Davies Draft: March 2, 2018
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, 2017
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)
111 Richmond Street West, Suite 700
Toronto, Ontario,
Canada M5H 2G4
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:
[X] Annual information form | [X] Audited annual financial statements |
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: 14,561,450 as of December 31, 2017.
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 [X] No [ ]
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.
Emerging growth company [ ]
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.[ ]
The term "new or revised financial accounting standard" refers
to any update issued by the Financial Accounting
Standards Board to its
Accounting Standards Codification after April 5, 2012.
CERTIFICATIONS
See Exhibits 99.4 and 99.5 to this Annual Report on Form 40-F.
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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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in the Registrants internal control over financial reporting that occurred during the period covered by this Form 40-F that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting.
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, 2017 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.points.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 2017 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.
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PRE-APPROVAL POLICIES AND PROCEDURES
A description of the audit committees pre-approval policies and procedures is disclosed in the Registrants 2017 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.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The Registrants contractual obligations as of December 31, 2017 are disclosed in the notes to the 2017 Audited Consolidated Financial Statements and in Managements Discussion and Analysis for the fiscal year ended December 31, 2017 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. David Adams, 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:
|
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. | |
| ||
|
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 committees 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. |
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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 8, 2018 |
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EXHIBITS
The following exhibits are filed as part of this Annual Report on Form 40-F:
Number | Document |
99.1 | Annual Information Form of the Registrant for the fiscal year ended December 31, 2017 |
99.2 | Audited Consolidated Financial Statements for the fiscal year ended December 31, 2017 |
99.3 | Managements Discussion and Analysis for the fourth fiscal quarter and fiscal year ended December 31, 2017 |
99.4 | Chief Executive Officer and Chief Financial Officer certifications required by Rule 13a-14(a) |
99.5 | Chief Executive Officer and Chief Financial Officer certifications required by Rule 13a-14(b) |
99.6 | Consent of KPMG LLP |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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POINTS INTERNATIONAL LTD. |
Annual Information Form |
March 8, 2018 |
Information presented herein is current as of March 8, 2018, 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, 2017 (2017 Audited Consolidated Financial Statements). Further information, including Points Management Discussion and Analysis for the year ended December 31, 2017 (2017 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 111 Richmond Street West, Suite 700, Toronto, Ontario, M5H 2G4.
The Corporation has five 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, (d) Points Development US Ltd. (formerly Accruity Inc.), a corporation incorporated under the laws of the State of Delaware and (e) Points Travel Inc., a corporation incorporated under the Business Corporations Act (Ontario).
GENERAL DEVELOPMENT OF THE BUSINESS
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 a normal course issuer bid pursuant to which the Corporation had 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, terminated on March 8, 2016 and was subject to the Corporations normal trading blackout periods. Pursuant to the 2015 Repurchase, the Corporation purchased 446,894 common shares, all for cancellation.
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 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 a new partnership with Miles & More, Europes largest frequent flyer program and the loyalty program for Lufthansa and nine other European airlines. Miles & More became the first loyalty program partner to integrate their web and mobile properties with the Points Travel platform, allowing their members to earn award miles for hotel bookings.
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In February 2016, the Corporation launched a hotel redemption program with La Quinta Inns & Suites, allowing La Quinta Returns members to redeem their loyalty points for bookings at thousands of luxury hotel locations across the globe. Built on the Points Travel platform, the redemption program provides participating members with even greater value and convenience.
In March 2016 the Corporation announced an additional normal course issuer bid pursuant to which the Corporation had 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 commenced on March 9, 2016, terminated on March 8, 2017 and was subject to the Corporations normal trading blackout periods. Pursuant to the 2016 Repurchase, the Corporation purchased 428,228 common shares, all for cancellation.
In April 2016, the Corporation launched Flying Blue, Air France-KLMs frequent flyer program, on the Points Travel platform. Flying Blues Points Travel integration allows members to both earn miles for hotel bookings or redeem their miles in a combination of miles and cash on hotel bookings. Also in April 2016, Points announced a partnership with Shangri-La Hotels and Resorts. Under the new partnership, members of Shangri-Las Golden Circle program will be able to Buy and Gift award points for themselves and others.
In May 2016, Points announced a partnership with App In the Air, the travel application that helps users navigate their entire flying process. Powered by the Points Loyalty Wallet, Points will power the loyalty section for App in the Air, which gives users the ability to register, track and transact their favourite travel loyalty programs.
In August 2016, the Corporation announced a new partnership with Canadas AIR MILES Reward Program to launch AIR MILES Travel Hub. Built on the Points Travel platform, the Travel Hub allows AIR MILES collectors to book stays at hotels and all-inclusive resorts around the world. Also in August 2016, the Corporation announced the launch of Hawaiian Airlines on the Points Travel platform. HawaiianMiles members will now be able to redeem their frequent flyer miles to pay for all or part of hotel bookings at hotel properties around the globe.
In November 2016, Points announced an expansion of its Points Travel partnership with Miles & More. Under this expansion, Miles & More members can now redeem their award miles to pay for all or part of their bookings at hotels and resorts around the globe. In December 2016, the Corporation expanded the functionality of Points Travel to include car rental booking functionality. The new service, launched with Miles & More, provides members the ability to book car rentals by using their miles, or a combination of miles and cash.
In February 2017, Points expanded its footprint in Latin America and the Caribbean with the announcement of a new partnership with Copa Airlines, enabling ConnectMiles members to buy, gift or transfer their reward miles.
In April 2017, in collaboration with Collinson Latitude, the Corporation signed a multi-year agreement with All Nippon Airways (ANA), Japans largest airline. In this new partnership, ANA Mileage Club has integrated with Points Travel, enabling members to earn or redeem their miles when transacting for hotel and car rental bookings. In addition, ANA also launched the ANA Global Mileage Mall and ANA Global Selection, powered by Collinson Latitudes Earn Mall and Redemption Store solutions. Also in April 2017, Points announced a new partnership with WestJet, enabling members to buy WestJet Dollars.
In May 2017, the Corporation launched its buy services with Etihad Airways, enabling Etihad Guest Reward members to buy miles. In June 2017, Points announced a new partnership with the Bank of Nova Scotia (Scotiabank), one of Canadas leading financial institutions, to add new multi-loyalty program functionality to Scotiabanks mobile banking app. Scotiabank users now have the ability to track and access loyalty balances for multiple loyalty programs.
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In August 2017, the Corporation announced a new partnership with Air Europa, enabling SUMA program members to buy, gift and transfer miles. Also in August 2017, the Corporation announced an additional normal course issuer bid pursuant to which the Corporation has the ability to repurchase up to 743,468 of its common shares (the 2017 Repurchase), representing approximately 5% of its issued and outstanding common shares as of July 31, 2017. In connection with the 2017 Repurchase, the Corporation entered into an automatic share purchase plan with a broker to facilitate repurchases of its common shares. Under the automatic share purchase plan, the Corporations broker may repurchase common shares at times when the Corporation would ordinarily not be permitted to due to regulatory restrictions or self-imposed blackout periods. The 2017 Repurchase commenced on August 14, 2017 and will terminate on August 13, 2018. As of the date of this AIF, pursuant to the 2017 Repurchase, the Corporation has purchased 458,375 common shares, all for cancellation.
In October 2017, the Corporation announced a new partnership with Groupon. Groupons U.S. members can now earn loyalty currency on purchases from their choice of a number of participating loyalty programs.
In November 2017, the Corporation announced a new partnership with Velocity Frequent Flyer, the loyalty program of Virgin Australia, to takes its Points Booster program online. Velocity members are now able to top up their Velocity Points online in order to redeem for a reward sooner.
GENERAL DESCRIPTION OF THE BUSINESS
Points is the global leader in providing loyalty eCommerce and technology solutions to the worlds leading loyalty programs, with a growing network of almost 60 loyalty programs integrated into and leveraging its own unique Loyalty Commerce Platform (LCP). The majority of the Corporations loyalty program partners operate in the United States. The Corporation also has a significant European customer base. The Corporation operated in three segments in 2017: (a) Loyalty Currency Retailing, (b) Platform Partners and (c) Points Travel.
Summary
Loyalty Currency Retailing
The Loyalty Currency Retailing segment provides products and services designed to help loyalty program members unlock the value of their loyalty currency and accelerate the time to a reward. Included in this segment are the Corporations buy, gift, transfer, reinstate and accelerator services. These services provide loyalty program members the ability to buy loyalty program currency (such as frequent flyer miles or hotel points) for themselves, as gifts for others, or perform a transfer of loyalty currency to another member within the same loyalty program.
The Corporation has direct partnerships with over 35 loyalty programs that leverage the Loyalty Currency Retailing services and functionality offered by the LCP. Loyalty Currency Retailing services provide high margin revenue and profitability to Points loyalty programs while increasing the member engagement by unlocking the value of loyalty currency in the members accounts.
Points may take a principal role in the retailing of loyalty currencies, whereby it sells points and miles at retail rates to end consumers while purchasing points and miles at wholesale rates from its loyalty program partners. Alternatively, the Corporation may assume an agency role in the retailing and wholesaling of loyalty currencies, where it takes a less active role in the relationship and receives a commission on each transaction.
Platform Partners
The Corporations Platform Partners segment comprises a broad range of applications that are connected to and enabled by the functionality of the LCP. Loyalty programs, merchants, and other consumer service applications leverage the LCP to broadly distribute loyalty currency and loyalty commerce transactions through multiple channels, including loyalty program, co-branded and third-party channels.
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Included in the Platform Partners segment are multiple third-party managed applications that are enabled by the LCP, including the Points Loyalty Wallet, one of the Corporations newest services.
Points Travel
The Points Travel segment connects the world of online travel bookings with the broader loyalty industry and consists of the Corporations Points Travel and PointsHound services.
In 2014, the Corporation acquired Accruity Inc., the San Francisco based start-up operator of the PointsHound loyalty-based hotel booking service, which today continues to offer consumers the ability to earn loyalty currency from 20 loyalty programs. Leveraging the PointsHound technology, the Corporation developed its Points Travel services, the first white-label travel hotel booking service specifically designed for loyalty programs. Points partners with loyalty programs to provide a seamless travel booking experience for loyalty program members and enables the members to earn and redeem their loyalty currency while making hotel and car bookings online. Points Travel offers a rewarding value proposition for loyalty program members as they can earn high levels of points/miles for a hotel or car booking or have the ability to fully redeem points/miles, or a combination of points and cash, for hotel stays and car rentals.
Method of Providing Services
The Corporations services are generally delivered through web-enabled e-commerce solutions.
Specialized Skill and Knowledge
The Corporation currently employs six 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.
Competitive Conditions
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.
With respect to the Platform Partners segment generally, and in particular 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 those offered by the Platform Partners segment, including 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 Platform Partners segment and the Points Loyalty Wallet.
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The PointsHound and Points Travel services face direct and indirect competition from other hotel booking engines and hotel booking solutions. These potential competitors currently offer products similar to the hotel booking features available through the PointsHound and Points Travel services, but do not offer the same value proposition that the Corporation can leverage through the Loyalty Currency Retailing segment.
Loyalty partners may have, or may develop, in-house business solutions departments that could take responsibility for work currently being done by the Corporation. 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 services 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 service offerings and the scale of the loyalty commerce platform to pursue longer term growth.
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.
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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 services 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 Retailing segment.
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, 2017, 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 69% 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.
Employees
As at December 31, 2017, the Corporation had 211 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 2017 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, 14,437,959 common shares were outstanding. The Corporation has no preferred shares outstanding.
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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 2017 | High ($) | Low ($) | Close ($) | Volume |
January | 11.30 | 9.85 | 9.85 | 81,853 |
February | 10.50 | 9.10 | 9.25 | 94,239 |
March | 10.55 | 8.50 | 10.31 | 208,640 |
April | 13.23 | 9.88 | 12.17 | 121,551 |
May | 14.20 | 12.00 | 13.22 | 199,573 |
June | 13.35 | 11.20 | 11.72 | 59,817 |
July | 11.82 | 9.71 | 10.25 | 60,581 |
August | 11.40 | 9.85 | 10.40 | 57,753 |
September | 15.46 | 10.08 | 14.20 | 238,858 |
October | 15.00 | 13.28 | 14.80 | 46,981 |
November | 15.45 | 12.74 | 15.00 | 126,055 |
December | 14.99 | 12.70 | 13.00 | 69,258 |
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 Corporation 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 |
David Adams (Quebec) |
May, 2016 | Corporate Director Former Chief Financial Officer, Aimia Inc. |
5,000 |
Christopher Barnard
(Ontario) |
May, 2007 (and Feb. 2000 to April, 2005) |
President, Points International Ltd. and Points.com Inc. | 198,121 |
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Michael Beckerman (Ontario) |
May, 2010 | Corporate Director Former Chief
Executive Officer, Ariad Communications and Bluespire Marketing |
11,735 |
Bernay Box (Texas, U.S.A.) |
May, 2009 | President of Bonanza Fund
Management, Inc. and investment advisor for Bonanza Master Fund, Ltd. |
797,988 |
Douglas Carty (Illinois, U.S.A.) |
February, 2002 | Corporate Director | 38,614 |
Bruce Croxon (Ontario) |
October, 2008 | Investor and Advisor | 30,123 |
Charles Gillman (California, U.S.A.) |
May, 2017 | Executive Managing Director of IDWR Multi- Family Office | Nil |
Robert MacLean (Ontario) |
February, 2002 | Chief Executive Officer, Points International Ltd. and Points.com Inc. | 171,953 |
John Thompson (Ontario) |
February, 2002 | Corporate Director | 176,212 |
Director Biographies
David Adams
Mr. Adams was appointed as a director of the Corporation in May of 2016 and is currently a member of the Corporations Audit Committee. He served as the Executive Vice President and Chief Financial Officer of Aimia Inc. from 2007 until his retirement in March, 2016. Aimia Inc. is a global data driven marketing and loyalty analytics company with close to 4,000 employees in 20 countries and owns and operates well known coalition loyalty programs such as Aeroplan in Canada. He currently serves on the Board of Directors and is Chair of the Audit Committee and a member of the Nominating and Governance Committee of Cardlytics Inc.(Nasdaq), a transaction based marketing company headquartered in Atlanta and the Board of Directors and Audit and Human Resource Committees of Club Premier, AeroMexicos frequent flyer program. He is also on the Board of Directors of Plan International Canada where he is Chair of the Human Resources and Compensation Committee and a member of the Audit Committee and is a member of the Board of Governors of the Stratford Festival.
Before joining Aimia, Mr. Adams was Senior Vice President and Chief Financial Officer at Photowatt Technologies Inc. Prior to Photowatt, he acted as Senior Vice President Finance and Chief Financial Officer of SR Telecom Inc. Mr. Adams has also previously held a variety of executive finance positions at CAE Inc., a global market leader in the production of flight simulators and control systems. Prior to these roles, Mr. Adams held a number of progressively senior roles with the Bank of Nova Scotia and Clarkson Gordon (Ernst & Young).
