Points International Ltd. - Exhibit 99.2 - Filed by newsfilecorp.com
POINTS INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION
AND ANALYSIS
INTRODUCTION
The following management’s 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
Corporation’s unaudited condensed consolidated interim financial statements
(including the notes thereto) as at and for the three and nine months ended
September 30, 2016, the 2015 annual MD&A and the 2015 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 Accounting Standard 34, Interim Financial Reporting, 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 2, 2016 and was reviewed by the Audit
Committee and approved by the Corporation’s 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 Corporation’s expectations, estimates and projections regarding future
events. Certain significant forward-looking statements included in this MD&A
include statements regarding: revenue growth, the shift in the internal mix of
revenue sources and the impact thereof on sustained profitability; the
maximization of gross profit and the accretive nature of new deals and products
on profitability; enhancing the capabilities of the Corporation’s loyalty
commerce platform and its consumer product innovations; development of growth
opportunities for the Corporation through access to growing loyalty membership
databases; the Corporation’s ability to generate positive returns on its
historical and ongoing investments in its loyalty commerce platform and its
expansion of new product offerings; the Corporation’s 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.
1 of 23
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 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
Corporation’s 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 Corporation’s
past experience and the Corporation will be able to contain costs. The
Corporation’s 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 Corporation’s third quarter 2016 financial results,
and those described in Points’ other filings with applicable securities
regulators, including Points’ AIF, Form 40-F, annual and interim MD&A, and
annual consolidated financial statements and interim condensed 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 Corporation’s financial statements are prepared in
accordance with International Financial Reporting Standards (“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 Corporation’s underlying
performance. These measures are reviewed regularly by management and the
Corporation’s Board of Directors in assessing the Corporation’s performance and
in making decisions about ongoing operations. These measures are also used by
investors as an indicator of the Corporation’s 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.
2 of 23
BUSINESS OVERVIEW
Points International Ltd.
Points International Ltd. is the global leader in powering
loyalty commerce. The Corporation’s products and services help the world’s
leading loyalty programs enhance loyalty member engagement and participation 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 Points.com website,
where millions of members manage their loyalty memberships, learn about new
promotions, and exchange points and miles between programs.
Loyalty Programs generate substantial economic benefits and are
increasingly seen as strategic marketing and business assets. Points provides
products and services which help make loyalty programs more valuable and
engaging. Points does not directly compete with loyalty rewards programs and as
such operates as a business partner of the loyalty program. Consequently, Points
products and services are available to numerous loyalty partners simultaneously
to enhance their programs through the Loyalty Commerce Platform (“LCP”), which
is the backbone of the Points product and service offerings. The LCP has been
designed as an Application Program Interface (“API”) driven transactional
platform that provides internal and external product developers easier access to
the direct integrations into the Corporation’s technological infrastructure.
This approach facilitates loyalty commerce transactions and encourages
incremental participation resulting in greater value to a loyalty program
partner and their membership base. The LCP offers a consistent interface for
developers that is self-serve capable, providing broad access to loyalty
transaction capabilities based on the Corporation’s direct integrations with its
loyalty program partners. The LCP supports not only the Corporation’s core Buy,
Gift and Transfer (“BGT”) products, but also additional loyalty products offered
by Points directly or by third party product providers. Additionally, the LCP
facilitates the broad distribution of loyalty currencies and loyalty commerce
transactions through multiple channels via the newly developed Points Loyalty
Wallet.
The Corporation’s business relationships with its Loyalty
Partners enable the products and services it offers to be exposed to the vast
memberships of these Loyalty Partners. Access to these growing loyalty
membership databases provides growth opportunities for the Corporation by
increasing the overall level of member engagement with the Corporation’s
products in a very cost effective manner. In addition, offering new and
innovative products to expand the suite of product offerings on the LCP to
existing and new loyalty programs presents an additional growth opportunity for
the Corporation. Securing additional Loyalty Partners to utilize our LCP,
products and services provides a further growth opportunity for Points. With
direct integrations into more than 50 of the world’s leading loyalty programs
and access to over 700 million loyalty members, the LCP uniquely positions the
Corporation to connect third party channels with highly engaged loyalty program
members and the broader loyalty market.
3 of 23
The Corporation’s e-commerce solutions are utilized by over 50
of the world’s leading loyalty programs, including:
| • |
United Airlines MileagePlus |
• |
InterContinental Hotels Group |
| • |
Southwest Airlines Rapid Rewards |
• |
Amtrak Guest Rewards |
| • |
British Airways Executive Club |
• |
Hilton HHonors |
| • |
Virgin Atlantic Flying Club |
• |
Alaska Airlines Mileage Plan |
| • |
AF-KLM Flying Blue |
• |
Saudi Arabian Airlines Alfursan |
| • |
Starwood Preferred Guest |
• |
Delta Air Lines SkyMiles |
| • |
Hyatt Gold Passport |
• |
American Airlines AAdvantage |
| • |
JetBlue TrueBlue |
• |
Lanpass |
| • |
La Quinta Returns |
• |
Miles & More |
In 2016, Points expects to deliver over $400 million annually
in additional revenue for partners whose loyalty program members number over 700
million. The Corporation’s headquarters are located in Toronto, Canada and its
shares are dually listed on the Toronto Stock Exchange (“TSX”) as PTS and on the
NASDAQ Capital Market (“NASDAQ”) as PCOM.
The Corporation’s revenue is primarily generated by transacting
points and miles online. Revenue is principally derived from the sale or
transfer of loyalty currencies directly to loyalty program members. The
Corporation categorizes its revenue in three ways: principal revenue, other
partner revenue and interest income.
Principal Revenue:
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
loyalty program partners at wholesale rates and resells them directly to
consumers. The Corporation has a substantial level of responsibility with
respect to operations, marketing, pricing and commercial transaction support. In
addition, the Corporation may assume additional responsibility when assuming a
principal role, such as credit and/or inventory risk.
Other Partner Revenue:
Other partner revenue includes
transactional revenue that is realized when the Corporation assumes an agency
role in the retailing and wholesaling of loyalty currencies for loyalty program
partners and other revenue received from partners which is not transactional in
nature.
