UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2015 | Commission File Number 0-51509 |
POINTS INTERNATIONAL LTD.
(Exact name of Registrant as specified in its charter)
Canada
(Province or other jurisdiction of
incorporation or organization)
7389
(Primary Standard Industrial
Classification Code Number)
Not Applicable
(I.R.S. Employer Identification
Number)
171 John Street, 5th Floor
Toronto, Ontario, Canada M5T 1X3
Tel. (416) 595-0000
(Address and telephone number of Registrants principal executive
offices)
CT Corporation System
111 Eighth Avenue,
13th Floor
New York, NY 10011
Tel. (212)
894-8400
(Name, address (including zip code) and telephone number
(including area code) of agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Name of each exchange on which registered |
Common Shares, no par value | NASDAQ Capital Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities registered or to be registered pursuant to Section 15(d) of the Act:
None
(Title of Class)
For annual reports, indicate by check mark the information filed with this Form:
Annual information form [X] | Audited annual financial statements [X] |
Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report: 15,306,402 as of December 31, 2015.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] | No [ ] |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes [ ] | No [ ] |
CERTIFICATIONS
See Exhibits 99.4 and 99.5 to this Annual Report on Form 40-F.
DISCLOSURE CONTROLS AND PROCEDURES
The conclusion of the Registrants Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the Registrants disclosure controls and procedures is included in Managements Discussion and Analysis under the heading Disclosure Controls and Procedures and is filed herewith as Exhibit 99.3 and incorporated herein by reference.
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MANAGEMENTS ANNUAL REPORT ON
INTERNAL CONTROL
OVER FINANCIAL REPORTING
Managements annual report on internal control over financial reporting is included in Managements Discussion and Analysis under the heading Managements Report on Internal Control Over Financial Reporting and is filed herewith as Exhibit 99.3 and incorporated herein by reference.
ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
The attestation report of KPMG LLP with respect to the Registrants internal control over financial reporting is included with the Audited Consolidated Financial Statements of the Registrant for the fiscal year ended December 31, 2015 filed herewith as Exhibit 99.2 and incorporated herein by reference.
NOTICES PURSUANT TO REGULATION BTR
None.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors of the Registrant has determined that Mr. Douglas Carty is (i) an audit committee financial expert (as such term is defined in paragraph 8(b) of General Instruction B to Form 40-F) and (ii) independent (as such term is defined in the rules of the NASDAQ Capital Market).
CODE OF ETHICS
The Registrant has adopted a code of ethics (as such term is defined in paragraph 9 of General Instruction B to Form 40-F) that applies to its employees, including its principal executive officer, principal financial officer and controller. The code of ethics is available at the Registrants website at www.pointsinternational.com and is available in print to any shareholder upon written request to the Secretary of the Registrant at the address listed on the first page of this Annual Report on Form 40-F.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate audit fees, audit-related fees, tax fees and all other fees (as such terms are defined in paragraph 10 of General Instruction B to Form 40-F) billed by the Registrants external auditor in each of the last two fiscal years is disclosed in the Registrants 2015 Annual Information Form under the heading Audit Committee External Auditor Service Fees and is filed herewith as Exhibit 99.1 and incorporated herein by reference.
PRE-APPROVAL POLICIES AND PROCEDURES
A description of the audit committees pre-approval policies and procedures is disclosed in the Registrants 2015 Annual Information Form under the heading Audit Committee Audit Committee Pre-Approval Policies and Procedures and is filed herewith as Exhibit 99.1 and incorporated herein by reference.
OFF-BALANCE SHEET ARRANGEMENTS
The Registrant has no off-balance sheet arrangements (as such term is defined in paragraph 11 of General Instruction B to Form 40-F) required to be disclosed in this Annual Report on Form 40-F.
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TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The Registrants contractual obligations as of December 31, 2015 are disclosed in the notes to the 2015 Audited Consolidated Financial Statements and in Managements Discussion and Analysis for the fiscal year ended December 31, 2015 under the heading Liquidity and Capital Resources Contractual Obligations and Commitments, each of which are filed herewith as Exhibits 99.2 and 99.3 respectively and incorporated herein by reference.
IDENTIFICATION OF AUDIT COMMITTEE
The Registrant has a separately standing audit committee established in accordance with 3(a)(58)(A) of the Exchange Act. The members of the audit committee as of the date of this filing are: Mr. Douglas Carty (Chair), Mr. Bernay Box and Mr. John Thompson.
DISCLOSURE PURSUANT TO THE REQUIREMENTS OF THE NASDAQ STOCK MARKET
As a foreign private issuer under the Exchange Act, the Registrant is permitted under NASDAQ Rule 5615(a)(3) to follow its home country practice in lieu of certain NASDAQ corporate governance standards. In order to claim such exemption, the Registrant must disclose the NASDAQ corporate governance standards that it does not follow and describe the home country practice that it follows in lieu of such standards. A description of the significant ways in which the Registrants governance practices differ from those followed by domestic companies follows:
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Rule 5620(c) of the NASDAQ Rules requires a quorum of no less than 33-1/3% of the outstanding shares of common stock at any meeting of the holders of common stock. Following Canadian practice, a quorum for meetings of the holders of the Registrants common stock is no less than 15% of the total number of the issued shares of the Corporation entitled to vote at the meeting. | |
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Rule 5605(d)(1) of the NASDAQ Marketplace Rules requires that each listed company adopt a formal written compensation committee charter that specifies, among other things, the compensation committee s responsibilities and authority, as set forth in Listing Rule 5605(d)(3). The Registrant has adopted a formal written mandate setting out the duties and responsibilities of its Human Resources and Corporate Governance Committee (the HRCGC). Among other things, such mandate includes recommending for approval by the board the compensation of the chief executive officer, but not of all other executive officers. However, as a matter of practice the HRCGC recommends for approval by the board the compensation of all executive officers. The mandate also does not specify that the chief executive officer may not be present during voting or deliberations on his or her compensation, although, as a matter of practice, the HRCGC does not permit the chief executive officer to be present during such voting or deliberations. In addition, such mandate does not specify the specific compensation committee responsibilities and authority set forth in Rule 5605(d)(3). The Registrants practices with regard to these requirements are permitted by Canadian law. |
UNDERTAKING
Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report on Form 40-F to be signed on its behalf by the undersigned, thereto duly authorized.
POINTS INTERNATIONAL LTD. | |||
By: | /s/ Robert MacLean | ||
Name: | Robert MacLean | ||
Title: | Chief Executive Officer | ||
Date: | March 2, 2016 |
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EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 40-F:
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POINTS INTERNATIONAL LTD.
Annual Information Form
March 2, 2016
Information presented herein is current as of March 2, 2016, unless otherwise indicated. All dollar amounts are in United States Dollars unless otherwise indicated.
Table of Contents
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The following Annual Information Form (AIF) of Points International Ltd. (which is also referred to herein as Points or the Corporation) should be read in conjunction with the Corporations audited consolidated financial statements (including the notes thereon) for the year ended December 31, 2015 (2015 Audited Consolidated Financial Statements). Further information, including Points Management Discussion and Analysis for the year ended December 31, 2015 (2015 MD&A), may be accessed at www.sedar.com or www.sec.gov.
CORPORATE STRUCTURE
Points International Ltd. is a corporation continued under the Canada Business Corporations Act. The head and registered office of the Corporation is 171 John Street, 5th Floor, Toronto, Ontario, M5T 1X3.
The Corporation has four wholly-owned direct subsidiaries: (a) Points.com Inc., a corporation amalgamated under the Business Corporations Act (Ontario), (b) Points International (UK) Limited, a company incorporated under the laws of the United Kingdom, (c) Points International (U.S.) Ltd., a corporation incorporated under the laws of the State of Delaware, and (d) Points Development US Ltd. (formerly Accruity Inc.), a corporation incorporated under the laws of the State of Delaware.
GENERAL DEVELOPMENT OF THE BUSINESS
In June 2013, the Corporation launched its partnership with Southwest Airlines, a leading US Airline that provides customers with flights to the United States, Mexico and Caribbean. This partnership helped the Corporation to extend its presence in the United States airlines industry, and this partner is expected to generate significant revenues for the Corporation in future years.
In 2014, the Corporation launched or announced 43 products and added nine new partners to its Loyalty Commerce Platform.
In April 2014, the Corporation purchased all of the common and preferred shares of Accruity Inc. for cash consideration of approximately $ 2.0 million. Approximately $375,000 of the purchase price was held back at the time of closing and was to be released to the sellers one year post-closing to the extent not used to satisfy any purchase price adjustments or indemnity claims. The held back amount was subsequently paid to the Accruity shareholders in accordance with the terms and conditions of the purchase agreement. Accruity was the San Francisco based start-up operator of the PointsHound loyalty-based hotel booking service. Following the completion of the acquisition, Accruitys name was changed to Points Development US Ltd. The Corporation anticipates building on the new relationships gained in the acquisition, which will help the Corporation progress on its long term growth objectives. Further to these objectives, in October 2014, PointsHound and Asia Miles, Asias leading travel and lifestyle reward program, formed a partnership providing Asia Miles members greater benefits on hotel stays booked through PointsHound.com.
In December 2014, the Corporation entered into a new long-term principal relationship with United Airlines subsidiary MileagePlus to power its Buy, Gift and Transfer and Reinstate Miles, and several other ancillary products available to MileagePlus members. This agreement with United Airlines MileagePlus is the Corporations broadest and most comprehensive strategic relationship to date.
In conjunction with the United Airlines MileagePlus agreement, in December 2014, the Corporation acquired substantially all of the assets of Crew Marketing International, Inc. (Crew Marketing), a long-time United Airlines MileagePlus technology vendor. Pursuant to the purchase agreement for the acquisition (the Crew Purchase Agreement), the purchase price payable thereunder by the Corporation is $14.75 million in cash and the issuance of 238,393 common shares of the Corporation. On closing, the Corporation paid $14.5 million in cash and issued the 238,393 common shares. In accordance with the terms of the Crew Purchase Agreement, the balance of the cash consideration ($250,000) was held back by the Corporation in support of certain obligations of the Vendor under the Crew Purchase Agreement. The held back amount was paid to the Vendor on January 29, 2015, in accordance with the terms and conditions of the Crew Purchase Agreement. The common shares were issued into escrow and will be released to Crew Marketing 18 months post-closing, subject to typical indemnities to the benefit of the Corporation.
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In March 2015, the Corporation noted that the previously announced consolidation of American Airlines AAdvantage and US Airways Dividend Miles programs had resulted in these programs representing a smaller portion of the Corporations business.
In March 2015, the Corporation announced an issuer bid pursuant to which the Corporation has the ability to repurchase up to 782,504 of its common shares (the 2015 Repurchase), representing approximately 5% of its issued and outstanding shares as at February 25, 2015. The 2015 Repurchase commenced on March 9, 2015, terminates on March 8, 2016 and is be subject to the Corporations normal trading blackout periods. Pursuant to the 2015 Repurchase, the Corporation has purchased 446,894 common shares, all for cancellation. On March 2, 2016 the Corporation announced an additional issuer bid pursuant to which the Corporation has the ability to repurchase up to 765,320 of its common shares (the 2016 Repurchase), representing approximately 5% of its issued and outstanding common shares as of February 23, 2016. The 2016 Repurchase is expected to commence on March 9, 2016 and terminate on March 8, 2017 and is subject to the Corporations normal trading blackout periods.
In May 2015, the Corporation launched its partnership with Hainan Airlines Co. (Hainan), the largest privately owned air transport company, and fourth largest airline in terms of fleet size, in the Peoples Republic of China. The partnership with Hainan supports Points expansion into the Chinese travel market. Also in May, 2015 PointsHound announced new strategic partnerships with several of Europe, the Middle East and Africas leading frequent flyer programs including Alitalia MilleMiglia, Virgin Atlantic Flying Club, and Finnair Plus.
In September 2015, the Corporation announced a redesigned Points.com, now the Points Loyalty Wallet, which allows users to track, manage and access multiple loyalty rewards programs wherever they are. The Points Loyalty Wallet is a set of platform capabilities accessible via application program interfaces (APIs) that allow loyalty programs, merchants and other interested businesses to embed balance tracking and loyalty commerce transactions into their product offerings whether on the web or in an app, and allow users to track, manage and access multiple loyalty rewards programs.
In November 2015, the Corporation announced new partnerships with the Royal Bank of Canada (RBC) and with Suretap Wallet LP (Suretap). RBC and Suretap will leverage the Points Loyalty Wallet by embedding the Corporations loyalty functionality into their wallet offerings. Through these partnerships, powered by the Points loyalty network, RBC and Suretap users can store loyalty information from more than 100 global loyalty rewards programs, making it easier to earn and use loyalty rewards. The addition of a loyalty section into these digital wallets provides participating loyalty programs with additional exposure to digital wallet users and provides current program members with new ways to earn and use their loyalty rewards.
Also in November 2015, the Corporation launched Points Travel, the first private label travel e-commerce platform designed specifically for the loyalty industry. The Points Travel platform helps loyalty programs increase their revenues from hotel sales, while offering new value to loyalty program members. In conjunction with this announcement, the Corporation announced that a new partnership with Miles & More, Europes largest frequent flyer program and the loyalty program for Lufthansa and nine other European airlines.
GENERAL DESCRIPTION OF THE BUSINESS
The Corporation operated in one segment in 2015.
Summary
The Corporation provides a range of e-commerce and technology services to loyalty program operators using a common proprietary infrastructure. These services are comprised of a wide range of white label or private branded e-commerce services (referred to by the Corporation as its Loyalty Currency Services) that enable the sale of loyalty currencies (such as frequent flyer miles, hotel points and credit card points), both retail and wholesale, and enhance loyalty program consumer offerings and their back end operations. The Corporation also offers the consumer focused Points Loyalty Wallet that allows users to track, manage and access multiple loyalty rewards programs via the Points.com website.
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The core Loyalty Currency Services provided by the Corporation are: (a) the online sale of loyalty currency direct to program members in order for the members to top-up their accounts to reach a redemption threshold or as a gift for friends and family members; and (b) the online transfer of pre-existing loyalty currency from one member into another members account, typically a family member or friend, as another means of enabling that other member to accumulate sufficient miles or points to reach a redemption threshold.
The Points Loyalty Wallet is a set of platform capabilities accessible via APIs that allow loyalty programs, merchants and other interested businesses to embed balance tracking and loyalty commerce transactions into their product offerings whether on the web or in an app, and allow users to track, manage and access multiple loyalty rewards programs. The Points Loyalty Wallet offers members of multiple loyalty programs the ability to track and manage their loyalty currencies much like their financial assets. Through this platform, users are able to use their loyalty currencies to conduct unique redemptions into retail goods or gift certificates, trade their loyalty currencies with other Points Loyalty Wallet users, and exchange their loyalty currencies into other participating loyalty programs. To facilitate these transactions, the Corporation has agreements with participating loyalty program operators.
The Corporation also operates the PointsHound.com website, a hotel booking engine and loyalty currency aggregator built specifically for frequent travelers. PointsHound.com 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.
In late 2015 the Corporation launched Points Travel, the first private label travel e-commerce platform designed specifically for the loyalty industry. The Points Travel platform helps loyalty programs increase their revenues from hotel sales, while offering new value to loyalty program members by accelerating loyalty program earnings.
The majority of the Corporations loyalty program partners operate in the United States. The Corporation also has a significant European customer base.
Method of Providing Services
The Corporations services are generally delivered through web-enabled e-commerce solutions.
Specialized Skill and Knowledge
The Corporation currently employs seven executive officers. The current executive team possesses many years of loyalty industry experience, and has managed large loyalty programs, sales forces, marketing departments and technology systems. The success of the Corporation is dependent upon the experience of such key personnel and loss of such personnel could adversely affect the Corporations business, operations and prospects.
In addition, the Corporations services are delivered using proprietary technology. As a result, the Corporation is also dependent upon its ability to retain talented and highly skilled information technology professionals to maintain, build and operate the technology infrastructure. The loss of these individuals and the inability to attract and retain highly qualified employees could have a material adverse effect on the Corporations business, revenues, operating results and financial condition.
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Competitive Conditions
With respect to the Points Loyalty Wallet, several indirect competitors are currently in the market with limited product offerings. Other Internet websites that offer financial and account aggregation and management are potential competitors. These indirect and potential competitors currently offer a product similar to the balance tracking features available through the Points Loyalty Wallet, but do not offer any of the transaction options available through the Points Loyalty Wallet, such as the ability to exchange currency from one program to another or trade currency with other users. Management believes that none of these competitors are actively partnering with loyalty programs to independently provide a service similar to the Points Loyalty Wallet. Rather, these indirect competitors are only able to retrieve and display member account information. However, it is possible that one or more of the indirect or potential competitors could, in the future, compete directly with the Points Loyalty Wallet.
PointsHound.com and the Points Travel platform also face direct and indirect competition from other hotel booking engines and hotel booking solutions. These indirect and potential competitors currently offer a product similar to the hotel booking features available through PointsHound.com and the Points Travel platform, but do not offer the same value proposition that the Corporation can leverage through its core Loyalty Currency Services.
The Corporation must compete with a wide range of companies that seek to provide business solutions technology, from small companies to large. Many existing and potential competitors do or could have greater technical or financial resources than the Corporation. The financial performance of the Corporation may be adversely affected by such competition. In particular, no assurances can be given that additional direct competitors to the Corporation may not be formed or that the Corporation may not lose some or all of its arrangements with its loyalty program partners, including its key loyalty program partners, thereby decreasing its ability to compete and operate as a viable business.
Loyalty partners may have, or may develop, in-house business solutions departments that could take responsibility for work currently being done by the Corporation. The consolidation of American Airlines AAdvantage and US Airways Dividend Miles programs resulted in the departure of their buy gift and transfer products. To date, the Corporation has been able to more than offset the loss of this business with the addition of new principal partnerships and organic growth. However, further development of in-house solutions could impact the Corporation in a negative way and reduce its ability to compete and operate as a viable business.
Any competition or adverse change in the business relationships described above could have a material adverse impact on the Corporations business, operations and prospects.
New Products
In fiscal 2015, the Corporation announced a redesigned Points.com, now the Points Loyalty Wallet, which allows users to track, manage and access multiple loyalty rewards programs via the Points.com website. The Points Loyalty Wallet is a set of platform capabilities accessible via APIs that allow loyalty programs, merchants and other interested businesses to embed balance tracking and loyalty commerce transactions into their product offerings whether on the web or in an app.
The Corporation also launched Points Travel, the first private label travel e-commerce platform designed specifically for the loyalty industry. The Points Travel platform helps loyalty programs increase their revenues from hotel sales, while offering new value to loyalty program members by accelerating loyalty program earnings.
Management believes that there is a tremendous opportunity in offering fully-sanctioned loyalty program transactions to third parties, and anticipates that the Points Loyalty Wallet and the Points Travel products will significantly increase the addressable market opportunity for the Corporation. Through mobile wallets, mobile apps, online travel and retail services, or point of sale providers, facilitating the interaction between relevant channels and the loyalty industry will offer significant engagement and monetization opportunities for both Points and its partners. As a result, the Corporation intends to continue to invest in the optimization of these product offerings and the scale of the loyalty commerce platform to pursue longer term growth.
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Intangible Property
The Corporation has built a significant brand and reputation around the Points.com name. The Corporations operating subsidiary, Points.com Inc., maintains certain trademark registrations for POINTS.COM which provides it with certain exclusive rights. These registrations are renewable in perpetuity. The Corporation also maintains a portfolio covering certain other trademarks. Although management believes the trademark portfolio is valuable, the portfolio is not considered to be critical to the success of the Corporations business.
As a technology supported business, the Corporation maintains a significant software base that is continually evolving. This software base is critical to the operation of the business.
The Corporation has two issued patents: US Patent No. 8,595,055 titled an Apparatus and method of facilitating the exchange of points between selected entities, and US Patent No. 8,433,607 titled a System and method for exchanging reward currency. Both patents relate to the Corporations website at www.points.com and the exchange and trade functions available on that site. The Corporation also maintains a patent application portfolio covering certain other inventions. Although management believes the patent portfolio is valuable, the portfolio is not considered to be critical to the success of the Corporations business.
Seasonality
The Corporations operations are moderately influenced by seasonality. The Corporation experiences higher activity in November and December through the Points Loyalty Wallet and other ancillary redemption products as its members redeem their miles or points for gift certificates before the December holidays.
The Corporations financial performance is also significantly impacted by the timing of promotions run by Points on behalf of its loyalty program partners in respect of its Loyalty Currency Services business.
Economic Dependence
The Corporation is dependent on the loyalty industry in general and is highly dependent on the viability of certain key loyalty program partners. For the year ended December 31, 2015, there were three loyalty program partners for which sales to their members individually represented more than 10% of the Corporations total revenue. In aggregate these three partners represented 67% of the Corporations total revenue. The loss of any one or more of the Corporations key loyalty program partners could have a material adverse effect on the Corporations business, revenues, operating results and financial condition. It should be noted that, in respect of the Corporations Principal Revenue (as defined in the Corporations consolidated financial statements) the Corporation transacts directly with loyalty program members and does not generate material revenue directly from loyalty partners.
Changes to Contracts
There can be no assurance that the Corporation will be successful in maintaining its existing contractual relationships with its loyalty program partners. The Corporations loyalty program partners have in the past, and may in the future, negotiate arrangements that are short-term and subject to renewal, non-exclusive and/or terminable at the option of the partner on relatively short notice without penalty. Loyalty program partners that have not provided a long-term commitment or guarantee of exclusivity, or that have the ability to terminate on short notice, may exercise this flexibility to end their relationship with the Corporation or to negotiate from time to time more preferential financial and other terms than originally contracted for. The Corporation cannot ensure that such negotiations will not have an adverse effect on the financial condition or results of operations of the Corporation.
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Employees
As at December 31, 2015, the Corporation had 181 full-time employees.
RISK FACTORS
Investing in Internet-based businesses can have a high degree of business risk. In addition to the other information contained in this AIF, investors should carefully consider the risk factors set out under the heading Risks and Uncertainties in the MD&A (which is incorporated into this AIF by reference) prior to making an investment decision with respect to the Corporation.
DIVIDENDS
The Corporation has not declared or paid any dividends to its shareholders. With the exception of any funds used by the Corporation to buy back its shares, the Corporation will retain earnings for general corporate purposes to promote future growth. As such, the board of directors of the Corporation does not anticipate paying any dividends for the foreseeable future. The board of directors may review this policy from time to time, having regard to the Corporations financial condition, financing requirements and other relevant factors.
GENERAL DESCRIPTION OF CAPITAL STRUCTURE
The Corporations share capital consists of an unlimited number of common shares and an unlimited number of preferred shares, issuable in series, of which five series consisting of one share each have been authorized. As of the date of this AIF, 15,298,602 common shares were outstanding. The Corporation has no preferred shares outstanding.
The common shares carry one vote per share, are entitled to dividends if, as and when declared by the board of directors of the Corporation and participate equally on any liquidation, dissolution or winding up of the Corporation.
MARKET FOR SECURITIES
The Corporations common shares are listed on the Toronto Stock Exchange (TSX) under the symbol PTS and on the NASDAQ Capital Market under the symbol PCOM. The following table shows the monthly price ranges and volumes for the common shares traded through the TSX in Canadian Dollars.
Fiscal 2015 | High ($) | Low ($) | Close ($) | Volume |
January | 16.00 | 12.25 | 13.80 | 127,874 |
February | 15.00 | 11.41 | 12.20 | 94,954 |
March | 13.01 | 11.49 | 12.86 | 144,625 |
April | 16.40 | 12.75 | 13.57 | 152,725 |
May | 18.20 | 13.57 | 17.85 | 122,731 |
June | 18.25 | 14.60 | 15.50 | 77,447 |
July | 16.84 | 12.10 | 14.77 | 136,939 |
August | 14.95 | 11.51 | 12.00 | 87,369 |
September | 15.80 | 11.41 | 14.40 | 73,450 |
October | 14.88 | 12.75 | 13.51 | 49,809 |
November | 14.88 | 11.38 | 14.15 | 156,667 |
December | 14.52 | 11.75 | 13.50 | 55,192 |
ESCROWED SECURITIES
The following table shows the number of securities of each class of the Corporation that, to the Corporations knowledge, are held in escrow or are subject to a contractual restriction on transfer and the percentage that number represents of the outstanding securities of that class as of December 31, 2015.
Designation of Class |
Number of
securities held in escrow or that are subject to a contractual restriction on transfer |
Percentage of
Class |
Common shares | 238,3931 | 1.6% |
1. In connection with the acquisition of substantially all of the assets of Crew Marketing, 238,393 common shares were issued in escrow to Computershare Trust Company, N.A. as escrow agent for the benefit of Crew Marketing. The shares will be released from escrow and delivered to Crew Marketing on May 22, 2016, to the extent not used to satisfy typical indemnities to the benefit of the Corporation.