Mr. Adams is a CPA, CA and holds a Bachelor of Commerce and Finance Degree from the University of Toronto and has completed the Stanford Executive Program.
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 Corporations 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.
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In 1998, Mr. Barnard co-founded Canadas first internet business incubator, Exclamation International, from which the Corporation was created. Prior to Exclamation, Mr. Barnard 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. Beckerman has served as a director of the Corporation since May of 2008 and is currently a member of the Corporations Human Resources and Corporate Governance Committee.
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 recently retired as CEO of Ariad Communications and Bluespire Marketing. Ariad enjoyed record growth during his tenure. 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.
Mr. Beckerman is a sought after speaker on marketing trends, branding and consumer behavior. 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 elected 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.
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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 Compensation, 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 Food Allergy Canada.
Charles Gillman
Mr. Gillman was elected as a director of the Corporation in May of 2017.
Mr. Gillman is currently the Executive Managing Director of the IDWR Multi-Family Office, a multi-family investment firm, a position he has held since June 2013. IDWR employs a team of analysts with expertise in finding publicly traded companies that require operational enhancement and an improvement in corporate capital allocation.
From 2001 to 2013, Mr. Gillman was a portfolio manager of certain family office investment portfolios at Nadel and Gussman, LLC. Prior to his employment at Nadel and Gussman, Mr. Gillman worked in the investment industry and as a strategic management consultant at McKinsey & Company, where he gained experience designing operational turnarounds of U.S. and international companies.
Mr. Gillman has served as a director of Digirad Corporation (NASDAQ:DRAD), a diagnostic imaging solutions company, since 2012. In addition, Mr. Gillman currently serves on the boards of directors of Novation Companies, Inc., a specialty finance company, a post he has held since 2016, Solitron Devices, Inc., a solid-state semiconductor components company, a post he has held since 2016 and Hill International, a construction management company , a post he has held since 2016.
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Mr. Gillman is a Summa Cum Laude graduate of the Wharton School of the University of Pennsylvania and a Director of the Penn Club of New York, which serves as the Manhattan home of the Wharton and Penn alumni community.
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.
Mr. MacLean is an active member of the global loyalty community and has spoken frequently at industry events worldwide.
Mr. MacLean is Chairman 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 also sits on several advisory boards.
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.
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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. (Nov. 2015 to present) |
Peter Lockhard Chief Operating Officer |
Ontario |
Chief Operating Officer and other previous roles, Points International Ltd. and Points.com Inc. |
Inez Murdoch |
Ontario |
Chief People Officer and other previous roles, Points International Ltd. and Points.com Inc. |
Owen Tran Chief Technology Officer |
Ontario |
Chief Technology Officer and other previous roles, Points International Ltd. and Points.com Inc. (April 2014 to present) Chief Technology Officer, Switchfly Inc. (Sept. 2007 to April 2014) |
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 1,449,653 common shares representing approximately 10.0% 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.
Other than as described below, 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.
Mr. Gillman was a director of Novation Companies, Inc. (NOVC), a U.S. publicly listed company, when it filed for Chapter 11 business reorganization in the U.S. Bankruptcy Court for the District of Maryland (Baltimore Division) on July 20, 2016. On June 12, 2017 a plan of reorganization proposed by NOVC was confirmed by the court, which plan became effective on July 27, 2017 following the satisfaction of certain conditions precedent. Mr. Gillman was first appointed to the board of directors of NOVC on January 6, 2016 and continues to serve in such capacity.
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Other than as described below, 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.
Mr. Gillman is subject to an order of the U.S. Securities and Exchange Commission (the SEC) issued on February 14, 2017 in connection with a failure by certain groups of investors, including Mr. Gillman, to properly disclose ownership information during a series of five campaigns to influence or exert control over certain publicly listed companies. In each of the campaigns, the groups collectively owned more than five percent of the companies outstanding common stock, however, they either failed to file, filed incomplete, or failed to update required ownership filings under applicable U.S. securities laws. Mr. Gillman was found to have violated Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 thereunder and Section 16(a) of the Exchange Act and Rules 16a-2 and 16a-3 thereunder. Without admitting or denying the findings, the investors, including Mr. Gillman, consented to the SEC order and agreed to certain sanctions. Mr. Gillman was ordered to pay a civil penalty of $30,000 and to cease and desist violations of U.S. securities laws.
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.
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), David Adams, 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. Adams holds a Bachelor of Commerce and Finance degree from the University of Toronto and is also a CPA, CA. As described in the section above on Directors and Executive Officers, Mr. Adams has held several senior executive positions that are directly relevant to his role on the Audit Committee, including most recently serving as the Executive Vice President and Chief Financial Officer of Aimia Inc. from 2007 until March, 2016.
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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.
External Auditor Service Fees (By Category)
The aggregate fees billed by the Corporations external auditor in the last two fiscal years are as follows:
2017 (CAD$) | 2016 (CAD$) | |
Audit Fees | 558,879 | 368,742 |
In the table above, Audit Fees include fees for the annual audit of our consolidated financial statements, interim reviews of our quarterly condensed consolidated financial statements and statutory audits of our wholly-owned subsidiaries by our external auditor.
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.
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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 2017 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 2017 Audited Consolidated Financial Statements and the 2017 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 Corporations financial statements, and accounting and financial reporting systems (including those used in connection with the preparation of its financial statements, budgets and forecasts); | |
(b) | the Corporations compliance with legal and regulatory requirements; | |
(c) | the External Auditors qualifications and independence; | |
(d) | the performance of the External Auditor and the performance of the Corporations internal audit function; and | |
(e) | the adequacy and integrity of the Corporations internal controls over financial reporting and disclosure controls and procedures. |
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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.
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 Corporations 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.
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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.
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.
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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.
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 Corporations public disclosure of financial information extracted or derived from the Corporations 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: |
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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 accounting 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; | |
| ||
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. |
financial information to be disclosed in the press releases discussing the annual and interim profits or losses of the Corporation, paying particular attention to any use of pro forma or adjusted financial information; | |
| ||
ii. |
financial information to be disclosed in any other press releases issued by the Corporation; and |
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iii. | 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. The Committee shall be responsible for the selection, compensation, retention and oversight of the work of the External Auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Corporation. In discharging its responsibilities, the Committee shall: |
i. |
recommend to the Board the accounting firm to be proposed to the shareholders for appointment as the External Auditor; | |
| ||
ii. |
recommend to the Board the compensation of the External Auditor; | |
| ||
iii. |
determine, at any time, whether the Board should recommend to the shareholders that the incumbent External Auditor be removed from office; | |
| ||
iv. |
review the terms of the External Auditors engagement and discuss the audit fees with the External Auditor, as necessary; and | |
| ||
v. |
require the External Auditor report directly to the Committee. |
(b) | Independence of External Auditor. The Committee shall satisfy itself as to the independence of the External Auditor. As part of this process, the Committee shall: |
i. |
assure the regular rotation of the lead audit partner as required by applicable laws and consider whether, in order to ensure continuing independence of the External Auditor, the Corporation should periodically rotate the accounting firm that serves as External Auditor; | |
| ||
ii. |
require the External Auditor to submit at least annually to the Committee a formal written statement delineating all relationships between the External Auditor and the Corporation, engage 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 recommend to the Board the appropriate actions to be taken in response to the External Auditors report to satisfy itself of the External Auditors independence; | |
| ||
iii. |
unless the Committee adopts pre-approval policies and procedures, it must pre-approve any non-audit services provided by the External Auditor to the Corporation or its subsidiaries; provided, however, that the Committee may delegate such pre-approval authority to one or more of its members, who shall report to the Committee concerning their exercise of such delegated authority at or prior to the next scheduled meeting of the Committee; and |
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iv. |
establish, approve and periodically review the Corporations hiring policy regarding partners, employees and former partners and employees of the External Auditor and any accounting firm that used to serve as External Auditor. |
(c) |
Issues Between External Auditor and Management. The Committee shall satisfy itself that any disagreement between management and the External Auditor regarding the Corporations financial reporting is resolved. As part of this process, the Committee shall: |
i. |
review any problems experienced by the External Auditor in conducting the audit, including any restrictions on the scope of the External Auditors activities or on its access to requested information; | |
| ||
ii. |
act as an intermediary with a view of resolving any significant disagreements that may arise between management of the Corporation and the External Auditor; | |
| ||
iii. |
review with the External Auditor: |
(A) |
any accounting adjustments that were noted or proposed by the External Auditor, but were ultimately not made; | |
|
| |
(B) |
any auditing or accounting issues presented by the engagement; | |
|
| |
(C) |
any internal control issues or weaknesses identified by the External Auditor; and | |
|
| |
(D) |
the responsibilities, budget and staffing of the Corporations internal audit function. |
(d) |
Evaluation of External Auditor. The Committee shall evaluate the External Auditor each year and present its conclusions to the Board. In connection with this evaluation, the Committee shall: |
i. | obtain and review a report prepared by the External Auditor describing: |
(A) |
the External Auditors quality-control procedures; | |
| ||
(B) |
any material issues raised by the most recent internal quality- control review, or peer review, of the External Auditor or by any inquiry, review, inspection or investigation involving the External Auditor by governmental or professional authorities, within the preceding five years, in respect of one or more independent audits carried out by the External Auditor, and any steps taken to deal with any such issues; and |
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(C) | all relationships between the External Auditor and the Corporation; |
ii. |
review and evaluate the performance of the lead partner of the External Auditor; and | |
| ||
iii. |
obtain the feedback from the relevant members of management of the Corporation and the Internal Auditor on the performance of the External Auditor. |
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 Corporations 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 Corporations hiring policies regarding partners, employees and former partners and employees of the present and former external auditor of the Corporation.
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, 2017 |
Points International Ltd. |
Consolidated Statements of Financial Position |
Expressed in thousands of United States dollars |
As at December 31 | Note | 2017 | 2016 | ||||||
ASSETS | |||||||||
Current assets | |||||||||
Cash and cash equivalents | $ | 63,514 | $ | 46,492 | |||||
Short-term investments | 23 | - | 10,033 | ||||||
Restricted cash | 5 | 500 | 500 | ||||||
Funds receivable from payment processors | 15,229 | 10,461 | |||||||
Accounts receivable | 6 | 7,741 | 4,057 | ||||||
Prepaid expenses and other assets | 7 | 2,420 | 1,475 | ||||||
Total current assets | 89,404 | 73,018 | |||||||
Non-current assets | |||||||||
Property and equipment | 8 | 2,128 | 1,750 | ||||||
Intangible assets | 9 | 15,265 | 16,896 | ||||||
Goodwill | 10 | 7,130 | 7,130 | ||||||
Deferred tax assets | 11 | 2,557 | 1,725 | ||||||
Other assets | 7 | 2,661 | 2,715 | ||||||
Total non-current assets | 29,741 | 30,216 | |||||||
Total assets | $ | 119,145 | $ | 103,234 | |||||
LIABILITIES | |||||||||
Current liabilities | |||||||||
Accounts payable and accrued liabilities | $ | 7,998 | $ | 6,335 | |||||
Income taxes payable | 695 | 1,638 | |||||||
Payable to loyalty program partners | 65,567 | 53,242 | |||||||
Current portion of other liabilities | 12 | 1,400 | 771 | ||||||
Total current liabilities | 75,660 | 61,986 | |||||||
Non-current liabilities | |||||||||
Deferred tax liabilities | 11 | - | 211 | ||||||
Other liabilities | 12 | 538 | 719 | ||||||
Total non-current liabilities | 538 | 930 | |||||||
Total liabilities | $ | 76,198 | $ | 62,916 | |||||
SHAREHOLDERS EQUITY | |||||||||
Share capital | 56,394 | 58,412 | |||||||
Contributed surplus | 10,647 | 9,881 | |||||||
Accumulated other comprehensive income (loss) | 374 | (127 | ) | ||||||
Accumulated deficit | (24,468 | ) | (27,848 | ) | |||||
Total shareholders equity | $ | 42,947 | $ | 40,318 | |||||
Total liabilities and shareholders equity | $ | 119,145 | $ | 103,234 | |||||
Guarantees and Commitments | 18 | ||||||||
Credit Facilities | 24 |
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 |
2 | P a g e |
Points International Ltd. |
Consolidated Statements of Comprehensive Income (Loss) |
Expressed in thousands of United States dollars, except per share amounts |
For the year ended December 31 | Note | 2017 | 2016 | ||||||
REVENUE | |||||||||
Principal | $ | 330,565 | $ | 308,964 | |||||
Other partner revenue | 16,768 | 12,648 | |||||||
Interest | 213 | 209 | |||||||
Total Revenue | 4 | 347,546 | 321,821 | ||||||
EXPENSES | |||||||||
Direct cost of principal revenue | 300,570 | 278,483 | |||||||
Employment costs | 25,767 | 23,220 | |||||||
Marketing and communications | 2,056 | 2,220 | |||||||
Technology services | 1,912 | 1,691 | |||||||
Depreciation and amortization | 3,988 | 4,529 | |||||||
Foreign exchange (gain) loss | (58 | ) | 230 | ||||||
Operating expenses | 16 | 8,470 | 6,418 | ||||||
Impairment of long-term investment | 22 | - | 5,000 | ||||||
Total Expenses | $ | 342,705 | $ | 321,791 | |||||
INCOME BEFORE INCOME TAXES | 4,841 | 30 | |||||||
Income tax expense | 11 | 1,461 | 1,545 | ||||||
NET INCOME (LOSS) | $ | 3,380 | $ | (1,515 | ) | ||||
OTHER COMPREHENSIVE INCOME | |||||||||
Items that will subsequently be reclassified to profit or loss: | |||||||||
Unrealized gain on foreign exchange derivatives designated as cash flow hedges | 1,012 | 401 | |||||||
Income tax effect | (268 | ) | (106 | ) | |||||
Reclassification to net income of loss (gain) on foreign exchange derivatives designated as cash flow hedges | (331 | ) | 269 | ||||||
Income tax effect | 88 | (67 | ) | ||||||
Other comprehensive income for the year, net of income tax | 501 | 497 | |||||||
TOTAL COMPREHENSIVE INCOME (LOSS) | $ | 3,881 | $ | (1,018 | ) | ||||
EARNINGS (LOSS) PER SHARE | |||||||||
Basic earnings (loss) per share | 14 | $ | 0.23 | $ | (0.10 | ) | |||
Diluted earnings (loss) per share | 14 | $ | 0.23 | $ | (0.10 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
3 | P a g e |
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 | ||||||||||||||||||||
number of shares | other | ||||||||||||||||||||
Contributed | comprehensive | Accumulated | Total shareholders | ||||||||||||||||||
Share Capital | Surplus | income (loss) | deficit | equity | |||||||||||||||||
Note | Number of | Amount | |||||||||||||||||||
Shares | |||||||||||||||||||||
Balance at December 31, 2016 | 14,878,674 | $ | 58,412 | $ | 9,881 | $ | (127 | ) | $ | (27,848 | ) | $ | 40,318 | ||||||||
Net Income | - | - | - | - | 3,380 | 3,380 | |||||||||||||||
Other comprehensive income | - | - | - | 501 | - | 501 | |||||||||||||||
Total comprehensive income | - | - | - | 501 | 3,380 | 3,881 | |||||||||||||||
Effect of share option compensation plan | 15 | - | - | 247 | - | - | 247 | ||||||||||||||
Effect of RSU compensation plan | 15 | - | 4,208 | - | - | 4,208 | |||||||||||||||
Share issuances share options | 16,988 | 395 | (335 | ) | - | - | 60 | ||||||||||||||
Share issuances RSUs | - | 1,261 | (1,261 | ) | - | - | - | ||||||||||||||
Share capital held in trust | 15 | - | (2,361 | ) | - | - | - | (2,361 | ) | ||||||||||||
Shares repurchased | 13 | (334,212 | ) | (1,313 | ) | (2,093 | ) | - | - | (3,406 | ) | ||||||||||
Balance at December 31, 2017 | 14,561,450 | $ | 56,394 | $ | 10,647 | $ | 374 | $ | (24,468 | ) | $ | 42,947 | |||||||||
Balance at December 31, 2015 | 15,306,402 | $ | 59,293 | $ | 9,859 | $ | (624 | ) | $ | (26,333 | ) | $ | 42,195 | ||||||||
Net loss | - | - | - | - | (1,515 | ) | (1,515 | ) | |||||||||||||
Other comprehensive income | - | - | - | 497 | - | 497 | |||||||||||||||
Total comprehensive income (loss) | - | - | - | 497 | (1,515 | ) | (1,018 | ) | |||||||||||||
Effect of share option compensation plan | 15 | - | - | 540 | - | - | 540 | ||||||||||||||
Effect of RSU compensation plan | 15 | - | - | 1,777 | - | - | 1,777 | ||||||||||||||
Share issuances share options | 500 | 7 | (2 | ) | - | - | 5 | ||||||||||||||
Share issuances RSUs | - | 791 | (791 | ) | - | - | - | ||||||||||||||
Shares repurchased | 13 | (428,228 | ) | (1,679 | ) | (1,502 | ) | - | - | (3,181 | ) | ||||||||||
Balance at December 31, 2016 | 14,878,674 | $ | 58,412 | $ | 9,881 | $ | (127 | ) | $ | (27,848 | ) | $ | 40,318 |
The accompanying notes are an integral part of these consolidated financial statements.