Interest Income:
Lastly, as part of its operating
economics, the Corporation earns interest income on the cash flows generated by
its products and services.
4 of 23
The Loyalty Market
Year-over-year, loyalty programs continue to generate a
significant source of ancillary revenue and cash flows for program operators.
According to the Colloquy group, a leading consulting and research firm focused
on the loyalty industry, the number of loyalty memberships in the U.S. increased
from 2.6 billion in 2012 to 3.3 billion in 2014, representing an increase of
27%. In addition, the average U.S. household belonged to 29 loyalty programs as
of 2014, versus 22 loyalty programs in 2012 (source: 2015 Colloquy Loyalty
Census, February 2015). As the number of loyalty memberships continues to
increase, the level of diversification in the loyalty landscape is evolving.
While the airline, specialty retail, and financial services industries continue
to be dominant in loyalty programs in the U.S., smaller verticals, including the
restaurant and drug store industries are beginning to see larger growth in their
membership base. Further, newer loyalty concepts, such as large e-commerce
programs, daily deals, and online travel agencies, are becoming more prevalent.
As a result of this changing landscape, loyalty programs must continue to
provide innovative value propositions in order to drive activity in their
programs.
In light of this environment, the Corporation continues to
advance the functionality of its LCP which provides external product developers
easy access to the direct integrations with the Corporation’s Loyalty Program
partners. The LCP provides a medium to more easily facilitate transactions and
provide greater value to a Loyalty Program’s membership base. The Corporation
continues to focus on innovation and be highly engaged in a quickly developing
loyalty industry. As the Corporation continues to advance the platform’s
capabilities, management believes the addressable market opportunity for the
Corporation will continue to increase.
QUARTERLY HIGHLIGHTS
Highlights of operating results for the three months ended
September 30, 2016 include:
-
Quarterly revenue of $82,442 an increase of $1,309 or 2% from the prior
year quarter;
-
Quarterly gross profit of $10,062, which was consistent with the prior year
quarter (please refer to ‘Revenue, Direct Costs and Gross Profit’ on page 8
for definition and explanation);
-
Net income of $335, a decrease of $433, or 56% from the prior year quarter;
-
Earnings before taxes, depreciation, amortization, share-based compensation
and foreign exchange (“Adjusted EBITDA”) of $2,250, lower by $263 or 10% from
the prior year quarter (please refer to ‘Adjusted EBITDA’ on page 11 for
definition and explanation); and,
-
As at September 30, 2016, the Corporation had cash and cash equivalents of
$47,832 and no debt.
5 of 23
SELECTED FINANCIAL INFORMATION
(All amounts are in
thousands of US dollars unless otherwise stated)
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 |
|
|
|
|
|
|
|
|
|
|
|
|
| share and per share amounts) |
|
September |
|
|
September |
|
|
September |
|
|
September |
|
| (unaudited) |
|
30, 2016 |
|
|
30,
2015 |
|
|
30, 2016 |
|
|
30,
2015 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenue |
$ |
82,442 |
|
$ |
81,133 |
|
$ |
239,866 |
|
$ |
216,148 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit1 |
|
10,062 |
|
|
10,080 |
|
|
31,417 |
|
|
32,702 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Ongoing operating costs |
|
8,201 |
|
|
8,078 |
|
|
24,721 |
|
|
23,838 |
|
| Adjusted EBITDA2 |
|
2,250 |
|
|
2,513 |
|
|
8,443 |
|
|
10,446 |
|
| Operating income3 |
|
636 |
|
|
1,120 |
|
|
3,076 |
|
|
6,227 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
$ |
335 |
|
$ |
768 |
|
$ |
2,159 |
|
$ |
4,204 |
|
| Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
$ |
0.02 |
|
$ |
0.05 |
|
$ |
0.14 |
|
$ |
0.27 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
$ |
0.02 |
|
$ |
0.05 |
|
$ |
0.14 |
|
$ |
0.27 |
|
| Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
15,222,256 |
|
|
15,528,928 |
|
|
15,261,967 |
|
|
15,602,849 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted |
|
15,234,597 |
|
|
15,567,440 |
|
|
15,274,083 |
|
|
15,663,486 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
$ |
97,943 |
|
$ |
85,198 |
|
$ |
97,943 |
|
$ |
85,198 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
$ |
52,204 |
|
$ |
42,995 |
|
$ |
52,204 |
|
$ |
42,995 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Shareholders' equity |
$ |
45,739 |
|
$ |
42,203 |
|
$ |
45,739 |
|
$ |
42,203 |
|
1Gross profit is a non-GAAP financial measure. Refer
to page 8 for definition and explanation.
2Adjusted EBITDA is a
non-GAAP financial measure. Refer to page 11 for definition and explanation.
3Operating income is an additional GAAP measure presented in the
financial statements, and is defined as Net income before Income tax expense.
Management presents this additional GAAP measure to provide comparability to
companies in different tax jurisdictions.
BUSINESS RESULTS AND DEVELOPMENTS
Year to date financial results for the nine months ended
September 30, 2016 reflected the strength of the Corporation’s core business, as
revenue grew 11% on a year over year basis. In addition, the Corporation
advanced its longer term growth initiatives by continuing to invest in the
Points Travel service and Loyalty Wallet offering. In particular, the Points
Travel product demonstrated its strong value proposition and market fit in the
loyalty space, with several successful launches in the first nine months of
2016.
During the third quarter of 2016, the Corporation experienced a
marginal increase in revenues on a year over year basis. Revenues were $82,442
in the third quarter of 2016 which had similar promotional calendars on the core
business as the previous year, resulting in relatively flat revenue compared to the same
period in 2015. Similarly, gross profit of $10,062 was relatively consistent
with the gross profit results in the third quarter of 2015. Adjusted EBITDA
decreased 10% from the prior year quarter to $2,250, resulting from increased
other operating costs associated with the new head office lease.