DIRECTORS AND EXECUTIVE OFFICERS
Current Directors
The following table provides certain background information with respect to each director of the Corporation. The Corporations directors will hold office for a term expiring at the conclusion of the next annual meeting of shareholders of the Company or until their successors are elected or appointed and will be eligible for re-election. Detailed biographies for each director are provided below.
Name Place of Residence |
Director Since | Current Principal Occupation | Common
Shares Beneficially Owned |
Christopher Barnard (Ontario) |
May, 2007 (and Feb. 2000 to April, 2005) |
President, Points
International Ltd. and Points.com Inc. |
185,488 |
Michael Beckerman (Ontario) |
May, 2010 | Chief Executive
Officer, Ariad Communications and Bluespire Marketing |
11,454 |
Bernay Box (Texas, U.S.A.) |
May, 2009 | President of Bonanza
Fund Management, Inc. and investment advisor for Bonanza Master Fund, Ltd. |
797,244 |
Douglas Carty (Illinois, U.S.A.) |
February, 2002 | Corporate Director | 38,173 |
Bruce Croxon (Ontario) |
October, 2008 | Investor and Advisor | 17,642 |
Robert MacLean (Ontario) |
February, 2002 |
Chief Executive
Officer, Points International Ltd. and Points.com Inc. |
158,048 |
John Thompson (Ontario) |
February, 2002 |
Corporate Director
|
175,876 |
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Director Biographies
Christopher Barnard
Mr. Barnard is a founder of the Corporation. As President of Points and its subsidiary Points.com Inc., Mr. Barnard is currently responsible for corporate strategy, corporate development and investor relations. He has also held various interim operating positions at the Corporation including Chief Financial Officer, as well as being responsible for both product development and marketing.
Mr. Barnard has also been instrumental in developing significant commercial relationships and key strategic partnerships with various parties over the company's history and in 2015 he was named as one of the 100 most influential leaders in Fintech globally. In his corporate development capacity, Mr. Barnard has been instrumental in raising capital for the Corporation, including multiple equity financings and a strategic investment from InterActive Corp/IAC, a New York based, NASDAQ 100 leading internet firm. He led Points' three corporate acquisitions, MilePoint, PointsHound and Crew Marketing and also, as part of Points' international expansion strategy, managed the company's strategic investment in China Rewards and sits on the board as Chairman.
In 1998, Mr. Barnard co-founded Canadas first internet business incubator, Exclamation International, from which the Corporation was created. Prior to Exclamation, Christopher was with HDL Capital, a Toronto boutique merchant bank. While at HDL he assisted a number of companies in entering the public markets, including Bid.com which was, at the time, one of Canadas most notable internet technology stories.
Mr. Barnard holds a Masters of Business Administration degree from the Richard Ivey School of Business in London, Ontario.
Michael Beckerman
Mr. Beckermans sales and marketing career spans over twenty years, three continents and several industries. During this time he has worked on both the client and agency side of the business.
His experience has included senior roles in Canada, Europe and Asia, and culminated with responsibility for NIKEs key U.S. retailers. Based in Hong Kong, Mr. Beckerman was responsible for the marketing of the NIKE brand across Asia-Pacific with a specific emphasis on advertising, promotions and sponsorship. He also served as Marketing Director for NIKE Germany and Director of Advertising for Europe and was at the helm when NIKE was named Brand of the Year. He later took over responsibilities for NIKEs European retail efforts.
Following NIKE, Mr. Beckerman served as Vice President, Marketing for Canadian Airlines. He led a comprehensive rebranding effort that touched everything from employee engagement, market research, product development and brand identify systems prior to heading up Marketing and International expansion for e-commerce site MVP.com. This was a high profile company that had Michael Jordan, Wayne Gretzky and John Elway as lead investors. Mr. Beckerman and his team were some of the pioneers of on-line metrics around basket size, cost per acquisition and on-line customer experience metrics. The MVP.com brand and web-site design and development are still used as benchmarks in the industry.
In 2001, Mr. Beckerman took on the role of Chief Marketing Officer for Bank of Montreal. He was responsible for increasing the marketing orientation and customer focus throughout that organization. While there, reporting to the CEO, he led the development of new brand identities for both its Canadian and U.S. operations which involved more than 1,000 retail locations and over 30,000 employees.
Mr. Beckerman is currently the CEO of Ariad Communications and Bluespire Marketing. Ariad has enjoyed record growth since he took over this role ten years ago. Ariad is an agency specializing in branding and on-line communications. Ariad has won numerous domestic and International awards and was recently named as one of the Top Places to Work in Canada.
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Mr. Beckerman is a sought after speaker on marketing trends, branding and consumer behaviour. He is a frequent judge for industry events and asked to sit on numerous industry panels. He also enjoys taking his marketing experience to help some charities and foundations sharpen their strategic focus, clearly articulate their cause and generate more funds for their charity.
Bernay Box
Mr. Box was appointed as a director of the Corporation in May of 2009 and is currently the Chairman of the Board of Directors and a member of the Audit Committee and the Human Resources and Corporate Governance Committee.
Mr. Box is the President and Chief Executive Officer of Bonanza Fund Management, Inc. and the managing partner of Bonanza Capital, Ltd., a private investment partnership based in Dallas, Texas.
Mr. Box is a graduate of Baylor University.
Douglas Carty
Mr. Carty is a long serving director of the Corporation. He was Chairman of the Board of the Corporation from 2002 through 2007 and is currently Chairman of the Corporations Audit Committee.
Mr. Carty is currently Chairman and Co-Founder of Switzer-Carty Transportation Inc., a Burlington, Ontario based provider of school bus services.
Mr. Carty is also a Director of Wajax Corporation where he serves on the Audit (Chair) and Governance Committees and YRC Worldwide Inc. where he serves on the Finance and Audit Committees.
Mr. Carty previously served at Laidlaw International Inc. as Chief Financial Officer and subsequently as President and Chief Executive Officer of its school bus subsidiary. Prior to Laidlaw, Mr. Carty served as Chief Financial Officer of Atlas Air Worldwide Holdings Inc. and Canadian Airlines Corporation.
Mr. Carty holds a Masters of Business Administration from the University of Western Ontario and a Bachelor of Arts (Honours) from Queens University.
Bruce Croxon
Mr. Croxon has served as a director of the Corporation since October of 2008 and is a member of the Corporations Human Resources and Corporate Governance Committee.
Mr. Croxon was a founder of Lavalife, a category leader and internationally recognized brand in the online dating industry. He was instrumental in growing the company to just under $100 million in revenue and was CEO when the company was sold to Vertrue, Inc. in 2004 and remained CEO until midway through 2006.
Mr. Croxon has since been active as both an investor and advisor in early stage companies in the technology and hospitality sectors. He is currently the Managing Partner of Round13 Capital, a fund that invests in early stage digital businesses in Canada. He is also active in a number of charities, including acting as a National Spokesperson for Anaphylaxis Canada.
Robert MacLean
Mr. MacLean is a founder of the Corporation and has served as Chief Executive Officer of the Corporation since February 2000. As CEO, Mr. MacLean champions the vision for the Corporation and directs an exceptional team of executives. Mr. MacLean has led his team to deliver a suite of innovative technology solutions, earning a growing number of partnerships with the worlds leading loyalty programs.
Prior to founding the Corporation, Mr. MacLean recorded an impressive list of leadership roles and achievements during 12 years in the airline and loyalty industry. As Vice President, Sales with Canadian Airlines, Mr. MacLean led a team of over 250 employees throughout North America, delivering over $2 billion in annual revenue. Mr. MacLean was also responsible for the airlines award-winning Canadian Plus loyalty program. Mr. MacLean also served as Canadian Airlines senior representative on the Oneworld Alliances Customer Loyalty Steering Committee.
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Mr. MacLean is an active member of the global loyalty community and speaks frequently at industry events worldwide.
Mr. MacLean is a member of the board of directors of Prodigy Ventures, a TSXV listed technology company, and is a past member of the board of directors of Hope Air. Hope Air is a national charity that helps Canadians get to medical treatment when they cannot afford the flight costs.
Mr. MacLean is a graduate of Acadia University.
John Thompson
Mr. Thompson is a long serving director of the Corporation. He is currently Chairman of the Human Resources and Corporate Governance Committee and a member of the Audit Committee.
Mr. Thompson has 28 years of executive experience with a range of private and public companies.
From 1999 to 2003, Mr. Thompson was a managing director of Kensington Capital Partners, the investment and advisory firm that did the first fund raise for Points in September 2000. At that time Mr. Thompson made his first investment in Points and has held it since.
Prior to joining Kensington, Mr. Thompson spent more than twenty years with Loblaw Companies Limited, Canadas leading grocery chain, last serving as Executive Vice President and prior to that as Senior Vice President, Finance and Administration. Mr Thompsons responsibilities at Loblaws included, amongst other things, responsibility for human resources and Presidents Choice, one of the largest, most recognized and most profitable brands in Canada.
Mr. Thompson is currently a member of the Governing Council of the Sunnybrook Foundation, the fundraising foundation for Sunnybrook Hospital, a premier academic health sciences centre in Canada, that is fully affiliated with the University of Toronto. He is a past member of the Board of Governors and Chairman of the Finance Committee of The Corporation of Roy Thomson Hall and Massey Hall, two of Canadas finest concert venues.
Mr. Thompson holds an Honours Business Administration degree from the Richard Ivey School of Business at the University of Western Ontario. Mr. Thompson is also a CPA, CA.
Current Executive Officers
The following table sets forth the name, province of residence, and current and five-year historic occupations of the executive officers of the Corporation.
Name Title |
Province
of Residence |
Principal Occupation
within the Preceding Five Years (current and for past five years unless otherwise noted) |
Robert MacLean Chief Executive Officer |
Ontario | Chief Executive Officer, Points International Ltd. and Points.com Inc. |
Christopher Barnard President |
Ontario | President, Points International Ltd. and Points.com Inc. |
Michael DAmico Chief Financial Officer |
Ontario | Chief Financial Officer, Points
International Ltd. and Points.com Inc. (November 2015 to present) Chief Financial Officer, Romios Gold Resources Inc. (Feb. 2011 to Dec. 2015) Chief Financial Officer, Appia Energy Corp. (Dec. 2012 to Dec 2015) |
Peter Lockhard Chief Operating Officer |
Ontario | Chief Operating Officer and other
previous roles, Points International Ltd. and Points.com Inc. |
Inez Murdoch Chief People Officer |
Ontario | Vice President and Chief People
Officer, Points International Ltd. and Points.com Inc. (Feb. 2011 to present) Vice President, Human Resources, USC Educations Savings Plans Inc. (Jan. 2008 to Mar. 2010) |
Dave Simons Chief Technology Officer |
Ontario | Chief Technology Officer, Points
International Ltd. and Points.com Inc. |
Martin Tongue Senior Vice President, Business Development |
Ontario | Senior Vice President and other
previous roles, Points International Ltd. and Points.com Inc. |
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Security Holdings
As of the date of this AIF, as a group, the directors and executive officers of the Corporation beneficially owned, directly or indirectly, or exercised control or direction over, an aggregate of 1,383,925 common shares representing approximately 9.0% of the issued and outstanding common shares.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
To the knowledge of the Corporation, no director or executive officer of the Corporation is, as at the date of this AIF, or within the last 10 years before the date of this AIF has been, a director, chief executive officer or chief financial officer of any company that: (a) while that person was acting in that capacity, was the subject of a cease trade order or similar order or an order that denied the company access to any exemption under securities legislation for a period of more than 30 consecutive days, or (b) was subject to a cease trade order or similar order or an order that denied the company access to any exemption under securities legislation, for a period of more than 30 consecutive days, that was issued after that person ceased to be a director, chief executive officer or chief financial officer, but which resulted from an event that occurred while that person was acting in that capacity.
To the knowledge of the Corporation, no director or executive officer of the Corporation is, as at the date of this AIF, or within the last ten years before the date of this AIF has been, a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.
To the knowledge of the Corporation, no director or executive officer of the Corporation has been subject to: (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.
To the knowledge of the Corporation, no director or executive officer of the Corporation has, within the last 10 years before the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold his or her assets.
Conflicts of Interest
To the knowledge of the Corporation, no director or executive officer of the Corporation has an existing or potential material conflict of interest with Points.
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AUDIT COMMITTEE
Audit Committee Charter
A copy of the Audit Committees mandate is attached hereto as Appendix A.
Composition of the Audit Committee
The Audit Committee is currently comprised of Douglas Carty (Chair), Bernay Box and John Thompson. Each member of the Audit Committee is independent and has represented to the Corporation that he is financially literate within the meaning of NI 52-110.
Relevant Education and Experience
Mr. Carty (Chair) holds a Master of Business Administration from the University of Western Ontario (subsequently renamed the Ivey School of Business) and a Bachelor of Arts (Honours) from Queens University. As described in the section above on Directors and Executive Officers, Mr. Carty has held several senior executive positions of public companies that are directly relevant to his performance as Chair of the Audit Committee.
Mr. Box is the President and CEO of Bonanza Fund Management, Inc. and the managing partner of Bonanza Capital, Ltd., a private investment partnership based in Dallas, Texas. Mr. Box has over 20 years of investment experience. Mr. Box holds a Bachelor of Business Administration degree specializing in Finance and Economics from Baylor University.
Mr. Thompson holds an Honours Business Administration degree from the Ivey School of Business at the University of Western Ontario. Mr. Thompson is also a CPA, CA. Mr. Thompson has 28 years of executive experience.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee is required to pre-approve all audit and non-audit services performed by the Corporations external auditor in order to ensure these services do not impair the external auditors independence.
In accordance with applicable Canadian and U.S. securities rules and regulations, services provided by the Corporations external auditor are categorized as audit services, audit-related services, tax services and all other services.
The Audit Committee reviews and pre-approves the terms and fees of the external auditors annual audit services engagement, which includes, the external auditors attestation report on the effectiveness of the Corporations internal control over financial reporting.
Certain identified audit services, audit-related services and tax services are pre-approved by the Audit Committee up to a prescribed limit in fees per fiscal year. Management and the external auditor ensure that details of any services performed pursuant to such pre-approval are reported to the Audit Committee on a quarterly basis.
The Chairman of the Audit Committee has authority to pre-approve any non-audit services, including audit-related and tax services, up to a prescribed limit in fees per fiscal year. The details of all such pre-approved services are reported to the Audit Committee on a quarterly basis.
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External Auditor Service Fees (By Category)
The aggregate fees billed by the Corporations external auditor in the last two fiscal years are as follows:
Auditor Fees | 2015 (CAD$) | 2014 (CAD$) |
Audit Fees | 438,400 | 264,250 |
Tax Fees | - | 16,025 |
Total | 438,400 | 280,275 |
In the table above, Audit Fees include fees for the annual audit of our consolidated financial statements and interim reviews of our quarterly condensed consolidated financial statements by our external auditor. Tax Fees are fees relating to general tax matters.
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
To the knowledge of the Corporation, no director or executive officer of Points or a person or company that beneficially owns or controls or directs, directly or indirectly, more than 10% of any class or series of the Corporations outstanding voting securities, or an associate or affiliate thereof, had any material interest, direct or indirect, in any transaction within the three most recently completed fiscal years or during the current fiscal year that has materially affected or is reasonably expected to materially affect the Corporation.
TRANSFER AGENT
Computershare Trust Company of Canada
100 University Ave.,
9th Floor
Toronto, ON M5J 2Y1
Canada
INTEREST OF EXPERTS
KPMG LLP, the external auditor of the Corporation, reported on the fiscal 2015 audited consolidated financial statements. KPMG LLP have confirmed that they are independent with respect to the Corporation within the meaning of the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation or regulations, and also that they are independent accountants with respect to the Corporation under all relevant US professional and regulatory standards.
ADDITIONAL INFORMATION
Additional information about the Corporation can be found at www.sedar.com or www.sec.gov.
Additional information, including directors and officers remuneration and indebtedness, principal holders of the Corporations securities, options to purchase securities and interests of insiders in material transactions, if applicable, is contained in the Corporations most recent Management Information Circular.
Additional financial information can also be found in the Corporations 2015 Audited Consolidated Financial Statements and the 2015 MD&A.
APPENDIX A
AUDIT COMMITTEE MANDATE
1. ESTABLISHMENT OF COMMITTEE
1.1 Establishment of the Audit Committee Confirmed
The establishment of the audit committee of the board of directors of Points International Ltd., is hereby confirmed with the purpose, constitutions and responsibilities herein set forth.
1.2 Certain Definitions
In this mandate:
(a) |
Board means the board of directors of Points International; | |
(b) |
Chair means the chair of the Committee; | |
(c) |
Committee means the audit committee of the Board; | |
(d) |
Director means a member of the Board; | |
(e) |
External Auditor means the person occupying the office of auditor of the Corporation in accordance with the Canada Business Corporations Act; | |
(f) |
Mandate means this written mandate of the Committee and any such mandate for the Committee which the Board resolves from time to time shall be the mandate of the Committee; and | |
(g) |
Points International or the Corporation means Points International Ltd. |
2. PURPOSE AND OBJECTIVE
2.1 Purpose
The Committees purpose is to assist the Board in the discharge of its obligations in connection with:
(a) |
the integrity of the companys financial statements; | |
(b) |
the companys compliance with legal and regulatory requirements; | |
(c) |
the independent auditors qualifications and independence; and | |
(d) |
the integrity of the companys internal control and management information systems. |
2.2 Discharge of Responsibilities
The Audit Committee will primarily fulfill its responsibilities by carrying out the activities enumerated in Section 8 of this Mandate.
3. AUTHORITY AND OUTSIDE ADVISERS
3.1 Information from Employees
The Board authorizes the Committee, within the scope of its responsibilities, to seek information it requires from any employee.
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3.2 Outside Advisors
The Committee shall also have the authority to retain (and terminate) such outside legal, accounting or other advisors as it may consider appropriate and shall not be required to obtain the approval of the Board in order to retain or compensate such advisors. The Committee shall have sole authority to approve related fees and retention terms.
4. COMMITTEE MEMBERSHIP
4.1 Number of Members
The Committee shall consist of not fewer than three Directors.
4.2 Independence of Members
The members of the Committee shall be independent directors as defined in NI 52-110, the NASDAQ Listing Rules and Rule 10A-3(b)(1) under the Securities Exchange Act of 1934.
4.3 Financial Literacy
(a) |
Requirement - Each member of the Committee shall be financially literate or must become financially literate within a reasonable period of time after his or her appointment to the Committee. | |
(b) |
Definition - Financially literate shall mean that the Director has the ability to read and understand a set of financial statements that present the breadth and complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Companys financial statements. |
4.4 Financial Expert
Unless approved by the Board, the Committee shall have at least one financial expert as defined under Item 407 of Regulation S-K under the Securities Exchange Act of 1934.
4.5 Annual Appointment of Members
The members of the Committee shall be appointed by the Board. The appointment of members of the Committee shall take place annually at the first meeting of the Board after a meeting of the shareholders at which Directors are elected, provided that if the appointment of members of the Committee is not so made, the Directors who are then serving as members of the Committee shall continue as members of the Committee until their successors are appointed.
4.6 Vacancy
The Board may appoint a member to fill a vacancy which occurs in the Committee between annual elections of Directors.
5. COMMITTEE CHAIR
5.1 Board to Appoint Chair
The Board shall appoint the Chair from the members of the Committee (or if it fails to do so, the members of the Committee shall appoint the Chair from among its members). If, at any meeting, the Chair is not in attendance, then the directors present shall be responsible for choosing one of their number to be chair of the meeting and for delivering a casting vote, as necessary.
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5.2 Chair to be Appointed Annually
The designation of its Chair shall take place annually at the first meeting of the Board after a meeting of the members at which Directors are elected, provided that if the designation of Chair is not so made, the Director who is then serving as Chair shall continue as Chair until his or her successor is appointed.
5.3 Casting Vote
In case of an equality of votes, the Chair in addition to his original vote shall have a second or casting vote.
6. COMMITTEE MEETINGS
6.1 Quorum
A quorum of the Committee shall be a majority of its members. No business shall be transacted by the Committee except at a meeting at which a quorum of the Committee is present.
6.2 Secretary
The Secretary of the Committee will be the Secretary of the Board, unless otherwise appointed by the Chair. The Secretary may, but need not, be a member of the Committee.
6.3 Time and Place of Meetings
The time and place of the meetings of the Committee and the calling of meetings and the procedure in all things at such meetings shall be determined by the Committee; provided, however, the Committee shall meet at least quarterly. In addition, meetings may be called by any member of the Committee or by the External Auditor on two days notice (exclusive of the day on which notice is sent but inclusive of the day for which notice is given).
6.4 Right to Vote
Each member of the Committee shall have the right to vote on matters that come before the Committee.
6.5 Invitees
The External Auditor, the Chief Executive Officer and the Chief Financial Officer of Points International shall be entitled to receive notice of and to be heard at each meeting of the Committee, as non-voting observers. The Committee may additionally invite Directors, officers and employees of Points International or any other person to attend meetings of the Committee to assist in the discussion and examination of the matters under consideration by the Committee.
6.6 In Camera Sessions with External Auditor
As part of each meeting of the Committee at which the Committee recommends that the Board approve the annual audited financial statements or at which the Committee reviews the interim financial statements, the Committee shall meet separately with each of:
(a) |
the Chief Financial Officer; and | |
(b) |
the External Auditor. |
No minutes of the in camera sessions will be taken unless the Chair of the meeting requests in writing that the discussion be added to the meeting minutes.
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7. REMUNERATION OF COMMITTEE MEMBERS
7.1 Director Fees Only
No member of the Committee may earn fees from Points International or any of its subsidiaries other than directors fees (which fees may include cash and/or shares or options or other in-kind consideration ordinarily available to Directors, as well as all of the regular benefits that other Directors receive).
7.2 Other Payments
For greater certainty, no member of the Committee shall accept any consulting, advisory or other compensatory fee from Points International and its affiliates.
8. DUTIES AND RESPONSIBILITIES OF THE COMMITTEE
8.1 Financial and Related Information
(a) |
Financial Reporting - The Committee shall only review annual and interim financial reports and related financial documents for release to the public after the External Auditor has reviewed such material (if applicable) and the Chief Financial Officer has completed and signed a disclosure checklist regarding key areas affecting Directors liability. The Committee must be satisfied that adequate procedures are in place for the review of the Companys public disclosure of financial information extracted or derived from the Companys financial statements and must periodically assess the adequacy of those procedures. | |
(b) |
Financial Statements - The Committee shall review and discuss with management and the External Auditor, Points Internationals annual and interim financial statements and related MD&A and report thereon to the Board before the Board approves those statements. | |
(c) |
Accounting Treatment - The Committee shall review and discuss with management and the External Auditor on a timely basis: |
i. |
major issues regarding accounting policies, principles and financial statement presentations, including any significant changes in Points Internationals selection or application of accounting principles and major issues as to the adequacy of Points Internationals internal controls and any special audit steps adopted in light of material control deficiencies; | |
ii. |
analyses prepared by management and the External Auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analysis of the effects of alternative GAAP methods on the financial statements; | |
iii. |
the effect on the financial statements of Points International of regulatory and accounting initiatives and issues, as well as off-balance sheet transactions, structures, obligations (including contingent obligations) and other relationships of Points International with unconsolidated entities or other persons that have a material current or future effect on the financial condition, changes in financial condition, results of operations, liquidity, capital resources, capital reserves or significant components of revenues or expenses of Points International; | |
iv. |
the extent to which changes or improvements in financial or accounting practices, as approved by the Committee, have been implemented; |
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v. |
any financial information or financial statements in prospectuses and other offering documents; | |
vi. |
the management certifications of the financial statements as may be required by applicable securities laws in Canada or otherwise, and all certifications and reports of any disclosure committee established by management from time to time; and | |
vii. |
any other relevant reports or financial information submitted by Points International to any governmental body, or the public. |
(d) |
Discussion of Accounting Treatments - The Committee shall have direct communication channels with the External Auditor to discuss and review specific issues as appropriate. | |
(e) |
Disclosure of Other Financial Information - The Committee shall discuss with management and the External Auditor: |
i. |
the types of information to be disclosed and the type of presentation to be made in connection with earnings press releases paying particular attention to any use of pro forma or adjusted non-GAAP, information; and | |
ii. |
financial information and earnings guidance (if any) provided to analysts and rating agencies. |
(f) |
Review of Communications - The Committee shall review with the External Auditor all material written communication between the External Auditor and management including, but not limited to, the management letter and schedule of unadjusted differences. |
8.2 External Auditor
(a) |
Authority with Respect to External Auditor - As the representative of Points Internationals shareholders, the Committee shall be directly responsible for Points Internationals relationship with the External Auditor for the purpose of preparing or issuing an auditors report or performing other audit, review or attest services for the Company (including the resolution of disagreements between management and the external auditor regarding financial reporting). In this capacity, the Committee shall have sole responsibility for recommending to the Board the person to be proposed to Points Internationals shareholders for appointment as external auditor and whether at any time the incumbent external auditor should be removed from office as well as the compensation of the external auditor. The Committee shall require the External Auditor to acknowledge in its engagement letter each year that the External Auditor is accountable to the Board and the Committee as representatives of shareholders. | |
(b) |
Competency of External Auditor - Once each year (and otherwise as the Chair may consider appropriate) the Committee shall review with the External Auditor its performance and that of the lead audit partner and obtain and review a report by the External Auditor describing the External Auditors internal quality-control procedures. | |
(c) |
Review of Audit Problems - The Committee shall review with the External Auditor any audit problems or difficulties and managements response. |
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(d) |
Independence - The Committee shall satisfy itself as to the independence of the External Auditor. As part of this process: |
i. |
The Committee shall require the External Auditor to submit on an annual basis to the Committee, a formal written statement delineating all relationships between the External Auditor and Points International and that the Committee is responsible for actively engaging in a dialogue with the External Auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the External Auditor and for recommending that the Board take appropriate action in response to the External Auditors report to satisfy itself of the External Auditors independence; and | |
ii. |
The Committee shall approve any permitted non-audit services provided by the External Auditor and may delegate such approval authority to one or more of its independent members, all in accordance with applicable securities laws and regulations and listing requirements. |
8.3 Management Response
The Committee shall obtain managements response to significant remarks or findings of the External Auditor and shall follow-up as required on the status of the implementation of corrective measures.