4 | P a g e |
Points International Ltd. |
Consolidated Statements of Cash Flows |
For the year ended December 31 | |||||||||
Expressed in thousands of United States dollars | Note | 2017 | 2016 | ||||||
Cash flows from operating activities | |||||||||
Net income (loss) for the year | $ | 3,380 | $ | (1,515 | ) | ||||
Adjustments for: | |||||||||
Depreciation of property and equipment | 863 | 1,127 | |||||||
Amortization of intangible assets | 3,125 | 3,402 | |||||||
Unrealized foreign exchange loss (gain) | 1,334 | (1,088 | ) | ||||||
Equity-settled share-based payment transactions | 15 | 4,455 | 2,317 | ||||||
Impairment of long-term investment | 22 | - | 5,000 | ||||||
Deferred income tax recovery | 11 | (1,223 | ) | (345 | ) | ||||
Net loss on derivative contracts designated as cash flow hedges | 681 | 670 | |||||||
Changes in non-cash balances related to operations | 20 | 4,150 | 286 | ||||||
Net cash provided by operating activities | $ | 16,765 | $ | 9,854 | |||||
Cash flows from investing activities | |||||||||
Acquisition of property and equipment | 8 | (1,241 | ) | (1,411 | ) | ||||
Additions to intangible assets | 9 | (1,494 | ) | (1,682 | ) | ||||
Changes in short-term investments | 23 | 10,033 | (10,033 | ) | |||||
Changes in restricted cash | 5 | - | 500 | ||||||
Net cash provided by (used in) investing activities | $ | 7,298 | $ | (12,626 | ) | ||||
Cash flows from financing activities | |||||||||
Proceeds from exercise of share options | 60 | 5 | |||||||
Shares repurchased | 13 | (3,406 | ) | (3,181 | ) | ||||
Purchases of share capital held in trust | 15 | (2,361 | ) | - | |||||
Net cash used in financing activities | $ | (5,707 | ) | $ | (3,176 | ) | |||
Effect of exchange rate fluctuations on cash held | (1,334 | ) | 1,076 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 17,022 | $ | (4,872 | ) | ||||
Cash and cash equivalents at beginning of the year | 46,492 | 51,364 | |||||||
Cash and cash equivalents at end of the year | $ | 63,514 | $ | 46,492 | |||||
Interest Received | $ | 265 | $ | 153 | |||||
Taxes Received | $ | 116 | $ | - | |||||
Taxes Paid | $ | (3,967 | ) | $ | (542 | ) |
Amounts 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.
5 | P a g e |
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 111 Richmond Street, Suite 700, Toronto, ON, Canada M5H 2G4. The consolidated financial statements of the Corporation as at and for the year ended December 31, 2017 comprise the Corporation and its wholly-owned subsidiaries, Points International (US) Ltd., Points International (UK) Ltd., Points.com Inc., Points Travel Inc., and Points Development (US) Ltd. The Corporations shares are publicly traded on the Toronto Stock Exchange (TSX) as PTS and on the NASDAQ Capital Market (NASDAQ) as PCOM.
The Corporation operates in three reportable segments (see Note 4 below)
Segment | Principal Activities |
Loyalty Currency Retailing | Loyalty currency retailing operations for the Corporations loyalty partners retail consumers. |
Platform Partners | A portfolio of technology solutions that enables the broad distribution of loyalty currencies across loyalty partner programs and platforms. |
Points Travel | White-label travel booking solution for the loyalty industry that allows retail consumers to earn and/or use their loyalty currency while making certain online travel bookings. |
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 during this time.
The consolidated financial statements of the Corporation as at and for the year ended December 31, 2017 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 8, 2018.
(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). The functional currency of the Corporation and each of the Corporations wholly-owned subsidiaries is also USD, except for Points Travel Inc. which uses the Canadian dollar (CAD) as its functional currency. Items included in the financial statements of each subsidiary are measured using their respective functional currencies and translated for presentation in the consolidated statements as required. All financial information has been rounded to the nearest thousand, 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.
6 | P a g e |
POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
(e) Use of estimates and judgments
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, 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 judgments 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. In making this determination the Corporation has considered assumptions that are most representative of the economic substance of the intended use of the underlying assets. These same assumptions were used when 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:
|
capitalizing direct labor and overhead costs to intangible assets; | |
|
determining the recoverable amount of financial and non-financial assets when testing for impairment; and | |
|
determining the fair value of share based payments and derivative instruments. |
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.
3. SIGNIFICANT ACCOUNTING POLICIES
(a) New accounting pronouncements adopted in 2017
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 in 2017:
|
Amendments to IAS 12, Income Taxes In January 2016, the IASB issued Recognition of Deferred Tax Assets for Unrealized Losses to clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The Corporation adopted the amendments to IAS 12 in its financial statements for the annual period beginning on January 1, 2017. The amendments did not have a material impact on the consolidated financial statements. |
| |
|
Amendments to IAS 7, Statement of Cash Flows (IAS 7) In January 2016, the IASB issued amendments that require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash changes. The Corporation adopted the amendments to IAS 7 in its financial statements for the annual period beginning on January 1, 2017. The amendments did not have a material impact on the consolidated financial statements. |
7 | P a g e |
POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
(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 currencies 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 with the loyalty programs members. 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 Corporation for the term of the contract. These technical design and development fees are recorded over the life of the term of the partner agreement. Management believes that the technical design and development work does not have stand-alone value to the program partner absent the corresponding arrangement to provide the loyalty currency transaction platform to program members 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. |
(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. |
8 | P a g e |
POINTS INTERNATIONAL LTD. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
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. Due to the nature of the business, the Corporation regularly generates significant cash which is in turn used to generate interest income that is included in Interest revenue. Interest revenue is recognized when earned.
When deciding the most appropriate basis for presenting revenue on either a gross or net basis, 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 approximating 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; and/or |
| is involved in determining product or service specifications. |
(c) Foreign currency translation
(i) Foreign currency transactions
Transactions in currencies other than the Corporations or its subsidiaries respective 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.
9 | P a g e |
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 until such time that the hedged transaction affects profit or loss; refer to Notes 3(d)(iv) and 17.
(ii) Foreign operations
The assets and liabilities of non-USD functional currency subsidiaries, including goodwill and fair value adjustments arising on acquisition, are translated to U.S. dollars at exchange rates at the reporting date. The income and expenses of these subsidiaries are translated to U.S. dollars using average exchange rates for the month during which the transactions occurred. Foreign currency differences resulting from translation are recognized in other comprehensive income within the cumulative translation account.
(d) Financial instruments
All financial assets and financial liabilities are recognized on the Corporations consolidated statements of financial position 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 statements of financial position 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: held to maturity financial assets, 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.
Held-to-maturity
Held-to-maturity financial assets
includes short-term investments, such as interest bearing bearer deposit notes,
held by the Corporation to generate interest income. Held-to-maturity financial
assets are recorded at amortized cost using the effective interest rate method.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative
financial assets that are designated as available-for-sale or are 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.
(ii) Non-derivative financial liabilities
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 |
Short-term investments | Held to maturity | Amortized cost |
Long-term investment | Available-for-sale financial assets | Fair value |
Accounts payable and accrued liabilities | Financial liabilities | Amortized cost |
Payable to loyalty program partners | Financial liabilities | Amortized cost |
(iii) Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issuance 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 denominated expenses. The changes in
fair value of 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.
(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 less its estimated 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. There were no changes in the current year.
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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).
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:
| assets acquired; 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 judgments 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.
(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; |
| 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 judgment 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. The Corporation tests indefinite life intangible assets for
impairment annually, at each year end
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
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 to 5 years |
(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.
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.
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 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.
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 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, into cash generating units (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 cash generating unit (CGU) or group of CGUs that are expected to benefit from the synergies of the combination.
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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 recoverable amount of the CGU or group of CGUs to which goodwill and indefinite life intangible assets has been allocated is less than the carrying amount of the CGU or group of CGUs, including goodwill and intangible assets, 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 CGU and then to the other assets of the CGU pro-rata on the basis of the carrying amount of each asset in the CGU.
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 in profit or loss over its respective vesting period with a corresponding increase in contributed surplus. 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. 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) to its employees. The RSUs vest over a period of up to three years or in full on the third anniversary of the grant date. The fair value of a Restricted Share Unit (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.
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.
(k) Deferred costs
In relation to the Corporations technology design and development revenue (see Note 3(b) (ii)), the Corporation incurs direct upfront contract initiation costs associated with the website application design and development work. 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 through operating expenses in the statement of comprehensive income 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 in the consolidated statement of financial position.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
(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 is comprised of bookings made through the Points Travel platform, which has not yet occurred along with 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 for bookings through Points Travel is recognized at the completion of the rental while revenue from the sale of these mileage codes is recognized upon redemption. Deferred revenue is included in other liabilities.
(n) Lease inducements
On signing its office lease, the Corporation received lease inducements from the landlord including a rent-free period 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.
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 judgments about future events. When new information becomes available that causes the Corporation to change its judgment 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
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
During the year ended December 31, 2017, the Corporation determined that the composition of its operating segments had changed as a result of a new internal reporting structure being implemented and other related changes. As a result, the Corporation has begun, on a retrospective basis, to disclose segmented information based on this new internal reporting structure, which includes three operating segments.
The Corporation determines its reportable segments based on, among other things, how the Corporations chief operating decision maker (CODM), the Chief Executive Officer, regularly reviews the Corporations operations and performance. The CODM reviews gross profit, which is defined as total revenue less direct cost of revenue, and segment profit (loss) represented by Adjusted EBITDA, which is defined as net income before interest expense, income taxes, depreciation, amortization, foreign exchange gains and losses, impairment charges and stock based compensation, as the key measure of profitability for the purpose of assessing performance for each operating segment and to make decisions about the allocation of resources. The Corporation follows the same accounting policies for its operating segments as those described in the notes to the consolidated financial statements. The Corporation accounts for transactions between reportable segments in the same way that it accounts for transactions with external parties and eliminates them on consolidation.
The Corporation makes significant judgments in determining its operating segments. These are components that engage in business activities from which they may earn revenue and incur expenses, for which operating results are regularly reviewed by the Corporations CODM to make decisions about resources to be allocated and to assess component performance, and for which discrete financial information is available.
(r) New standards and interpretations not yet adopted
The IASB has issued the following new standards and amendments to existing standards:
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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 |
|
IFRS 15, Revenue from Contracts with Customers (IFRS 15) - In May 2014, the IASB issued IFRS 15 which supersedes existing standards and interpretations including IAS 18, Revenue and IFRIC 13, Cus- tomer Loyalty Programmes. |
IFRS 15 introduces a single comprehensive 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. |
Under IFRS 15, an entity recognizes revenue when a performance obligation is satisfied and the goods or services underlying the particular performance obligation is transferred to the customer. The Corporation will adopt IFRS 15 in its financial statements for the annual period beginning on January 1, 2018. With a view to enhancing the clarity, comparability and utility of our financial information post-implementation of the standard, we will apply the standard retrospectively, subject to permitted and elected practical expedients.