6 of 23
The Corporation continued to invest in its LCP and consumer
product innovations in 2016. Leveraging these platform developments and product
innovation efforts, the Corporation was successful in executing against its new
partner pipeline for the new Points Travel product. In addition, ongoing
developments made to the LCP have strengthened the Corporation’s core business
offering.
The Points Travel product connects online hotel bookings with
loyalty, quickly integrating into a loyalty program’s web and mobile properties
to create a unique travel e-commerce offering that is program-branded and
leverages the transactional capabilities of the LCP. The third quarter of 2016
continued to demonstrate the product’s unique offering with the successful
launch of the Air Miles Travel Hub and the Hawaiian Airlines hotel booking
redemption program. These launches add to a growing list of loyalty program
partners participating on the new Points Travel Platform, including La Quinta
Returns and Air France-KLM’s Flying Blue program, both launched earlier in 2016.
Along with Miles & More, which was launched in pilot at the end of 2015 and
rolled out in early 2016, these new product launches represent a distinct
product offering to the world’s loyalty programs, further increasing the
addressable market opportunity for the Corporation by connecting loyalty with
the online travel vertical.
Development efforts during the first nine months of 2016 also
focused on advancing the Loyalty Wallet, a new product offering which management
views as a longer term growth opportunity for the Corporation. The Loyalty
Wallet facilitates the broad distribution of loyalty currencies, making it
easier for loyalty members to earn and use loyalty currencies in their preferred
channels with relevant transactions.
The Corporation’s core retailing business remains strong. In
the first quarter of 2016, the Corporation announced multi-year partnership
extensions with two of its larger principal partners, Southwest Airlines Rapid
Rewards and Air France-KLM’s Flying Blue programs. These partnership extensions,
combined with existing deals in place at the beginning of the year, represent
75% of 2015 revenue locked into long-term contracts. In addition, in the second
quarter of 2016, the Corporation launched the new principal partnership with
Shangri-La hotels, a premier hotel network that that operates hotels across
North America, Europe, Australia, China, and the Middle East. Through these new
contracts and contract extensions, Points will continue to power the BGT and
business incentive programs for these loyalty program partners.
7 of 23
With these multi-year partnerships secured, combined with a
positive market demand for newer products including Points Travel and Loyalty
Wallet, Management remains optimistic about the Corporation’s longer-term
ability to deliver improved profitability. However, the sales ramp associated
with these new products to date in 2016 has been slower than the expectations
management had for the year. In addition, a large retail incentive program
expected during the year was not executed in line with 2016 expectations. The
high-margin profile of these new services and one-off initiatives has moderated
management’s profitability expectations for this year, resulting in updated
financial guidance for the year ending December 31, 2016:
| • |
Revenue is expected to grow 10%
to 20% over 2015 |
| • |
Adjusted EBITDA is expected to be
flat to slightly down over 2015 |
As previously announced, beginning in 2016, the Company updated
its calculation of Adjusted EBITDA to adjust for the impact of share-based
compensation, to be more inline with peer and industry standards. Figures for
prior periods have been adjusted to reflect this in comparisons.
Lastly, Points reinitiated its Normal Course Issuer Bid
(“NCIB”) during the first quarter of 2016 to repurchase and cancel up to 764,930
of its common shares as part of its commitment to creating shareholder value.
The Corporation’s balanced capital allocation strategy leverages its strong
balance sheet to invest in growth opportunities while returning value to
shareholders.
RESULTS OF OPERATIONS
REVENUE, DIRECT COSTS AND GROSS PROFIT
Gross profit, 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 profit 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 Corporation’s 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 profit
dollars 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 to generate principal revenues earned under the reseller model,
which include the wholesale cost of loyalty currency paid to partners for the
purchase of such currency, and credit card processing fees.
8 of 23
| |
|
For the three months |
|
|
For the nine months |
|
| |
|
ended |
|
|
ended |
|
| (In thousands of US dollars) |
|
September |
|
|
September |
|
|
September |
|
|
September |
|
| (unaudited) |
|
30, 2016 |
|
|
30,
2015 |
|
|
30, 2016 |
|
|
30,
2015 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Principal revenue |
$ |
79,671 |
|
$ |
78,809 |
|
$ |
230,941 |
|
$ |
206,364 |
|
| Other partner revenue |
|
2,725 |
|
|
2,301 |
|
|
8,786 |
|
|
9,728 |
|
| Interest revenue |
|
46 |
|
|
23 |
|
|
139 |
|
|
56 |
|
| Total revenue |
|
82,442 |
|
|
81,133 |
|
|
239,866 |
|
|
216,148 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Direct cost of
principal revenue |
|
72,380 |
|
|
71,053 |
|
|
208,449 |
|
|
183,446 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross
profit1 |
$ |
10,062 |
|
$ |
10,080 |
|
$ |
31,417 |
|
$ |
32,702 |
|
| Gross margin2 |
|
12% |
|
|
12% |
|
|
13% |
|
|
15% |
|
1 Gross profit is a non-GAAP financial measure and
is defined as Total revenue less Direct cost of principal revenue. Refer to page
8 for definition and explanation.
2 Gross margin is a non-GAAP
financial measure and is defined as Gross profit as a percentage of Total
revenue.
Revenue and gross profit growth are dependent on various
factors, including the timing and size of promotional campaigns that are placed
in market by the Corporation, the growth in loyalty program partner’s membership
base, and the effectiveness of merchandising and marketing efforts and channels
initiated by the Corporation to generate incremental revenues.
The Corporation generated revenues of $82,442 for the three
months ended September 30, 2016, an increase of $1,309, or 2% over the third
quarter of 2015. The year over year increase in the third quarter was primarily
driven by organic growth of approximately 1% from existing partnerships, as the
promotional calendar in the third quarter of 2016 was slightly stronger for
certain principal partners relative to the prior year quarter. Revenues for the
nine month period ended September 30, 2016, increased $23,718 or 11% over the
comparable prior year period, due largely to organic growth from the
Corporation’s existing partnerships
Principal revenue for the third quarter of 2016 was $79,671, an
increase of $862 or 1% over the third quarter of 2015. During the three month
period ended September 30, 2016, organic growth across loyalty partners
contributed to the increase in principal revenue over the comparable quarter in
2015. On a year to date basis, principal revenue for the nine month period ended
September 30, 2016 increased $24,577 or 12% over the comparable prior year
period. The year to date increase in principal revenue was driven by strong
organic growth from the Corporation’s principal partners.