8.4 Related Party Transactions
The Committee shall review and approve all related party transactions in which Points International is involved or which Points International proposes to enter into.
8.5 Risk Assessment, Risk Management and Internal Control
(a) |
The Committee shall gain an understanding of Points Internationals business and shall discuss Points Internationals major financial risk exposures and the steps management has taken to monitor and control such exposures. | |
(b) |
The Committee shall assess and evaluate managements internal control plan. | |
(c) |
The Committee shall obtain regular updates from management and legal counsel regarding compliance matters. |
8.6 Other Matters
The Committee shall perform any other activities consistent with this Mandate, Points Internationals by-laws and governing law, as the Committee or the Board deems necessary or appropriate.
9. WHISTLE BLOWING
9.1 Procedure
The Committee shall be responsible for reviewing and evaluating the Companys procedures for:
(a) |
the receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls or auditing matters; and | |
(b) |
the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters. |
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10. HIRING PRACTICES
10.1 Hiring Policies
The Committee shall review and approve the Companys hiring policies regarding partners, employees and former partners and employees of the present and former external auditor of the Company.
11. REPORTING TO THE BOARD
11.1 Regular Reporting
The Committee shall report to the Board following each meeting of the Committee and at such other times as the Chair may determine to be appropriate (provided that the Committee shall report to the Board at least four times per year) and shall ensure that the Board is made aware of matters that may significantly affect the financial condition or affairs of Points International.
12. EVALUATION OF COMMITTEE PERFORMANCE AND MANDATE REVIEW
12.1 Establish Process
The Board may establish a process for committees of the Board for assessing the performance of such committees on a regular basis and, if established, the Committee shall follow such process in assessing its performance.
12.2 Amendments to Mandate
The Committee shall review and assess the adequacy of this Mandate annually and recommend to the Board any changes it deems appropriate.
Consolidated Financial Statements
Points International Ltd.
December 31, 2015
KPMG LLP | Telephone (416) 228-7000 | |
4100 Yonge Street | Fax (416) 228-7123 | |
Suite 200 | www.kpmg.ca | |
North York ON | ||
M2P 2H3 |
INDEPENDENT AUDITORS REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Points International Ltd.:
We have audited the accompanying consolidated financial statements of Points International Ltd., which comprise the consolidated statements of financial position as at December 31, 2015 and 2014, the consolidated statements of comprehensive income, changes in shareholders equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
KPMG LLP is a Canadian limited liability partnership and a member of the KPMG | |
network of independent member firms affiliated with KPMG International Cooperative | |
(KPMG International), a Swiss entity. | |
KPMG Canada provides services to KPMG LLP |
Page 2
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Points International Ltd. as at December 31, 2015 and 2014, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Points International Ltd.s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our audit report dated March 2, 2016 expressed an unqualified (unmodified) opinion on the effectiveness of Points International Ltd.s internal control over financial reporting.
Chartered Professional Accountants, Licensed Public Accountants
March 2, 2016
Toronto, Canada
KPMG LLP | Telephone (416) 228-7000 | |
4100 Yonge Street | Fax (416) 228-7123 | |
Suite 200 | www.kpmg.ca | |
North York ON | ||
M2P 2H3 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Points International Ltd.:
We have audited Points International Ltd.s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Points International Ltd.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control over Financial Reporting in Managements Discussion and Analysis for the year ended December 31, 2015. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
KPMG LLP is a Canadian limited liability partnership and a member of the KPMG | |
network of independent member firms affiliated with KPMG International Cooperative | |
(KPMG International), a Swiss entity. | |
KPMG Canada provides services to KPMG LLP |
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In our opinion, Points International Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Points International Ltd. as of December 31, 2015 and 2014, and the related consolidated statements of comprehensive income, changes in shareholders equity, and cash flows for the years ended December 31, 2015 and 2014, and our report dated March 2, 2016 expressed an unmodified (unqualified) opinion on those consolidated financial statements.
Chartered Professional Accountants, Licensed Public Accountants
March 2, 2016
Toronto, Canada
Points International Ltd. |
Consolidated Statements of Financial Position |
Expressed in thousands of United States dollars |
As at December 31 | Note | 2015 | 2014 | ||||||
ASSETS | |||||||||
Current assets | |||||||||
Cash and cash equivalents | $ | 51,364 | $ | 36,868 | |||||
Restricted cash | 4 | 1,000 | 1,573 | ||||||
Funds receivable from payment processors | 6,588 | 6,691 | |||||||
Accounts receivable | 5 | 2,988 | 2,305 | ||||||
Prepaid expenses and other assets | 6 | 1,256 | 1,134 | ||||||
Total current assets | 63,196 | 48,571 | |||||||
Non-current assets | |||||||||
Property and equipment | 7 | 1,466 | 1,856 | ||||||
Intangible assets | 8 | 18,616 | 18,320 | ||||||
Goodwill | 9 | 7,130 | 7,130 | ||||||
Deferred tax assets | 10 | 1,755 | 3,492 | ||||||
Long-term investment | 23 | 5,000 | 5,000 | ||||||
Other assets | 6 | 2,765 | 692 | ||||||
Total non-current assets | 36,732 | 36,490 | |||||||
Total assets | $ | 99,928 | $ | 85,061 | |||||
LIABILITIES | |||||||||
Current liabilities | |||||||||
Accounts payable and accrued liabilities | $ | 5,808 | $ | 6,260 | |||||
Payable to loyalty program partners | 49,526 | 36,030 | |||||||
Current portion of other liabilities | 11 | 1,852 | 1,285 | ||||||
Total current liabilities | 57,186 | 43,575 | |||||||
Non-current liabilities | |||||||||
Deferred tax liabilities | 10 | 425 | - | ||||||
Other liabilities | 11 | 122 | 269 | ||||||
Total non-current liabilities | 547 | 269 | |||||||
Total liabilities | $ | 57,733 | $ | 43,844 | |||||
SHAREHOLDERS EQUITY | |||||||||
Share capital | 59,293 | 61,084 | |||||||
Contributed surplus | 9,859 | 11,985 | |||||||
Accumulated other comprehensive loss | (624 | ) | (354 | ) | |||||
Accumulated deficit | (26,333 | ) | (31,498 | ) | |||||
Total shareholders equity | $ | 42,195 | $ | 41,217 | |||||
Total liabilities and shareholders equity | $ | 99,928 | $ | 85,061 | |||||
Guarantees and Commitments | 17 | ||||||||
Subsequent Event | 26 |
The accompanying notes are an integral part of these consolidated financial statements.
APPROVED ON BEHALF OF THE BOARD:
/s/ Bernay Box | Chairman |
/s/ Robert MacLean | Director and Chief Executive Officer |
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Points International Ltd. |
Consolidated Statements of Comprehensive Income |
Expressed in thousands of United States dollars, except per share amounts |
For the year ended December 31 | Note | 2015 | 2014 | ||||||
REVENUE | |||||||||
Principal | $ | 283,409 | $ | 244,686 | |||||
Other partner revenue | 12,871 | 10,211 | |||||||
Interest | 96 | 92 | |||||||
Total Revenue | 296,376 | 254,989 | |||||||
EXPENSES | |||||||||
Direct cost of principal revenue | 253,710 | 215,333 | |||||||
Employment costs | 22,699 | 22,529 | |||||||
Marketing and communications | 1,704 | 1,379 | |||||||
Technology services | 1,343 | 1,083 | |||||||
Depreciation and amortization | 3,546 | 2,150 | |||||||
Foreign exchange loss (gain) | (131 | ) | 138 | ||||||
Operating expenses | 15 | 5,866 | 5,610 | ||||||
Total Expenses | $ | 288,737 | $ | 248,222 | |||||
OPERATING INCOME | 7,639 | 6,767 | |||||||
Interest and other income | - | (5 | ) | ||||||
INCOME BEFORE INCOME TAXES | 7,639 | 6,772 | |||||||
Income tax expense | 10 | 2,474 | 2,088 | ||||||
NET INCOME | 5,165 | 4,684 | |||||||
OTHER COMPREHENSIVE LOSS | |||||||||
Items that will
subsequently be reclassified to profit or
loss: Loss on foreign exchange on derivatives designated as cash flow hedges, net of income tax recovery of $476 |
(1,320 | ) | (573 | ) | |||||
(2014:
recovery of
$206) Reclassification to net income of loss on foreign ex- change derivatives designated as cash flow hedges, net of income tax recovery $378 (2014: recovery of $203) |
1,050 | 564 | |||||||
Other comprehensive loss for the year, net of income tax | (270 | ) | (9 | ) | |||||
TOTAL COMPREHENSIVE INCOME | $ | 4,895 | $ | 4,675 | |||||
EARNINGS PER SHARE | |||||||||
Basic earnings per share | 13 | $ | 0.33 | $ | 0.30 | ||||
Diluted earnings per share | 13 | $ | 0.33 | $ | 0.30 |
The accompanying notes are an integral part of these consolidated financial statements.
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Points International Ltd.
Consolidated Statements of
Changes in Shareholders Equity
Attributable to equity holders of the Company | ||||||||||||||||||
Expressed in thousands of United States dollars except | Accumulated other | |||||||||||||||||
number of shares | Contributed | comprehensive | Accumulated | Total shareholders | ||||||||||||||
Share Capital | Surplus | loss | deficit | equity | ||||||||||||||
Number of Shares | Amount | |||||||||||||||||
Balance at December 31, 2014 | 15,649,085 | $ | 61,084 | $ | 11,985 | $ | (354 | ) | $ | (31,498 | ) | $ | 41,217 | |||||
Net income | - | - | - | - | 5,165 | 5,165 | ||||||||||||
Other comprehensive loss | - | - | - | (270 | ) | - | (270 | ) | ||||||||||
Total comprehensive income | - | - | - | (270 | ) | 5,165 | 4,895 | |||||||||||
Effect of share option compensation plan | - | - | 934 | - | - | 934 | ||||||||||||
Effect of RSU and PSU compensation plan | - | - | 654 | - | - | 654 | ||||||||||||
Share issuances share options | 96,411 | 615 | (338 | ) | - | - | 277 | |||||||||||
Share issuances RSUs | - | 513 | (513 | ) | - | - | - | |||||||||||
Share capital held in trust (note 14) | - | (1,215 | ) | - | - | - | (1,215 | ) | ||||||||||
Shares repurchased (note 12) | (439,094 | ) | (1,704 | ) | (2,863 | ) | - | - | (4,567 | ) | ||||||||
Balance at December 31, 2015 | 15,306,402 | $ | 59,293 | $ | 9,859 | $ | (624 | ) | $ | (26,333 | ) | $ | 42,195 | |||||
Balance at December 31, 2013 | 15,359,903 | $ | 58,693 | $ | 10,381 | $ | (345 | ) | $ | (36,182 | ) | $ | 32,547 | |||||
Net income | - | - | - | - | 4,684 | 4,684 | ||||||||||||
Other comprehensive loss | - | - | - | (9 | ) | - | (9 | ) | ||||||||||
Total comprehensive income | - | - | - | (9 | ) | 4,684 | 4,675 | |||||||||||
Effect of share option compensation plan | - | - | 852 | - | - | 852 | ||||||||||||
Effect of RSU and PSU compensation plan | - | - | 969 | - | - | 969 | ||||||||||||
Share issuances - share options | 50,789 | 242 | (125 | ) | - | - | 117 | |||||||||||
Share issuances - RSUs | - | 92 | (92 | ) | - | - | - | |||||||||||
Share capital held in trust (note 14) | - | (731 | ) | - | - | - | (731 | ) | ||||||||||
Shares issued for acquisition of Crew (note 24) | 238,393 | 2,788 | - | - | - | 2,788 | ||||||||||||
Balance at December 31, 2014 | 15,649,085 | $ | 61,084 | $ | 11,985 | $ | (354 | ) | $ | (31,498 | ) | $ | 41,217 |
The accompanying notes are an integral part of these consolidated financial statements.
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Points International Ltd. |
Consolidated Statements of Cash Flows |
For the year ended December 31 |
Expressed in thousands of United States dollars | Note | 2015 | 2014 | ||||||
Cash flows from operating activities | |||||||||
Net income for the year | $ | 5,165 | $ | 4,684 | |||||
Adjustments for: | |||||||||
Depreciation of property and equipment | 1,037 | 990 | |||||||
Amortization of intangible assets | 2,509 | 1,160 | |||||||
Unrealized foreign exchange loss (gain) | (949 | ) | (1,045 | ) | |||||
Equity-settled share-based payment transactions | 14 | 1,588 | 1,821 | ||||||
Deferred income tax expense | 2,261 | 1,864 | |||||||
Unrealized net (gain)/loss on derivative contracts designated as cash flow hedges | (368 | ) | (12 | ) | |||||
Changes in non-cash balances related to operations | 19 | 10,689 | (17,081 | ) | |||||
Net cash provided by (used in) operating activities | $ | 21,932 | $ | (7,619 | ) | ||||
Cash flows from investing activities | |||||||||
Acquisition of property and equipment | (647 | ) | (754 | ) | |||||
Additions to intangible assets | (2,805 | ) | (1,894 | ) | |||||
Long-term investment | 23 | - | (1,500 | ) | |||||
Acquisition of business, net of cash acquired | 24 | - | (16,011 | ) | |||||
Changes in restricted cash | 530 | - | |||||||
Net cash used in investing activities | $ | (2,922 | ) | $ | (20,159 | ) | |||
Cash flows from financing activities | |||||||||
Proceeds from exercise of share options | 277 | 117 | |||||||
Shares repurchased | (4,567 | ) | - | ||||||
Purchases of share capital held in trust | (1,215 | ) | (731 | ) | |||||
Net cash used in financing activities | $ | (5,505 | ) | $ | (614 | ) | |||
Net increase (decrease) in cash and cash equivalents | $ | 13,505 | $ | (28,392 | ) | ||||
Cash and cash equivalents at beginning of the year | 36,868 | 64,188 | |||||||
Effect of exchange rate fluctuations on cash held | 991 | 1,072 | |||||||
Cash and cash equivalents at end of the year | $ | 51,364 | $ | 36,868 | |||||
Interest Received | $ | 89 | $ | 98 | |||||
Interest Paid | $ | - | $ | - | |||||
Taxes Received | $ | 31 | $ | - | |||||
Taxes Paid | $ | (435 | ) | $ | (7 | ) |
Amounts paid and received for interest were reflected as operating cash flows in the consolidated statements of cash flows.
The accompanying notes are an integral part of these consolidated financial statements.
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
1. REPORTING ENTITY
Points International Ltd. (the Corporation) is a company domiciled in Canada. The address of the Corporations registered office is 171 John Street, 5th Floor, Toronto, ON, Canada M5T 1X3. The consolidated financial statements of the Corporation as at and for the year ended December 31, 2015 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 (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 programs consumer offerings or its back-end operations, and management of an online consumer-focused loyalty points management web-portal. The Corporations operations can be 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, however this is dependent on changes in the Corporations partnership base and the timeliness and effectiveness of promotional activity.
The consolidated financial statements of the Corporation as at and for the year ended December 31, 2015 are available at www.sedar.com or www.sec.gov.
2. BASIS OF PREPARATION
(a) Statement of compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements were authorized for issue by the Board of Directors on March 2, 2016.
(b) Basis of measurement
The consolidated financial statements have been prepared on a historical cost basis except for certain assets and liabilities initially recognized in connection with business combinations, and certain financial instruments, which are measured at fair value.
(c) Functional and presentation currency
These consolidated financial statements are presented in U.S. dollars (USD), which is the Corporations functional currency. The functional currency of each of the Corporations wholly-owned subsidiaries is also USD, and items included in the financial statements of each subsidiary are measured using that functional currency. All financial information has been rounded to the nearest thousands, except when otherwise indicated.
(d) Basis of consolidation
Subsidiaries
Subsidiaries are entities the
Corporation controls. Entities over which the Corporation has control are fully
consolidated from the date that control commences until the date that control
ceases. All intercompany transactions and balances between subsidiaries are
eliminated on consolidation.
Business combinations
Acquisitions of subsidiaries
are accounted for using the acquisition method of accounting. Fair value of the
consideration paid is calculated as the sum of the fair value at the date of
acquisition of:
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
| assets given; plus |
| equity instruments issued; less |
| liabilities incurred or assumed. |
Goodwill is measured as the fair value of consideration transferred less the net recognized amount of the identifiable assets acquired and liabilities assumed, all of which are measured at fair value as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.
The Corporation uses estimates and judgments to determine the fair value of assets acquired and liabilities assumed at the acquisition date using the best available information, including information from financial markets. The estimates and judgements include key assumptions such as discount rates, attrition rates, and terminal growth rates for performing discounted cash flow analyses. The transaction costs associated with the acquisitions are expensed as incurred.
(e) Use of estimates and judgements
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, 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.
On an ongoing basis, the Corporation has applied judgements in the following areas:
|
determining whether revenue and direct costs of revenue should be appropriately presented on a gross or net basis; | |
|
determining cash generating units (CGUs) and the allocation of goodwill for the purpose of impairment testing; | |
|
choosing methods for depreciating and amortizing our property and equipment and intangible assets, that represent most accurately the consumption of benefits derived from those assets and are most representative of the economic substance of the intended use of the underlying assets (see Property and Equipment and Intangible Assets, below); | |
|
deciding to designate certain intangible assets as assets with indefinite useful lives as the Corporation believes that there is no limit to the period that these assets are expected to generate net cash inflows; | |
|
determining whether certain hedging relationships and financial instruments qualify for hedge accounting; and | |
|
interpreting tax rules and regulations |
The Corporation also uses significant estimates in the following areas:
|
considering inputs to determine the fair value of assets acquired and liabilities assumed in business combinations; | |
|
considering intended use, industry trends and other factors to determine the estimated useful lives of property and equipment and definite life intangible assets; | |
|
capitalizing direct labor and overhead costs to intangible assets | |
|
determining the recoverable amount of financial and non-financial assets when testing for impairment; | |
|
determining the fair value of share based payments and derivative instruments; and | |
|
assessing provisions for doubtful accounts and provisions for transaction losses |
Estimates are based on historical experience adjusted as appropriate for current circumstances and other assumptions that management believes to be reasonable. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. The application of the estimates and judgments noted above are discussed in Note 3.
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
3. SIGNIFICANT ACCOUNTING POLICIES
(a) New accounting pronouncements adopted in 2015
The accounting policies set out below have been applied consistently by the Corporation and its subsidiaries to all years presented in these consolidated financial statements. In addition, the Corporation adopted the following accounting pronouncements, which are effective for the Corporations annual consolidated financial statements commencing January 1, 2015:
|
Amendments to IFRS 7, Financial Instruments: Disclosures In October 2010, the IASB amended IFRS 7 to allow users to improve their understanding of transfer transactions of financial assets, including under- standing the possible impacts of any risks that may remain with the entity. The adoption of this amendment did not have any impact on the consolidated financial statements. |
(b) Revenue recognition
The Corporations revenue is categorized as principal, other partner revenue, and interest revenue and is generated through the sale of loyalty currencies and through the technology and marketing services provided to loyalty program partners and their customers. Revenue is measured at the fair value of the consideration received or receivable.
Revenue from the sale of loyalty currencies is recognized when the following criteria are met:
| The risks and rewards of ownership, including managerial involvement, have transferred to the buyer; |
| The amount of revenue can be measured reliably; |
| The receipt of economic benefits is probable; and |
| Costs incurred or to be incurred are identifiable and can be measured reliably. |
Revenue from the rendering of services is recognized when the following criteria are met:
| The amount of revenue can be measured reliably; |
| The stage of completion can be measured reliably; |
| The receipt of economic benefits is probable; and |
| Costs incurred and to be incurred are identifiable and can be measured reliably. |
The Corporations revenue has been categorized as follows:
Principal Revenue
Principal revenue groups together several streams of revenue that the Corporation realizes in delivering services to various loyalty programs. The following is a list of revenue streams and the related revenue recognition policy.
(i) |
Reseller revenue is a type of transactional revenue that is realized when the Corporation takes a principal role in the retailing, wholesaling and/or transferring of loyalty currency for loyalty program partners. The Corporations role as the principal in the transaction is determined by the contractual arrangement in place with the loyalty program partner. In this instance, the Corporation has a substantive level of responsibility with respect to operations, marketing, pricing and commercial transaction support and is the primary obligor in the arrangement. In addition, the Corporation may assume substantive credit and/or inventory risk with each transaction processed. Revenue earned as reseller revenue is recorded on a gross basis. Related costs are recorded as direct costs of principal revenue. |
(ii) |
Technical design and development work is performed at the commencement of a business relationship with a loyalty program partner. The majority of the technical design and development fees relate to up-front revenues to cover the Corporations cost of setting up the loyalty program web interface and customizing the look and feel of the site to that of the loyalty program partner. Once the loyalty program partner website is functional, end consumers are able to transact on the site which gives rise to transactional revenues for the Company for the term of the contract. These technical design and development fees are recorded as multiple component arrangements. When a single sales transaction requires the delivery of more than one product or service (separately identifiable components), the revenue recognition criteria are applied to the separately identifiable components. A component is considered to be separately identifiable if the product or service delivered has stand-alone value to the customer and the fair value associated with the product or service can be measured reliably. Management believes that the technical design and development work does not have stand-alone value to the program partner, and as such, this revenue is deferred, along with direct related costs to the extent there is deferred revenue, and recognized over the term of the contract, which approximates the period of expected benefit. |
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
(iii) |
Customized technical design service fees are also charged to loyalty program partners who require custom programming or web-design work that is not tied to an ongoing stream of revenue. This revenue is distinct from any other existing agreement and the delivered product has stand-alone value to the loyalty program partner. This revenue is recognized based on percentage-of-completion at the end of each reporting period. In using the percentage-of-completion method, revenues are generally recorded based on the total hours incurred to date on a contract relative to the total estimated hours. |
Other Partner Revenue
Other partner revenue is primarily a type of transactional revenue that is realized when the Corporation takes an agency role in the retailing, wholesaling and/or transferring of loyalty currency for loyalty program partners. The Corporations role as an agent in the transaction is determined by the contractual arrangement in place with the loyalty program partner. In this instance, the Corporation has a minimal level of responsibility with respect to operations, marketing, pricing and commercial transaction support. As well, the Corporation assumes minimal credit and inventory risk with each transaction processed. Revenue generated when the Corporation takes an agency role is recorded on a net basis. Other partner revenue also includes revenue received from partners which are not transactional in nature but have been earned in the period, such as management fees charged to loyalty program partners who require custom marketing or non-technical solutions that are not covered by any other agreements with the Corporation.
Interest Revenue
Interest revenue is earned on funds invested in accordance with the Corporations Board approved investment policy. Interest revenue is recognized when earned.