The Corporation has assessed the impact of IFRS 15 on the Corporations revenue recognition. Key differences between IFRS 15 and IAS 18 that are expected to impact the consolidated financial statements are as follows:
(a) |
Certain revenues previously classified as net for Transfer and Reinstate services, will be rec- ognized as gross revenue under IFRS 15. The Corporation expects that the net effect of this change will increase revenues and direct costs reported under IAS 18 in 2017 by approxi- mately $1,500. | |
(b) |
Under IAS 18, the Corporation classified certain Points Travel bonus costs to marketing ex- penses as the Corporation offers promotional offers as it is growing the business. This classi- fication is not permissible under IFRS 15, and therefore the Corporation will record these costs as a reduction to revenue after transition to IFRS 15. The Corporation expects that the net effect of this change will decrease revenue and marketing costs reported under IAS 18 in 2017 by approximately $210. | |
(c) |
Interest earned on funds held as part of the sales process does not meet the definition of rev- enue under IFRS 15 and therefore these amounts will be reclassified to Finance Income in the consolidated statements of comprehensive income. The Corporation expects that this change will decrease revenues and total expenses reported under IAS 18 in 2017 by approx- imately $210. |
Management continues to finalize its evaluation of the impact of IFRS 15 but does not expect the standard to have further material adjustments to the consolidated financial statements or on revenue recognition.
|
Amendments to IFRS 2, Share-based Payment (IFRS 2) In June 2016, the IASB issued amendments that provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, share-based payment transactions with a net settlement feature for withholding tax obligations, and a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Corporation intends to adopt the amendments to IFRS 2 in its financial statements for the annual period beginning on January 1, 2018. The Corporation does not expect the amendments to have a material impact on the 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 |
|
IFRS 9, Financial Instruments (IFRS 9) - In July 2014, the IASB issued IFRS 9 (2014) that will 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 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 does not expect the standard to have a material impact on the consolidated financial statements. |
|
IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration In December 2016, the IASB issued interpretation which clarifies the date that should be used for translation when a foreign currency transaction involves an advance payment or receipt. The Corporation intends to adopt the Inter- pretation in its financial statements for the annual period beginning on January 1, 2018. The Corporation does not expect the impact of adoption of the Interpretation to have a material impact on the consolidated financial statements. |
|
IFRS 16, Leases (IFRS 16) 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. |
4. OPERATING SEGMENTS
The Corporations reportable segments are Loyalty Currency Retailing, Platform Partners, and Points Travel. These operating segments are organized around differences in products and services. Corporate costs have been allocated to each reportable segment.
The Corporations measure of segment profit or loss is represented by Adjusted EBITDA which is defined as net income as presented in the consolidated statement of comprehensive income but excludes interest expense, income taxes, depreciation, amortization, foreign exchange gains and losses, impairment charges and stock based compensation. Segment profit or loss results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Assets and liabilities are not provided to the CODM at the operating segment level and are therefore not allocated to the operating segments for reporting purposes.
For the year ended December 31, 2017:
Loyalty | ||||||||||||
Currency | Platform | Points | Total | |||||||||
Retailing | Partners | Travel | ||||||||||
Total revenue | 338,341 | 7,704 | 1,501 | 347,546 | ||||||||
Direct cost of principal revenue | 299,969 | 570 | 31 | 300,570 | ||||||||
Gross profit | 38,372 | 7,134 | 1,470 | 46,976 | ||||||||
Adjusted operating expenses1 | 17,623 | 8,881 | 7,246 | 33,750 | ||||||||
Adjusted EBITDA | 20,749 | (1,747 | ) | (5,776 | ) | 13,226 | ||||||
Equity-settled share-based payment expense1 | 4,455 | |||||||||||
Income tax expense | 1,461 | |||||||||||
Depreciation and amortization | 3,988 | |||||||||||
Foreign exchange gain | (58 | ) | ||||||||||
Net income | 3,380 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
For the year ended December 31, 2016:
Loyalty | ||||||||||||
Currency | Platform | Points | Total | |||||||||
Retailing | Partners | Travel | ||||||||||
Total revenue | 314,706 | 6,856 | 259 | 321,821 | ||||||||
Direct cost of principal revenue | 277,909 | 562 | 12 | 278,483 | ||||||||
Gross profit | 36,797 | 6,294 | 247 | 43,338 | ||||||||
Adjusted operating expenses1 | 16,837 | 8,601 | 5,794 | 31,232 | ||||||||
Adjusted EBITDA | 19,960 | (2,307 | ) | (5,547 | ) | 12,106 | ||||||
Equity-settled share-based payment expense1 | 2,317 | |||||||||||
Income tax expense | 1,545 | |||||||||||
Depreciation and amortization | 4,529 | |||||||||||
Foreign exchange loss | 230 | |||||||||||
Impairment loss | 5,000 | |||||||||||
Net income | (1,515 | ) |
1Adjusted operating expenses comprise Employment Costs, Marketing and Communications, Technology Services and Operating Expenses, excluding equitysettled sharebased payment expense, which is included in Employment Costs in the consolidated statement of comprehensive income (loss).
Enterprise-wide disclosures - Geographic information
Year ended | ||||||||||||
For the period ended December 31, | 2017 | 2016 | ||||||||||
Revenue | ||||||||||||
United States | $ | 303,856 | 87% | $ | 282,824 | 88 % | ||||||
Europe | 31,109 | 9% | 28,754 | 9 % | ||||||||
Canada and other | 12,581 | 4% | 10,243 | 3 % | ||||||||
$ | 347,546 | 100% | $ | 321,821 | 100% |
Revenue earned by the Corporation is generated from sales to loyalty program partners directly or from sales directly to members of loyalty programs with which the Corporation partners. Revenues by geographic region are shown above and are based on the country of residence of each of the Corporations loyalty partners. At December 31, 2017, substantially all of the Corporation's assets were in Canada.
Dependence on loyalty program partners
For the year ended December 31, 2017, there were three (2016 four) loyalty program partners for which sales to their members individually represented more than 10% of the Corporations total revenue. In aggregate, sales to the members of these partners represented 69% (2016 76%) of the Corporations total 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 |
5. RESTRICTED CASH
Restricted cash of $500 (2016 $500) is held as collateral for forward contracts entered into during the normal course of business.
6. 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:
2017 | 2016 | |||||
Accounts receivable before allowance for doubtful accounts | $ | 7,832 | $ | 4,220 | ||
Allowance for doubtful accounts | (91 | ) | (163 | ) | ||
Accounts receivable | $ | 7,741 | $ | 4,057 |
The Corporations exposure to credit and currency risks related to accounts receivable is disclosed in Note 17.
7. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets are comprised of:
2017 | 2016 | |||||
Prepaid expenses | $ | 1,352 | $ | 1,008 | ||
Foreign exchange forward contracts designated as cash flow hedges | 550 | 84 | ||||
Loyalty reward currency inventory | 58 | 162 | ||||
Income tax receivable | 457 | 176 | ||||
Current portion of deferred costs | 3 | 45 | ||||
Prepaid expenses and current portion of other assets | $ | 2,420 | $ | 1,475 | ||
Non-current portion of deferred costs | $ | - | $ | 3 | ||
Non-current portion of loyalty reward currency inventory | 2,661 | 2,712 | ||||
Other assets | $ | 2,661 | $ | 2,715 |
Other assets include the non-current portion of certain loyalty reward currency inventory held by the Corporation that are used in Points.com Inc.s retail and promotional activities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
8. PROPERTY AND EQUIPMENT
Computer | Computer | Furniture & | Leasehold | Total | |||||||||||
Hardware | Software | Fixtures | Improvements | ||||||||||||
Cost | |||||||||||||||
Balance at January 1, 2016 | $ | 2,568 | $ | 1,759 | $ | 998 | $ | 1,466 | $ | 6,791 | |||||
Additions | 190 | 431 | 96 | 694 | 1,411 | ||||||||||
Disposals / Write-Offs | (149 | ) | - | (50 | ) | (1,454 | ) | (1,653 | ) | ||||||
Balance at December 31, 2016 | $ | 2,609 | $ | 2,190 | $ | 1,044 | $ | 706 | $ | 6,549 | |||||
Additions | 526 | 19 | 188 | 508 | 1,241 | ||||||||||
Disposals / Write-Offs | - | - | (154 | ) | - | (154 | ) | ||||||||
Balance at December 31, 2017 | $ | 3,135 | $ | 2,209 | $ | 1,078 | $ | 1,214 | $ | 7,636 | |||||
Depreciation and impairment losses | |||||||||||||||
Balance at January 1, 2016 | $ | 2,027 | $ | 1,561 | $ | 701 | $ | 1,036 | $ | 5,325 | |||||
Depreciation for the year | 347 | 190 | 117 | 473 | 1,127 | ||||||||||
Disposals / Write-Offs | (149 | ) | - | (50 | ) | (1,454 | ) | (1,653 | ) | ||||||
Balance at December 31, 2016 | $ | 2,225 | $ | 1,751 | $ | 768 | $ | 55 | $ | 4,799 | |||||
Depreciation for the year | 322 | 216 | 129 | 196 | 863 | ||||||||||
Disposals / Write-Offs | - | - | (154 | ) | - | (154 | ) | ||||||||
Balance at December 31, 2017 | $ | 2,547 | $ | 1,967 | $ | 743 | $ | 251 | $ | 5,508 | |||||
Carrying amounts | |||||||||||||||
At December 31, 2016 | $ | 384 | $ | 439 | $ | 276 | $ | 651 | $ | 1,750 | |||||
At December 31, 2017 | $ | 588 | $ | 242 | $ | 335 | $ | 963 | $ | 2,128 |
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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. INTANGIBLE ASSETS
Customer | Domain | Technology(2 | ) | Other (1 | ) | Total | |||||||||
relationships | Names(1 | ) | |||||||||||||
Cost | |||||||||||||||
Balance at January 1, 2016 | $ | 8,500 | $ | 4,300 | $ | 16,772 | $ | 204 | $ | 29,776 | |||||
Additions | - | - | 1,681 | 1 | 1,682 | ||||||||||
Impairments / Write-offs | - | - | - | - | - | ||||||||||
Balance at December 31, 2016 | $ | 8,500 | $ | 4,300 | $ | 18,453 | $ | 205 | $ | 31,458 | |||||
Additions | - | - | 1,494 | - | 1,494 | ||||||||||
Impairments / Write-offs | - | - | - | - | - | ||||||||||
Balance at December 31, 2017 | $ | 8,500 | $ | 4,300 | $ | 19,947 | $ | 205 | $ | 32,952 | |||||
Amortization and impairment losses | |||||||||||||||
Balance at January 1, 2016 | $ | 921 | $ | - | $ | 10,239 | $ | - | $ | 11,160 | |||||
Amortization for the year | 850 | - | 2,552 | - | 3,402 | ||||||||||
Impairments / Write-offs | - | - | - | - | - | ||||||||||
Balance at December 31, 2016 | $ | 1,771 | $ | - | $ | 12,791 | $ | - | $ | 14,562 | |||||
Amortization for the year | 850 | - | 2,275 | - | 3,125 | ||||||||||
Impairments / Write-offs | - | - | - | - | - | ||||||||||
Balance at December 31, 2017 | $ | 2,621 | $ | - | $ | 15,066 | $ | - | $ | 17,687 | |||||
Carrying amounts | |||||||||||||||
At December 31, 2016 | $ | 6,729 | $ | 4,300 | $ | 5,662 | $ | 205 | $ | 16,896 | |||||
At December 31, 2017 | $ | 5,879 | $ | 4,300 | $ | 4,881 | $ | 205 | $ | 15,265 |
(1) |
Domain names and Other which includes Patents and Trademarks are deemed to have indefinite useful lives and are therefore not amortized. The Corporation's classification of certain intangible assets with indefinite useful lives is based on the expectation that these assets will continue to contribute to the Corporations 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) |
Technology includes technological assets acquired through acquisitions and internal use software development costs. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
During the year ended December 31, 2017, an amount of $3,561 was recognized as research and development expenses in employment costs in the statement of comprehensive income (2016 - $2,257).
10. GOODWILL
Cost | |||
Balance at January 1, 2016 | $ | 7,130 | |
Additions | - | ||
Impairments | - | ||
Balance at December 31, 2016 | $ | 7,130 | |
Additions | - | ||
Impairments | - | ||
Balance at December 31, 2017 | $ | 7,130 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
Impairment testing for cash-generating units containing goodwill as at December 31, 2017
The Corporation tests CGUs or groups of CGUs with indefinite life intangible assets and/or allocated goodwill for impairment as at December 31 of each calendar year. For the purposes of the 2017 annual impairment test, management has determined that the Corporation has three CGUs (Note 1), being Loyalty Currency Retailing, Points Travel and Platform Partners. The goodwill value has been allocated to the CGUs that are expected to benefit from the synergies of the business combinations in which goodwill arose.
When assessing whether or not there is impairment, the Corporation determines the recoverable amount of a CGU 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. Management estimates the discounted future cash flows for periods of up to five years and a terminal value. The future cash flows are based on Managements estimates and expected future operating results of the CGUs after considering economic conditions and a general outlook for the CGUs 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 CGU'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.
Management has 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 CGUs, which could result in impairment losses.
The table below provides an overview of the methods and assumptions that Management has used to determine recoverable amounts for the CGUs with indefinite life intangible assets and goodwill.
(In thousands of dollars, except years and percentages) | ||||||||||||||||||
Carrying | Carrying value of | Recoverable | Period | Terminal | Pre-tax | |||||||||||||
value of | indefinite-life | amount | used | growth | discount | |||||||||||||
goodwill | intangible assets | method | (years) | rate % | rate % | |||||||||||||
Loyalty Currency Retailing | $ | 5,681 | $ | 4,505 | Value in Use | 5 | 2.5% | 20.4% | ||||||||||
Points Travel | $ | 1,449 | - | Value in Use | 5 | 2.5% | 30.5% |
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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. INCOME TAXES
2017 | 2016 | |||||
Current Tax Expense | ||||||
Current year | $ | 2,410 | $ | 1,845 | ||
Prior year | 274 | 45 | ||||
$ | 2,684 | $ | 1,890 | |||
Deferred Tax Expense (recovery) |
||||||
Current year movement in recognized temporary differences and losses | (1,223 | ) | (345 | ) | ||
$ | (1,223 | ) | $ | (345 | ) | |
Total income tax expense | $ | 1,461 | $ | 1,545 |
Reconciliation of effective tax rate
The total provision for income taxes differs from that amount which would be computed by applying the Canadian statutory income tax rate to income before income taxes. The reasons for these differences are as follows:
2017 | 2016 | |||||
Income tax expense at statutory rate of 26.5% (2016 26.5%) | $ | 1,284 | $ | 8 | ||
Increase (decrease) in taxes resulting from: | ||||||
Tax cost of non-deductible items | 126 | 854 | ||||
Losses not benefitted | - | 663 | ||||
Other differences | 51 | 20 | ||||
Income tax expense | $ | 1,461 | $ | 1,545 |
Recognized deferred tax assets
Deferred tax assets are attributable to the following:
2017 | 2016 | |||||
Deferred tax assets | ||||||
Forward exchange contracts | $ | - | $ | 46 | ||
Intangible assets | 873 | 980 | ||||
Reserves | 269 | 73 | ||||
RSUs | 1,482 | 672 | ||||
Tax losses | 67 | 89 | ||||
$ | 2,691 | $ | 1,860 | |||
Deferred tax liabilities | ||||||
Forward exchange contracts | $ | 134 | $ | - | ||
Property and equipment | - | 346 | ||||
$ | 134 | $ | 346 | |||
Net deferred tax assets | $ | 2,557 | $ | 1,514 |
The Corporation has capital losses of $10,456 (2016 $10,456) which can be carried forward indefinitely and are not included as part of the recognized deferred tax assets.