Other partner revenue for the third quarter of 2016 was $2,725,
and increased by $424 or 18%, over the third quarter of 2015. The increase is
primarily driven by growth in the core business and to a lesser extent,
incremental revenue from the new Points Travel product. Other partner revenue
for the nine month period ended September 30, 2016, decreased $942 or 10% over
the comparable prior year period. The year over year decrease was primarily due
to the departure of the US Airways BGT products at the end of the first quarter
of the prior year. Revenues from this partnership were recorded in other partner
revenue in the first quarter of 2015.
9 of 23
Gross profit for the third quarter of 2016 was $10,062,
consistent with the prior year quarter. Gross margin of 12% in the third quarter
of 2016 was consistent with the prior year quarter. The margin profile was
mainly attributed to promotional activities that were more heavily weighted
towards large reseller partnerships with a lower gross margin profile. Gross
margin for the nine months ended September 30, 2015, was 13% compared to 15% in
the comparable prior year period. The decrease was primarily due to the mix of
partner and product revenues relative to the prior year period, as well as the
departure of US Airways, which was recognized as other partner revenue in the
first quarter of 2015.
ONGOING OPERATING COSTS
| |
|
For the three months |
|
|
For the nine months |
|
| |
|
ended |
|
|
ended |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands of US dollars) |
|
September |
|
|
September |
|
|
September |
|
|
September |
|
| (unaudited) |
|
30, 2016 |
|
|
30,
2015 |
|
|
30, 2016 |
|
|
30,
2015 |
|
| Employment costs |
$ |
5,457 |
|
$ |
5,732 |
|
$ |
17,574 |
|
$ |
17,479 |
|
| Marketing and communications |
|
460 |
|
|
499 |
|
|
1,247 |
|
|
1,173 |
|
| Technology services |
|
446 |
|
|
357 |
|
|
1,236 |
|
|
988 |
|
| Operating expenses |
|
1,838 |
|
|
1,490 |
|
|
4,664 |
|
|
4,198 |
|
| Total ongoing operating costs |
$ |
8,201 |
|
$ |
8,078 |
|
$ |
24,721 |
|
$ |
23,838 |
|
Ongoing operating costs are predominantly cash-based
expenditures and include employment costs, marketing and communications
expenditures, technology service costs and operating expenses. The majority of
ongoing operating costs are predominantly in Canadian dollars, exposing the
Corporation to foreign exchange risk. To mitigate the impact of foreign exchange
volatility, management enters into foreign exchange forward contracts for the
majority of its predictable Canadian dollar expenditures on a rolling 12-month
basis.
Ongoing operating costs for the third quarter of 2016 increased
by $123 or 2%, compared to the prior year quarter. For the nine months ended
September 30, 2016, ongoing operating costs increased by $883 or 4% over the
comparable prior year period. The change reflects the increase in the office
expenses due to the relocation of the corporate head office. Expense increases
incurred in Canadian dollars were minimized by foreign exchange benefits, as the
Corporation’s CAD/USD exchange rate after the effects of hedging contracts was
more favourable in 2016 versus the same period in 2015. Further details of the
changes in ongoing operating costs are provided below.
Employment costs
Employment costs, including salaries and bonuses, employee
share-based compensation expenses, contract labour charges, recruiting, benefits
and other related taxes, are predominantly in Canadian dollars. Employment costs
of $5,457 in the third quarter of 2016 decreased by $275 or 5% over the third
quarter of 2015. For the nine months ended September 30, 2016, employment costs
increased $95 or 1% from the comparable prior year period.
10 of 23
Full-time employees (“FTEs”) in the third quarter of 2016 were
215, an increase of 18, from 197 in the third quarter of 2015. The increase
reflects additional resources added over the last twelve months, largely in the
areas of technology, product, and marketing. FTEs in the third quarter of 2016
included 20 contract and short term roles. New resource additions were made to
the Corporation’s San Francisco office and select hires in the Toronto head
office. Personnel in the San Francisco office were predominantly technology and
product based and focused on expanding the Corporation’s Loyalty Wallet and
Points Travel products.
The incremental employment costs for the nine months ended
September 30, 2016 associated with the increased FTEs were largely offset by
foreign exchange benefits from the Canadian dollar hedging contracts which were
more favourable in the first nine months of 2016 compared to the same period in
2015.
Included in employment costs are share-based compensation costs
of $389 and $1,747 for the three and nine months ended September 30, 2016,
respectively, that are excluded in the calculation of Adjusted EBITDA. The
Corporation has two share-based compensation plans for its employees and
directors: a share option plan and a share unit plan.
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 and communication costs for the third quarter of 2016
decreased by $39, or 8%, from the third quarter of 2015 due to the timing of
marketing activities. For the nine months ended September 30, 2016, marketing
and communications costs increased $74 or 6% versus the comparable prior year
period. These increases were mainly due to the increased promotional activities,
stronger publicity efforts and increased consumer research conducted during
2016.
Technology Services
Technology services include online hosting and managed
services, equipment rental, and software license fees. Technology service costs
for the third quarter of 2016 increased by $89, or 25%, from the prior year
quarter. For the nine months ended September 30, 2016, technology services costs
increased $248 or 25% versus the comparable prior year period. The year over
year increase was primarily attributable to increased cloud-based services, data
security costs, software licensing fees and infrastructure costs.