When deciding the most appropriate basis for presenting revenue, both the legal form and substance of the agreement between the Corporation and its business partners are reviewed to determine each partys respective role in the transaction. Where the Corporations role in a transaction is that of a principal, revenue is recognized on a gross basis. Where the Corporations role in a transaction is that of an agent, revenue is recognized on a net basis with revenue representing the margin earned.
This determination requires the exercise of judgment. In making this assessment, management considers whether the Corporation:
| has primary responsibility for providing the goods and services to the customer or for fulfilling the orders; |
| has inventory risk before or after the customer order; |
| has discretion in establishing prices (directly or indirectly); |
| bears the customers credit risk for the amount receivable from the customer; |
| modifies the product or performs part of the services; |
| has discretion in selecting the supplier used to fulfill an order; or |
| is involved in determining product or service specifications. |
(c) Foreign currency translation
The functional and presentation currency of the Corporation is US dollars (USD). Transactions in currencies other than the Corporations functional currency are recognized at the average exchange rates in effect on the transaction date. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are retranslated to the functional currency at the exchange rates prevailing at that date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are retranslated to the functional currency at the exchange rates prevailing at the date when the fair value was determined. Non-monetary items that are measured at historical cost in a foreign currency are not retranslated.
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
Foreign exchange gains and losses on monetary items are recognized in profit or loss; except for foreign currency derivatives designated as qualifying cash flow hedges, the fair values of which are deferred in accumulated other comprehensive income in shareholders equity; refer to Notes 3(d)(iv) and 16.
(d) Financial instruments
All financial assets and financial liabilities are recognized on the Corporations consolidated balance sheets when the Corporation becomes a party to the contractual provisions of the instrument.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are incremental and directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities measured at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities measured at fair value through profit or loss are recognized immediately in profit or loss.
Financial assets and liabilities are offset and the net amount presented in the consolidated balance sheets when, and only when, the Corporation has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
(i) Non-derivative financial assets
Non-derivative financial assets are comprised of the following: loans and receivables and available-for-sale financial assets. All financial instruments are initially measured at fair value. Measurement in periods subsequent to initial recognition depends on the classification of the financial instrument.
The Corporation derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. An interest in transferred financial assets that is created or retained by the Corporation is recognized as a separate asset or liability.
Loans and receivables
Loans and receivables are
financial assets with fixed or determinable payments that are not quoted in an
active market. They arise principally through the provision of goods and
services to customers (accounts receivable), but also incorporate other types of
contractual monetary assets. Such assets are recognized initially at fair value
plus any directly attributable transaction costs. Subsequent to initial
recognition, loans and receivables are measured at amortized cost using the
effective interest method, less any impairment losses.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that
are designated as available-for-sale and assets that are not classified in any
of the other categories. Subsequent to initial recognition, they are measured at
fair value and changes therein, other than impairment losses and foreign
currency differences on available-for-sale debt instruments, are recognized in
other comprehensive income and presented within equity. When an investment is
derecognized, the cumulative gain or loss in other comprehensive income is
transferred to profit or loss.
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
(ii) Non-derivative financial liabilities
Financial liabilities are recognized initially on the date on which the Corporation becomes a party to the contractual provisions of the instrument. The Corporation derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.
The Corporation has the following non-derivative financial liabilities: accounts payable and accrued liabilities and payable to loyalty program partners. These financial liabilities are initially recognized at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method.
The Corporations non-derivative financial assets and liabilities are classified and measured as follows:
Asset/Liability | Category | Measurement | |
Funds receivable from payment processors | Loans and receivables | Amortized cost | |
Accounts receivable | Loans and receivables | Amortized cost | |
Long term investment | Available-for-sale financial assets | Fair value | |
Accounts payable and accrued liabilities | Non-derivative financial liabilities | Amortized cost | |
Payable to loyalty program partners | Non-derivative financial liabilities | Amortized cost |
(iii) Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects.
(iv) Derivative financial instruments, including hedge accounting
The Corporation holds derivative financial instruments to hedge its foreign currency risk exposures. These derivatives are designated in accounting hedge relationships and the Corporation applies cash flow hedge accounting. On initial designation of the hedge, the Corporation formally documents the relationship between the hedging instrument and hedged item, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Corporation makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income.
Derivatives are recognized initially at fair value; attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.
Cash flow hedges
The Corporation
enters into foreign exchange forward contracts to reduce the foreign exchange
risk with respect to the Canadian dollar and the EURO. The changes in fair value
of hedging derivatives designated as cash flow hedges are recognized in other
comprehensive income, except for any ineffective portion, which is recognized
immediately in profit or loss. Gains and losses in accumulated other
comprehensive income are reclassified to profit or loss in the same period as
the corresponding hedged items affect profit or loss. The carrying amount of
hedging derivatives designated as cash flow hedges that mature within one year
is included in prepaid expenses and other assets and/or current portion of other
liabilities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in other comprehensive income and presented in unrealized gains/losses on cash flow hedges in equity remains there until the forecasted transaction affects profit or loss. If the forecasted transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss. In other cases the amount recognized in other comprehensive income is transferred to profit or loss in the same period that the hedged item affects profit or loss.
(e) Cash and cash equivalents
Cash equivalents include highly liquid investments (term deposits) with maturities of three months or less at the date of purchase that are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. Cash equivalents are carried at amortized cost which approximates their fair value because of the short-term nature of the instruments.
(f) Funds receivable from payment processors
Funds receivable from payment processors represent amounts collected from customers on behalf of the
Corporation and are typically deposited directly to the Corporations bank account within three business days from the date of sale.
(g) Property and equipment
(i) Recognition and measurement
Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The cost consists of the purchase price, and any costs directly attributable to bringing the asset to the location and condition for its intended use.
When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.
Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount of property and equipment, and are recognized within other income in profit or loss.
(ii) Depreciation
Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value.
Depreciation is recognized in profit or loss based on the estimated useful lives of the assets using the following methods and annual rates:
| Furniture and fixtures | Straight-line over 5 years |
| Computer hardware | Straight-line over 3 years |
| Computer software | Straight-line over 3 years |
| Leasehold improvements | Straight-line over shorter of useful life or the lease term |
Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
(h) Goodwill & Intangible assets
(i) Goodwill
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the tangible and intangible net assets acquired. Goodwill is not amortized. The Corporation tests goodwill for impairment annually, at each year end, to determine whether the carrying value exceeds the recoverable amount, as discussed in Note 3 (i).
(ii) Internal use software development costs
Certain costs incurred in connection with the development of software to be used internally or for providing services to customers are capitalized once a project has progressed beyond a conceptual, preliminary stage to that of application development. Development costs that are directly attributable to the design and testing of identifiable software products controlled by the Corporation are recognized as intangible assets when the following criteria are met:
|
It is technically feasible to complete the software product so that it will be available for use; |
|
Management intends to complete the software product and use or sell it; |
|
There is an ability to use or sell the software product; |
|
It can be demonstrated how the software product will generate probable future economic benefits; |
|
Adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and |
|
The expenditure attributable to the software product during its development can be reliably measured. |
Development costs that qualify for capitalization include both internal and external costs, but are limited to those that are directly related to the specific product. The capitalized development costs are measured at cost less accumulated amortization and accumulated impairment losses. Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditures, including costs incurred in the planning stage and operating stage and expenditures on internally generated goodwill and brands, are recognized in profit or loss as incurred.
Indefinite useful lives
Certain intangible assets
with indefinite lives, being domain names, patents and trademarks are not
amortized because there is no foreseeable limit to the period that these assets
are expected to generate net cash inflows. The Corporation uses judgement to
designate these assets as indefinite useful life assets, analyzing all relevant
factors, including the expected usage of the asset, the typical life cycle of
the asset and anticipated changes in the market demand for the products and
services that the asset helps generate.
Finite useful lives
Intangible assets with finite
useful lives are amortized into depreciation and amortization in the
Consolidated Statements of Comprehensive Income on a straight-line basis over
their estimated useful lives as noted in the table below. Useful lives, residual
values and the amortization methods are reviewed at least once a year.
Amortization periods and methods are outlined below:
| Customer Relationships | Straight-line over 10 years |
| Technology | Straight-line over 3 years |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
(i) Impairment
Financial Assets
In accordance with IAS 39, Financial Instruments: Recognition & Measurement, the Corporation makes an assessment at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset that has a detrimental impact on the estimated future cash flows associated with the financial asset or group of financial assets.
Non-Financial Assets with Finite Useful Lives
In accordance with IAS 36, Impairment of Assets, the Corporation evaluates the carrying value of non-financial assets with finite lives, being property, plant and equipment and certain intangible assets, whenever events or changes in circumstances indicate that a potential impairment has occurred. An impairment loss is considered to have occurred if the carrying value of an asset is not recoverable.
Available-for-sale financial assets
If the fair value of an available-for-sale financial asset declines below the carrying amount, qualitative and quantitative assessments of whether the impairment is either significant or prolonged are undertaken. When an available-for-sale asset is assessed to be impaired, an amount comprising the difference between its cost and its current fair value, less any impairment loss previously recognized in profit or loss, is transferred from equity to profit or loss, or charged directly to profit or loss. Impairment reversals in respect of equity instruments classified as available-for-sale are not recognized in profit or loss until realized.
Goodwill & Indefinite Life Intangibles
Goodwill and intangible assets that are not amortized are subject to an annual impairment assessment, and the recoverable amount is estimated each year at the same time. The recoverable amount is the higher of an assets/cash generating units (CGU) fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
For the purposes of assessing impairment, assets that do not generate independent cash inflows are grouped at the lowest level for which there are separately identifiable cash inflows such as CGUs. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to the CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.
If the recoverable amount of the CGUs or group of CGUs to which goodwill has been allocated is less than the carrying amount of the CGUs or group of CGUs, including goodwill, an impairment loss is recorded in the consolidated statements of comprehensive income. The impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGUs and then to the other assets of the CGUs pro-rata on the basis of the carrying amount of each asset in the CGUs.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
The Corporation evaluates impairment losses for potential reversals, other than goodwill impairment, when events or changes in circumstances warrant such consideration. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, provided that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.
(j) Share-based payment transactions
Employees
The Corporation has two share-based compensation plans for its employees: a share option plan and a share unit plan.
The share option plan allows directors, officers and employees to acquire shares of the Corporation through the exercise of share options granted by the Corporation. Options generally vest over a period of three years. The maximum term of an option is five years from the date of grant. For options with graded vesting, each tranche in an award is considered a separate grant with a different vesting date, expected life and fair value. The fair value of each tranche is recognized into profit or loss over its respective vesting period. The fair value of each tranche is estimated at the date of grant using the Black-Scholes option pricing model incorporating assumptions regarding risk-free interest rates, dividend yield, expected volatility of the Corporations stock, and a weighted average expected life of the options. Options vesting may also be dependent on futures service and share based compensation charges for these options are recorded over each awards vesting period and charged to profit or loss with a corresponding increase in contributed surplus. Any consideration paid on the exercise of share options is added to share capital along with the related portion previously added to contributed surplus when the compensation costs were charged to profit or loss.
Under the share unit plan, the Corporation grants Restricted Share Units (RSUs) and Performance Share Units (PSUs) to its employees. The RSUs vest either over a period of three years or in full on the third anniversary of the grant date. The fair value of a RSU, defined as the volume weighted average trading price per share on the stock exchange during the immediately preceding five trading days, is recognized over the RSUs vesting period and charged to profit or loss with a corresponding increase in contributed surplus. Under the share unit plan, share units can be settled in cash or shares at the Corporations discretion. The Corporation intends to settle all share units in equity at the end of the vesting period.
For PSUs, the estimated fair value of the share-based awards that are ultimately expected to vest are based on future performance-related conditions, are recorded over each awards vesting period and charged to profit or loss with a corresponding increase in contributed surplus. In determining the number of awards that are expected to vest, the Corporation takes into account voluntary termination behaviour as well as trends of actual forfeitures.
Non-employees
For share-based compensation issued to non-employees, the Corporation recognizes an asset or expense based on the fair value of the good or service received from non-employees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
(k) Deferred costs
In relation to the Corporations technology design and development revenue involving revenue arrangements with separately identifiable components (see Note 3(b)(ii)), the Corporation incurs direct upfront contract initiation costs associated with the website application design and development. Deferred costs relating to the revenue streams are deferred to the extent of the deferred revenue which does not exceed the minimum guaranteed contractual revenues. These costs are deferred and amortized over the expected life of the agreement. The current portion of deferred costs is included in prepaid expenses and other assets whereas the non-current portion of deferred costs is included in other assets.
(l) Payable to loyalty program partners
Payable to loyalty program partners includes amounts owing to these partners for loyalty currency purchased by the Corporation as a principal or as an agent collected through ecommerce services for retailing, wholesaling and other loyalty currency services transactions with end users.
(m) Deferred revenue
Deferred revenue includes proceeds received in advance for technology design and development work and is deferred and recognized over the expected life of the partner agreement (see Note 3(b)(ii)). Deferred revenue also includes proceeds received by the Corporation for the sale of mileage codes that can be redeemed for multiple loyalty program currencies at a later date. Revenue from the sale of these mileage codes is recognized upon redemption. Deferred revenue is included in other liabilities.
(n) Lease inducements
On signing the office lease, the Corporation received lease inducements from the landlord including a rent-free period of six months and a tenant improvement allowance based on square footage of rentable area of the premises. Lease inducements are amortized to rent expense on a straight-line basis over the term of the lease. Lease inducements are included in other liabilities.
(o) Income taxes
Income tax expenses comprise current and deferred taxes. Current taxes and deferred taxes are recognized in profit or loss except to the extent that they relate to a business combination, or items recognized directly in equity or in other comprehensive income.
Current taxes are the expected taxes payable or receivable on the taxable income or loss for the period, using tax rates substantively enacted at the reporting date, and any adjustment to taxes payable in respect of previous years.
Deferred taxes are recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred taxes are not recognized for:
| temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; |
| temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and |
| taxable temporary differences arising on the initial recognition of goodwill. |
Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been substantively enacted by the reporting date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
In determining the amount of current and deferred tax, the Corporation takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Corporation believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information that may become available that causes the Corporation to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
(p) Earnings per share (EPS)
The Corporation presents basic and diluted earnings per share data for its common shares. Basic EPS is calculated by dividing the profit or loss attributable to common shareholders of the Corporation by the weighted average number of common shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effects of all dilutive potential common shares.
(q) Segment reporting
An operating segment is a component of the Corporation that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Corporations other components. All operating segments operating results are reviewed regularly to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The Corporation operates in a single reportable operating segment the portfolio of technology solutions to the loyalty program industry.
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
(r) New standards and interpretations not yet adopted
The IASB has issued the following new standards and amendments to existing standards:
|
IFRS 15, Revenue from Contracts with Customers - In May 2014, the IASB issued IFRS 15 which supersedes existing standards and interpretations including IAS 18, Revenue and IFRIC 13, Customer Loyalty Pro- grammes. |
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 recog- nized 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: |
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 mandatorily effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Corporation is assessing the impact of this standard on its consolidated financial statements.
|
IFRS 9, Financial Instruments - In July 2014, the IASB issued IFRS 9 (2014) that will eventually supersede the current IAS 39 Financial Instruments standard. This standard establishes principles for the financial re- porting 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 strate- gies 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 is mandatorily effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The Corporation is assessing the impact of this standard on its consolidated financial statements. |
|
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 adoption of this standard is not expected to have a material impact on the consolidated financial statements. |
|
IFRS 16, Leases In January 2016, the IASB issued IFRS 16 which specifies how a company will recognize, measure, present, and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is twelve months or less or the underlying asset has a low value. The standard is mandatorily effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. The Corporation is assessing the impact of this standard on its consolidated financial statements. |
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
4. RESTRICTED CASH
Restricted cash of $1,000 (2014 $1,573) is held primarily as collateral for forward contracts entered into during the normal course of business.
5. ACCOUNTS RECEIVABLE
The Corporation's accounts receivable are comprised mainly of amounts owing to the Corporation by loyalty program partners for transactions carried out on the Points.com website, amounts owing to the Corporation by companies that perform loyalty program transactions where the Corporation is a partner in facilitating such transactions, and amounts charged with respect to loyalty program technical design and development fees. The amount is presented net of an allowance for doubtful accounts. Accounts receivable are comprised of:
2015 | 2014 | |||||
Accounts receivable before allowance for doubtful accounts | $ | 3,034 | $ | 2,341 | ||
Allow ance for doubtful accounts | (46 | ) | (36 | ) | ||
Accounts receivable | $ | 2,988 | $ | 2,305 |
The Corporations exposure to credit and currency risks related to accounts receivable is disclosed in Note 16.
6. PREPAID EXPENSES AND OTHER ASSETS
2015 | 2014 | |||||
Prepaid expenses | $ | 710 | $ | 287 | ||
Forw ard exchange contracts designated as cash flow hedges | 20 | 208 | ||||
Loyalty reward currencies | 218 | 531 | ||||
Income tax receivable | 160 | - | ||||
Current portion of deferred costs | 148 | 108 | ||||
Prepaid expenses and current portion of other assets | $ | 1,256 | $ | 1,134 | ||
Non-current portion of deferred costs | $ | 47 | $ | 128 | ||
Non-current portion of loyalty rew ard currencies | 2,718 | 564 | ||||
Other assets | $ | 2,765 | $ | 692 |
Other assets include the non-current portion of certain loyalty reward currencies held by the Corporation that are used in Points.com Inc.s retail and promotional activities and the non-current portion of deferred costs.
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
7. PROPERTY AND EQUIPMENT
Computer | Computer | Furniture & | Leasehold | Total | |||||||||||
Hardware | Software | Fixtures | Improvements | ||||||||||||
Cost | |||||||||||||||
Balance at January 1, 2014 | $ | 1,871 | $ | 1,510 | $ | 748 | $ | 1,317 | $ | 5,446 | |||||
Additions | 512 | 56 | 107 | 79 | 754 | ||||||||||
Disposals / Write-Offs | (5 | ) | - | (9 | ) | - | (14 | ) | |||||||
Balance at December 31, 2014 | $ | 2,378 | $ | 1,566 | $ | 846 | $ | 1,396 | $ | 6,186 | |||||
Additions | 227 | 193 | 157 | 70 | 647 | ||||||||||
Disposals / Write-Offs | (37 | ) | - | (5 | ) | - | (42 | ) | |||||||
Balance at December 31, 2015 | $ | 2,568 | $ | 1,759 | $ | 998 | $ | 1,466 | $ | 6,791 | |||||
Depreciation and impairment losses | |||||||||||||||
Balance at January 1, 2014 | $ | 1,234 | $ | 1,057 | $ | 497 | $ | 566 | $ | 3,354 | |||||
Depreciation for the year | 402 | 261 | 107 | 220 | 990 | ||||||||||
Disposals / Write-Offs | (5 | ) | - | (9 | ) | - | (14 | ) | |||||||
Balance at December 31, 2014 | $ | 1,631 | $ | 1,318 | $ | 595 | $ | 786 | $ | 4,330 | |||||
Depreciation for the year | 433 | 243 | 111 | 250 | 1,037 | ||||||||||
Disposals / Write-Offs | (37 | ) | - | (5 | ) | - | (42 | ) | |||||||
Balance at December 31, 2015 | $ | 2,027 | $ | 1,561 | $ | 701 | $ | 1,036 | $ | 5,325 | |||||
Carrying amounts | |||||||||||||||
At December 31, 2014 | $ | 747 | $ | 248 | $ | 251 | $ | 610 | $ | 1,856 | |||||
At December 31, 2015 | $ | 541 | $ | 198 | $ | 297 | $ | 430 | $ | 1,466 |
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
8. INTANGIBLE ASSETS
Customer | Domain | Technology(3) | Other (1) | Total | |||||||||||
relationships | Names(1) | ||||||||||||||
Cost | |||||||||||||||
Balance at January 1, 2014 | $ | - | $ | - | $ | 9,233 | $ | 142 | $ | 9,375 | |||||
Additions | - | - | 1,838 | 56 | 1,894 | ||||||||||
Additions acquired through acquisitions (2) | 8,500 | 4,300 | 2,931 | - | 15,731 | ||||||||||
Impairments / Write-offs | - | - | - | - | - | ||||||||||
Balance at December 31, 2014 | $ | 8,500 | $ | 4,300 | $ | 14,002 | $ | 198 | $ | 27,000 | |||||
Additions | - | - | 2,799 | 6 | 2,805 | ||||||||||
Impairments / Write-offs | - | - | (29 | ) | - | (29 | ) | ||||||||
Balance at December 31, 2015 | $ | 8,500 | $ | 4,300 | $ | 16,772 | $ | 204 | $ | 29,776 | |||||
Amortization and impairment losses | |||||||||||||||
Balance at January 1, 2014 | $ | - | $ | - | $ | 7,520 | $ | - | $ | 7,520 | |||||
Amortization for the year | 74 | - | 1,086 | - | 1,160 | ||||||||||
Impairments / Write-offs | - | - | - | - | - | ||||||||||
Balance at December 31, 2014 | $ | 74 | $ | - | $ | 8,606 | $ | - | $ | 8,680 | |||||
Amortization for the year | 847 | - | 1,662 | - | 2,509 | ||||||||||
Impairments / Write-offs | - | - | (29 | ) | - | (29 | ) | ||||||||
Balance at December 31, 2015 | $ | 921 | $ | - | $ | 10,239 | $ | - | $ | 11,160 | |||||
Carrying amounts | |||||||||||||||
At December 31, 2014 | $ | 8,426 | $ | 4,300 | $ | 5,396 | $ | 198 | $ | 18,320 | |||||
At December 31, 2015 | $ | 7,579 | $ | 4,300 | $ | 6,533 | $ | 204 | $ | 18,616 |
(1) |
Domain names and Other which includes Patents and Trademarks are deemed to have indefinite useful lives and are therefore not amortized. The Company's classification of certain intangible assets with indefinite useful lives is based on the expectation that these assets will continue to contribute to the Companys net cash inflows on an indefinite basis. The determination of these assets as having indefinite useful lives is based on judgment that includes an analysis of all relevant factors, including the expected usage of the asset, anticipated renewal of the licenses, the typical life cycle of the asset and anticipated changes in the market demand for the products and services that the asset helps generate. | |
(2) |
See note 24 for Acquisition of Businesses in fiscal 2014. | |
(3) |
Technology includes technological assets acquired through acquisitions and internal use software development costs. |
During the year ended December 31, 2015, an amount of $1,122 was recognized as research and development expenses (2014 - $1,198).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
9. GOODWILL
Cost | |||
Balance at January 1, 2014 | $ | 2,580 | |
Additions1 | 4,550 | ||
Impairments | - | ||
Balance at December 31, 2014 | $ | 7,130 | |
Additions | - | ||
Impairments | - | ||
Balance at December 31, 2015 | $ | 7,130 |
1See note 24 for additions to goodwill in 2014
Impairment testing for cash-generating units containing goodwill as at December 31, 2015
The Corporation tests cash generating units (CGUs) or groups of cash generating units with indefinite life intangible assets and/or allocated goodwill for impairment as at December 31 of each calendar year. For the purposes of the 2015 annual impairment testing, management has determined that the Corporation has a single CGU, Points International Ltd. The goodwill acquired as part of the Milepoint acquisition in 2004 was previously allocated to a group of CGUs comprising certain partner relationships of the business (the Milepoint CGU). The technology acquired from each of the Corporations historical acquisitions, including Milepoint, has been further augmented and integrated with the Company's new Loyalty Commerce Platform in 2015. Management determined that this development represented a significant change in the independently generated cash flows and that the business is a single operating unit which represents the smallest group of assets generating independent cash flows. Goodwill and indefinite life intangible assets are tested as part of the Points International Ltd. CGU.
When assessing whether or not there is impairment, the Corporation determines the recoverable amount of a cash generating unit based on the greater of its value in use or its fair value less costs to sell. Value in use is estimated by discounting estimated future cash flows to their present value. We estimate the discounted future cash flows for periods of up to five years and a terminal value. The future cash flows are based on our estimates and expected future operating results of the cash generating unit after considering economic conditions and a general outlook for the cash generating unit's industry. Discount rates consider market rates of return, debt to equity ratios and certain risk premiums, among other things. The terminal value is the value attributed to the cash generating unit's operations beyond the projected time period of the cash flows using a perpetuity rate based on expected economic conditions and a general outlook for the industry.
We have made certain assumptions for the discount and terminal growth rates to reflect variations in expected future cash flows. These assumptions may differ or change quickly depending on economic conditions or other events. It is therefore possible that future changes in assumptions may negatively affect future valuations of cash generating units and goodwill, which could result in impairment losses.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
The table below is an overview of the methods and assumptions we used to determine recoverable amounts for the cash generating unit with indefinite life intangible assets and goodwill.
