a g e |
Points International Ltd.
Condensed Consolidated Interim Balance Sheets
Expressed in thousands of United States dollars
(Unaudited)
As at | September 30, | December 31, | ||||
2014 | 2013 | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 55,832 | $ | 64,188 | ||
Restricted cash | 1,587 | 1,602 | ||||
Funds receivable from payment processors | 6,829 | 9,071 | ||||
Accounts receivable | 1,799 | 1,401 | ||||
Prepaid expenses and other assets | 2,574 | 2,210 | ||||
Total current assets | $ | 68,621 | $ | 78,472 | ||
Non-current assets | ||||||
Property and equipment | 1,838 | 2,092 | ||||
Intangible assets | 2,954 | 1,855 | ||||
Goodwill | 4,299 | 2,580 | ||||
Deferred tax assets | 4,395 | 5,966 | ||||
Long-term investment | 5,000 | 3,500 | ||||
Other assets | 711 | 547 | ||||
Total non-current assets | $ | 19,197 | $ | 16,540 | ||
Total assets | $ | 87,818 | $ | 95,012 | ||
LIABILITIES | ||||||
Current liabilities | ||||||
Accounts payables and accrued liabilities | $ | 5,160 | $ | 4,783 | ||
Payable to loyalty program partners | 44,394 | 56,111 | ||||
Current portion of other liabilities | 1,085 | 1,134 | ||||
Total current liabilities | $ | 50,639 | $ | 62,028 | ||
Non-current liabilities | ||||||
Deferred tax liabilities | 267 | - | ||||
Other liabilities | 325 | 437 | ||||
Total non-current liabilities | $ | 592 | $ | 437 | ||
Total liabilities | $ | 51,231 | $ | 62,465 | ||
SHAREHOLDERS EQUITY | ||||||
Share capital | 58,288 | 58,693 | ||||
Contributed surplus | 11,491 | 10,381 | ||||
Accumulated other comprehensive loss | (226 | ) | (345 | ) | ||
Accumulated deficit | (32,966 | ) | (36,182 | ) | ||
Total shareholders equity | $ | 36,587 | $ | 32,547 | ||
Total liabilities and shareholders equity | $ | 87,818 | $ | 95,012 |
6 | 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)
For the three months | For the nine months | |||||||||||
ended | ended | |||||||||||
September | September | September | September | |||||||||
30, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | |||||||||
REVENUE | ||||||||||||
Principal | $ | 58,787 | $ | 52,479 | $ | 182,857 | $ | 126,970 | ||||
Other partner revenue | 2,640 | 1,947 | 7,232 | 6,274 | ||||||||
Interest | 19 | 15 | 59 | 39 | ||||||||
Total Revenue | $ | 61,446 | $ | 54,441 | $ | 190,148 | $ | 133,283 | ||||
EXPENSES | ||||||||||||
Direct cost of principal revenue | 51,259 | 45,707 | 160,886 | 110,481 | ||||||||
Employment costs | 5,584 | 4,864 | 17,240 | 13,733 | ||||||||
Marketing and communications | 523 | 267 | 1,049 | 843 | ||||||||
Technology services | 308 | 214 | 807 | 772 | ||||||||
Depreciation and amortization | 481 | 803 | 1,569 | 2,570 | ||||||||
Foreign exchange (gain) loss | 90 | (50 | ) | 84 | (46 | ) | ||||||
Operating expenses | 1,169 | 1,059 | 3,797 | 3,423 | ||||||||
Total Expenses | $ | 59,414 | $ | 52,864 | $ | 185,432 | $ | 131,776 | ||||
OPERATING INCOME | $ | 2,032 | $ | 1,577 | $ | 4,716 | $ | 1,507 | ||||
Interest and other income | - | - | (5 | ) | - | |||||||
OPERATING INCOME BEFORE INCOME TAXES | $ | 2,032 | $ | 1,577 | $ | 4,721 | $ | 1,507 | ||||
Income tax expense | 479 | 432 | 1,505 | 192 | ||||||||
NET INCOME | $ | 1,553 | $ | 1,145 | $ | 3,216 | $ | 1,315 | ||||
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 recovery of $109 and $117, respectively, for the three and nine months ended September 30, 2014 (2013: expense of $45 and recovery of $111) | (304 | ) | 124 | (325 | ) | (308 | ) | |||||
Reclassification to net income of loss (gain) on foreign exchange derivatives designated as cash flow hedges, net of income tax recovery of $37 and $160, respectively, for the three and nine months ended September 30, 2014 (2013 recovery of $44 and $60) | 102 | 123 | 444 | 168 | ||||||||
Other comprehensive income (loss) for the period, net of income tax | $ | (202 | ) | $ | 247 | $ | 119 | $ | (140 | ) | ||
TOTAL COMPREHENSIVE INCOME | $ | 1,351 | $ | 1,392 | $ | 3,335 | $ | 1,175 | ||||
EARNINGS PER SHARE | ||||||||||||
Basic earnings per share | $ | 0.10 | $ | 0.08 | $ | 0.21 | $ | 0.09 | ||||
Diluted earnings per share | $ | 0.10 | $ | 0.07 | $ | 0.21 | $ | 0.08 |
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 shareholders | ||||||||||||||
(Unaudited) | Surplus | losses on cash | other | deficit | equity | ||||||||||||||||