11 of 23
Operating Expenses
Operating expenses include office overhead, travel expenses,
professional fees and other costs associated with operations. Operating expenses
for the third quarter of 2016 increased by $348, or 23%, from the prior year
quarter. For the nine months ended September 30, 2016, operating expenses increased $466 or
11% versus the comparable prior year period. The increases observed were
primarily driven by the head office move and the new office lease agreement
which reflects current market rates.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure, which is
defined as earnings before income tax expense, depreciation and amortization,
share-based compensation and foreign exchange. Management excludes these items
because they could potentially distort the analysis of trends in business
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 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, 2016 |
|
|
30,
2015 |
|
|
30, 2016 |
|
|
30,
2015 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
$ |
335 |
|
$ |
768 |
|
$ |
2,159 |
|
$ |
4,204 |
|
| Income tax expense |
|
301 |
|
|
352 |
|
|
917 |
|
|
2,023 |
|
| Depreciation and amortization |
|
1,224 |
|
|
891 |
|
|
3,451 |
|
|
2,651 |
|
| Foreign exchange loss (gain) |
|
1 |
|
|
(9 |
) |
|
169 |
|
|
(14 |
) |
| Share-based compensation |
|
389 |
|
|
511 |
|
|
1,747 |
|
|
1,582 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted EBITDA1 |
$ |
2,250 |
|
$ |
2,513 |
|
$ |
8,443 |
|
$ |
10,446 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Profit2 |
$ |
10,062 |
|
$ |
10,080 |
|
$ |
31,417 |
|
$ |
32,702 |
|
| Adjusted
EBITDA1 as a % of Gross Profit2 |
|
22% |
|
|
25% |
|
|
27% |
|
|
32% |
|
1 Adjusted EBITDA is a non-GAAP financial measure.
Refer to page 11 for definition and explanation.
2 Gross profit
is a non-GAAP financial measure. Refer to page 8 for definition and explanation.
12 of 23
For the quarter ended September 30, 2016, the Corporation’s
Adjusted EBITDA was $2,250, a decrease of $263 or 10% from the third quarter of
2015. For the nine months ended September 30, 2016, Adjusted EBITDA was $8,443,
a decrease of $2,003 or 19% over the comparable prior year period. These
decreases were the result of decreased gross profit and increased ongoing
operating costs during the nine months ended September 30, 2016.
Adjusted EBITDA as a percentage of gross profit is viewed by
management as a key internal measure of operating efficiency. This measure
demonstrates the Corporation’s ability to generate profitability after it has
funded ongoing operating costs and strategic investments. For the quarter ended
September 30, 2016, Adjusted EBITDA as a percentage of gross profit was 22%, a
decrease from 25% in the prior year quarter, which is attributed to increased
operating costs related to our new head office lease and technology services.
For the nine months ended September 30, 2016, Adjusted EBITDA as a percentage of
gross profit was 27%, down from 32% in the comparable prior year period. The
year to date decrease was primarily due to a decrease in gross profit due to the
increased cost of promotional activity with the Corporation’s loyalty program
partners.
DEPRECIATION, AMORTIZATION AND INCOME TAX EXPENSES
| |
|
For the three months |
|
|
For the nine months |
|
| |
|
ended |
|
|
ended |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands of US dollars) |
|
September |
|
|
September |
|
|
September |
|
|
September |
|
| (unaudited) |
|
30, 2016 |
|
|
30,
2015 |
|
|
30, 2016 |
|
|
30,
2015 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
$ |
1,224 |
|
$ |
891 |
|
$ |
3,451 |
|
$ |
2,651 |
|
| Foreign exchange loss (gain) |
|
1 |
|
|
(9 |
) |
|
169 |
|
|
(14 |
) |
| Income tax expense |
|
301 |
|
|
352 |
|
|
917 |
|
|
2,023 |
|
| Total |
$ |
1,526 |
|
$ |
1,234 |
|
$ |
4,537 |
|
$ |
4,660 |
|
Depreciation and amortization expense
Depreciation and amortization expense in the third quarter of
2016 increased $333, or 37%, from the third quarter of 2015. For the nine months
ended September 30, 2016, depreciation and amortization expense increased $800
or 30% over the comparable prior year period. The increase from the prior year
periods was due to additional amortization incurred from internally developed
systems which became available for use throughout the second half of 2015 and
the first half of 2016, and the increased amortization of leasehold improvements
due to the revised termination date of the previous head office premises
lease.
13 of 23
Foreign exchange gain / loss
The Corporation is exposed to Foreign Exchange (“FX”) risk as a
result of transactions in currencies other than its functional currency, the US
dollar. FX gains and losses arise from the translation of the Corporation’s
balance sheet and expenses. The Corporation holds balances in foreign currencies
(e.g. non-US dollar denominated cash, accounts payable 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 at the period-end FX
rate. The net effect after translating the balance sheet accounts is recorded in
the condensed consolidated interim statement of comprehensive income for the
period.
The majority of the Corporation’s revenues in the third quarter
of 2016 were transacted in US dollars, EUROs and British Pound. 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 FX 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.
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 derivative’s 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
derivative’s gain or loss is recognized in current income. For the quarter ended
September 30, 2016, the Corporation reclassified a gain of $20, net of tax, from
other comprehensive income into net income (2015 - reclassified loss of $341,
net of tax, from other comprehensive loss into net income). The cash flow hedges
were effective for accounting purposes during the nine months ended September
30, 2016. Realized losses from the Corporation’s hedging activities, in 2016,
were driven by the changes in the relative strength of the U.S. dollar relative
to the Canadian dollar.
For the quarter ended September 30, 2016, the Corporation
recorded a foreign exchange loss of $1 compared with a foreign exchange gain of
$9 in the third quarter of 2015. Foreign exchange gains and losses fluctuate
from period to period due to movements in foreign currency rates.
14 of 23
Income Tax Expense
The Corporation is subject to tax in multiple jurisdictions and
assesses its taxable income to ensure eligible tax deductions are fully
utilized. The Corporation recorded an income tax expense of $301 for the quarter
ended September 30, 2016 compared to $352 in the prior year quarter. Income tax
expense was $917 for the nine months ended September 30, 2016 compared to $2,023
in the prior year period. This expense largely relates to the recognition of
current tax liabilities, as the Corporation generated taxable income in the
third quarter of 2016.