(In thousands of dollars, except years and percentages) | ||||||||||||||||||
Carrying | Carrying value | Recoverable | Period | Terminal | Pre-tax | |||||||||||||
value of | of indefinite-life | amount | used | growth | discount | |||||||||||||
goodwill | intangible assets | method | (years) | rate % | rate % | |||||||||||||
Points International Ltd. | $ | 7,130 | $ | 4,300 | Value in Use | 5 | 2.5% | 20.9% |
Impairment losses
We did not record an impairment
charge to goodwill in 2015 or 2014.
10. INCOME TAXES
2015 | 2014 | |||||
Current Tax Expense | ||||||
Current year | $ | 213 | $ | 252 | ||
Prior year | - | $ | (28 | ) | ||
$ | 213 | $ | 224 |
2015 | 2014 | |||||
Deferred Tax Expense | ||||||
Current year movement in recognized temporary differences and losses | 2,261 | 2,029 | ||||
Recognition of previously unrecognized tax losses | - | (165 | ) | |||
$ | 2,261 | $ | 1,864 | |||
Total income tax expense | $ | 2,474 | $ | 2,088 |
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
Income tax recognized in other comprehensive income
For the year ended December 31, | 2015 | 2014 | ||||||||||||||||
In thousands of US dollars | Before | Tax | Before | Tax | ||||||||||||||
tax | benefit | Net of tax | tax | benefit | Net of tax | |||||||||||||
Loss on foreign exchange
derivatives designated as cash flow hedges |
$ | (1,796 | ) | $ | 476 | $ | (1,320 | ) | $ | (779 | ) | $ | 206 | $ | (573 | ) | ||
Reclassification to net
income of loss on foreign exchange derivatives designated as cash flow hedges |
1,428 | (378 | ) | 1,050 | 767 | (203 | ) | 564 | ||||||||||
$ | (368 | ) | $ | 98 | $ | (270 | ) | $ | (12 | ) | $ | 3 | $ | (9 | ) |
Reconciliation of effective tax rate
The total provision for income taxes differs from that amount which would be computed by applying the Canadian federal income tax rate to income before income taxes. The reasons for these differences are as follows:
2015 | 2014 | |||||
Income tax expense at statutory rate of 26.5% (2014 26.5%) | $ | 2,024 | $ | 1,793 | ||
Increase (decrease) in taxes resulting from: | ||||||
Tax cost of non-deductible items | 296 | 275 | ||||
Recognition of previously unrecognized tax losses | - | (165 | ) | |||
Other differences | 154 | 185 | ||||
Income tax expense | $ | 2,474 | $ | 2,088 |
Recognized deferred tax assets
Deferred tax assets are attributable to the following:
In thousands of US dollars | 2015 | 2014 | ||||
Deferred tax assets | ||||||
Property and equipment | $ | - | $ | 1,373 | ||
Forward exchange contracts | 209 | 111 | ||||
Intangibles | 760 | 511 | ||||
Reserves | 2 | 14 | ||||
RSU | 314 | 356 | ||||
Tax losses | 401 | 1,127 | ||||
$ | 1,686 | $ | 3,492 | |||
Deferred tax liabilities | ||||||
Property and equipment | $ | 356 | - | |||
Forward exchange contracts | - | - | ||||
Intangibles | - | - | ||||
Reserves | - | - | ||||
RSU | - | - | ||||
$ | 356 | $ | - | |||
Net deferred tax assets | $ | 1,330 | $ | 3,492 |
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
The Corporation has capital losses of $5,456 (2014 $5,456) which can be carried forward indefinitely and are not included as part of the deferred tax asset.
The Corporation has non-capital loss carry-forwards in Canada for income tax purposes in the amount of approximately $1,485. The losses may be used to reduce future years' taxable income and expire approximately as follows:
Total | |||
2032 | $ | 1,485 | |
Total | $ | 1,485 |
The utilization of the deferred tax assets is dependent upon future taxable profits in excess of the profits arising on the reversal of existing taxable temporary differences.
Unrecognized deferred tax assets and liabilities
Deferred tax assets and liabilities have not been recognized in respect of the following items:
2015 | 2014 | |||||
Tax losses | $ | 723 | $ | 723 | ||
Net deferred tax asset | $ | 723 | $ | 723 |
Current Tax Receivable and Payable
The Corporation has recognized a current tax receivable of $160 (2014 nil) within the Prepaid expenses and other assets balance presented on the balance sheet. In addition, the Corporation has recognized a current tax liability of $278 (2014 - $309) within the Accounts payable and accrued liabilities.
Temporary Differences Associated with Points International Limited Investments
The temporary difference associated with the investments in the Corporations subsidiaries is $370. A deferred tax liability associated with these investments has not been recognized as the Corporation controls the timing of the reversal and it is probable that the temporary difference will not reverse in the foreseeable future.
At December 31, 2015, a deferred tax liability of nil (2014 nil) was recognized for taxes that would be payable on the unremitted earnings of certain subsidiaries of Points International Limited as the Corporation has determined that the undistributed profits of its subsidiaries will not be distributed in the foreseeable future.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
11. OTHER LIABILITIES
2015 | 2014 | |||||
Forw ard exchange contracts designated as cash flow hedges | $ | 845 | $ | 665 | ||
Current portion of lease inducements | 152 | 132 | ||||
Current portion of deferred revenue | 855 | 488 | ||||
Current portion of other liabilities | $ | 1,852 | $ | 1,285 | ||
Non-current portion of lease inducements | 76 | 214 | ||||
Non-current portion of deferred revenue | 46 | 55 | ||||
Other liabilities | $ | 122 | $ | 269 |
12. CAPITAL AND OTHER COMPONENTS OF EQUITY
Authorized with no Par Value
Unlimited
common shares
Unlimited preferred shares
Issued
At December 31, 2015 all issued shares are fully paid. The holders of common shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share. There were no dividends declared in 2015 (2014 nil).
Accumulated other comprehensive income
Accumulated other comprehensive income is comprised of the unrealized gains/losses on cash flow hedges. The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.
Normal Course Issuer Bid (NCIB)
On February 4, 2015, the Board of Directors of the Corporation approved a plan to repurchase the Corporations common shares. The Corporation was informed that the Toronto Stock Exchange ("TSX") accepted its notice of intention to make an NCIB to repurchase up to 782,504 of its common shares (the "Repurchase"), representing approximately 5% of its 15,650,085 common shares issued and outstanding as of February 25, 2015.
The Company repurchased and cancelled, through the facilities of the TSX, 439,094 common shares, at an aggregate purchase price of $4,567, for the year ended December 31, 2015, resulting in a reduction to stated capital and contributed surplus of $1,704 and $2,863, respectively. All of these shares were repurchased for cancellation pursuant to private agreements between the Company and arm's-length third party sellers. These purchases were made under issuer bid exemption orders issued by the Ontario Securities Commission and are included in calculating the number of common shares that the Company may purchase pursuant to the NCIB.
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
Capital management
The Corporations financial strategy is designed and formulated to maintain a flexible capital structure to allow the Corporation the ability to respond to changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust its capital structure, the Corporation may issue debt. The Corporations financing and refinancing decisions are made on a specific transaction basis and depend on such things as the Corporations needs, and market and economic conditions at the time of the transaction. The Corporation may invest in longer or shorter term investments depending on eventual liquidity requirements. The Corporation does not have any externally imposed capital compliance requirements other than restricted cash and those required to maintain the credit facilities. There were no changes in the Corporations approach to capital management during the year.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
2015 | 2014 | |||||
Net income available to common shareholders for basic and diluted earnings per share | $ | 5,165 | $ | 4,684 | ||
Weighted average number of common shares outstanding basic | 15,547,595 | 15,402,258 | ||||
Effect of dilutive securities share-based payments | 53,575 | 224,801 | ||||
Weighted average number of common shares outstanding diluted | 15,601,170 | 15,627,059 | ||||
Earnings per share - reported | ||||||
Basic | $ | 0.33 | $ | 0.30 | ||
Diluted | $ | 0.33 | $ | 0.30 |
a) |
Basic earnings per share |
Earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the year.
b) |
Diluted earnings per share |
Diluted earnings per share represents what the net income per share would be if instruments convertible into common shares had been converted at the beginning of the period, or at the time of issuance, if later. In determining diluted earnings per share, the average number of common shares outstanding is increased by the number of shares that would have been issued if all share options with an issue price below the average share price for the period had been exercised at the beginning of the period, or at the time of issuance, if later. The average number of common shares outstanding is also decreased by the number of common shares that could have been repurchased on the open market at the average share price for the year by using the proceeds from the exercise of share options. Share options with a strike price above the average share price for the period are not adjusted because including them would be anti-dilutive.
At December 31, 2015, 618,880 options (2014 - 125,500) were excluded from the diluted weighted average number of common shares calculation as their effect would have been anti-dilutive.
The average market value of the Corporations shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding.
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
14. SHARE-BASED PAYMENTS
As at December 31, 2015, the Corporation had two share-based compensation plans for its employees: a share option plan and a share unit plan.
Share option plan
Under the share option plan, employees, directors and consultants are periodically granted share options to purchase common shares at prices not less than the market price of the common shares on the day prior to the date of grant. The options generally vest over a three-year period and expire at the end of five years from the grant date. Under the plan, share options can only be settled in equity.
December 31, 2015 | December 31, 2014 | |||||
Options authorized by shareholders | 2,250,000 | 2,250,000 | ||||
Less: options exercised | (1,380,111 | ) | (1,244,713 | ) | ||
Net options authorized | 869,889 | 1,005,287 | ||||
Less: options issued and outstanding | (760,774 | ) | (547,289 | ) | ||
Options available for grant | 109,115 | 457,998 |
Fair value
The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. Expected volatility is determined by the amount the Corporations daily share price fluctuated over the expected life of the options. The fair value of options granted in 2015 and 2014 were calculated using the following weighted assumptions:
2015 | 2014 | |||||
Dividend yield | NIL | NIL | ||||
Risk free rate | 0.51% | 1.20% | ||||
Expected volatility | 40.39% | 36.63% | ||||
Expected life of options in years | 4.20 | 4.20 |
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
A summary of the status of the Corporations share option plan as of December 31, 2015 and 2014, and changes during the years ended on those dates is presented below.
2015 | 2014 | |||||||||||
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Number of | Exercise Price | Number of | Exercise Price | |||||||||
Options | (in CAD$) | Options | (in CAD$) | |||||||||
Beginning of year | 547,289 | $ | 15.34 | 478,593 | $ | 10.13 | ||||||
Granted | 375,906 | $ | 12.34 | 126,252 | 30.74 | |||||||
Exercised | (135,398 | ) | $ | 6.24 | (55,713 | ) | 5.14 | |||||
Expired and forfeited | (27,023 | ) | $ | 12.19 | (1,843 | ) | 23.91 | |||||
End of year | 760,774 | $ | 15.59 | 547,289 | $ | 15.34 | ||||||
Exercisable at end of year | 314,105 | $ | 15.11 | 232,748 | $ | 9.87 | ||||||
Weighted average fair value of options granted | $ | 3.85 | $ | 9.54 |
Options outstanding | Options exercisable | ||||||||||||||
Weighted | |||||||||||||||
Weighted average | average | Weighted | |||||||||||||
remaining | exercise | average | |||||||||||||
Range of Exercise | Number | contractual life | price (in | Number | exercise price | ||||||||||
Prices (in CAD$) | of options | (years) | CAD$) | of options | (in CAD$) | ||||||||||
$5.00 to $9.99 | 87,745 | 1.20 | $ | 9.73 | 87,745 | $ | 9.73 | ||||||||
$10.00 to $14.99 | 407,684 | 3.69 | $ | 12.17 | 84,035 | $ | 11.50 | ||||||||
$15.00 to $19.99 | 143,553 | 2.23 | $ | 15.97 | 98,348 | $ | 15.96 | ||||||||
$20.00 and over | 121,792 | 3.21 | $ | 30.84 | 43,977 | $ | 30.84 | ||||||||
760,774 | 314,105 |
Share unit plan
On March 7, 2012 the Corporation implemented an employee share unit plan (the Share Unit Plan) under which employees are periodically granted RSUs and PSUs. The RSUs vest either over a period of three years or in full on the third anniversary of the grant date. During 2015, 242,860 RSUs have been granted (2014 - 53,279) and there were no PSUs issued (2014 73,758). As at December 31, 2015, 301,841 RSUs and nil PSUs were outstanding (2014 228,035 RSUs and PSUs).
Number of RSUs | ||||||
and PSUs | Weighted Average Fair Value (in CAD$) | |||||
Balance at January 1, 2015 | 228,035 | $ | 20.38 | |||
Granted | 242,860 | $ | 12.92 | |||
Vested | (64,119 | ) | $ | 12.51 | ||
Forfeited | (104,935 | ) | $ | 22.30 | ||
Balance at December 31, 2015 | 301,841 | $ | 15.38 |
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
Number of RSUs and | ||||||
PSUs | Weighted Average Fair Value (in CAD$) | |||||
Balance at January 1, 2014 | 126,438 | $ | 13.92 | |||
Granted | 127,037 | $ | 25.54 | |||
Vested | (12,000 | ) | $ | 10.32 | ||
Forfeited | (13,440 | ) | $ | 17.35 | ||
Balance at December 31, 2014 | 228,035 | $ | 20.38 |
Included in the table above are 73,758 PSUs which were granted to certain employees in 2014 and were all forfeited in 2015.
The fair value of each RSU, determined at the date of grant using the volume weighted average trading price per share on the TSX during the immediately preceding five trading days, is recognized over the RSUs vesting period and charged to profit or loss with a corresponding increase in contributed surplus.
Under the Share Unit Plan, share units can be settled in cash or shares at the 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. For the year ended December 31, 2015, the Corporation made two purchases of the Corporations common shares for a total of 97,360 shares (2014 - 32,000) for $1,215 (2014 - $731). As at December 31, 2015, 153,453 of the Corporations common shares were held in trust.
The Corporation accounts for the share-based awards granted under both plans in accordance with the fair value based method of accounting for equity settled share-based compensation arrangements per IFRS 2, Share-based Payment. The estimated fair value of the awards that are ultimately expected to vest is recorded over the vesting period as part of employment costs. The compensation cost for all share-based awards that has been charged against profit or loss and included in employment costs is $1,588 for the year ended December 31, 2015 (2014 - $1,821).
15. OPERATING EXPENSES
2015 | 2014 | |||||
Office expenses | $ | 1,227 | $ | 1,118 | ||
Travel and personnel expenses | 1,725 | 1,844 | ||||
Professional fees | 1,482 | 1,838 | ||||
Insurance, bad debts and governance | 1,432 | 810 | ||||
Operating expenses | $ | 5,866 | $ | 5,610 |
16. FINANCIAL INSTRUMENTS
The Corporation has exposure to the following risks from its use of financial instruments:
| credit risk |
| liquidity risk |
| market risk |
This note presents information about the Corporations exposure to each of the above risks, the Corporations objectives, policies and processes for measuring and managing risk, and the Corporations management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the Corporations risk management framework. The Corporations risk management policies are established to identify and analyze the risks faced by the Corporation, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Corporations activities. The Corporation, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Corporations Audit Committee oversees how management monitors compliance with the Corporations risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Corporation.
Credit risk
Credit risk is the risk of financial loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Corporations receivables from customers.
The Corporations cash and cash equivalents and restricted cash held as collateral also subject the Corporation to credit risk. The Corporation has term deposits, consistent with its practice of protecting its capital rather than maximizing investment yield. The Corporation manages credit risk by investing in cash equivalents and term deposits rated at A or R1 or above.
The Corporation, in the normal course of business, is exposed to credit risk from its customers and the accounts receivable are subject to normal industry risks. The Corporation usually provides various loyalty currency services to loyalty program operators which normally results in an amount payable to the loyalty program operator in excess of the amount held in accounts receivable. The Corporation also manages and analyzes its accounts receivable on an ongoing basis and hence the Corporations exposure to bad debts has not been significant.
The aging of accounts receivable is as follows:
December 31, 2015 | December 31, 2014 | |||||
Current | $ | 2,217 | $ | 1,882 | ||
Past due 3160 days | 77 | 30 | ||||
Past due 6190 days | 261 | 175 | ||||
Past due 91120 days | 112 | 88 | ||||
Past due over 120 days | 367 | 166 | ||||
Trade accounts receivable | 3,034 | 2,341 | ||||
Less allowance for doubtful accounts | (46 | ) | (36 | ) | ||
$ | 2,988 | $ | 2,305 |
The following table provides the change in allowance for doubtful accounts for trade accounts receivable:
2015 | 2014 | |||||
Balance, beginning of year | $ | 36 | $ | 13 | ||
Provision for doubtful accounts | 61 | 32 | ||||
Bad debts written off, net of recoveries | (51 | ) | (9 | ) | ||
Balance, end of year | $ | 46 | $ | 36 |
The provision for doubtful accounts has been included in operating expenses in the consolidated statements of comprehensive income, and is net of any recoveries of amounts that were provided for in a prior period. The carrying amount of the Corporations financial assets represent its maximum exposure to credit risk.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
Liquidity risk
Liquidity risk is the risk that the Corporation will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Corporation actively maintains access to adequate funding sources to ensure it has sufficient available funds to meet current and foreseeable financial requirements at a reasonable cost. The following table summarizes the carrying amount and the contractual maturities of both the interest and principal portion of significant financial liabilities as at December 31, 2015 and 2014:
Contractual Cash Flow Maturities | |||||||||||||||
Carrying | Total | Within 1 | 1 year | 3 years | |||||||||||
Amount | year | to 3 | and | ||||||||||||
As at December 31, 2015 | years | beyond | |||||||||||||
Accounts payable and accrued liabilities | $ | 5,808 | $ | 5,808 | $ | 5,808 | $ | - | $ | - | |||||
Forward exchange contracts designated | |||||||||||||||
as cash flow hedges | 845 | 845 | 845 | - | - | ||||||||||
Payable to loyalty program partners | 49,526 | 49,526 | 49,526 | - | - | ||||||||||
$ | 56,179 | $ | 56,179 | $ | 56,179 | $ | - | $ | - |
Contractual Cash Flow Maturities | |||||||||||||||
Carrying | Total | Within 1 | 1 year | 3 years | |||||||||||
Amount | year | to 3 | and | ||||||||||||
As at December 31, 2014 | years | beyond | |||||||||||||
Accounts payable and accrued liabilities | $ | 6,260 | $ | 6,260 | $ | 6,260 | $ | - | $ | - | |||||
Forward exchange contracts designated | |||||||||||||||
as cash flow hedges | 665 | 665 | 665 | - | - | ||||||||||
Payable to loyalty program partners | 36,030 | 36,030 | 36,030 | - | - | ||||||||||
$ | 42,955 | $ | 42,955 | $ | 42,955 | $ | - | $ | - |
Management believes that cash on hand, future cash flows generated from operations and availability of current and future funding will be adequate to repay these financial liabilities when they become due.
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Corporations cash flows or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.
Currency risk
The Corporation has customers and suppliers that transact in currencies other than the US dollar which gives rise to a risk that earnings and cash flows may be adversely affected by fluctuations in foreign currency exchange rates. The Corporation is primarily exposed to the Canadian dollar, the EURO and the British Pound. The Corporation enters into foreign exchange forward contracts to reduce the foreign exchange risk with respect to Canadian dollar denominated disbursements and revenues which are denominated in the EURO. Revenues earned from the Corporations partners based in Canada are contracted in and paid in Canadian dollars. The Corporation uses these funds to fund the Canadian operating expenses thereby reducing its exposure to foreign currency fluctuations.
As at December 31, 2015, forward contracts with a notional value of $13,599, and in a net liability position of $825 (2014 $457 in liability position), with settlement dates extending to November 2016, have been designated as cash flow hedges for hedge accounting treatment under IAS 39, Financial Instruments: Recognition and Measurement. These contracts are intended to reduce the foreign exchange risk with respect to anticipated Canadian dollar denominated expenses and EURO denominated revenue.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
The change in fair value of derivatives designated in cash flow hedges is recognized in other comprehensive income, except for any ineffective portion, which is recognized immediately in the foreign exchange gain or loss. As at December 31, 2015 and 2014, all hedges were considered effective. Realized gains and losses in accumulated other comprehensive income are reclassified to profit or loss in the same period as the corresponding hedged items are recognized in income. In 2015, total realized losses of $1,784 were reclassified to employment costs (2014 - $758 total realized losses) for Canadian dollar currency hedges and realized gains of $356 (2014 - $10 total realized losses) were reclassified to principal revenue for EURO currency hedges. The carrying amount of hedging derivatives designated in cash flow hedges that mature within one year is included in prepaid expenses and other assets and/or current portion of other liabilities.
The Corporation holds balances in foreign currencies that give rise to exposure to foreign exchange risk. In general and strictly relating to the foreign exchange (FX) gain or loss of translating certain non-US dollars balance sheet accounts, a strengthening US dollar will lead to an FX loss on assets and gain on liabilities and vice versa. Sensitivity to a +/- 10% movement in all currencies held by the Corporation versus the US dollar would affect the Corporations net income by $56 (2014 - $107) excluding the effect of hedging. Significant balances denominated in foreign currencies that are considered financial instruments are as follows:
As at December 31, 2015 | USD Total | CAD | GBP | EUR | ||||||||
FX Rates used to translate to USD | 0.7209 | 1.4802 | 1.0906 | |||||||||
Financial assets | ||||||||||||
Cash and cash equivalents | $ | 51,364 | 2,848 | 2,529 | 3,207 | |||||||
Restricted cash | 1,000 | - | - | - | ||||||||
Funds receivable from payment processors | 6,588 | - | 457 | 576 | ||||||||
Accounts receivable | 2,988 | 586 | 476 | 51 | ||||||||
$ | 61,940 | 3,434 | 3,462 | 3,834 | ||||||||
Financial liabilities | ||||||||||||
Accounts payable and accrued liabilities | $ | 5,808 | 4,294 | 597 | 55 | |||||||
Payable to loyalty program partners | 49,526 | - | 2,846 | 3,786 | ||||||||
$ | 55,334 | 4,294 | 3,443 | 3,841 |
As at December 31, 2014 | USD Total | CAD | GBP | EUR | ||||||||
FX Rates used to translate to USD | 0.8599 | 1.5532 | 1.2155 | |||||||||
Financial assets | ||||||||||||
Cash and cash equivalents | $ | 36,868 | 69 | 2,498 | 5,349 | |||||||
Restricted cash | 1,573 | 376 | - | - | ||||||||
Funds receivable from payment processors | 6,691 | 1 | 768 | 1,516 | ||||||||
Accounts receivable | 2,305 | 592 | 367 | 58 | ||||||||
$ | 47,437 | 1,038 | 3,633 | 6,923 | ||||||||
Financial liabilities | ||||||||||||
Accounts payable and accrued liabilities | $ | 6,260 | 3,530 | 447 | 95 | |||||||
Payable to loyalty program partners | 36,030 | - | 2,481 | 5,102 | ||||||||
$ | 42,290 | 3,530 | 2,928 | 5,197 |
Interest rate risk
The Corporation does not believe that the results of operations or cash flows would be affected to any significant degree by a sudden change in market interest rates, relative to interest rates on the investments, owing to the short-term nature of the investments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
Determination of fair value
For financial assets and liabilities that are valued at other than fair value on the consolidated statement of financial position (funds receivable from payment processors, security deposits, accounts receivable, accounts payable and accrued liabilities and payable to loyalty program partners), fair value approximates the carrying value at December 31, 2015 and 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 valuation methodologies, as disclosed below. However, considerable judgment is required to develop certain of these estimates. Accordingly, these estimated values are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies. The methods and assumptions used to estimate the fair value of each class of financial instruments are discussed below.