flow hedges | comprehensi | ||||||||||||||||||||
ve loss | |||||||||||||||||||||
Balance at December 31, 2013 | $ | 58,693 | $ | 10,381 | $ | 69,074 | $ | (345 | ) | $ | (345 | ) | $ | (36,182 | ) | $ | 32,547 | ||||
Net lncome | - | - | - | - | - | 3,216 | 3,216 | ||||||||||||||
Other comprehensive income | - | - | - | 119 | 119 | - | 119 | ||||||||||||||
Total comprehensive income | - | - | - | 119 | 119 | 3,216 | 3,335 | ||||||||||||||
Effect of share option compensation plan | - | 634 | 634 | - | - | - | 634 | ||||||||||||||
Effect of PSU and RSU compensation plan | - | 690 | 690 | - | - | - | 690 | ||||||||||||||
Share issuances | 326 | (214 | ) | 112 | - | - | - | 112 | |||||||||||||
Share capital held in trust | (731 | ) | - | (731 | ) | - | - | - | (731 | ) | |||||||||||
Balance at September 30, 2014 | $ | 58,288 | $ | 11,491 | $ | 69,779 | $ | (226 | ) | $ | (226 | ) | $ | (32,966 | ) | $ | 36,587 | ||||
Balance at December 31, 2012 | $ | 57,564 | $ | 10,105 | $ | 67,669 | $ | (54 | ) | $ | (54 | ) | $ | (39,788 | ) | $ | 27,827 | ||||
Net income | - | - | - | - | - | 1,315 | 1,315 | ||||||||||||||
Other comprehensive loss | - | - | - | (140 | ) | (140 | ) | - | (140 | ) | |||||||||||
Total comprehensive loss | - | - | - | (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 |
Points International Ltd.
Condensed Consolidated Interim Statements of Cash Flows
Expressed in thousands of United States dollars
(Unaudited)
For the three months | For the nine months | |||||||||||
ended | Ended | |||||||||||
September | September | September | September | |||||||||
30, 2014 | 30, 2013 | 30, 2014 | 30, 2013 | |||||||||
Cash flows from operating activities | ||||||||||||
Net income for the period | $ | 1,553 | $ | 1,145 | $ | 3,216 | $ | 1,315 | ||||
Adjustments for: | ||||||||||||
Depreciation of property and equipment | 241 | 229 | 753 | 892 | ||||||||
Amortization of intangible assets | 240 | 574 | 816 | 1,678 | ||||||||
Unrealized foreign exchange (gain) loss | (532 | ) | 455 | (476 | ) | 165 | ||||||
Equity-settled share-based payment transactions | 513 | 292 | 1,324 | 820 | ||||||||
Deferred income tax expense | 529 | 415 | 1,474 | 92 | ||||||||
Unrealized net gain/loss on derivative contracts designated as cash flow hedges | (275 | ) | 335 | 162 | (191 | ) | ||||||
Changes in non-cash balances related to operations, exclusive of effects of business combination | (6,060 | ) | 1,321 | (10,802 | ) | 3,289 | ||||||
Net cash (used in) provided by operating activities | $ | (3,791 | ) | $ | 4,766 | $ | (3,533 | ) | $ | 8,060 | ||
Cash flows from investing activities | ||||||||||||
Acquisition of property and equipment | (163 | ) | (101 | ) | (499 | ) | (742 | ) | ||||
Additions to intangible assets | (400 | ) | (217 | ) | (1,184 | ) | (489 | ) | ||||
Long-term investment | - | - | (1,500 | ) | (2,500 | ) | ||||||
Acquisition of business, net of cash acquired | - | - | (1,511 | ) | - | |||||||
Changes in restricted cash, net of unrealized foreign exchange gain/loss | - | - | - | 1,575 | ||||||||
Net cash used in investing activities | $ | (563 | ) | $ | (318 | ) | $ | (4,694 | ) | $ | (2,156 | ) |
Cash flows from financing activities | ||||||||||||
Proceeds from exercise of share options | 25 | 240 | 112 | 610 | ||||||||
Payment for share purchases | - | - | (731 | ) | (595 | ) | ||||||
Net cash provided by (used in) financing activities | $ | 25 | $ | 240 | $ | (619 | ) | $ | 15 | |||
Net increase (decrease) in cash and cash equivalents | $ | (4,329 | ) | $ | 4,688 | $ | (8,846 | ) | $ | 5,919 | ||
Cash and cash equivalents at beginning of the period | $ | 59,614 | $ | 46,646 | $ | 64,188 | $ | 45,108 | ||||
Effect of exchange rate fluctuations on cash held | 547 | (459 | ) | 490 | (152 | ) | ||||||
Cash and cash equivalents at end of the period | $ | 55,832 | $ | 50,875 | $ | 55,832 | $ | 50,875 | ||||
Interest Received | $ | 19 | $ | 15 | $ | 64 | $ | 42 | ||||
Interest Paid | $ | - | $ | - | $ | - | $ | - | ||||
Taxes Received | $ | - | $ | - | $ | - | $ | - | ||||
Taxes Paid | $ | - | $ | 14 | $ | 3 | $ | 53 |
Amounts paid and received for interest were reflected as operating cash flows in the condensed consolidated interim statements of cash flows.