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, 2016 |
|
|
30,2015 |
|
|
30, 2016 |
|
|
30,
2015 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
$ |
335 |
|
$ |
768 |
|
$ |
2,159 |
|
$ |
4,204 |
|
| Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
$ |
0.02 |
|
$ |
0.05 |
|
$ |
0.14 |
|
$ |
0.27 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
$ |
0.02 |
|
$ |
0.05 |
|
$ |
0.14 |
|
$ |
0.27 |
|
The Corporation reported net income of $335 for the quarter
ended September 30, 2016 compared with net income of $768 for the quarter ended
September 30, 2015. The decrease from the prior year quarter was largely due to
the lower Adjusted EBITDA and increased depreciation and amortization charges,
partially offset by decreased income tax expense.
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 15,222,256 common shares for the quarter ended
September 30, 2016, compared with 15,528,928 common shares for the quarter ended
September 30, 2015. The Corporation reported basic earnings per share and
diluted earnings per share of $0.02 for the third quarter of 2016 compared with
basic earnings per share and diluted earnings per share of $0.05 for the third
quarter of 2015.
15 of 23
BALANCE SHEET VARIANCES
| Consolidated Balance Sheet Data as at |
|
September 30, |
|
|
December 31, |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
| (unaudited)
|
|
2016 |
|
|
2015 |
|
| Cash and cash equivalents |
$ |
47,832 |
|
$ |
51,364 |
|
| Restricted cash |
|
500 |
|
|
1,000 |
|
| Funds receivable from payment processors
|
|
7,275 |
|
|
6,588 |
|
| Accounts receivable |
|
4,140 |
|
|
2,988 |
|
| Prepaid expenses and other assets |
|
2,278 |
|
|
1,256 |
|
| Total current
assets |
$ |
62,025 |
|
$ |
63,196 |
|
| Property and equipment |
|
1,647 |
|
|
1,466 |
|
| Intangible assets |
|
17,451 |
|
|
18,616 |
|
| Goodwill |
|
7,130 |
|
|
7,130 |
|
| Deferred tax assets |
|
1,975 |
|
|
1,755 |
|
| Long-term investment |
|
5,000 |
|
|
5,000 |
|
| Other assets |
|
2,715 |
|
|
2,765
|
|
| Total non-current assets |
$ |
35,918 |
|
$ |
36,732 |
|
| |
|
|
|
|
|
|
| Accounts payable and accrued liabilities
|
$ |
6,195 |
|
$ |
5,808 |
|
| Payable to loyalty program partners |
|
43,720 |
|
|
49,526 |
|
| Current portion of other liabilities |
|
731 |
|
|
1,852 |
|
| Total current
liabilities |
$ |
50,646 |
|
$ |
57,186 |
|
| Deferred tax liabilities |
|
765 |
|
|
425 |
|
| Other liabilities
|
|
793 |
|
|
122
|
|
| Total non-current liabilities |
$ |
1,558 |
|
$ |
547 |
|
| |
|
|
|
|
|
|
| Total shareholders’ equity |
$ |
45,739 |
|
$ |
42,195 |
|
Cash and cash equivalents
The Corporation’s cash and cash equivalents balance decreased
$3,532 compared to the end of 2015. The decrease in cash and cash equivalents
was due to cash outflows related to the Corporation’s NCIB, increased investment
in capital assets and intangible assets, and changes in working capital
balances, partially offset by Adjusted EBITDA earned during the nine months
ended September 30, 2016. The Corporation’s cash and cash equivalents balance is
also impacted by the timing of loyalty partner transactions that can vary from
period to period.
Funds receivable from payment processors
The Corporation’s funds receivable from payment processors
balance increased $687 compared to the end of 2015, 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 period, and when
the receivable balances have not been settled in cash by payment processors for the increased credit card
transaction activity at period end.
16 of 23
Prepaid expenses and other assets
The Corporation’s prepaid expenses and other assets balance
increased $1,022 compared to the end of 2015. This increase was primarily the
result of incremental software licenses, a deposit for the lease on the new head
office premises and corporate insurance renewals as well as favourable
mark-to-market movements on the Corporation’s foreign exchange forward
contracts.
Accounts payable and accrued liabilities
The Corporation’s accounts payable and accrued liabilities
balance increased $387 compared to the end of 2015, and is primarily due to the
timing of payments including the Corporation’s annual employee incentives.
Payable to loyalty program partners
The Corporation’s payable to loyalty program partners balance
decreased $5,806 compared to the end of 2015, which is primarily attributable to
the timing of payments made to loyalty partners. The Corporation will typically
remit funds to loyalty program partners approximately 30 days after the month of
loyalty currency sales.
LIQUIDITY AND CAPITAL RESOURCES
| Consolidated Balance Sheet Data as |
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
| (In thousands
of US dollars)(unaudited) |
|
2016 |
|
|
2015
|
|
|
2015
|
|
| Cash and cash equivalents |
$ |
47,832 |
|
$ |
51,364 |
|
$ |
38,847 |
|
| Restricted cash |
|
500 |
|
|
1,000 |
|
|
1,282 |
|
| Funds receivable from payment processors |
|
7,275 |
|
|
6,588 |
|
|
5,533 |
|
| Total funds available |
|
55,607 |
|
|
58,952 |
|
|
45,662 |
|
| Payable to loyalty program partners |
|
43,720 |
|
|
49,526 |
|
|
35,632 |
|
| NET OPERATING
CASH1 |
$ |
11,887 |
|
$ |
9,426 |
|
$ |
10,030 |
|
| |
|
|
|
|
|
|
|
|
|
| Total current assets |
$ |
62,025 |
|
$ |
63,196 |
|
$ |
50,317 |
|
| Total current liabilities |
|
50,646 |
|
|
57,186 |
|
|
42,286 |
|
| WORKING
CAPITAL2 |
$ |
11,379 |
|
$ |
6,010 |
|
$ |
8,031 |
|
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 Corporation’s 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.
2 Management defines “Working Capital” as ‘Total current assets’
less ‘Total current liabilities’.