The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
|
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities | |
|
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) | |
|
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). |
Quoted market prices for an identical asset or liability represent a Level 1 valuation. When quoted market prices are not available, the Corporation maximizes the use of observable inputs within valuation models. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the use of significant unobservable inputs are considered Level 3. The fair value of financial assets and financial liabilities measured at fair value in the consolidated balance sheet as at December 31, 2015 and 2014 are as follows:
2015 | Carrying Value | Level 2 | Level 3 | ||||||
Assets: | |||||||||
Forward exchange contracts designated as cash flow hedges(i) | $ | 20 | $ | 20 | $ | - | |||
Investment in China Rewards(ii) | 5,000 | - | 5,000 | ||||||
Liabilities: | |||||||||
Forward exchange contracts designated as cash flow hedges(i) | (845 | ) | (845 | ) | - | ||||
$ | 4,175 | $ | (825 | ) | $ | 5,000 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
2014 | Carrying Value | Level 2 | Level 3 | ||||||
Assets: | |||||||||
Forward exchange contracts designated as cash flow hedges(i) | $ | 208 | $ | 208 | $ | - | |||
Investment in China Rewards(ii) | 5,000 | - | 5,000 | ||||||
Liabilities: | |||||||||
Forward exchange contracts designated as cash flow hedges(i) | (665 | ) | (665 | ) | - | ||||
$ | 4,543 | $ | (457 | ) | $ | 5,000 |
(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 statements of financial position. | |
(ii) |
The valuation technique used by the Corporation for the Investment in China Rewards was a discounted cash flow approach. |
There were no material financial instruments categorized in Level 1 as at December 31, 2015 and December 31, 2014 and there were no transfers of fair value measurement between Levels 2 and 3 of the fair value hierarchy in the respective periods. There were no gains or losses recognized in other comprehensive loss as a result of financial instruments categorized in Level 3 during the year ended December 31, 2015 or 2014.
17. GUARANTEES AND COMMITMENTS
Total | Year 1(3) | Year 2 | Year 3 | Year 4 | Year 5+ | |||||||||||||
Operating leases(1) | $ | 8,087 | $ | 863 | $ | 1,443 | $ | 1,306 | $ | 1,238 | $ | 3,237 | ||||||
Principal revenue(2) | 670,163 | 169,344 | 194,168 | 170,751 | 135,900 | - | ||||||||||||
$ | 678,250 | $ | 170,207 | $ | 195,611 | $ | 172,057 | $ | 137,138 | $ | 3,237 |
(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 of purchase of points/miles, for each contract year, over the duration of the contract term between the Corporation and loyalty program partner. Management evaluates each guarantee at each interim reporting date and at the end of each contract year, to determine if the guarantee was met for that respective contract year. |
(3) |
The guarantees and commitments schedule is prepared on a rolling 12-month basis. |
The Corporation leases office premises, equipment and services under operating leases. The leases typically run for a period of 1 to 7 years, with an option to renew the lease after that date. During the year ended December 31, 2015 an amount of $730 was recognized as an expense in profit or loss in respect of operating leases (2014 - $721).
18. DETERMINATION OF FAIR VALUES
A number of the Corporations accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
(i) Intangible assets
The fair value of the
intangible assets, including customer relationships, acquired technology, domain
names, trademark, patents, and internally use software development costs, is
based on the present value of expected future cash flows, or using other
judgments and estimates, expected to be derived from the use and eventual sale
of the assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
(ii) Goodwill
The fair value of goodwill is based on
the discounted cash flows, less impairment, that are expected to be derived from
product offerings of specific contractual arrangements and the partner
relationships.
(iii) Derivatives
The fair value of forward exchange
contracts is based on valuations received from the derivative counterparty,
which management evaluates for reasonability. Fair values reflect the credit
risk of the instrument and include adjustments to take account of the credit
risk of the Corporation and the derivative counterparty when appropriate.
(iv) Long-term investment
The fair value of the
investment in China Rewards is based on a discounted cash flow approach.
19. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash balances related to operations are as follows:
2015 | 2014 | |||||
Decrease in funds receivable from payment processors | $ | 103 | $ | 2,380 | ||
Increase in accounts receivable | (683 | ) | (877 | ) | ||
(Increase) decrease in prepaid expenses and other assets | (122 | ) | 1,097 | |||
Increase in other assets | (2,073 | ) | (145 | ) | ||
(Decrease) increase in accounts payable and accrued liabilities | (452 | ) | 562 | |||
Increase (decrease) in other liabilities | 420 | (17 | ) | |||
Increase (decrease) in payable to loyalty program partners | 13,496 | (20,081 | ) | |||
$ | 10,689 | $ | (17,081 | ) |
20. 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
2015 | 2014 | |||||
Revenue | ||||||
United States | $ | 258,448 | $ | 218,445 | ||
Europe | 28,126 | 32,060 | ||||
Canada and other | 9,802 | 4,484 | ||||
$ | 296,376 | $ | 254,989 | |||
Revenue | ||||||
United States | 87% | 86% | ||||
Europe | 10% | 13% | ||||
Canada and other | 3% | 1% | ||||
100% | 100% |
Revenues earned by the Corporation are generated from sales to loyalty program partners directly or from sales directly to members of loyalty programs with which the Corporation partners. Revenue by geographic region are shown above and are based on the country of residence of each of the Corporations loyalty partners. At December 31, 2015 and 2014, substantially all of the Corporation's assets were in Canada.
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POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
Dependence on loyalty program partners
For the year ended December 31, 2015, there were three (2014 four) loyalty program partners for which sales to their members individually represented more than 10% of the Corporations total revenue. In aggregate these three partners represented 67% (2014 81% represented by four partners) of the Corporations total revenue.
21. RELATED PARTIES
Transactions with key management personnel
Transactions
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 over those companies. One 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 arms length. The amounts owing are unsecured, interest-free and due for payment under normal payment terms from the date of the transaction.
The Corporation recognized the value and outstanding balances related to these transactions as follows:
Transaction values for the year | Balance outstanding as at | |||||||||||
In thousands of Canadian dollars | ended December 31 | December 31 | ||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||
Marketing expenses | $ | 89 | $ | 137 | $ | 8 | $ | - |
The Corporation has an investment in China Rewards which allows it to elect one member of the Board of Directors. As at December 31, 2015, the Corporation had a receivable of $93 from China Rewards. 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. The Corporation has earned commission revenue of $14 on the aforementioned transactions.
Compensation
In addition to their salaries, the Corporation also provides non-cash benefits to directors and executive officers. Directors and executive officers participate in the Corporations share-based compensation plans (see Note 14).
Key management personnel compensation comprised the following:
In thousands of Canadian dollars | 2015 | 2014 | ||||
Short -term employee salaries and benefits | $ | 2,402 | $ | 2,632 | ||
Share-based payments | 1,904 | 1,352 | ||||
Total compensation | $ | 4,306 | $ | 3,984 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
22. CORPORATE ENTITIES
As at December 31, 2015, the Corporation has the following wholly-owned subsidiaries:
Country of | Ownership interest | ||
incorporation | |||
2015 | 2014 | ||
Points.com Inc. | Canada | 100% | 100% |
Points International (US) Ltd. | U.S.A. | 100% | 100% |
Points International (UK) Ltd. | U.K. | 100% | 100% |
Points Development (US) Ltd. | U.S.A. | 100% | 100% |
23. LONG-TERM INVESTMENT
In 2013, 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. The investment was agreed to be made in a series of tranches, subject to certain milestones being met.
As at December 31, 2015, the Corporation has made an investment of $5,000 in China Rewards, of which $1,500 was invested in 2014 and $3,500 was invested in 2013. This investment is classified as an available-for-sale security and measured at fair value on the consolidated statements of financial position with changes in fair value recorded in other comprehensive income. During 2015, there was no change in fair value (2014 nil).
24. ACQUISITION OF BUSINESSES
The Corporation made two acquisitions in 2014, which are described below. The acquisitions have been accounted for using the acquisition method of accounting in accordance with IFRS 3, Business Combinations, and included the results of operations of the acquired entities from the dates of acquisition in our consolidated statements of comprehensive income.
Accruity Inc.
On April 22, 2014, the Corporation purchased 100% of the common and preferred shares of Accruity Inc. (Accruity) for cash consideration of $2,000. Accruity is the San Francisco based start-up operator of the PointsHound loyalty-based hotel booking service, and the acquisition of Accruity will help the Corporation progress on its long term growth objectives. 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.
Goodwill of $1,449 represents the expected operational synergies to help broaden the Corporations customer facing product suite and intangible assets that do not qualify for separate recognition. The goodwill is not tax deductible.
Crew Marketing International, Inc.
On December 22, 2014, the Corporation purchased substantially all of the assets of Crew Marketing International, Inc. (Crew Marketing) for total consideration of $17,538. The consideration included $14,500 of cash consideration paid on the acquisition date. The acquisition included 238,393 units of restricted share consideration, with an acquisition date value of $2,788, held in escrow and to be paid 18 months from the date of acquisition. Crew Marketing provided technological and commercial applications to power loyalty commerce solutions for the United Airlines MileagePlus loyalty program, and as a result of the acquisition, the Corporation owns these applications and will be the provider of loyalty commerce solutions to United Airlines.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
Goodwill of $3,101 represents the expanded growth of the existing business with the United Airlines MileagePlus loyalty user base and the ability to promote technologies and applications to the existing customer base and/or intangible assets that do not qualify for separate recognition. The goodwill is tax deductible.
Consideration transferred, assets acquired and liabilities assumed
The total consideration and calculation of goodwill in the 2014 acquisitions is shown below:
Crew Marketing International, Inc. |
Accruity Inc. | |||||
Cash | $ | 14,500 | $ | 1,525 | ||
Holdback | 250 | 475 | ||||
Equity consideration | 2,788 | - | ||||
Total consideration | $ | 17,538 | $ | 2,000 | ||
Fair value of consideration transferred | $ | 17,538 | $ | 2,000 | ||
Current assets | - | 62 | ||||
Customer relationship | 8,500 | - | ||||
Domain names | 4,300 | - | ||||
Technology | 2,200 | 731 | ||||
Current liabilities | - | (192 | ) | |||
Deferred tax liability | (563 | ) | (50 | ) | ||
Fair value of net identifiable assets acquired and liabilities assumed | 14,437 | 551 | ||||
Goodwill | $ | 3,101 | $ | 1,449 |
25. CREDIT FACILITIES
On July 2, 2015, the Corporation entered into a bank credit facility agreement with Royal Bank of Canada, in which the following three credit facilities became available to the Corporation:
|
Revolving term facility (Facility #1) of $6,000 available until July 2, 2016. The interest rate charged on borrowings from Facility #1 ranges from 0.35% to 0.75% per annum over the bank base rate. | |
|
Term loan facility (Facility #2) of $7,500 to be utilized solely for the purposes of financing the cash consideration relating to acquisitions made by the Corporation. This facility is available until July 2, 2016. The interest rate charged on borrowings from Facility #2 ranges from 0.40% to 0.80% per annum over the bank base rate. | |
|
Term loan facility (Facility #3) of $7,000 to be utilized solely for the purposes of repurchasing the Corporations common shares. This facility is available until March 8, 2016. The interest rate charged on borrowings from Facility #3 ranges from 0.40% to 0.80% per annum over the bank base rate. |
The aggregate borrowings outstanding under both Facility #2 and Facility #3 must not exceed $7,500. There have been no borrowings to date under any of these facilities. The Corporation is required to comply with certain financial and non-financial covenants under the agreement. The Corporation is in compliance with all applicable covenants on its interest bearing loans and facilities during the year ended December 31, 2015.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
[All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted] |
26. SUBSEQUENT EVENT
On March 2, 2016, the Board of Directors of the Corporation approved a plan to repurchase the Corporations common shares. The Corporation has been informed that the Toronto Stock Exchange ("TSX") has approved its notice of intention to make a normal course issuer bid to repurchase up to 764,930 of its common shares (the "Repurchase"), representing approximately 5% of its 15,298,602 common shares issued and outstanding as of February 24, 2016.
The primary purpose of the Repurchase is for cancellation. Repurchases will be made from time-to-time at the Corporations' discretion, based on ongoing assessments of the Corporations' capital needs, the market price of its common shares, general market conditions and other factors. Repurchases may be effected through the facilities of the TSX, the NASDAQ Capital Market or other alternative trading systems in the United States and Canada. The actual number of common shares purchased and the timing of such purchases will be determined by management considering market conditions, stock prices, its cash position, and other factors.
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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 audited consolidated financial statements (including the notes thereto) for the years ended December 31, 2015 and 2014. Further information, including the Annual Information Form (AIF) and Form 40-F for the year ended December 31, 2015, 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 March 2, 2016 and was reviewed by the Audit Committee and approved by 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 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 fourth quarter and 2015 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.
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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, the Corporation 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 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 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.
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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 and services help the worlds 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 Loyalty Wallet, 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 for their parent companies and are increasingly seen as strategic marketing and business assets. Points provides products and services which enhance these loyalty programs and the member engagement which is so critical to the success of the program. 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 Corporations 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 Corporations 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 Corporations business relationships with its Loyalty Partners enables the products and services offered by Points to be exposed to the vast memberships of these loyalty programs. Access to these growing loyalty membership databases provides growth opportunities for the Corporation by increasing the overall level of member engagement with the Corporations 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 and products and services provides a further growth opportunity for Points. With direct integrations into more than 50 of the worlds leading loyalty programs and access to over 500 million loyalty members, the LCP uniquely positions the Corporation to connect third parties channels with highly engaged loyalty program members and the broader loyalty market.
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The Corporations e-commerce solutions are utilized by over 50 of the worlds leading loyalty programs, including:
| United Airlines MileagePlus | | InterContinental Hotels Group |
| Southwest Airlines Rapid Rewards | | Scandinavian Airlines EuroBonus |
| 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 Express Membership Rewards |
| American Airlines AAdvantage | | Lanpass |
In 2015, Points e-commerce solutions delivered approximately $400 million annually in incremental revenue for Points loyalty program partners. 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 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 currency 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 also earns interest income on the cash flows
generated by its products and services.
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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 Corporations loyalty program members. The loyalty commerce platform provides a medium to more easily facilitate transactions and provide greater value to a programs 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 platforms capabilities, Management believes the addressable market opportunity for the Corporation will continue to increase.
OPERATING HIGHLIGHTS AND DEVELOPMENTS
Financial Growth
During 2015, the Corporation continued to generate strong growth across key financial metrics while absorbing the impact of airline industry consolidation. Points generated record revenues of $296,376 in 2015, an increase of 16% over 2014. The addition of new principal partnerships over the past twelve months combined with strong organic growth from existing partners, more than offset the impact of the departure of the American Airlines and US Airways BGT products at the beginning of 2015. Most notably, 2015 represented the first full year of operating Points long-term principal partnership with United Airlines Mileage Plus program, which launched in late 2014.
From a profitability perspective, the Corporation generated net income of $5,165 in 2015, an increase of 10% over 2014. Further, the Corporation delivered record Adjusted EBITDA (please refer to Adjusted EBITDA on page 13 for definition) of $11,054 in 2015, an increase of 22% over 2014. The Corporation takes a balanced approach to managing the business, based not only on short term profitability targets but also with a view to investing against significant market opportunities. Adjusted EBITDA in 2015 reflected this balanced approach, with gross margin dollars from core retailing products continuing to grow in 2015 while increasing investments were made to advance the scale and functionality of the Corporations LCP. During the year, 66% of incremental gross margin generated in 2015 contributed to increased Adjusted EBITDA.
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The Loyalty Commerce Platform - Expanding Points Addressable Market Opportunities Through Investment
The Corporations business and the loyalty market continued to evolve in 2015. As part of this evolution, Points continued to expand the LCP for loyalty programs and third party developers. Management continues to see an increasing number of ways in which loyalty programs, third parties, and merchants are starting to leverage the functionality of the LCP, introducing a broader range of revenue opportunities for the Corporation.
Leveraging these platform advancements, the Corporation announced its Loyalty Wallet offering in 2015. The Loyalty Wallet is a distributable set of platform capabilities, accessible via APIs that allow loyalty programs, merchants, and third parties to embed balance tracking and loyalty commerce transactions into their product offerings. The distributable functionality of the Loyalty Wallet enables the Corporation to broadly distribute loyalty currencies and loyalty commerce transactions through multiple distribution channels. Management believes these third party distribution channels will significantly increase the market opportunity for the Corporation, by engaging loyalty program members in their preferred channel with personalized loyalty transactions. The Corporation is uniquely positioned to connect third party channels with highly engaged loyalty program members and the broader loyalty market.
As the Corporation has continued to advance the capabilities of the LCP, so too has the pace of product innovation on the platform. Leveraging the online travel assets acquired in the 2014 acquisition of Accruity Inc., and its San Francisco based hotel booking service PointsHound, the Corporation completed the first stage of its private-branded hotel e-commerce platform in 2015, branded Points Travel. The Points Travel product connects online hotel bookings with loyalty, quickly integrating into a loyalty programs web and mobile properties to create a unique travel e-commerce offering that is program-branded and leverages the transactional capabilities of the loyalty commerce platform. This new innovation represents a distinct product offering to the worlds loyalty programs, further increasing the addressable market opportunity to the Corporation by connecting loyalty with the online travel vertical.
Lastly, investments against the LCP in 2015 were focused on enhancing the functionality and efficiency of the Corporations core BGT retailing products. Development efforts were focused on expanding marketing and merchandising capabilities, including responsive design, personalized offers, and mid and back office efficiencies. The initial roll out of these new capabilities with existing BGT partners began in 2015, and the Corporation expects to advance this migration in 2016. Management anticipates measureable improvements across these core products, including increased transactions and conversions.
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Management will continue to invest against the advancement of the LCP to position the Corporation to better facilitate the growth and innovation of the broader loyalty industry and capture what management views as a significant market opportunity. In addition, these investments will enable the corporation to add scale to the business, which it believes will lead to stronger operating leverage in the future.
New Partnerships & Products
The Corporation was successful in growing the breadth and depth of its loyalty network in 2015, with new partner signings across both its core retailing products and newer product innovations such as the Loyalty Wallet and Points Travel.
In support of its loyalty wallet efforts, the Corporation launched a redesigned Points.com in the third quarter of 2015, now branded the Points Loyalty Wallet, which features a responsive design for mobile devices and a new user interface that is designed to increase user engagement within the wallet. More importantly, the Corporation announced new Loyalty Wallet partnerships with Suretap, a leader in open mobile wallet technology with support from Canadas major wireless carriers, and the Royal Bank of Canada (RBC), the largest financial institution in Canada. Through these new distribution partnerships, the loyalty commerce platform will power a loyalty section for these respective wallets, where users will be able to store loyalty information from more than 100 loyalty reward currencies, making it easier to earn and use loyalty currencies. Once loyalty card information is integrated, consumers in these wallets may be able to scan or tap their phone at the point of sale to make a purchase, redeem a coupon, and collect loyalty points. Expected to be in market in 2016, these new loyalty wallet partnerships, are a first step in the LCP facilitating the broad distribution of loyalty currencies and loyalty commerce transactions by engaging program members in the channels they use with relevant transactions.
Building on the Corporation's Points Travel development efforts, the Corporation announced a new partnership with Miles & More GmbH in 2015, Europes largest loyalty program and the frequent flyer currency for Lufthansa and nine other European airlines. Miles & More members will now have the ability to earn miles at over 100,000 hotels globally through the Points Travel product. In addition, just after the fourth quarter of 2015, the Corporation announced and launched a new Points Travel partnership with La Quinta Inns & Suites. The new product offering enables La Quinta Returns members the ability to redeem their account balances for online bookings at thousands of luxury hotels and resorts. Redemptions can be made using loyalty currency or a combination of loyalty currency and cash.
In addition, the Corporation continued to increase the reach of its core retailing products in 2015, expanding its footprint in the growing Asian loyalty market. The Corporation announced and launched a new commission partnership with Hainan Airlines, the fourth largest airline in terms of fleet size in the Peoples Republic of China. Points now powers the buy, gift and exchange products for international members of the Hainans Fortune Wings Club loyalty program. Additionally, the Corporation signed a new principal partnership with Shangri-La Hotels, a premier hotel network that operates 92 hotels across North America, Europe, Australia, China, and the Middle East. The new partnership with Shangri-Las Golden Circle loyalty program will enable loyalty program members the ability to buy and gift their loyalty points.
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Lastly, the Corporation continued to connect loyalty programs with new merchants, offering third parties the opportunity to participate and transact through the loyalty commerce platform. In the third quarter of 2015, the Corporation, in partnership with JetBlue Airways, integrated Farmax, the leading pharmacy chain in the Dominican Republic, and its loyalty card Provital, to the Points Loyalty Commerce Platform. This integration allows Farmax customers to now earn TrueBlue points through their daily purchases at Farmax retail locations and affiliated establishments.
Capital Allocation
Points strong balance sheet enabled the Corporation to continue to invest in the business while returning value to shareholders. As part of its commitment to create shareholder value, the Corporation completed the repurchase and cancellation of 439,094 of its common shares as part of its Normal Course Issuer Bid during the year. These purchases were made in accordance with applicable securities laws and stock exchange rules of the United States and Canada. The Corporation will continue to purchase it shares under an NCIB with a similar program in 2016.
2015 KEY FINANCIAL MEASURES
Highlights of operating results for year ended December 31, 2015 include:
| Record revenues of $296,376, an increase of $41,387 or 16% over the prior year; | |
| Gross margin of $42,666, an increase of $3,010 or 8% over the prior year (please refer to Revenue, Direct Costs and Gross Margin on page 10 for definition and explanation); | |
| Net income of $5,165, an increase of $481, or 10% over the prior year; | |
| Adjusted EBITDA of $11,054, higher by $1,999 or 22% from the prior year (please refer to Adjusted EBITDA on page 13 for definition and explanation); and | |
| As at December 31, 2015, the Corporation had cash and cash equivalents of $51,364, no debt and $13.5 million available through its credit facilities with its principal bank. |
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SELECTED FINANCIAL INFORMATION
The following information is provided to give a context for the broader comments elsewhere in this report.
(In thousands of US dollars, except share | |||||||||
and per share amounts) | 2015 | 2014 | 2013 | ||||||
Revenue | $ | 296,376 | $ | 254,989 | $ | 202,370 | |||
Gross margin1 | 42,666 | 39,656 | 33,104 | ||||||
Ongoing operating costs | 31,612 | 30,601 | 25,670 | ||||||
Adjusted EBITDA2 | 11,054 | 9,055 | 7,434 | ||||||
Operating income3 | 7,639 | 6,767 | 4,272 | ||||||
Net income | $ | 5,165 | $ | 4,684 | $ | 3,606 | |||
Earnings per share | |||||||||
Basic | $ | 0.33 | $ | 0.30 | $ | 0.24 | |||
Diluted | $ | 0.33 | $ | 0.30 | $ | 0.23 | |||
Weighted average shares outstanding | |||||||||
Basic | 15,547,595 | 15,402,258 | 15,241,989 | ||||||
Diluted | 15,601,170 | 15,627,059 | 15,531,144 | ||||||
Total assets | $ | 99,928 | $ | 85,061 | $ | 95,012 | |||
Total liabilities | $ | 57,733 | $ | 43,844 | $ | 62,465 | |||
Shareholders equity | $ | 42,195 | $ | 41,217 | $ | 32,547 | |||
1Gross margin is a non-GAAP financial measure. Refer
to page 10 for definition and explanation.
2Adjusted EBITDA is a non-GAAP financial measure.
Refer to page 13 for definition and explanation.
3Operating income is an additional GAAP measure
presented in the financial statements, and is defined as Net income before
Interest and other income 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.
RESULTS OF OPERATIONS
REVENUE, DIRECT COSTS AND GROSS MARGIN
Gross margin, defined by management as total revenue less direct cost 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. In general, the Corporation seeks to maximize the gross margin generated from each loyalty partner relationship.
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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.
(In thousands of US dollars) | 2015 | 2014 | Variance | ||||||
Principal revenue | $ | 283,409 | $ | 244,686 | $ | 38,723 | |||
Other partner revenue | 12,871 | 10,211 | 2,660 | ||||||
Interest revenue | 96 | 92 | 4 | ||||||
Total Revenue | $ | 296,376 | $ | 254,989 | $ | 41,387 | |||
Direct cost of principal revenue | 253,710 | 215,333 | 38,377 | ||||||
Gross margin1 | $ | 42,666 | $ | 39,656 | $ | 3,010 | |||
Gross margin %2 | 14% | 16% | (2% | ) |
1Gross margin is a non-GAAP financial measure and is
defined as Total revenue less Direct cost of principal revenue.
2 Gross margin % is a non-GAAP financial measure and
is defined as Gross margin as a percentage of Total revenue.
The Corporation generated record revenue of $296,376 for the year ended December 31, 2015, an increase of $41,387 or 16% over 2014. The increase in revenues over the prior year is primarily attributable to the full year results from 2014 BGT product launches with Hilton HHonors in June 2014 and BGT and Reinstate products with United Airlines MileagePlus in December 2014. Additionally, the Corporations strong promotional activities resulted in an approximate 9% organic growth in existing partners over the prior year. These increases were partially offset by the departure of American Airlines and US Airways BGT products at the beginning of 2015. With the EURO weakening approximately 17% against the US dollar on a year over year basis, revenues were adversely impacted by $4,715 net of related foreign exchange hedges in 2015.