The Corporation has non-capital loss carry-forwards in Canada for income tax purposes in the amount of approximately $253 (2016 $338). The losses may be used to reduce future years' taxable income and expire approximately as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
Total | |||
2036 | $ | 112 | |
2037 | 141 | ||
Total | $ | 253 |
Management has concluded the deferred tax asset meets the relevant recognition criteria under IFRS. Management's conclusion is supported by managements forecasts and the future reversal of existing taxable temporary differences which are expected to produce sufficient taxable income to realize the deferred tax assets.
Unrecognized deferred tax assets
Deferred tax assets have not been recognized in respect of the following items:
2017 | 2016 | |||||
Capital losses | $ | 1,385 | $ | 1,385 |
Current Tax Receivable
The Corporation has recognized a current tax receivable of $457 (2016 $176) within the prepaid expenses and other assets balance presented on the balance sheet.
Temporary Differences Associated with Points International Ltd. Investments
The temporary difference associated with the investments in the Corporations subsidiaries is $287 (2016: $1,468). 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, 2017 and 2016, no deferred tax liability was recognized for taxes that would be payable on the unremitted earnings of certain subsidiaries of Points International Ltd. as the Corporation has determined that the undistributed profits of its subsidiaries will not be distributed in the foreseeable future.
12. OTHER LIABILITIES
2017 | 2016 | |||||
Foreign exchange forward contracts designated as | ||||||
cash flow hedges | $ | 43 | $ | 258 | ||
Current portion of lease inducements | 113 | 17 | ||||
Current portion of deferred revenue | 1,244 | 496 | ||||
Current portion of other liabilities | $ | 1,400 | $ | 771 | ||
Non-current portion of lease inducements | 483 | 596 | ||||
Non-current portion of deferred revenue | 55 | 123 | ||||
Other liabilities | $ | 538 | $ | 719 |
13. CAPITAL AND OTHER COMPONENTS OF EQUITY
Authorized with no Par Value
Unlimited
common shares
Unlimited preferred shares
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
Issued
At December 31, 2017 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 2017 (2016 nil).
Accumulated other comprehensive income
Accumulated other comprehensive income is comprised of the unrealized gains/losses on cash flow hedges and the cumulative translation adjustment for the translation of subsidiaries accounts where non-USD functional currency balances are translated to the functional currency of the parent. 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 March 8, 2017, the Board of Directors of the Corporation approved a plan to repurchase the Corporations common shares. The Toronto Stock Exchange (TSX) accepted the notice of intention, on August 9, 2017, to make a normal course issuer bid to repurchase up to 743,468 of its common shares (the 2017 Repurchase), representing 5% of its 14,869,374 common shares issued and outstanding as of July 31, 2017. The Corporation entered into an automatic share purchase plan with a broker in order to facilitate the 2017 Repurchase.
The primary purpose of the 2017 Repurchase is for cancellation. Under the automatic share purchase plan, the Corporation may repurchase shares at times when they would otherwise not be permitted to due to regulatory restrictions or self-imposed blackout periods. Repurchases are made from time to time at the brokers discretion, based upon parameters prescribed by the Corporations written agreement. Repurchases may be effected through the facilities of the TSX, the NASDAQ Capital Market (NASDAQ) or other alternative trading systems in the United States and Canada. The actual number of common shares purchased and the timing of such purchases are determined by the broker considering market conditions, stock prices, its cash position and other factors.
During the year ended December 31, 2017, the Corporation repurchased and cancelled 334,212 shares at an aggregate purchase price of $3,406, resulting in a reduction to stated capital and contributed surplus of $1,313 and $2,093 respectively. These purchases were made under the 2017 Repurchase and are included in calculating the number of common shares that the Corporation may purchase pursuant to the NCIB.
On March 2, 2016, the Board of Directors of the Corporation approved a plan to repurchase the Corporations common shares. The TSX approved the Corporation's 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. For the year ended December 31, 2016, the Corporation repurchased and cancelled an aggregate of 428,228 common shares, at an aggregate purchase price of $3,181 under the Repurchase. All of these common shares were canceled, resulting in a reduction to stated capital and contributed surplus of $1,679 and $1,502, respectively.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
14. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
2017 | 2016 | |||||
Net income (loss) available to common shareholders for basic | ||||||
and diluted earnings per share | $ | 3,380 | $ | (1,515 | ) | |
Weighted average number of common shares outstanding basic | 14,806,020 | 15,219,283 | ||||
Effect of dilutive securities | 14,293 | - | ||||
Weighted average number of common shares outstanding | ||||||
diluted | 14,820,313 | 15,219,283 | ||||
Earnings (loss) per share - reported | ||||||
Basic | $ | 0.23 | $ | (0.10 | ) | |
Diluted | $ | 0.23 | $ | (0.10 | ) |
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 the net income per share 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, 2017, 563,995 options (2016 723,995) 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.
15. SHARE-BASED PAYMENTS
As at December 31, 2017, 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. On May 5, 2016, the shareholders of the Corporation approved a new share option plan which increased the number of options available for grant as described in the Management Information Circular dated March 2, 2016. The new share option plan changed the number of net options authorized for grant to be determined based on 10% of the larger of the outstanding shares as at March 2, 2016 or any time thereafter. The options available for grant as at December 31, 2017 are shown in the table below:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
December 31, 2017 | |||
Shares outstanding as at March 2, 2016 | 15,298,602 | ||
Percentage of shares outstanding | 10% | ||
Net options authorized | 1,529,860 | ||
Less: options issued & outstanding | (615,843 | ) | |
Options available for grant | 914,017 |
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. There were no options granted in 2017. The fair value of options granted in 2016 were calculated using the following weighted assumptions.
2016 | |||
Dividend yield | NIL | ||
Risk free rate | 0.56% - 0.60% | ||
Expected volatility | 46.49% - 46.87% | ||
Expected life of options in years | 4.20 | ||
Weighted average fair value of options granted | $ | 4.26 |
A summary of the status of the Corporations share option plan as of December 31, 2017 and 2016, and changes during the years ended on those dates is presented below.
2017 | 2016 | |||||||||||
Weighted | Weighted | |||||||||||
Average | Average | |||||||||||
Number of | Exercise Price | Number of | Exercise Price | |||||||||
Options | (in CAD$) | Options | (in CAD$) | |||||||||
Beginning of year | 723,995 | $ | 15.25 | 760,774 | $ | 15.59 | ||||||
Granted | - | $ | - | 71,494 | $ | 10.65 | ||||||
Exercised | (80,973) | $ | 9.74 | (500) | $ | 9.17 | ||||||
Expired and forfeited | (27,179) | $ | 14.58 | (107,773) | $ | 14.66 | ||||||
End of year | 615,843 | $ | 16.00 | 723,995 | $ | 15.25 | ||||||
Exercisable at end of year | 521,538 | $ | 16.67 | 416,753 | $ | 16.08 |
For the year ended December 31, 2017:
Options outstanding | Options exercisable | ||||||||||||||
Weighted | Weighted | ||||||||||||||
Weighted average | average | average | |||||||||||||
remaining | exercise | Number | exercise | ||||||||||||
Range of Exercise | Number | contractual life | price (in | of | price (in | ||||||||||
Prices (in CAD$) | of options | (years) | CAD$) | options | CAD$) | ||||||||||
$5.00 to $9.99 | 39,401 | 3.19 | $ | 9.89 | 39,401 | $ | 9.89 | ||||||||
$10.00 to $14.99 | 352,002 | 2.30 | $ | 12.27 | 257,697 | $ | 12.25 | ||||||||
$15.00 to $19.99 | 119,370 | 0.23 | $ | 15.98 | 119,370 | $ | 15.98 | ||||||||
$20.00 and over | 105,070 | 1.21 | $ | 30.84 | 105,070 | $ | 30.84 | ||||||||
615,843 | 521,538 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
For the year ended December 31, 2016:
Options outstanding | Options exercisable | ||||||||||||||
Weighted | |||||||||||||||
Weighted average | average | Weighted | |||||||||||||
remaining | exercise | average | |||||||||||||
Range of Exercise | Number of | contractual life | price (in | Number | exercise price | ||||||||||
Prices (in CAD$) | options | (years) | CAD$) | of options | (in CAD$) | ||||||||||
$5.00 to $9.99 | 124,618 | 1.47 | $ | 9.79 | 85,217 | $ | 9.74 | ||||||||
$10.00 to $14.99 | 367,764 | 3.29 | $ | 12.26 | 136,148 | $ | 12.30 | ||||||||
$15.00 to $19.99 | 123,233 | 1.23 | $ | 15.98 | 122,843 | $ | 15.96 | ||||||||
$20.00 and over | 108,380 | 2.21 | $ | 30.84 | 72,545 | $ | 30.84 | ||||||||
723,995 | 416,753 |
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. The RSUs vest over a period of up to three years or in full on the third anniversary of the grant date. During 2017, 376,473 RSUs were granted (2016 332,483). As at December 31, 2017, 711,936 RSUs were outstanding (2016 480,302 RSUs).
Number of RSUs | Weighted Average Fair Value (in CAD$) | |||||
Balance at January 1, 2017 | 480,302 | $ | 12.17 | |||
Granted | 376,473 | $ | 9.48 | |||
Vested | (98,182 | ) | $ | 16.38 | ||
Forfeited | (46,657 | ) | $ | 12.20 | ||
Balance at December 31, 2017 | 711,936 | $ | 10.16 |
Number of RSUs | Weighted Average Fair Value (in CAD$) | |||||
Balance at January 1, 2016 | 301,841 | $ | 15.38 | |||
Granted | 332,483 | $ | 10.10 | |||
Vested | (69,620 | ) | $ | 14.97 | ||
Forfeited | (84,402 | ) | $ | 13.19 | ||
Balance at December 31, 2016 | 480,302 | $ | 12.17 |
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. There were 208,600 share units purchased by the trust at a cost of $2,361 during the year ended December 31, 2017 (2016 nil). As at December 31, 2017, 194,251 of the Corporations common shares were held in trust for this purpose (December 31, 2016 83,833).
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 $4,455 for the year ended December 31, 2017 (2016 - $2,317).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
16. OPERATING EXPENSES
2017 | 2016 | |||||
Office expenses | $ | 2,507 | $ | 1,720 | ||
Travel and personnel expenses | 1,949 | 1,949 | ||||
Professional fees | 2,806 | 1,519 | ||||
Insurance, bad debts and governance | 1,208 | 1,230 | ||||
Operating expenses | $ | 8,470 | $ | 6,418 |
17. 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.
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, restricted cash held as collateral and short-term investments 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.
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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 aging of accounts receivable is as follows:
December 31, 2017 | December 31, 2016 | |||||
Current | $ | 6,554 | $ | 2,876 | ||
Past due 3160 days | 420 | 637 | ||||
Past due 6190 days | 244 | 223 | ||||
Past due 91120 days | 139 | 134 | ||||
Past due over 120 days | 475 | 350 | ||||
Trade accounts receivable | 7,832 | 4,220 | ||||
Less allowance for doubtful accounts | (91 | ) | (163 | ) | ||
$ | 7,741 | $ | 4,057 |
The following table provides the change in allowance for doubtful accounts for trade accounts receivable:
2017 | 2016 | |||||
Balance, beginning of year | $ | 163 | $ | 46 | ||
Provision for doubtful accounts | 102 | 156 | ||||
Bad debts written off, net of recoveries | (174 | ) | (39 | ) | ||
Balance, end of year | $ | 91 | $ | 163 |
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 current financial assets represent its maximum exposure to credit risk.
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, 2017 and 2016:
Contractual Cash Flow Maturities | |||||||||||||||
Carrying | Total | Within 1 | 1 year | 3 years | |||||||||||
Amount | year | to 3 | and | ||||||||||||
As at December 31, 2017 | years | beyond | |||||||||||||
Accounts payable and accrued liabilities | $ | 7,998 | $ | 7,998 | $ | 7,998 | - | - | |||||||
Foreign exchange forward contracts designated as cash flow hedges | 43 | 43 | 43 | - | - | ||||||||||
Income taxes payable | 695 | 695 | 695 | - | - | ||||||||||
Payable to loyalty program partners | 65,567 | 65,567 | 65,567 | - | - | ||||||||||
$ | 74,303 | $ | 74,303 | $ | 74,303 | $ | - | $ | - |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
Contractual Cash Flow Maturities | |||||||||||||||
Carrying | Total | Within 1 | 1 year | 3 years | |||||||||||
Amount | year | to 3 | and | ||||||||||||
As at December 31, 2016 | years | beyond | |||||||||||||
Accounts payable and accrued liabilities | $ | 6,335 | $ | 6,335 | $ | 6,335 | $ | - | $ | - | |||||
Foreign exchange forward contracts designated as cash flow hedges | 258 | 258 | 258 | - | - | ||||||||||
Income taxes payable | 1,638 | 1,638 | 1,638 | ||||||||||||
Payable to loyalty program partners | 53,242 | 53,242 | 53,242 | - | - | ||||||||||
$ | 61,473 | $ | 61,473 | $ | 61,473 | $ | - | $ | - |
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 has entered into foreign exchange forward contracts to reduce the foreign exchange risk with respect to Canadian dollar denominated disbursements. 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, 2017, forward contracts with a notional value of $15,380, and in a net asset position of $507 (2016 $174 in liability position), with settlement dates extending to December 2018, 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.
The change in fair value of derivatives designated as 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, 2017 and 2016, 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 2017, total realized gains of $331 were reclassified to employment costs for Canadian dollar currency hedges (2016 - $269 total realized losses). 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 dollar 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 $407 (2016 - $42) excluding the effect of hedging. Significant balances denominated in foreign currencies that are considered financial instruments are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
As at December 31, 2017 | CAD | GBP | EUR | JPY | ||||||||
FX Rates used to translate to USD | 0.7966 | 1.3491 | 1.1979 | 0.0089 | ||||||||
Financial assets | ||||||||||||
Cash and cash equivalents | 2,143 | 4,371 | 4,444 | 181,454 | ||||||||
Funds receivable from payment processors | 745 | 527 | 1,673 | 57,239 | ||||||||
Accounts receivable | 334 | 2,091 | 432 | 34,355 | ||||||||
3,222 | 6,989 | 6,549 | 273,048 | |||||||||
Financial liabilities | ||||||||||||
Accounts payable and accrued liabilities | 4,233 | 2,149 | 255 | 8,370 | ||||||||
Payable to loyalty program partners | 1,413 | 5,254 | 6,103 | 71,376 | ||||||||
5,646 | 7,403 | 6,358 | 79,746 |
As at December 31, 2016 | CAD | GBP | EUR | JPY | ||||||||
FX Rates used to translate to USD | 0.7437 | 1.2336 | 1.0516 | 0.0086 | ||||||||
Financial assets | ||||||||||||
Cash and cash equivalents | 1,906 | 4,826 | 5,815 | - | ||||||||
Funds receivable from payment processors | 569 | 303 | 1,612 | - | ||||||||
Accounts receivable | 261 | 1,160 | 398 | - | ||||||||
2,736 | 6,289 | 7,825 | - | |||||||||
Financial liabilities | ||||||||||||
Accounts payable and accrued liabilities | 3,393 | 1,342 | 517 | - | ||||||||
Payable to loyalty program partners | 1,267 | 4,526 | 6,400 | - | ||||||||
4,660 | 5,868 | 6,917 | - |
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.