17 of 23
The Corporation’s financial strength is reflected in its
balance sheet. As at September 30, 2016, the Corporation continues to remain
debt free with $11,887 of net operating cash. Net operating cash increased
$2,461 from December 31, 2015. The increase is primarily due to Adjusted EBITDA
of $8,443 generated in the nine month period ended September 30, 2016, partially
offset by capital and intangible asset additions in the amount of $2,467, cash
used for NCIB share repurchases in the amount of $1,153, the deposit of $325 for
the new head office lease, and changes in other working capital balances.
The Corporation’s working capital (defined as current assets
minus current liabilities) was $11,379 at September 30, 2016 compared to working
capital of $6,010 as at December 31, 2015. Working capital increased primarily
due to Adjusted EBITDA generated during the nine month period ended September
30, 2016, slightly offset by investing and financing activities during the
period. 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.
On June 23, 2016, the Corporation amended its bank credit
facility agreement with Royal Bank of Canada. As at September 30, 2016, the
following two facilities are available until May 31, 2017. The first facility is
a revolving operating facility in the amount of $8,500. The second facility is a
term loan facility of $5,000 to be used solely for the purposes of financing the
cash consideration relating to acquisitions made by the Corporation. The term
loan facility of $7,000 to fund repurchases of the Corporation’s common shares
expired unutilized on March 8, 2016 and was not renewed. No amounts have been
drawn to date under these facilities.
Sources and Uses of Cash
| |
|
For the three months ended |
|
|
For the nine months ended |
|
| (In thousands of US dollars) |
|
September |
|
|
September |
|
|
September |
|
|
September |
|
| (unaudited) |
|
30, 2016 |
|
|
30,
2015 |
|
|
30, 2016 |
|
|
30,
2015 |
|
| Operating activities |
$ |
(5,938 |
) |
$ |
763 |
|
$ |
(868 |
) |
$ |
8,068 |
|
| Investing activities |
|
(1,037 |
) |
|
(968 |
) |
|
(1,967 |
) |
|
(2,245 |
) |
| Financing activities |
|
(478 |
) |
|
(1,810 |
) |
|
(1,148 |
) |
|
(4,608 |
) |
| Effects of
exchange rates |
|
(86 |
) |
|
327 |
|
|
451 |
|
|
764 |
|
| Change in cash and cash equivalents |
$ |
(7,539 |
) |
$ |
(1,688 |
) |
$ |
(3,532 |
) |
$ |
1,979 |
|
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. The Corporation experienced a
18 of 23
decrease in cash from operating activities on a quarterly basis
primarily due to the timing of payments to loyalty program partners.
Investing Activities
Cash used in investing activities during the third quarter of
2016 included internally developed systems and the purchase of capital assets.
Development efforts in the second quarter included additional development
features to enable the technological scalability of the LCP and the advancement
of the Loyalty Wallet and Points Travel products. For the remainder of 2016, the
Corporation will continue to focus a significant amount of its development
resources on adding new capabilities to the LCP and its consumer product
innovations.
Financing Activities
Cash flows used in financing activities for the three and nine
month periods ended September 30, 2016 were primarily related to the NCIB share
repurchases which was reinitiated in March 2016.
Contractual Obligations and Commitments
| |
|
Total |
|
|
Year 1(3) |
|
|
Year 2 |
|
|
Year 3 |
|
|
Year 4 |
|
|
Year |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5+
|
|
| Operating
leases(1) |
$ |
7,505 |
|
$ |
1,070 |
|
$ |
1,359 |
|
$ |
1,350 |
|
$ |
1,174 |
|
$ |
2,552 |
|
| Principal revenue(2) |
|
507,033 |
|
|
29,853 |
|
|
169,825 |
|
|
171,381 |
|
|
135,937 |
|
|
37
|
|
|
$ |
514,538 |
|
$ |
30,923 |
|
$ |
171,184 |
|
$ |
172,731 |
|
$ |
137,111 |
|
$ |
2,589 |
|
(1) The Corporation is obligated under various non-cancellable
operating leases for premises and equipment and service agreements for web
hosting services.
(2) For certain loyalty partners, 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 each interim reporting date and at the
end of each contract year, to determine if the guarantee will be met for that
respective contract year.
(3) The guarantees and commitments schedule is prepared on a
rolling 12-month basis. Principal revenue contract guarantees are excluded from
the commitments table once the minimum threshold is surpassed as the
Corporation’s contractual commitment is satisfied.
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 partners. Under this type of guarantee,
in the event that the sale of loyalty program currencies 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 a balance in prepaid and other assets of $2,891
on the consolidated balance sheet representing mileage reward currencies held
for future resale.
Transactions with Related Parties
Certain members of the Board of Directors, or their related
parties, hold positions in other companies that result in them having control or
significant influence within those companies. Two of these companies transacted with the
Corporation during the year. The terms and conditions of these transactions are
consistent with those conducted with third parties at arm’s length. The amounts
owing are unsecured, interest-free and due for payment under normal payment
terms from the date of the transaction.
19 of 23
The Corporation incurred the following amounts relating to
these transactions as follows:
| |
|
Transaction values for the three |
|
|
Transaction values for the nine |
|
| |
|
months ended September 30, |
|
|
months ended September 30, |
|
| |
|
2016 |
|
|
2015 |
|
|
2016 |
|
|
2015 |
|
| Marketing expenses |
$ |
22 |
|
$ |
25 |
|
$ |
67 |
|
$ |
75 |
|
| Technology
services expenses |
$ |
- |
|
$ |
- |
|
$ |
3 |
|
$ |
- |
|
The Corporation has an investment in China Rewards which allows
it to elect one member of the Board of Directors. As at September 30, 2016, the
Corporation had a receivable of $93 from China Rewards (December 31, 2015: $93).
The transactions are in the normal course of operations and are measured at the
exchange amount, which is the amount of consideration established and agreed to
by the related parties.
Cash from Exercise of Options
Certain options are due to expire within 12 months from the
date of this MD&A. If exercised in full, issued and outstanding common
shares will increase by 88,702 shares.