Principal revenue for 2015 was $283,409, an increase of $38,723 or 16% over 2014. The increase in principal revenues from Hilton HHonors BGT product and United Airlines BGT and Reinstate products, as well as organic growth from existing principal partnerships, more than offset the decrease in principal revenue from the departure of the US Airways BGT product. Changes in the Corporations principal revenues are driven by many factors that include 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, including retail price changes of loyalty currencies initiated by the Corporation to generate incremental revenues.
Other partner revenue for 2015 was $12,871, higher by $2,660, or 26%, from 2014. The year-over-year increase was largely due to the changes in the US Airways BGT arrangement whereby revenues were recorded as other partner revenue in the first quarter of 2015, new products launched during the year, and growth from existing commission partnerships.
Gross margin for 2015 was $42,666, an increase of $3,010, or 8%, from the prior year. The increase in gross margin dollars was largely driven by the annualized impact from principal partnerships launched by the Corporation in 2014, as well as organic growth from the Corporations existing partnership base, partially offset by the departure of the US Airways BGT product. Gross margin percentage decreased from 16% in 2014 to 14% in 2015. The decrease was primarily due to specific promotional offers put into market with the Corporations larger principal partners in the second half of the year, which generated increased transaction volumes and member engagement, but at a lower overall gross margin percentage. The gross margin percentage was also impacted by the relative mix of revenues generated from principal partnerships and other partner revenues.
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ONGOING OPERATING COSTS
(In thousands of US dollars) | 2015 | 2014 | Variance | ||||||
Employment costs | $ | 22,699 | $ | 22,529 | $ | 170 | |||
Marketing and communications | 1,704 | 1,379 | 325 | ||||||
Technology services | 1,343 | 1,083 | 260 | ||||||
Operating expenses | 5,866 | 5,610 | 256 | ||||||
Total ongoing operating costs | $ | 31,612 | $ | 30,601 | $ | 1,011 |
Ongoing operating costs are predominantly cash based expenditures and include employment costs, marketing and communications expenditures, technology services 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 for the majority of its predictable Canadian dollar expenditures on a rolling 12-month basis to mitigate the impact of foreign exchange volatility.
Ongoing operating costs for 2015 were $31,612, an increase of $1,011, or 3%, from 2014. The increase in ongoing operating costs over the prior year was primarily attributable to increased headcount, marketing and technology services costs, largely offset by foreign exchange benefits as the Canadian dollar weakened against the US dollar during the year.
Employment Costs
Employment costs, including 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 $22,699 in 2015 were relatively flat with 2014, increasing $170, or 1%, from 2014.
The Corporation added a number of new technology, product, and marketing driven resources to the business in 2015. Average full time equivalents (FTEs) increased from 167 in 2014 to 193 in 2015. FTEs in 2015 included contract and short term roles of 16.
The incremental payroll costs associated with increased resourcing levels in 2015 were largely offset by foreign exchange savings due to the continued weakness of the Canadian dollar in 2015.
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New resource additions in 2015 were made to the Corporations San Francisco office, which was acquired in the Corporations acquisition of Accruity Inc. in April of 2014, 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 Corporations Loyalty Wallet and Points Travel innovations.
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 communications costs for 2015 were $1,704, increasing $325 or 24% from 2014. The increase from the prior year was due to increased partner engagement activities and publicity efforts held throughout the course of 2015, including the Corporation hosting a loyalty partner conference and also higher advertising costs.
Technology Services
Technology services include online hosting and managed services, equipment rental and software license fees. Technology service costs for 2015 were $1,343, increasing $260 or 24% from 2014. The increase from the prior year was the result of higher software license fees and data security costs.
Operating Expenses
Operating expenses include office overhead, travel expenses, professional fees and other costs associated with operations. Operating expenses for 2015 were $5,866, an increase of $256, or 5% from 2014. The increase from the prior year period was mainly attributable to higher operating costs associated with the acquisition of Crew Marketing in December 2014. Operating costs are expected to increase slightly in 2016.
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 interest, taxes, depreciation, 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.
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Reconciliation of Net Income to Adjusted EBITDA
(In thousands of US dollars) | 2015 | 2014 | Variance | ||||||
Net income | $ | 5,165 | $ | 4,684 | $ | 481 | |||
Interest and other income | - | (5 | ) | 5 | |||||
Income tax expense | 2,474 | 2,088 | 386 | ||||||
Depreciation and amortization | 3,546 | 2,150 | 1,396 | ||||||
Foreign exchange loss (gain) | (131 | ) | 138 | (269 | ) | ||||
Adjusted EBITDA1 | $ | 11,054 | $ | 9,055 | $ | 1,999 | |||
Gross Margin2 | $ | 42,666 | $ | 39,656 | $ | 3,010 | |||
Adjusted EBITDA1 as a % of Gross Margin2 | 26% | 23% | 3% |
1 Adjusted EBITDA is a non-GAAP financial measure.
See above for definition and explanation.
2Gross margin is a non-GAAP financial measure and is
defined as Total revenue less direct cost of principal revenue. Refer to page 10
for definition and explanation.
For the year ended December 31, 2015, the Corporations Adjusted EBITDA was $11,054, an increase of $1,999 or 22% from 2014. The increase in Adjusted EBITDA was largely the result of increased gross margin in 2015 outpacing the growth in operating expenses. In 2015, 66% of incremental gross margin contributed 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 year ended December 31, 2015, Adjusted EBITDA as a percentage of gross margin was 26%, an increase of 3% over the prior year period. The increase was primarily attributed to higher gross margin dollars earned in 2015 from new products and partnerships exceeding incremental ongoing operating costs.
DEPRECIATION, AMORTIZATION, INCOME TAX, INTEREST AND OTHER EXPENSES
(In thousands of US dollars) | 2015 | 2014 | Variance | ||||||
Depreciation and amortization | $ | 3,546 | $ | 2,150 | $ | 1,396 | |||
Foreign exchange loss (gain) | (131 | ) | 138 | (269 | ) | ||||
Interest and other income | - | (5 | ) | 5 | |||||
Income tax expense | 2,474 | 2,088 | 386 | ||||||
Total | $ | 5,889 | $ | 4,371 | $ | 1,518 |
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Depreciation and Amortization Expense
Depreciation and amortization expense in 2015 increased $1,396, or 65%, from 2014. The increase in expense from the prior year is due to the amortization of the additional intangible assets acquired from Crew marketing in December 2014. Amortization expense is expected to increase to approximately $4,000 in 2016, which would reflect amortization on additional intangible assets developed by the Corporation.
Foreign Exchange (FX) Gain / Loss
US / Canadian FX Rates | 2015 | 2014 | 2013 | ||||||
Period Start | 0.8599 | 0.9351 | 1.0080 | ||||||
Period End | 0.7209 | 0.8599 | 0.9351 | ||||||
Period Average | 0.7837 | 0.9059 | 0.9716 |
US / EURO FX Rates | 2015 | 2014 | 2013 | ||||||
Period Start | 1.2155 | 1.3768 | 1.2967 | ||||||
Period End | 1.0906 | 1.2155 | 1.3768 | ||||||
Period Average | 1.1105 | 1.3292 | 1.3283 |
The Corporation is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency, the US dollar. Foreign exchange gains and losses arise from the translation of the Corporations balance sheet, revenues, and expenses. The Corporation holds balances in foreign currencies (e.g. non-US dollar denominated cash, accounts payables and accrued liabilities) that give rise to exposure to foreign exchange risk. At period end, non-US dollar monetary balance sheet accounts are translated in accordance with the period-end FX rate. To the extent that the foreign denominated monetary assets and liabilities are not equal, the net effect after translating the balance sheet accounts is recorded in the consolidated statement of comprehensive income for the period. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
The majority of the Corporations revenues in 2015 were transacted in US dollars and EUROs. 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 as much as 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.
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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 net income. For the year ended December 31, 2015, the Corporation reclassified a loss of $1,050, net of tax, from other comprehensive loss into net income. The cash flow hedges were effective for accounting purposes at December 31, 2015. Realized losses from the Corporations hedging activities, in 2015, were driven by the appreciation of the U.S. dollar against the Canadian dollar.
For the year ended December 31, 2015, the Corporation recorded a foreign exchange gain of $131 compared with a foreign exchange loss of $138 in 2014.
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 $2,474 in 2015 compared to an income tax expense of $2,088 in 2014. This expense largely relates to the reduction of the deferred tax asset, as the Corporation generated higher taxable income in 2015 compared to 2014.
NET INCOME AND EARNINGS PER SHARE
(In thousands of US dollars, except per share amounts) | 2015 | 2014 | Variance | ||||||
Net Income | $ | 5,165 | $ | 4,684 | $ | 481 | |||
Earnings per share | |||||||||
Basic | $ | 0.33 | $ | 0.30 | $ | 0.03 | |||
Diluted | $ | 0.33 | $ | 0.30 | $ | 0.03 |
The Corporation reported net income of $5,165 for the year ended December 31, 2015 compared with net income of $ 4,684 for the year ended December 31, 2014. The increase from the prior year was driven by higher gross margin dollars earned for the full year from principal partnerships launched during 2014. The higher margin dollars were partially offset by higher operating expenses resulting from more FTEs compared to the prior period, and increased marketing and communications costs as a result of the Corporations stronger advertising and public relations effort.
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 15,547,595 common shares for the year ended December 31, 2015, compared with 15,402,258 common shares for the year ended December 31, 2014. The Corporation reported basic and diluted earnings per share of $0.33 for the year ended December 31, 2015 compared with basic and diluted earnings per share of $0.30 for the year ended December 31, 2014.
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BALANCE SHEET VARIANCES
Consolidated Balance Sheet Data as at | Dec 31, | Dec 31, | ||||
(In thousands of US dollars) | 2015 | 2014 | ||||
Cash and cash equivalents | $ | 51,364 | $ | 36,868 | ||
Restricted cash | 1,000 | 1,573 | ||||
Funds receivable from payment processors | 6,588 | 6,691 | ||||
Accounts receivable | 2,988 | 2,305 | ||||
Prepaid expenses and other assets | 1,256 | 1,134 | ||||
Total current assets | $ | 63,196 | $ | 48,571 | ||
Property and equipment | 1,466 | 1,856 | ||||
Intangible assets | 18,616 | 18,320 | ||||
Goodwill | 7,130 | 7,130 | ||||
Deferred tax assets | 1,755 | 3,492 | ||||
Long-term investment | 5,000 | 5,000 | ||||
Other assets | 2,765 | 692 | ||||
Total non-current assets | $ | 36,732 | $ | 36,490 | ||
Accounts payable and accrued liabilities | $ | 5,808 | $ | 6,260 | ||
Payable to loyalty program partners | 49,526 | 36,030 | ||||
Current portion of other liabilities | 1,852 | 1,285 | ||||
Total current liabilities | $ | 57,186 | $ | 43,575 | ||
Total non-current liabilities | $ | 547 | $ | 269 | ||
Total shareholders equity | $ | 42,195 | $ | 41,217 |
Cash and cash equivalents
The Corporations cash and cash equivalent balance fluctuates to a large degree with movements in its principal revenue volume. As the processor of record in these transactions, the timing of activity around a reporting period will affect this line item as well as the Payable to loyalty program partners line item in the consolidated financial statements. The increase from prior year is primarily attributable to the business acquisitions and long term investments made during 2014, as well as increased gross margin dollars in 2015, slightly offset by the use of cash in the Corporations normal course issuer bid which began in early 2015.
Other assets
The Corporations other assets balance increased $2,073 and was primarily driven by an increase in loyalty reward currencies related to the Corporations revenue guarantees to certain loyalty program partners.
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Deferred tax asset
The Corporations deferred tax asset balance decreased $1,737, which was primarily attributable to the Corporation generating taxable income in 2015.
Payable to loyalty program partners
The Corporations balance payable to loyalty program partners increased $13,496, which is attributable to the level of transactional activity with loyalty program members, and the timing of payments made to loyalty partners. The increase was also partially the result of the Corporations revenue guarantees to certain loyalty program partners. The Corporation may have up to approximately sixty days to pay loyalty partners based on its settlement cycle with loyalty partners.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Balance Sheet Data as at | December 31, | December 31, | ||||
(In thousands of US dollars) | 2015 | 2014 | ||||
Cash and cash equivalents | $ | 51,364 | $ | 36,868 | ||
Restricted cash | 1,000 | 1,573 | ||||
Funds receivable from payment processors | 6,588 | 6,691 | ||||
Total funds available | 58,952 | 45,132 | ||||
Payable to loyalty program partners | 49,526 | 36,030 | ||||
NET OPERATING CASH1 | $ | 9,426 | $ | 9,102 | ||
Total current assets | $ | 63,196 | $ | 48,571 | ||
Total current liabilities | 57,186 | 43,575 | ||||
WORKING CAPITAL | $ | 6,010 | $ | 4,996 |
1 Management defines Net Operating Cash as Total Funds Available (Cash and cash equivalents, Restricted cash, and Funds receivable from payment processors) less amounts Payable to loyalty program partners. Management believes that this non-GAAP financial measure provides a useful measure of the Corporations liquidity. Other companies may include other items in their definition of Net Operating Cash. Therefore it is unlikely to be comparable to similar measures presented by other companies.
The Corporations financial strength is reflected in its balance sheet. As at December 31, 2015, the Corporation continues to remain debt-free with $9,426 of net operating cash (December 31, 2014 $9,102). Net operating cash increased $324 from December 31, 2014, and this was primarily attributed to Adjusted EBITDA of $11,054 generated in the year, largely offset by cash used for NCIB share repurchases in the amount of $4,567, share purchased and held in trust to fund the Corporations stock unit plan in the amount of $1,215, additions to capital and intangible assets in the amount of $3,452, and changes in other working capital balances.
The Corporations working capital (defined as current assets minus current liabilities) was $6,010 at December 31, 2015 compared to working capital of $4,996 as at December 31, 2014. Working capital increased mainly due to Adjusted EBITDA generated during the year, partially offset by investing and financing activities during the year. 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.
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On July 2, 2015, the Corporation entered into a bank credit facility agreement with Royal Bank of Canada, in which three credit facilities will be available. The first facility is a revolving term facility in the amount of $6,000 and available until July 2, 2016. The second facility is a term loan facility of $7,500 to be used solely for the purposes of financing the cash consideration relating to acquisitions made by the Corporation, and available until July 2, 2016. The third facility is a term loan facility of $7,000 to be used solely for the purposes of repurchasing the Corporations common shares, and available until March 8, 2016. The aggregate borrowings under both the second and third facilities may not exceed $7,500. There have been no borrowings to date under these facilities.
Sources and Uses of Cash
(In thousands of US dollars) | 2015 | 2014 | Variance | ||||||
Operating activities | $ | 21,932 | $ | (7,619 | ) | $ | 29,551 | ||
Investing activities | (2,922 | ) | (20,159 | ) | 17,237 | ||||
Financing activities | (5,505 | ) | (614 | ) | (4,891 | ) | |||
Effects of exchange rates | 991 | 1,072 | (81 | ) | |||||
Change in cash and cash equivalents | $ | 14,496 | $ | (27,320 | ) | $ | 41,816 |
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 2015, the Corporation experienced an increase in cash inflows primarily due to the timing of payments to loyalty partners and receipts of funds from payment processors.
Investing Activities
Cash used in investing activities decreased in 2015 largely due the acquisition of Accruity Inc. in April 2014 and Crew Marketing in December 2014, as well as the final tranche payment in China Rewards in the second quarter of 2014. During 2015, the Corporations investing activities were primarily focused towards the internal development of intangible assets such as the Loyalty Wallet and Points Travel products.
Financing Activities
Cash flows used in financing activities for the year ended December 31, 2015, related to the NCIB share repurchases and share purchased and held in trust to fund the Corporations employee share unit plan, slightly offset by issuance of capital stock from the exercise of employee stock options.
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Contractual Obligations and Commitments
Total | Year 13 | Year 2 | Year 3 | Year 4 | Year 5+ | |||||||||||||
Operating leases1 | $ | 8,087 | $ | 863 | $ | 1,443 | $ | 1,306 | $ | 1,238 | $ | 3,237 | ||||||
Principal revenue2 | 670,163 | 169,344 | 194,168 | 170,751 | 135,900 | - | ||||||||||||
$ | 678,250 | $ | 170,207 | $ | 195,611 | $ | 172,057 | $ | 137,138 | $ | 3,237 |
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.
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 $2,936 on the consolidated balance sheet representing mileage reward currencies acquired as part of prepaid and other assets.
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 over those companies. Certain 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 arms length. The amounts owing are unsecured, interest-free and due for payment under normal payment terms from the date of the transaction.
The Corporation recognized the value and outstanding balances related to these transactions as follows:
In thousands of Canadian | Transaction values for the year | Balance outstanding as at | ||||||||||
dollars | ended December 31 | December 31 | ||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||
Marketing expenses | $ | 89 | $ | 137 | $ | 8 | $ | - |
The Corporation has an investment in China Rewards which allows it to elect one member of the Board of Directors. As at December 31, 2015, the Corporation had a receivable of $93 from China Rewards. 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. The Corporation has earned commission revenue of $14 on the aforementioned transactions.
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Subsequent Event
On March 2, 2016, the Board of Directors of the Corporation approved a plan to repurchase the Corporations common shares. The Corporation has been informed that the Toronto Stock Exchange ("TSX") has accepted its notice of intention to make a normal course issuer bid to repurchase up to 764,930 of its common shares (the "Repurchase"), representing approximately 5% of its 15,298,602 common shares issued and outstanding as of February 24, 2016.
The primary purpose of the Repurchase is purchases for cancellation. Repurchases will be made from time-to-time at the Corporations' discretion, based on ongoing assessments of the Corporations' capital needs, the market price of its common shares, general market conditions and other factors. Repurchases may be effected through the facilities of the TSX, the NASDAQ Capital Market or other alternative trading systems in the United States and Canada. The actual number of common shares purchased and the timing of such purchases will be determined by management considering market conditions, stock prices, its cash position, and other factors.
Cash from Exercise of Options
Certain options are due to expire within 12 months from the date of this MD&A. If exercised in full, issued and outstanding common shares will increase by 51,956 shares.
Securities with Near-Term Expiry Dates Outstanding Amounts as at March 2, 2016 (figures in CAD$).
Security Type | Date of Expiry | Number | Strike Price | ||||||
Options | March 14, 2016 | 49,428 | 11.04 | ||||||
Options | May 12, 2016 | 528 | 9.86 | ||||||
Options | July 11, 2016 | 500 | 9.17 | ||||||
Options | December 02, 2016 | 1,500 | 9.02 | ||||||
Total | 51,956 |
OUTSTANDING SHARE DATA
As of March 2, 2016, the Corporation has 15,298,602 common shares outstanding.
As of the date hereof, the Corporation has outstanding options to acquire up to 741,764 common shares. The options have exercise prices ranging from $9.02 to $30.84 with a weighted average exercise price of $15.49. The expiration dates of the options range from March 14, 2016 to March 16, 2020.
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The following table lists the common shares issued and outstanding as at March 2, 2016 and the securities that are currently convertible into common shares along with the maximum number of common shares issuable on conversion or exercise.
Common Shares | Proceeds | |||||
Common Shares Issued & Outstanding | 15,298,602 | |||||
Convertible Securities: Share options | 741,764 | CAD$ 11,488,292 | ||||
Common Shares Issued & Potentially Issuable | 16,040,366 | CAD$ 11,488,292 | ||||
Securities Excluded from Calculation: | ||||||
Options Available to grant from ESOP1 | 128,125 |
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 of share options exercised and the number of outstanding share options.
FOURTH QUARTER RESULTS
For the three months ended | |||||||||
(In thousands of US dollars, except per share | Dec. 31, | Sept. 30, | Dec. 31, | ||||||
amounts) | 2015 | 2015 | 2014 | ||||||
Revenue | $ | 80,228 | $ | 81,133 | $ | 64,841 | |||
Gross margin1 | 9,964 | 10,080 | 10,394 | ||||||
Ongoing operating expenses | 7,774 | 8,078 | 7,708 | ||||||
Adjusted EBITDA2 | 2,190 | 2,002 | 2,686 | ||||||
Operating income3 | 1,412 | 1,120 | 2,051 | ||||||
Net income | $ | 961 | $ | 768 | $ | 1,468 | |||
Earnings per share | |||||||||
Basic | $ | 0.06 | $ | 0.05 | $ | 0.10 | |||
Diluted | $ | 0.06 | $ | 0.05 | $ | 0.09 | |||
Total assets | $ | 99,928 | $ | 85,198 | $ | 85,061 | |||
Shareholders equity | $ | 42,195 | $ | 42,203 | $ | 41,217 |
1Gross margin 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.
2Adjusted EBITDA is a non-GAAP financial measure.
Refer to page 11 for definition and explanation.
3Operating income (loss) is an additional IFRS
measure presented in the financial statements, and is defined as Net income
before Interest and other income and Income tax expense. Management presents
this additional IFRS measure to provide comparability of the Corporations
operating income before the impact of interest and taxes.
REVENUE, DIRECT COSTS AND GROSS MARGIN
The Corporation generated revenues of $80,228 during the fourth quarter of 2015. This represents a decrease of $905 or 1% over the third quarter of 2015, and a $15,387 or 24% increase from the prior year fourth quarter. Gross margin dollars decreased $116 or 1% over the third quarter of 2015, and $430 or 4% from the prior year fourth quarter. Gross margin dollars will typically increase or decrease in line with the change in revenues, however, gross margin is impacted by the relative mix of partner and product revenues earned and the gross margin associated with each transaction.
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ONGOING OPERATING COSTS
For the three months ended | |||||||||
Dec. 31, | Sept. 30, | Dec. 31, | |||||||
(In thousands of US dollars) | 2015 | 2015 | 2014 | ||||||
Employment costs | $ | 5,220 | $ | 5,732 | $ | 5,289 | |||
Marketing and communications | 531 | 499 | 330 | ||||||
Technology services | 355 | 357 | 276 | ||||||
Operating expenses | 1,668 | 1,490 | 1,813 | ||||||
Total | $ | 7,774 | $ | 8,078 | $ | 7,708 |
Ongoing operating costs decreased $304 or 4% over the third quarter of 2015 and increased $66 or 1% over the fourth quarter of 2014. The decrease over the third quarter of 2015 is largely attributed to the weakening Canadian dollar and the cancellation of 73,758 performance share units in Q4 2015. The increase over the fourth quarter of 2014 is primarily due the Corporations increased advertising and public relations effort in 2015.
DEPRECIATION, AMORTIZATION, INTEREST AND OTHER EXPENSES
For the three months ended | |||||||||
Dec. 31, | Sept. 30, | Dec. 31, | |||||||
(In thousands of US dollars) | 2015 | 2015 | 2014 | ||||||
Depreciation and amortization | $ | 895 | $ | 891 | $ | 581 | |||
Foreign exchange (gain) loss | (117 | ) | (9 | ) | 54 | ||||
Income tax expense | 451 | 352 | 583 | ||||||
Total | $ | 1,229 | $ | 1,234 | $ | 1,218 |
Depreciation and amortization expenses were slightly higher than the third quarter of 2015 and increased by $314 or 54% over the fourth quarter of 2014 due to the addition of the intangible assets acquired from Crew Marketing in December 2015.
Foreign exchange (gains) losses are a result of transactions in currencies other than the Corporations functional currency, the US dollar. At period end, non-US dollar monetary balance sheet accounts are translated in accordance with the period-end FX rate. An appreciation of the US dollar will result in foreign exchange losses in non-USD monetary balances, and a depreciation of the US dollar will result in foreign exchange gains in non-USD monetary balances.
Income tax expense is a result of the taxable income generated by the Corporation in each period. The Corporation assesses its taxable income to ensure eligible tax deductions are fully utilized.
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Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA
For the three months ended | |||||||||
Dec. 31, | Sept. 30, | Dec. 31, | |||||||
(In thousands of US dollars) | 2015 | 2015 | 2014 | ||||||
Net income | $ | 961 | $ | 768 | $ | 1,468 | |||
Income tax expense | 451 | 352 | 583 | ||||||
Depreciation and amortization | 895 | 891 | 581 | ||||||
Foreign exchange (gain) loss | (117 | ) | (9 | ) | 54 | ||||
Adjusted EBITDA | $ | 2,190 | $ | 2,002 | $ | 2,686 |
Adjusted EBITDA of $2,190 increased $188 or 9% from the third quarter of 2015 and decreased $496, or 18%, from the fourth quarter of 2014. The increase from the third quarter of 2015 was driven by the success of customer analytics that allowed for effective marketing campaigns that resulted in incremental revenues and gross margin dollars. The decrease from the prior year fourth quarter resulted from the departure of the US Airways BG products combined with promotional activities and offers that carried a lower gross margin profile compared to the prior year.