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, short-term investments, security deposits, accounts receivable, accounts payable and accrued liabilities and payable to loyalty program partners), fair value approximates the carrying value at December 31, 2017 and 2016 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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
| 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, 2017 and 2016 are as follows:
2017 | Carrying Value | Level 2 | ||||
Assets: | ||||||
Foreign exchange forward contracts designated as cash flow hedges(i) | $ | 550 | $ | 550 | ||
Liabilities: | ||||||
Foreign exchange forward contracts designated as cash flow hedges(i) | (43 | ) | (43 | ) | ||
$ | 507 | $ | 507 |
2016 | Carrying Value | Level 2 | ||||
Assets: | ||||||
Foreign exchange forward contracts designated as cash flow hedges(i) | $ | 84 | $ | 84 | ||
Liabilities: | ||||||
Foreign exchange forward contracts designated as cash flow hedges(i) | (258 | ) | (258 | ) | ||
$ | (174 | ) | $ | (174 | ) |
(i) |
The carrying values of the Corporations foreign exchange forward contracts are included in prepaid expenses and other assets and current portion of other liabilities in the consolidated statements of financial position. |
There were no material financial instruments categorized in Level 1 or Level 3 as at December 31, 2017 and December 31, 2016 and there were no transfers of fair value measurement between Levels 2 and 3 of the fair value hierarchy in the respective periods.
18. GUARANTEES AND COMMITMENTS
Total | Year 1 | (3) | Year 2 | Year 3 | Year 4 | Year 5+ | ||||||||||||
Operating leases(1) | $ | 10,201 | $ | 2,180 | $ | 2,099 | $ | 1,974 | $ | 1,912 | $ | 2,036 | ||||||
Principal revenue(2) | 337,784 | 187,433 | 146,351 | 4,000 | - | - | ||||||||||||
$ | 347,985 | $ | 189,613 | $ | 148,450 | $ | 5,974 | $ | 1,912 | $ | 2,036 |
(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 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, 2017 an amount of $2,011 was recognized as an expense in profit or loss in respect of operating leases (2016 - $1,129).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
19. 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.
(ii) Goodwill
The fair value of the CGU is based on the discounted cash flows that are expected to be derived from product offerings and 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 was historically based on a discounted cash flow approach.
20. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash balances related to operations are as follows:
2017 | 2016 | |||||
Increase in funds receivable from payment processors | $ | (4,768 | ) | $ | (3,873 | ) |
Increase in accounts receivable | (3,684 | ) | (1,069 | ) | ||
Increase in prepaid expenses and other assets | (945 | ) | (219 | ) | ||
Decrease in other assets | 54 | 50 | ||||
Increase in accounts payable and accrued liabilities | 1,663 | 805 | ||||
(Decrease) increase in income taxes payable | (943 | ) | 1,360 | |||
Increase (decrease) in other liabilities | 448 | (484 | ) | |||
Increase in payable to loyalty program partners | 12,325 | 3,716 | ||||
$ | 4,150 | $ | 286 |
21. RELATED PARTIES
Transactions with key management personnel
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 15).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted |
Key management personnel compensation comprised the following:
In thousands of Canadian dollars | 2017 | 2016 | ||||
Short-term employee salaries and benefits | $ | 2,240 | $ | 2,206 | ||
Share-based payments | 3,230 | 1,425 | ||||
Total compensation | $ | 5,470 | $ | 3,631 |
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 Corporation recorded expenses of less than $10 in the year ended December 31, 2017 (2016: $96) and had no outstanding amounts payable to this related party at December 31, 2017 (2016: $7). The amounts owing are unsecured, interest-free and due for payment under normal payment terms from the date of the transaction.
22. LONG-TERM INVESTMENT
In 2013, the Corporation entered into a binding agreement to make a minority investment in China Rewards, a domestic Chinese retail coalition loyalty program start-up based in Shanghai, Peoples Republic of China. The investment of $5,000 was agreed to be made in a series of tranches which were paid in 2013 and 2014. In 2016, the Corporation recorded an impairment of $5,000 related to its investment in China Rewards as a result of changes in the expected recoverability of the cost of the investment. There were no further long-term investments entered into in the year ended December 31, 2017.
23. SHORT-TERM INVESTMENT
On September 26, 2017 the Corporation settled the interest bearing, unsecured discount bearer deposit note purchased in the prior year and issued by Royal Bank of Canada with a term of 360 days maturing on October 20, 2017. The Corporation settled the deposit note for $10,160, which included $127 of interest earned on the note.
24. CREDIT FACILITIES
On June 30, 2017, the Corporation amended its bank credit facility agreement with Royal Bank of Canada. The following two facilities are available to the Corporation as of December 31, 2017:
|
Revolving operating facility (Facility #1) of $8,500 available until May 31, 2018. 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 $5,000 to be utilized solely for the purposes of financing the cash consideration relating to acquisitions made by the Corporation. This facility is available until May 31, 2018. The interest rate charged on borrowings from Facility #2 ranges from 0.40% to 0.80% per an- num over the bank base rate. |
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 facilities during the year ended December 31, 2017. The Corporation did not have any borrowings as at or during the year ended December 31, 2017.
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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, 2017 and 2016. Further information, including the Annual Information Form (AIF) and Form 40-F for the year ended December 31, 2017, 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 8, 2018 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, the size of the Corporations pipeline opportunities; expected gross profit and gross margin; 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 2017 financial results, and those described in Points other filings with applicable securities regulators, including Points AIF, Form 40-F, annual and interim MD&A, and annual consolidated financial statements and interim condensed consolidated financial statements and the notes thereto. These documents are available at www.sedar.com and www.sec.gov.
1
The forward-looking statements contained in this MD&A are made as at the date of this MD&A and, accordingly, are subject to change after such date. Except as required by law, Points does not undertake any obligation to update or revise any forward-looking statements made or incorporated in this MD&A, whether as a result of new information, future events or otherwise.
USE OF NON-GAAP MEASURES
The Corporations financial statements are prepared in accordance with 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 of Directors in assessing the Corporations performance and in 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.
2
BUSINESS OVERVIEW
Points International Ltd.
Points International Ltd. is the global leader in providing loyalty e-commerce solutions to the loyalty industry. Loyalty programs generate substantial economic benefits and are increasingly seen as strategic marketing and business assets for their parent companies. The Corporation does not compete directly with loyalty programs, but rather acts as a business partner by providing products and services that help make programs more valuable and engaging. The Corporation delivers e-commerce solutions to loyalty programs on both a privately branded and Points branded basis.
The Corporations products and services are available to numerous loyalty program partners simultaneously through the Loyalty Commerce Platform (LCP), which is the backbone of 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 easy access to the loyalty industry. The LCP offers a consistent interface for developers and loyalty programs that is self-serve capable, providing broad access to loyalty transaction capabilities, program integration, analytics, reporting, security and fraud services. With direct integrations into almost 60 loyalty program partners and access to approximately 1 billion loyalty program members, the LCP uniquely positions the Corporation to connect third party channels with highly engaged loyalty program members and the broader loyalty market.
The Corporation is directly integrated with and provides e-commerce solutions to leading loyalty programs, including:
· | AF-KLM Flying Blue | · | Southwest Airlines Rapid Rewards |
· | Alaska Airlines Mileage Plan | · | United Airlines MileagePlus |
· | American Airlines AAdvantage | · | Virgin Atlantic Flying Club |
· | ANA Mileage Club | · | Hilton Honors |
· | British Airways Executive Club | · | Hyatt Gold Passport |
· | Delta Air Lines SkyMiles | · | InterContinental Hotels Group |
· | JetBlue TrueBlue | · | La Quinta Returns |
· | LATAM Pass KMS | · | Starwood Preferred Guest |
· | Lufthansas Miles & More | · | Chase Ultimate Rewards |
· | Saudi Arabian Airlines Alfursan | · | Citi ThankYou |
· | Etihad Guest | · | Velocity Frequent Flyer |
The Corporations headquarters is located in Toronto, Canada and its shares are dual listed on the Toronto Stock Exchange under the trading symbol PTS and on the NASDAQ Capital Market under the trading symbol PCOM.
UNDERSTANDING OUR BUSINESS AND THE LOYALTY INDUSTRY
The Corporation has three operating segments which all leverage the shared capabilities of the LCP and one organized based on Managements view of its business activities:
3
Loyalty Currency Retailing:
The Loyalty Currency Retailing
segment provides products and services designed to help loyalty program members
unlock the value of their loyalty currency and accelerate the time to a reward.
Included in this segment are the Corporations buy, gift and accelerator
products and transfer and reinstate services. These offerings provide loyalty
program members the ability to buy loyalty program currency (such as frequent
flyer miles or hotel points) for themselves, as gifts for others, perform a
transfer of loyalty currency to another member within the same loyalty program
or reinstate previously expired loyalty currency.
The Corporation has direct partnerships with over 35 loyalty programs who leverage the Loyalty Currency Retailing services and the functionality offered by the LCP. Loyalty Currency Retailing services provide high margin revenue and profitability to Points loyalty programs while increasing member engagement by unlocking the value of loyalty currency in the members accounts.
Revenue in this segment is primarily derived through the online sale or transfer of loyalty currencies direct to loyalty program members at retail rates while purchasing points and miles at wholesale rates. The Corporation may take a principal role in the retailing of loyalty currencies. As part of this principal role, the Corporation has a contractual obligation to fulfill a revenue guarantee to the loyalty program based on the terms of the contract between the Corporation and the loyalty program. Under a principal arrangement, the Corporation will assume credit and/or inventory risk in the form of a revenue guarantee to the loyalty program and will have a substantial level of responsibility with respect to marketing, pricing and commercial transaction support. Revenue earned under a principal arrangement is included in Principal Revenue in the Corporations consolidated financial statements. Alternatively, the Corporation may assume an agency role in the retailing and wholesaling of loyalty currencies, where it takes a less active role in the relationship and receives a commission on each transaction. Revenue earned under an agency role is included in Other Partner Revenue in the Corporations consolidated financial statements.
Platform Partners:
The Corporations Platform Partners
segment comprises a broad range of applications that are connected to and
enabled by the functionality of the LCP. Loyalty programs, merchants, and other
consumer service applications leverage the LCP to broadly distribute loyalty
currency and loyalty commerce transactions through multiple channels, including
loyalty program, co-branded, and 3rd party channels.
Included in Platform Partners are multiple third party managed applications that are enabled by the LCP including the Points Loyalty Wallet, one of the Corporations newest services. Revenue in this segment is earned on a commission or set fee basis per transaction or from recurring monthly fixed fees and are predominantly included in Other Partner Revenue in the consolidated financial statements.
Points Travel:
The Points Travel segment connects the world
of online travel bookings with the broader loyalty industry and consists of the
Corporations Points Travel and PointsHound products.
4
In 2014 the Corporation acquired Accruity Inc., the San Francisco based start-up operator of the PointsHound loyalty-based hotel booking service, which today continues to offer consumers the ability to earn loyalty currency from 20 loyalty programs. Leveraging the PointsHound technology, the Corporation developed its Points Travel product, the first white-label travel hotel booking service specifically designed for loyalty programs. Points partners with loyalty programs to provide a seamless travel booking experience for loyalty program members and enables the members to earn and redeem their loyalty currency while making hotel and car bookings online. Points Travel offers a rewarding value proposition for loyalty program members as they can earn high levels of points/miles per night for a hotel booking or redeem points/miles with or without additional cash for hotel stays and car rentals.
Revenue in this segment is generated from commissions, which are typically the gross amount charged to end consumers less the wholesale cost of hotel rooms or car rentals, cost of loyalty currencies delivered to the consumers and other directly related costs for online hotel and car rental bookings or redemptions. This revenue is included in Other Partner Revenue in the Corporations consolidated financial statements.
The Loyalty Industry
Year-over-year, loyalty
programs continue to generate a significant source of ancillary revenue and cash
flows for companies that have developed and maintain these loyalty programs.
According to the Colloquy group, a leading consulting and research firm focused
on the loyalty industry, the number of loyalty memberships in the US increased
from 3.3 billion in 2014 to 3.8 billion in 2016, representing an increase of 15%
(source: 2017 Colloquy Loyalty Census, June 2017). As the number of loyalty
memberships continues to increase, the level of diversification in the loyalty
landscape is evolving. While the airline, hotel, specialty retail, and financial
services industries continue to be dominant in loyalty programs in the US,
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 response to these market changes and customer dynamics, the Corporation has implemented a strategy to leverage its unique position in the global loyalty industry. By continuing to focus on innovation and enhance its LCP, the Corporation aims to advance its Loyalty Currency Retailing segment while also diversifying its revenue streams into areas that match its capabilities and strategy.
5
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following information is provided to give a context for the broader comments elsewhere in this report.