Securities with Near-Term Expiry Dates –
Outstanding Amounts as at November 2, 2016 (figures in CAD$).
| Security Type |
Expiry date |
Number |
Exercise Price |
| Option |
December 2, 2016
|
1,000 |
9.02 |
| Option |
March 19, 2017 |
85,217 |
9.74 |
| Option |
August 17, 2017
|
607 |
12.27 |
| Option |
September 28, 2017 |
1,878
|
11.00
|
| Total |
|
88,702 |
|
OUTSTANDING SHARE DATA
As of November 2, 2016, the Corporation has 15,167,074 common
shares outstanding.
As of the date hereof, the Corporation has outstanding options
to acquire up to 724,995 common shares. The options have exercise prices ranging
from $9.02 to $30.84 with a weighted average exercise price of $15.24. The
expiration dates of the options range from December 2, 2016 to August 22, 2021.
The following table lists the common shares issued and
outstanding as at November 2, 2016 and the securities that are currently
convertible into common shares along with the maximum number of common shares
issuable on conversion or exercise.
20 of 23
| |
Common Shares |
Proceeds |
| Common Shares Issued &
Outstanding |
15,167,074 |
|
| Convertible Securities: Share options |
724,995 |
CAD$
11,049,184 |
| Common Shares Issued & Potentially Issuable |
15,892,069 |
CAD$ 11,049,184 |
| Securities Excluded from Calculation: |
|
|
| Options Available to grant from
ESOP(1) |
804,865 |
|
(1) “ESOP” is defined as the Employee Stock Option
Plan. The number of options available to grant is calculated as the total share
option pool less the number outstanding share options.
SUMMARY OF QUARTERLY RESULTS
(in thousands of US dollars, except per share
amounts)
| Three month period |
Total |
|
Basic earnings |
Diluted earnings |
| ended |
Revenue |
Net income |
per share |
per share |
| September 30, 2016 |
$ 82,442 |
$ 335 |
$ 0.02 |
$ 0.02 |
| June 30, 2016 |
83,864 |
931 |
0.06 |
0.06 |
| March 31, 2016 |
73,560 |
893 |
0.06 |
0.06 |
| December 31, 2015 |
80,228 |
961 |
0.06 |
0.06 |
| September 30, 2015 |
81,133 |
768 |
0.05 |
0.05 |
| June 30, 2015 |
67,898 |
1,721 |
0.11 |
0.11 |
| March 31, 2015 |
67,117 |
1,715 |
0.11 |
0.11 |
| December 31, 2014 |
|
|
0.10 |
0.09 |
| |
64,841 |
1,468 |
|
|
Through years of successfully building and expanding
partnerships with loyalty programs around the world, and deepening its
understanding of loyalty program membership bases, the Corporation has built a
reputation of being a leading provider of e-commerce solutions for the global
loyalty rewards industry. Since inception, the Corporation has worked to gain
the trust of loyalty rewards programs of leading businesses in many industries.
In its earlier years, the Corporation focused its attention on developing
relationships with companies in the airline industry in the US and in Europe. In
more recent years, the Corporation has focused on diversifying its loyalty
program partnership base, and has placed attention on other industries which are
growing and include the hotel loyalty industry, financial services industry, and
the speciality retail sector. Through the addition of new partnerships year
after year, the Corporation has been able to generate increased revenues on a
consistent basis. In addition to this, the Corporation has been able to grow
revenues with existing partnerships year over year, as it increases its
understanding of loyalty program members through the use of direct marketing
techniques and effective consumer analytics. In addition, revenue growth has
come from the ability to sell additional loyalty products and services to existing partners. Generally,
increases in transaction levels, revenues and gross profit will drive higher
overall profitability.
21 of 23
The Corporation’s revenues are primarily impacted by retention
of existing partnerships and products, new partnerships and products launched
during the year, and the level and type of promotional activity offered to
loyalty program members during the year. In the absence of any new partner or
products launched, quarterly revenues will be impacted by the level of marketing
and promotional activity carried out with loyalty program members which will
vary quarter over quarter. Historically, revenues are highest in the fourth
quarter in each year as redemption volumes and promotional activity typically
peak at this time, however this is dependent on changes in the Corporation’s
partnership base and effectiveness of promotional activity.
The Corporation’s net income will reflect the growth in gross
profit relative to the growth in expenses. Since 2013, the Corporation has
gradually increased investments intended to advance its LCP. Beginning in 2014,
additional investments were made, including the acquisition of Accruity Inc.,
that have focused on expanding the new product offerings, such as Points Travel
and the Loyalty Wallet. These increased investment levels have resulted in
increased ongoing operating costs, however the Corporation anticipates these
investments will generate positive return to the Corporation in future
periods.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
For the Corporation’s accounting policies and critical
accounting estimates and judgments, refer to the Corporation’s MD&A and
consolidated financial statements for the year ended December 31, 2015. The
preparation of the consolidated financial statements in accordance with IFRS,
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. Significant changes in these assumptions, including those
related to our future business plans and cash flows, could materially change the
amounts we record. Actual results may differ from these estimates.
The IASB has issued new standards and amendments to existing
standards. These changes have not yet been adopted by Corporation and could have
an impact on future periods.
| • |
IFRS 15, Revenue from Contracts
with Customers (effective January 1, 2018); |
| • |
IFRS 9, Financial Instruments
(effective January 1, 2018); and |
| • |
IFRS 16, Leases (effective
January 1, 2019). |
These changes are described in detail in the Corporation’s 2015
annual report. The Corporation is assessing the impacts of the above standards
on its condensed consolidated interim financial statements. In addition, the
Corporation intends to adopt the amendments to IFRS 2 in its financial
statements for the annual period beginning on January 1, 2018. The Company does
not expect the standard to have a material impact on the financial statements.
22 of 23
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 Corporation’s
annual MD&A for the year ended December 31, 2015. There have been no changes
to the risks and uncertainties during the quarter ended September 30, 2016.
MANAGEMENT’S REPORT ON DISCLOSURE CONTROLS AND 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 Corporation’s internal control over financial reporting
during the quarter ended September 30, 2016 that have materially affected, or
are reasonably likely to materially affect, the Corporation’s internal control
over financial reporting.
23 of 23