SUMMARY OF QUARTERLY RESULTS
(in thousands of US dollars, except per share amounts)
Diluted | |||||||||||||
Basic earnings | earnings | ||||||||||||
Three month period ended | Total Revenue | Net income | per share | per share | |||||||||
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 | 64,841 | 1,468 | 0.10 | 0.09 | |||||||||
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 |
Through years of successfully building partnerships with loyalty programs around the world, growing relationships with loyalty programs, and deepening its understanding of loyalty program members, the Corporation has built a reputation of being a leading global 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 and hospitality industries in the US and Europe, as the loyalty industry was more established in these regions. 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 financial services industry and the speciality retail sector. Through the addition of new partnerships or products year after year, the Corporation has been able to generate increases in revenues on a consistent basis. In addition, the Corporation has increased revenues from existing partnerships by strengthening its understanding of loyalty program member behaviour, through the use of direct marketing efforts and data analytics. Increases in both transaction levels as well as revenues will generally drive higher overall profitability, while decreases in both transaction levels as well as revenues will generally drive lower overall profitability.
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Growth in the Corporations revenues are impacted by the number and size of new loyalty program partner and product launches in a year. In addition, revenues are also impacted by the retention of existing loyalty program partnerships and products, and level of marketing activities placed into market with existing loyalty program partners and the overall effectiveness of such activities. Historically, in the absence of any new partner or products launched, and 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 addition, and in the absence of launching new partnerships and products, revenues in the second and third quarter will be impacted by the level and effectiveness of marketing activities carried out with loyalty program members. Revenues for the third quarter of 2015 were the highest in the Corporations history, and was a result of new partnerships launched in 2014, as well organic growth from existing partnerships resulting from successful promotional activity carried out by the Corporation.
Net income of the Corporation is impacted by the gross margin earned in each quarter, which is a result of the relative mix of revenues earned in the period and gross margin generated on each transaction, marketing and promotional activity carried out with loyalty program members, and changes in operating expenses. In 2014 and 2015, the Corporation increased operating expenses and resource levels. Additions to staff resourcing were largely in the area of research and development, focused on advancing the capabilities of the Corporations loyalty commerce platform. Resources were also added in the areas of business development, marketing and data analytics. The change in headcount in these areas have resulted in increased employment expenses over prior periods. In 2014 the Corporation was successful in completing the acquisition of two businesses in the year. The acquisition of both businesses led to higher professional and consulting fees required in closing each acquisition in 2014 and increased operating expenses for the Corporation in 2014 and 2015. Net income increased in 2015 on a year over year basis and was the result of growth in gross margin outpacing the growth in operating expenses.
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CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Revenue Recognition and Presentation
Presentation: gross versus net
When deciding the most appropriate basis for presenting revenue and direct costs of revenue, both the legal form and substance of the agreement between the Corporation and its business partners are reviewed to determine each partys respective role in the transaction. This determination requires the exercise of judgment and management usually considers whether:
| The Corporation has primary responsibility for providing the goods and services to the customer or for fulfilling the orders; |
| The Corporation has inventory risk before or after the customer order, during shipping or on return; |
| The Corporation has discretion in establishing prices (directly or indirectly); |
| The Corporation bears the customers credit risk for the amount receivable from the customer; |
| The Corporation modifies the product or performs part of the services; |
| The Corporation has discretion in selecting the supplier used to fulfill an order; or |
| The Corporation is involved in determining product or service specifications. |
Where the Corporations role in a transaction is that of a principal, revenue is recognized on a gross basis. Under the principal revenue model, the gross value of the transaction billed to the customer is recognized as revenue by the Corporation and the costs incurred to purchase the points or miles sold in this transaction are recognized separately as direct cost of principal revenue.
Where the Corporations role in a transaction is that of an agent, revenue is recognized on a net basis with revenue representing the margin earned.
Arrangements with multiple components
In revenue arrangements including delivery of more than one product or service (separately identifiable components), each identifiable component is a separate unit of accounting and the arrangement consideration is allocated to each unit of accounting based on its relative fair value.
Determining the fair value of each component can require complex estimates due to the nature of the goods and services provided. The Corporation generally determines the fair value of individual elements based on the price when the element is sold on a stand-alone basis.
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Evaluation of Goodwill
The amount of goodwill initially recognized as a result of a business combination is dependent on the allocation of the purchase price to the fair value of the identifiable assets acquired and the liabilities assumed. The determination of the fair value of the assets and liabilities is based, to a considerable extent, on managements judgement and estimates that use inputs that may not be readily observable.
Allocation of the purchase price affects the results of the Corporation as finite lived intangible assets are amortized, whereas indefinite lived intangible assets, including goodwill, are not amortized and could result in differing amortization charges based on the allocation to indefinite lived and finite lived intangible assets.
The Corporation tests goodwill for impairment annually to determine whether the carrying value exceeds the recoverable amount. In calculating the value in use of a cash generating unit (CGU) or group of CGUs, i.e. the net present value of the future cash flows associated with the CGU or group of CGUs, certain assumptions are required to be made by management in respect of highly uncertain matters which require judgement. These include the anticipated cash flows from the specific partner relationships, the likelihood that these partners will renew existing contracts and enter into new product arrangements with the Corporation in the future, annual growth assumptions, and the selection of an appropriate discount rate. Management prepares forecasts that assess the specific risks related to each individual partner relationship separately and are used in determining the value in use of the CGUs or group of CGUs to which goodwill has been allocated.
Income Taxes
The recognition of deferred tax assets is based upon whether it is probable that sufficient and suitable taxable profits will be available in the future or whether taxable temporary differences will reverse such that deferred tax assets can be utilized. Recognition therefore involves a degree of estimation and judgement regarding the future financial performance or the timing of the reversal of deferred tax liabilities of the particular legal entity in which the deferred tax assets have been recognized.
The Corporation is subject to examination by taxation authorities in various jurisdictions. Because the determination of tax liabilities involves certain uncertainties in interpreting complex tax regulations, managements best estimates are used to determine potential tax liabilities. Differences between the estimates and the actual amount of taxes are recorded in net earnings at the time they can be determined.
Share-based Payments
The Corporation applies the fair value method to all grants of share options. The fair value of options granted is estimated at the date of grant using the Black-Scholes option pricing model incorporating assumptions regarding risk-free interest rates, dividend yield, expected volatility of the Corporations stock, and a weighted average expected life of options. The estimated fair value of the options that are ultimately expected to vest are recorded over the options vesting period and charged to earnings with a corresponding credit to contributed surplus. In determining the number of options that are expected to vest, the Corporation takes into account voluntary termination behaviour as well as trends of actual option forfeitures.
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Changes in the subjective input assumptions can materially affect the fair value estimate and therefore, the existing models do not necessarily provide a reliable single measure of the fair value of the stock options. A change in the assumptions used by the Corporation could have an impact on net income.
Estimation of useful life
Finite lived intangible assets
Finite lived intangible assets consist of the Corporations aggregate amounts spent on internal use software development costs, as well as acquired technology and customer relationships. The relative size of the Corporations intangible assets, excluding goodwill, makes the judgements surrounding the estimated useful lives critical to the Corporations financial position and performance.
The useful life used to amortize internal use software development costs relates to the future performance of the assets and managements judgement of the period over which economic benefit will be derived from the assets. The useful life is determined by management and is regularly reviewed for appropriateness. The life is based on historical experience with similar development costs as well as anticipation of future events which may impact their life such as changes in technology. Historically, changes in useful lives have not resulted in material changes to the Corporations amortization charge.
Property and equipment
Estimates and assumptions to determine the carrying value of property and equipment and related depreciation impact to the Corporations financial position and performance.
The charge in respect of periodic depreciation is derived after determining an estimate of an assets expected useful life and the expected residual value at the end of its life. Increasing an assets expected life or its residual value would result in a reduced depreciation charge in the consolidated statements of comprehensive income. The useful lives and residual values of the Corporations assets are determined by management at the time the asset is acquired and reviewed annually for appropriateness. The useful lives are based on historical experience with similar assets as well as anticipation of future events which may impact their life such as changes in technology. Historically, changes in useful lives and residual values have not resulted in material changes to the Corporations depreciation charge.
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For the Corporations accounting policies and critical accounting estimates and judgments, refer to the Corporations 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.
Recent accounting pronouncements adopted by the Corporation in 2015 are listed below:
| Amendments to IFRS 7, Financial Instruments: Disclosures In October 2010, the IASB amended IFRS 7 to allow users to improve their understanding of transfer transactions of financial assets, including understanding the possible effects of any risks that may remain with the entity the transferred the assets. |
New accounting standards and interpretations not yet adopted by the Corporation are listed below:
The IASB has issued the following new standards and amendments to existing standards:
| IFRS 15, Revenue from Contracts with Customers - 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: |
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.
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The standard is mandatorily effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Corporation is assessing the impact of this standard on its consolidated financial statements.
|
IFRS 9, Financial Instruments - In July 2014, the IASB issued IFRS 9 (2014) that will eventually supersede 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 is mandatorily effective for annual periods beginning on or after January 1, 2018 with early adoption permitted. The Corporation is assessing the impact of this standard on its consolidated financial statements. |
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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 adoption of this standard is not expected to have a material impact on the consolidated financial statements. |
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IFRS 16, Leases In January 2016, the IASB issued IFRS 16 which specifies how a company will recognize, measure, present, and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is twelve months or less or the underlying asset has a low value. The standard is mandatorily effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. The Corporation is assessing the impact of this standard 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. The following section summarizes certain of the major risks and uncertainties that could materially affect our future business results going forward. The risks described below may not be the only risks faced by the Corporation. Other risks which currently do not exist or which are deemed immaterial may surface and have a material adverse impact on the Corporations results of operations and financial condition.
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A downturn in the demand for air travel could adversely impact the demand for loyalty currency services
The Corporation and the majority of its loyalty program partners operate in the travel industry. The ability of the Corporations loyalty program partners to continue to drive commercial activity to their businesses is integral to generating loyalty miles/points for their respective programs. As well, the overall popularity of loyalty miles/points and value they have to end-customers is what drives the business activity of the Corporation. The Corporation generates the majority of its revenue from end-customers who are transacting loyalty miles/points through the Corporations online solutions. As such, the majority of revenue is transactional in nature and dependent on the number and size of these transactions. There is no assurance that the popularity of these programs will continue to grow or maintain current levels of popularity. A change in consumer tastes or a downturn in the travel industry in North America may adversely affect the Corporations ability to generate ongoing revenue from transactions.
Consolidation activity in the airline industry is common and has been part of an industrywide solution to address structural financial problems. This consolidation activity has continued in 2014. This activity could potentially increase due to increasing operating costs, or bankruptcy of major carriers. Additional consolidation activity among the Corporations partner base could result in the loss of a partnership and potentially have an adverse impact on the Corporations future earnings.
We rely on contractual relationships with loyalty program partners that are subject to termination and renegotiation
There can be no assurance that the Corporation will be successful in maintaining its existing contractual relationships with its loyalty program partners. The Corporations loyalty program partners have in the past, and may in the future, negotiate arrangements that may be short-term and subject to renewal, non-exclusive and/or terminable at the option of the partner on relatively short notice without penalty. Loyalty program partners that have not provided a long-term commitment or guarantee of exclusivity, or that have the ability to terminate on short notice, may exercise this flexibility to end their relationship with the Corporation or to negotiate from time to time more preferential financial and other terms than originally contracted for. The Corporation cannot ensure that such negotiations will not have a material adverse effect on the financial condition or results of operations of the Corporation. In addition, there can be no assurance that the Corporation will be able to establish relationships with new loyalty program partners.
We could face significant liquidity risk if we fail to meet contractual performance commitments
In relation to the reseller model, the Corporation has made contractual guarantees on the minimum value of points and miles that will be processed over the term of its agreements with certain loyalty program partners, which, for the most part, have been met. The commitments are measured annually. There is a risk that these commitments may not be met, such as the case in 2015 and in certain prior years, resulting in the Corporation being required to purchase the shortfall in points/miles to meet annual contracted levels and take these into inventory. The Corporation's ability to use or sell any purchased points/miles is limited by terms in its contracts. As a result, there is a risk that the Corporation may have difficulty in selling or making use of this inventory which could have a material adverse effect on the Corporations business, revenues, operating results and financial condition. There is also a risk that the Corporation may have insufficient resources to purchase any shortfall and that the Corporation may need to obtain financing to meet such commitments. There is a risk that such financing may not be available to the Corporation. The failure to obtain such financing could have a material adverse impact on the Corporations business, revenues, operating results and financial condition.
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We could face significant competition from other companies in the loyalty industry including loyalty program partners that may have, or develop, in-house business solutions departments that could take responsibility for services currently provided by the Corporation
With respect to the Corporations Points.com consumer portal, several indirect competitors are currently in the market with limited product offerings. Other Internet websites that offer financial and account aggregation and management are potential competitors. These indirect and potential competitors currently offer the ability to track program balances, but do not offer any of the transaction options available on Points.com. Management believes that none of these competitors are actively partnering with loyalty programs to independently provide a service similar to Points.com. Rather, these indirect competitors are only able to retrieve and display member account information. However, it is possible that one or more of the indirect or potential competitors could, in the future, compete directly with Points.com.
The Corporation's loyalty currency services must compete with a wide range of companies that provide business solutions technology, from small companies to large. Many existing and potential competitors do or could have greater technical or financial resources than the Corporation. The financial performance of the Corporation may be adversely affected by such competition. In particular, no assurances can be given that additional direct competitors to the Corporation may not be formed or that the Corporation may not lose some or all of its arrangements with its loyalty program partners, including its key loyalty program partners, thereby decreasing its ability to compete and operate as a viable business. In addition, the increasing popularity of open source technology places greater risk on the proprietary technology offered by the Corporation to its existing and potential partners.
Loyalty partners may have, or may develop, in-house business solutions departments that could take responsibility for work currently being done by the Corporation. Any competition or adverse change in the business relationship described above could have a material adverse impact on the Corporation's business, operations and prospects.
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Our brand, revenue and profitability are affected by our ability to control cyber security risks
Due to the online nature of the Corporations business, member databases are maintained for products and services offered on Points.com. These databases contain member information including account transactions. Although the Corporation has established rigorous security procedures, the databases may be vulnerable to potential unauthorized access to, or use or disclosure of member data. If the Corporation were to experience a security breach, its reputation may be negatively affected and the traffic generated on Points.com could decline in the event of any publicized compromise of security. Any perception that the Corporation released consumer information without authorization could subject the businesses to complaints and investigation by the applicable privacy regulatory bodies and adversely affect relationships with Points.com members and loyalty program partners. In addition, any unauthorized release of member information, or any public perception that member information was released without authorization, could lead to legal claims from consumers or regulatory enforcement actions.
We could face adverse consequences if there is a risk in the viability of the internet and system infrastructure
The end customers of the Corporations software depend on internet service providers, online service providers and the Corporations infrastructure for access to the software solutions the Corporation provides to its loyalty program partners. These services are subject to service outages and delays due to system failures, stability or interruption. As a result, the Corporation may not be able to meet a satisfactory level of service as contracted with its partners, and may cause a breach of the Corporations contractual commitments, which could have a material adverse effect on the Corporations business, revenues, operating results and financial condition.
The promotion and strengthening of our brand is critical to our business
The Corporation believes that continuing to strengthen its brand is an important factor in achieving widespread acceptance of the Corporations services, and will require an increased focus on active marketing efforts. The Corporation will likely need to spend increasing amounts of money on, and devote greater resources to, advertising, marketing, and other efforts to create and maintain brand loyalty among users and potential users. Brand promotion activities may not yield increased revenues, and even if they do, any increased revenues may not offset the expenses incurred in building the Corporations brand. If the Corporation fails to promote and maintain the Corporations brand, or if the Corporation incurs substantial expenses in an unsuccessful attempt to promote and maintain the Corporations brand, the Corporations business could be harmed.
We are exposed to adverse consequences if the Corporation cannot successfully retain its intellectual property
Our success depends, in part, on our ability to protect our proprietary methodologies, processes, know-how, tools, techniques and other intellectual property that we use to provide our services. Our general practice is to pursue patent, copyright, trademark, trade secret or other appropriate intellectual property protection that is reasonable and necessary to protect and leverage our intellectual assets. We also assert trademark rights in and to our name, product names, logos and other markings used to identify our goods and services in the marketplace. We routinely file for and have been granted trademark registrations from trademark offices worldwide. All of these actions taken allow us to enforce our intellectual property rights should the need arise. However, the laws of some countries in which we conduct business may offer only limited protection of our intellectual property rights; and despite our efforts, the steps taken to protect our intellectual property may not be adequate to prevent or deter infringement or other misappropriation of intellectual property, and we may not be able to detect unauthorized use of our intellectual property, or take appropriate steps to enforce our intellectual property rights.
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We are exposed to litigation and adverse consequences if we infringe on the intellectual property rights of others
Third parties may assert claims against the Corporation alleging infringement of their intellectual property rights. An adverse determination in any litigation of this type could result in the Corporation being required to pay significant damages, require the Corporation to design around a third partys patent or to license alternative technology from another party. In addition, litigation may be time-consuming and expensive to defend and could result in the diversion of time and resources. Any claims by third parties may also result in limitations on the ability to use the intellectual property subject to these claims. Any of the foregoing could have a material adverse effect on the Corporations business, revenues, operating results and financial condition.
Our operations are dependent on the proper functioning of software and processing of transactions
Defects in our owned or licensed software products, delays in delivery, and failures or mistakes in our processing of electronic transactions could materially harm our business, including our customer relationships and operating results. Our operations are dependent on our ability to protect our computer equipment and the information stored in our data centres against damage that may be caused by fire, power loss, telecommunication failures, unauthorized intrusion, computer viruses and disabling devices, and other similar events. A failure in our production systems or a disaster or other event affecting our production systems or business operations could result in a disruption or loss of availability of our products or services to our customers. Any disruption to our services could impair our reputation and cause us to lose customers or revenue, or face litigation, necessitate customer service or repair work that would involve substantial costs and distract management from operating our business.
Our financial performance is substantially dependent on retaining key technical and management personnel
Our performance is substantially dependent on the performance of our key technical and senior management personnel. Our success is highly dependent on our continuing ability to identify, hire, train, motivate, promote and retain highly qualified management, directors, technical, and sales and marketing personnel. Competition for such personnel is always strong. Our inability to attract or retain the necessary management, directors, technical, and sales and marketing personnel, or to attract such personnel on a timely basis could have a material adverse effect on our business, results of operations, financial condition and the price of our securities.
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Chargebacks of a material amount could have an adverse consequence on the Corporation
A chargeback is any credit card transaction undertaken by an end-customer that is later reversed or repudiated. The Corporation is subject to exposure in regard to chargebacks, a high incidence of which could result in penalties or eventual shut down of the payment method. While Points has fraud control measures in place to minimize exposure, chargebacks could have a material adverse effect on its business, operating results and financial condition.
Our business could be negatively impacted by changes to domestic and international tax laws, rules and regulations
The Corporation operates in multiple jurisdictions and has relationships with several foreign partners. The application of various domestic and international sales, use, occupancy, value-added and other tax laws, rules and regulations to the Corporations products and services is subject to interpretation by the applicable taxing authorities. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the internet and Ecommerce. If the tax laws, rules or regulations are amended, if new adverse laws, rules or regulations are adopted, or if current laws are interpreted adversely to the Corporations interests, particularly with respect to occupancy or value-added taxes, the results could increase the Corporations tax payments (prospectively or retrospectively) and/or subject it to penalties and decrease the demand for the Corporations products and services if the Corporation passes on such costs to the consumer. As a result, these changes could have a material adverse effect on the Corporations business, operating results and financial condition.
MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING
The audited consolidated financial statements of Points International Ltd. are the responsibility of management and have been approved by the Board of Directors.
The consolidated financial statements have been prepared by management in accordance with IFRS as issued by the IASB. These statements include some amounts that are based on estimates and judgment. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects.
The Corporations policy is to maintain systems of internal accounting and administrative controls of high quality, consistent with reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is relevant, accurate and reliable and that the Corporations assets are appropriately accounted for and adequately safeguarded.
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The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for approving the financial statements. The Board carries out this responsibility principally through its Audit Committee.
The Audit Committee is appointed by the Board and is comprised entirely of outside directors. The committee meets periodically with management and the external auditors to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues to satisfy itself that each party is properly discharging its responsibilities. The Audit Committee reviews the Corporations annual consolidated financial statements, the report of the independent registered public accounting firm on the consolidated financial statements and the effectiveness of internal control over financial reporting, and other information in the Annual Report. The Committee reports its findings to the Board for consideration by the Board when it approves the financial statements for issuance to the shareholders.
On behalf of the shareholders, the financial statements have been audited by KPMG LLP, the external auditors, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). KPMG LLP has full and free access to the Audit Committee.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Corporation in reports filed with securities regulatory agencies is recorded, processed, summarized and reported on a timely basis and is accumulated and communicated to the Corporations management, including the Corporation's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. An evaluation was carried out under the supervision of and with the participation of the Corporations management, including the Corporation's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Corporation's disclosure controls and procedures (as defined in rules adopted by the US Securities and Exchange Commission ("SEC") and in National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings) as of December 31, 2015. Based on this evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.
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 ruled adopted by the SEC and 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 and year ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Corporations internal control over financial reporting.
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Internal control includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Corporation, provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, provide reasonable assurance that receipts and expenditures are made only in accordance with authorization of management and the Board of Directors, and provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the Corporations assets that could have a material impact on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and can provide only reasonable assurance with respect to the financial statement preparation and presentation.
Management of the Corporation has evaluated the effectiveness of internal control over financial reporting based on the framework in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management has concluded that the Corporations internal control over financial reporting is effective as of December 31, 2015.
The effectiveness of the Corporations internal control over financial reporting as of December 31, 2015, has been audited by KPMG LLP, the Corporations Independent Registered Public Accounting Firm, who also audited the Corporations consolidated financial statements as at and for the year ended December 31, 2015.
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Rule 13a-14(a) Certification - CEO
I, Robert MacLean, certify that:
1. |
I have reviewed this annual report on Form 40-F of Points International Ltd.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
4. |
The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles; | |
(c) |
Evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
(d) |
Disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and |
5. |
The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions): |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and | |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting. |
Date: March 2, 2016
/s/ Robert MacLean |
Robert MacLean |
Chief Executive Officer |
Rule 13a-14(a) Certification - CFO
I, Michael DAmico, certify that:
1. |
I have reviewed this annual report on Form 40-F of Points International Ltd.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; |
4. |
The companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles; | |
(c) |
Evaluated the effectiveness of the companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
(d) |
Disclosed in this report any change in the companys internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting; and |
5. |
The companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the companys auditors and the audit committee of the companys board of directors (or persons performing the equivalent functions): |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the companys ability to record, process, summarize and report financial information; and | |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the companys internal control over financial reporting. |
Date: March 2, 2016
/s/ Michael DAmico |
Michael DAmico |
Chief Financial Officer |
Rule 13a-14(b) Certification - CEO
In accordance with Rule 14a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code, the undersigned officer of Points International Ltd. (the Corporation), hereby certifies, to the best of such officer's knowledge, that:
The Corporations annual report on Form 40-F for the year ended December 31, 2015, to which this certification is attached (the Report), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and information contained in the Report fairly presents, in all material respects, the financial condition of the Corporation at the end of the period covered by the Report and results of operation of the Corporation for the periods covered by the Report.
Date: March 2, 2016
/s/ Robert MacLean |
Robert MacLean |
Chief Executive Officer |
Rule 13a-14(b) Certification - CFO
In accordance with Rule 14a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code, the undersigned officer of Points International Ltd. (the Corporation), hereby certifies, to the best of such officer's knowledge, that:
The Corporations annual report on Form 40-F for the year ended December 31, 2015, to which this certification is attached (the Report), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and information contained in the Report fairly presents, in all material respects, the financial condition of the Corporation at the end of the period covered by the Report and results of operation of the Corporation for the periods covered by the Report.
Date: March 2, 2016
/s/ Michael DAmico |
Michael DAmico |
Chief Financial Officer |
KPMG LLP | Telephone (416) 228-7000 | |
4100 Yonge Street | Fax (416) 228-7123 | |
Suite 200 | www.kpmg.ca | |
North York ON | ||
M2P 2H3 |
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Points International Ltd.:
We consent to the use of:
each of which is incorporated by reference in this annual report on Form 40-F of Points International Ltd. for the fiscal year ended December 31, 2015.
We also consent to the incorporation by reference of such reports in Registration Statement No. 333-172806 on Form S-8 of Points International Ltd.
Chartered Professional Accountants, Licensed Public Accountants
March 2, 2016
Toronto, Canada
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