For the year ended | ||||||||||||
(In thousands of US dollars, except share and | 31-Dec-17 | 31-Dec-16 | Variance $ | Variance % | ||||||||
per share amounts) (unaudited) | ||||||||||||
Consolidated | ||||||||||||
Revenue | $ | 347,546 | $ | 321,821 | 25,725 | 8% | ||||||
Gross profit1 | 46,976 | 43,338 | 3,638 | 8% | ||||||||
Gross margin2 | 14% | 13% | ||||||||||
Adjusted operating expenses3 | 33,750 | 31,232 | 2,518 | 8% | ||||||||
Adjusted EBITDA4 | 13,226 | 12,106 | 1,120 | 9% | ||||||||
Adjusted EBITDA4 as a % of Gross profit1 | 28% | 28% | ||||||||||
Total Expenses | 342,705 | 321,791 | 20,914 | 6% | ||||||||
Net income (loss) | 3,380 | (1,515 | ) | 4,895 | 323% | |||||||
Earnings (loss) per share | ||||||||||||
Basic | $ | 0.23 | $ | (0.10 | ) | 0.33 | 330% | |||||
Diluted | $ | 0.23 | $ | (0.10 | ) | 0.33 | 330% | |||||
Weighted average shares outstanding | ||||||||||||
Basic | 14,806,020 | 15,219,283 | (413,263 | ) | (3% | ) | ||||||
Diluted | 14,820,313 | 15,219,283 | (398,970 | ) | (3% | ) | ||||||
Total assets | 119,145 | 103,234 | 15,911 | 15% | ||||||||
Total Liabilities | 76,198 | 62,916 | 13,282 | 21% | ||||||||
Shareholders equity | 42,947 | 40,318 | 2,629 | 7% | ||||||||
Loyalty Currency Retailing | ||||||||||||
Revenue | 338,341 | 314,706 | 23,635 | 8% | ||||||||
Gross profit1 | 38,372 | 36,797 | 1,575 | 4% | ||||||||
Adjusted operating expenses3 | 17,623 | 16,837 | 786 | 5% | ||||||||
Adjusted EBITDA4 | 20,749 | 19,960 | 789 | 4% | ||||||||
Platform Partners | ||||||||||||
Revenue | 7,704 | 6,856 | 848 | 12% | ||||||||
Gross profit1 | 7,134 | 6,294 | 840 | 13% | ||||||||
Adjusted operating expenses3 | 8,881 | 8,601 | 280 | 3% | ||||||||
Adjusted EBITDA4 | (1,747 | ) | (2,307 | ) | 560 | 24% | ||||||
Points Travel | ||||||||||||
Revenue | 1,501 | 259 | 1,242 | 480% | ||||||||
Gross profit1 | 1,470 | 247 | 1,223 | 495% | ||||||||
Adjusted operating expenses3 | 7,246 | 5,794 | 1,452 | 25% | ||||||||
Adjusted EBITDA4 | (5,776 | ) | (5,547 | ) | (229 | ) | (4% | ) |
6
1 Gross profit is a non-GAAP financial measure and
is defined as Total Revenue less Direct Cost of Principal Revenue. Refer to the
Performance indicators and Non-GAAP financial measures section for definition
and explanation.
2 Gross margin is a non-GAAP financial measure
and is defined as Gross profit as a percentage of Total revenue. Refer to the
Performance indicators and Non-GAAP financial measures section for definition
and explanation.
3 Adjusted operating expenses is a non-GAAP
financial measure and is defined as Total Expenses less Direct Cost of Principal
Revenue, Depreciation and Amortization, Foreign Exchange Loss (Gain), Stock
Based Compensation and Impairment. Refer to the Performance indicators and
Non-GAAP financial measures section for definition and explanation.
4 Adjusted EBITDA is a non-GAAP financial measure and is defined
as Gross Profit less Adjusted Operating Expenses. Refer to the
Performance indicators and Non-GAAP financial measures section for definition
and explanation.
2017 BUSINESS HIGHLIGHTS AND DEVELOPMENTS
|
Total revenue increased 8% to $347,546 in 2017 compared to $321,821 in 2016 | |
|
Gross profit increased $3,638 or 8% to $46,976 in 2017 compared to $43,338 in 2016 | |
|
Adjusted EBITDA increased 9% to $13,226 compared to $12,106 in 2016 | |
|
Net Income increased $4,895 or 323% to $3,380 in 2017 compared to a net loss of $1,515 in 2016. | |
|
The Board of Directors re-approved the Corporation's Normal Course Issuer Bid (NCIB) to repurchase and cancel up to 743,468 of its issued and outstanding shares, with the addition of an Automatic Share Purchase Plan (ASPP). During 2017, the Corporation repurchased and cancelled 334,212 shares at a cost of $3,406. |
Financial results for the year ended December 31, 2017 were strong, with the Corporation generating record annual revenue, gross profit, and Adjusted EBITDA. These results reflected stable growth and strong profitability in the Corporations Loyalty Currency Retailing segment, combined with anticipated losses in the Platform Partners and Points Travel segments. The Corporation experienced increasing traction in these two segments with strong year over year increases in revenue and gross profit and several new partner launches and announcements.
7
Loyalty Currency Retailing
Revenue for the Loyalty Currency Retailing segment increased $23,635 or 8%, to $338,341 for the year ended December 31, 2017, primarily due to organic growth from the Corporations existing reseller partnerships and to a lesser extent, new partners added in the year. Gross profit increased $1,575 or 4% to $38,372 for the year, which was due to both growth from existing partnerships and the impact of new loyalty program partners launched during the year. Full year adjusted operating expenses increased 5% or $786 compared to 2016, largely due to incremental rent expenses incurred in 2017 that were attributed to the segment. The segment continues to generate strong bottom line profitability, with Adjusted EBITDA of $20,749 for the year ended 2017, an increase of 4% over 2016.
The Corporation continued to execute against its new business pipeline in 2017, with 6 new loyalty program partnerships launched during the year in this segment. In the first quarter, Points launched a new reseller partnership with Copa Airlines ConnectMiles program, enabling their members to buy, gift or transfer their reward miles. Also in the first quarter, the Corporation launched its buy service for Etihad Airways, one of the largest Middle Eastern carriers. Finally, the Corporation brought to market new loyalty currency services for WestJet and the Air Canada Altitude program in the first quarter. In the second half of the year, the Corporation continued to expand its footprint in Europe, launching its Buy, Gift and Transfer products with Air Europa, a regional Spanish carrier. In the fourth quarter of 2017, the Corporation brought to market a new relationship with Virgin Australias Velocity Frequent Flyer Program, its first partnership with an Australian frequent flyer program.
In addition to adding new loyalty programs, the Corporation was also successful in expanding relationships with existing partners, launching the Hilton Honors pooling program in the second quarter of 2017 and introducing additional channels to its buy service for Shangri La hotels in China.
Platform Partners
Platform Partners revenue for the year ended December 31, 2017, was $7,704, and increase of 12% over the prior year. Similarly, 2017 gross profit for the segment increased 13% relative to 2016. The year over year increases were due to strong transactional growth in 2017 across several existing applications leveraging the Loyalty Commerce Platform, and to a lesser extent, new launches in 2017. While gross profit showed strong growth, adjusted operating expenses were relatively flat with 2016, increasing $280 or 3% over the prior year period, resulting in a 24% reduction in Adjusted EBITDA loss relative to the prior year period.
During the year, the Corporation was successful in launching new products and loyalty programs onto its loyalty commerce platform, including new financial and retail platform partners. The Corporation, in collaboration with Collinson Latitude, launched new earn and redemption loyalty commerce eStores for Melia Rewards, the loyalty program for Melia Hotels International, and ANA Mileage Club, the frequent flyer program for All Nippon Airways.
8
In the second quarter of 2017, the Corporation announced a new partnership with Scotiabank, one of Canadas largest banks, to add new multi-loyalty program functionality to Scotiabanks My Mobile Wallet & Mobile Banking apps. In the third quarter of 2017, Points also launched a new relationship with Apple and Intercontinental Hotel Group to power special member bonuses for online Apple.com store purchases.
Lastly, in the fourth quarter of 2017, the Corporation launched a new partnership with Groupon, the leading daily deals service, to incent customers through the LCP with up to 10 points per dollar spent with popular hotel and airline loyalty programs, including Alaska Airlines Mileage Plan, Choice Privileges, IHG Rewards Club, JetBlue TrueBlue, La Quinta Returns and United MileagePlus. Through one integration with the LCP, Points provided Groupon with secured managed transactional access to multiple loyalty programs to offer purchase incentives to its large member base.
Points Travel
Revenue in the Points Travel segment for the year ended
December 31, 2017 was $1,501 compared to $259 in 2016. Correspondingly, full
year 2017 gross profit of $1,470 represented an increase of $1,223 or 495% over
the prior year period. The growth in revenue and gross profit was reflective of
strong transactional growth across all Points Travel partners, driven by
increased customer awareness and conversion associated with these new products,
which are still in the early phases of their growth trajectories. In addition,
the full year impact of prior year launches also favourably impacted gross
profit on a year over year basis.
Adjusted operating expenses for the year ended December 31, 2017 increased $1,452 or 25% compared to the prior year period, largely due to increased Points Travel operational costs, higher marketing spend, and increased rental costs attributed to the segment. As a result, the Adjusted EBITDA loss generated by the segment in 2017 increased 4% to $5,776.
The Corporation had 5 loyalty program partners in market leveraging the Points Travel services at the end of 2016, and added two additional loyalty program partners in 2017. In the second quarter, the Corporation launched a new partnership with All Nippon Airways (ANA), Japans largest airline, to offer their loyalty members the ability to earn or redeem their miles when transacting for hotel and car rental bookings. The partnership with ANA represents the Corporations first partnership with a Japanese frequent flyer program. In addition, the Corporation expanded its partnership with the Etihad Guest program late in the fourth quarter, enabling program members the ability to fully redeem on hotel and car bookings with miles, or a combination of miles and cash.
9
KEY CHANGES IN FINANCIAL RESULTS COMPARED TO 2016
REVENUE, GROSS PROFIT AND GROSS MARGIN
Consolidated revenues for the year ended December 31, 2017 was $347,546, an increase of $25,725 or 8% over the comparable prior year period. The increase in consolidated revenue was primarily driven by organic growth from existing partnerships in the Loyalty Currency Retailing segment.
For the year ended December 31, 2017, consolidated gross profit was $46,976, an increase of $3,638 or 8% over the comparable period. The year over year increases for the year ended December 31, 2017 was driven by growth across all three segments. Gross Profit growth was driven by both organic growth from existing partners and products and the impact of new partners and products launched over the last twelve months.
Gross margin for the year ended December 31, 2017 was 14%, a 1% increase over the year ended December 31, 2016, as the increased gross profit generated from the Points Travel and Platform Partners segments favourably impacted consolidated gross margin.
Total Expenses and Adjusted Operating Expenses
For the year ended December 31, 2017, the Corporation incurred consolidated total expenses, of $342,705, an increase of $20,914 or 6% over the comparable prior year period, largely due to the increases in the direct cost of revenues.
On a year to date basis, the Corporation incurred consolidated adjusted operating expenses of $33,750, an increase of $2,518 or 8% over the comparable prior year period. The increases were primarily due to incremental rental costs associated with the new head office lease, marketing expenses incurred towards the Points Travel product, higher professional fees, and incremental costs related to operationalizing the Points Travel service.
Net Income and Adjusted EBITDA
The Corporation generated consolidated net income for the year ended December 31, 2017 of $3,380, an increase of $4,895 or 323% compared to the prior year period. The increase was mainly due to a $5,000 write-off of the Corporations investment in China Rewards in 2016.
For the year December 31, 2017, consolidated Adjusted EBITDA was $13,226, an increase of $1,120 or 9% over the comparable prior year period. Improvements from the Loyalty Currency Retailing and Platform Partners segments were partially offset by an increased Adjusted EBITDA loss in the Points Travel segment due to increased operating expenses relative to 2016 levels.
REVIEW OF ANNUAL CONSOLIDATED PERFORMANCE
This section discusses the Corporations consolidated net income and other expenses that do not form part of the segment discussions above.
10
For the year ended | ||||||||||||
(In thousands of US dollars) (unaudited) | December 31, 2017 |
December 31, 2016 |
Variance $ | Variance % | ||||||||
Adjusted EBITDA | $ | 13,226 | $ | 12,106 | 1,120 | 9% | ||||||
Deduct (add): | ||||||||||||
Stock based compensation | 4,455 | 2,317 | 2,138 | 92% | ||||||||
Depreciation and amortization | 3,988 | 4,529 | (541 | ) | (12% | ) | ||||||
Foreign exchange loss (gain) | (58 | ) | 230 | (288 | ) | (125% | ) | |||||
Income tax expense | 1,461 | 1,545 | (84 | ) | (5% | ) | ||||||
Impairment Loss | - | 5,000 | (5,000 | ) | (100% | ) | ||||||
Net income (loss) | $ | 3,380 | $ | (1,515 | ) | 4,895 | 323% |
Stock based compensation
The Corporation incurs certain employment related expenses that are settled in equity-based instruments. For the year ended December 31, 2017, stock based compensation expense was $4,455, an increase of $2,138 or 92% over the comparable prior year period. The increase in stock based compensation expense compared to the prior year reflects the increased number of Restricted Share Units granted during the period and outstanding at the end of the period and the fact that in 2017 annual performance bonuses for certain officers were settled in RSUs rather than cash.
Depreciation and amortization
For the year ended December 31, 2017, depreciation and amortization expense was $3,988, a decrease of $541 or 12% compared to the prior year period. The decrease from the prior year periods was primarily due to additional amortization of leasehold improvements incurred in 2016 resulting from a revised termination date of the previous head office premise lease.
Foreign exchange loss (gain)
The Corporation is exposed to Foreign Exchange (FX) risk as a result of transactions in currencies other than its functional currency, the US dollar. FX gains and losses arise from the translation of the Corporations balance sheet, revenue and expenses. The Corporation holds balances in foreign currencies (e.g. non-US dollar denominated cash, accounts payable and accrued liabilities, and deposits) that give rise to exposure to foreign exchange risk. At year end, non-US dollar monetary balance sheet accounts are translated at the year-end FX rate. The net effect after translating the balance sheet accounts is recorded in the consolidated statement of comprehensive income for the period.
The majority of the Corporations revenues in the year ended December 31, 2017 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. Ongoing operating costs are incurred predominantly in Canadian dollars, exposing the Corporation to FX risk.
As part of the risk management strategy of the Corporation, management enters into foreign exchange forward contracts extending out to approximately one year to reduce the foreign exchange risk with respect to the Canadian dollar. These contracts have been designated as cash flow hedges. The Corporation does not use derivative instruments for speculative purposes.
11
For a derivative instrument designated as a cash flow hedge, the effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income and is subsequently recognized in income when the hedged exposure affects income. Any ineffective portion of the derivatives gain or loss is recognized in current income. For the year ended December 31, 2017, the Corporation reclassified a gain of $331, net of tax, from other comprehensive income into net income (2016 - reclassified loss of $269, net of tax, from other comprehensive loss into net income). The cash flow hedges were effective for accounting purposes during the year ended December 31, 2017. Realized gains from the Corporations hedging activities, in 2017, were driven by the changes in the relative strength of the US dollar compared to the Canadian dollar.
For the year ended December 31, 2017, the Corporation recorded a foreign exchange gain of $58 compared with a foreign exchange loss of $230 in the year ended 2016. Foreign exchange gains and losses fluctuate from period to period due to movements in foreign currency rates.
Income tax expense
The Corporation is subject to income tax in multiple jurisdictions and assesses its taxable income to ensure eligible tax deductions are fully utilized. For the year ended December 31, 2017, the Corporation incurred income tax expense of $1,461 compared to $1,545 in the prior year period. This expense largely relates to the recognition of current tax liabilities, with the current tax expense increasing by $794, which has been offset by an increase in deferred tax recovery of $878.
Net Income / (loss) and earnings / (loss) per share
For the year ended | ||||||||||||
(In thousands of US dollars, | ||||||||||||
except per share amounts) | December 31, | December 31, | ||||||||||
(unaudited) | 2017 | 2016 | $ Variance | % Variance | ||||||||
Net income / (loss) | $ | 3,380 | $ | (1,515 | ) | 4,895 | 323% | |||||
Earnings / (loss) per share | ||||||||||||
Basic | $ | 0.23 | $ | (0.10 | ) | 0.33 | 330% | |||||
Diluted | $ | 0.23 | $ | (0.10 | ) | 0.33 | 330% |
For the year ended December 31, 2017, the Corporation reported net income of $3,380 compared to a net loss of $1,515 in the prior year period. The increases were largely due to the write-off of the Corporations China Rewards investment in the prior year.
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 14,806,020 common shares for the year ended December 31, 2017, compared with 15,219,283 common shares for the year ended December 31, 2016. The Corporation reported basic earnings per share and diluted earnings per share of $0.23 for the year ended 2017 compared to $0.10 basic loss per share and diluted loss per share for in the year ended of 2016.
12
LIQUIDITY AND CAPITAL RESOURCES |
Consolidated Balance Sheet Data as at | December 31, | December 31, | ||||||||||
(In thousands of US dollars)(unaudited) | 2017 | 2016 | $ Variance | % Variance | ||||||||
Cash and cash equivalents | $ | 63,514 | $ | 46,492 | 17,022 | 37% | ||||||
Short term investments | - | 10,033 | (10,033 | ) | (100% | ) | ||||||
Restricted cash | 500 | 500 | - | - | ||||||||
Funds receivable from payment processors | 15,229 | 10,461 | 4,768 | 46% | ||||||||
Total funds available | 79,243 | 67,486 | 11,757 | 17% | ||||||||
Total current assets | $ | 89,404 | $ | 73,018 | 16,386 | 22% | ||||||
Total current liabilities | 75,660 | 61,986 | 13,674 | 22% | ||||||||
WORKING CAPITAL1 | $ | 13,744 | $ | 11,032 | 2,712 | 25% |
1 Working Capital is a Non-GAAP financial measure. Refer to the Performance indicators and Non-GAAP financial measures section for definition and explanation.
The Corporations financial strength is reflected in its balance sheet. As at December 31, 2017, the Corporation continues to remain debt free with total funds available of $79,243. The Corporations working capital was $13,744 at December 31, 2017 compared to working capital of $11,032 as at December 31, 2016. Consistent with the prior years, working capital continues to be positive. The Corporation has been able to generate sufficient cash through normal course operations to fund capital expenditure needs, current operating and working capital requirements, and purchases of shares under the Corporations Normal Course Issuer Bid (NCIB). The Corporations ability to generate sufficient cash flows and/or obtain additional sources of funding may be affected by the risks and uncertainties discussed within this MD&A.
As at December 31, 2017, the following two facilities are available until May 31, 2018. The first facility is a revolving operating facility in the amount of $8,500 at an interest rate range of 0.35% to 0.75% . The second facility is a term loan facility of $5,000 to be used solely for the purposes of financing the cash consideration relating to acquisitions made by the Corporation, at an interest rate range of 0.40% to 0.80% . There have been no borrowings to date under 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 facilities during the year ended December 31, 2017.
13
Sources and Uses of Cash
For the year ended | ||||||||||||
(In thousands of US | December 31, | December 31, | ||||||||||
dollars) (unaudited) | 2017 | 2016 | $ Variance | % Variance | ||||||||
Operating activities | $ | 16,765 | $ | 9,854 | 6,911 | 70% | ||||||
Investing activities | 7,298 | (12,626 | ) | 19,924 | 158% | |||||||
Financing activities | (5,707 | ) | (3,176 | ) | (2,531 | ) | (80% | ) | ||||
Effects of exchange rates | (1,334 | ) | 1,076 | (2,410 | ) | (224% | ) | |||||
Change in cash and cash equivalents | $ | 17,022 | $ | (4,872 | ) | 21,894 | 449% |
Operating Activities
Cash flows from operating activities, which increased in the year ended December 31, 2017 compared to the prior year, 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 and the timing of receipts from the Corporations payment processors.
Investing Activities
Cash used in investing activities during the year ended December 31, 2017 included cash used for internally developed intangible assets and the purchase of property and equipment. Development efforts in the year included developing new integration capabilities of the LCP and the advancement of the Loyalty Wallet and Points Travel products. Additionally, a short-term investment was settled in the third quarter of 2017, leading to an increase in cash provided by investing activities in the current year compared to the prior years.
14
Financing Activities
Cash flows used in financing activities during the fourth quarter and year ended December 31, 2017 were primarily related to purchases of shares under the Corporations NCIB in the amount of $3,406 and additional purchases for shares held in trust to fulfill the Corporations obligations related to its employee share unit plan totalling $2,621.
Contractual Obligations and Commitments
Total | Year 1 | (3) | Year 2 | Year 3 | Year 4 | Year 5+ | ||||||||||||
Operating leases(1) | $ | 10,201 | $ | 2,180 | $ | 2,099 | $ | 1,974 | $ | 1,912 | $ | 2,036 | ||||||
Principal revenue(2) | 337,784 | 187,433 | 146,351 | 4,000 | - | - | ||||||||||||
$ | 347,985 | $ | 189,613 | $ | 148,450 | $ | 5,974 | $ | 1,912 | $ | 2,036 |
(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. If a revenue guarantee has been met, it is
removed from the principal revenue disclosure above.
Operating lease and principal revenue obligations will continue to be funded through working capital. The Corporation has made contractual commitments on the minimum value of transactions processed over the term of its agreements with certain loyalty program partners. Under this type of guarantee, in the event that the sale of loyalty program currencies are less than the guaranteed amounts, the Corporation would be obligated to purchase additional miles or points from the loyalty program partner equal to the value of the revenue commitment shortfall. The Corporation has a balance in prepaid and other assets of $2,719 on the consolidated balance sheet representing mileage reward currencies held for future resale.
Transactions with Related Parties
Certain members of the Board of Directors, or their related parties, hold positions in other companies that result in them having control or significant influence over those companies. One of these companies transacted with the Corporation during the year. The Corporation recorded expenses of less than $10 in the year ended December 31, 2017 (2016: $96) and had no outstanding amounts payable to this related party at December 31, 2017 (2016: $7). The amounts owing are unsecured, interest-free and due for payment under normal payment terms from the date of the transaction.
15
Financial Instruments
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 has entered into foreign exchange forward contracts to reduce the foreign exchange risk with respect to Canadian dollar denominated disbursements. 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, 2017, forward contracts with a notional value of $15,380, and in a net asset position of $507 (2016 $174 in liability position), with settlement dates extending to December 2018, 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.
BALANCE SHEET VARIANCES
Consolidated Balance Sheet Data as at | December 31, | December 31, | ||||
(In thousands of US dollars) (unaudited) | 2017 | 2016 | ||||
Cash and cash equivalents | $ | 63,514 | $ | 46,492 | ||
Short term investment | - | 10,033 | ||||
Restricted cash | 500 | 500 | ||||
Funds receivable from payment processors | 15,229 | 10,461 | ||||
Accounts receivable | 7,741 | 4,057 | ||||
Prepaid expenses and other assets | 2,420 | 1,475 | ||||
Total current assets | $ | 89,404 | $ | 73,018 | ||
Property and equipment | 2,128 | 1,750 | ||||
Intangible assets | 15,265 | 16,896 | ||||
Goodwill | 7,130 | 7,130 | ||||
Deferred tax assets | 2,557 | 1,725 | ||||
Other assets | 2,661 | 2,715 | ||||
Total non-current assets | $ | 29,741 | $ | 30,216 | ||
Accounts payable and accrued liabilities | $ | 7,998 | $ | 6,335 | ||
Income taxes payable | 695 | 1,638 | ||||
Payable to loyalty program partners | 65,567 | 53,242 | ||||
Current portion of other liabilities | 1,400 | 771 | ||||
Total current liabilities | $ | 75,660 | $ | 61,986 | ||
Deferred tax liabilities | - | 211 | ||||
Other liabilities | 538 | 719 | ||||
Total non-current liabilities | $ | 538 | $ | 930 | ||
Total shareholders equity | $ | 42,947 | $ | 40,318 |
16
Cash and cash equivalents
The Corporations cash and cash equivalents balance increased $17,022 compared to the end of 2016. The increase in cash and cash equivalents was due to the settlement of the short term investment, which was partially offset by cash outflows related to increased investment in property and equipment and intangible assets, corporate income tax payments and changes in working capital balances, payments to loyalty program partners, purchases of share capital held in trust and under the NCIB, partially offset by Adjusted EBITDA earned during the year ended December 31, 2017.
Funds receivable from payment processors
The Corporations funds receivable from payment processors balance increased $4,768 compared to the end of 2016, which is attributable to the timing of promotional activities. In general, the Corporation will experience a higher balance when promotions are timed towards the end of the period, and when the receivable balances have not been settled in cash by payment processors.
Accounts receivable
The Corporations accounts receivable balance increased $3,684, net of a decrease of allowance for doubtful accounts of $72, compared to the end of 2016 primarily due to business activities with a certain loyalty program partner and increased revenue in the Platform Partners segment, along with higher revenues in the quarter. The Corporation is confident that the full amount of the outstanding accounts receivable balance will be collected.
Accounts payable and accrued liabilities
The Corporations accounts payable and accrued liabilities balance increased $1,663 compared to the end of 2016, and is primarily due to the timing of payments including the Corporations annual employee incentives.
Income taxes payable
The Corporations income taxes payable decreased by $943 compared to the end of 2016 due to the timing of corporate income tax instalments made to tax authorities.
Payable to loyalty program partners
The Corporations payable to loyalty program partners increased $12,325 compared to the end of 2016, which is primarily attributable to the timing of payments made to loyalty partners. The Corporation will typically remit funds to loyalty program partners approximately 30 days after the end of the month of loyalty currency sales.
17
Cash from Exercise of Options
Certain options are due to expire within 12 months from the date of this MD&A. If exercised in full, issued and outstanding common shares will increase by 119,687 shares.
Securities with Near-Term Expiry Dates Outstanding Amounts as at March 8, 2018 (exercise price in CAD$).
Security Type | Month of Expiry | Number | Exercise Price |
Option | March 18, 2018 | 118,201 | 15.94 |
Option | March 20, 2018 | 1,486 | 10.64 |
Total | 119,687 |
OUTSTANDING SHARE DATA
As of March 8, 2018, the Corporation has 14,437,959 common shares outstanding.
As of the date hereof, the Corporation has outstanding options to acquire up to 615,843 common shares. The options have exercise prices ranging from $9.89 to $30.84 with a weighted average exercise price of $16.00. The expiration dates of the options range up to August 22, 2021.
The following table lists the common shares issued and outstanding as at March 8, 2018 and the securities that are currently convertible into common shares along with the maximum number of common shares issuable on conversion or exercise.
Common Shares | Proceeds | |||||
Common Shares Issued & Outstanding | 14,437,959 | |||||
Convertible Securities: Share options | 615,843 | CAD$ 9,855,340 | ||||
Common Shares Issued & Potentially Issuable | 15,053,802 | CAD$ 9,855,340 | ||||
Securities Excluded from Calculation: Options Available to grant from ESOP(1) | 914,017 |
(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.
18
FOURTH QUARTER RESULTS
For the three months ended | ||||||||||||
(In thousands of US dollars, except share | 31-Dec-17 | 31-Dec-16 | Variance $ | Variance % | ||||||||
and per share amounts) (unaudited) | ||||||||||||
Consolidated | ||||||||||||
Revenue | $ | 87,723 | $ | 81,955 | 5,768 | 7% | ||||||
Gross profit1 | 13,081 | 11,921 | 1,160 | 10% | ||||||||
Gross margin2 | 15% | 15% | ||||||||||
Adjusted operating expense3 | 9,031 | 8,258 | 773 | 9% | ||||||||
Adjusted EBITDA4 | 4,050 | 3,663 | 387 | 11% | ||||||||
Adjusted EBITDA4 as a % of Gross profit1 | 31% | 31% | ||||||||||
Total Expenses | 86,167 | 85,001 | 1,166 | 1% | ||||||||
Net income (loss) | 1,191 | (3,674 | ) | 4,865 | 132% | |||||||
Earnings (loss) per share | ||||||||||||
Basic | $ | 0.08 | $ | (0.24 | ) | 0.32 | 133% | |||||
Diluted | $ | 0.08 | $ | (0.24 | ) | 0.32 | 133% | |||||
Weighted average shares outstanding | ||||||||||||
Basic | 14,654,041 | 15,092,158 | (438,117 | ) | (3% | ) | ||||||
Diluted | 14,710,169 | 15,092,158 | (381,989 | ) | (3% | ) | ||||||
Total assets | 119,145 | 103,234 | 15,911 | 15% | ||||||||
Total Liabilities | 76,198 | 62,916 | 13,282 | 21% | ||||||||
Shareholders equity | 42,947 | 40,318 | 2,629 | 7% | ||||||||
Loyalty Currency Retailing | ||||||||||||
Revenue | 85,361 | 79,682 | 5,679 | 7% | ||||||||
Gross profit1 | 10,851 | 9,791 | 1,060 | 11% | ||||||||
Adjusted operating expenses3 | 4,932 | 3,917 | 1,015 | 26% | ||||||||
Adjusted EBITDA4 | 5,919 | 5,874 | 45 | 1% | ||||||||
Platform Partners | ||||||||||||
Revenue | 1,918 | 2,215 | (297 | ) | (13% | ) | ||||||
Gross profit1 | 1,781 | 2,074 | (293 | ) | (14% | ) | ||||||
Adjusted operating expenses3 | 2,151 | 2,207 | (56 | ) | (3% | ) | ||||||
Adjusted EBITDA4 | (370 | ) | (133 | ) | (237 | ) | (178% | ) | ||||
Points Travel | ||||||||||||
Revenue | 444 | 58 | 386 | 666% | ||||||||
Gross profit1 | 449 | 56 | 393 | 702% | ||||||||
Adjusted operating expenses3 | 1,948 | 2,134 | (186 | ) | (9% | ) | ||||||
Adjusted EBITDA4 | (1,499 | ) | (2,078 | ) | 579 | 28% |
1 Gross profit is a non-GAAP financial measure and
is defined as Total Revenue less Direct Cost of Principal Revenue. Refer to the
Performance indicators and Non-GAAP financial measures section for definition
and explanation.
2 Gross margin is a non-GAAP financial measure
and is defined as Gross profit as a percentage of Total revenue. Refer to the
Performance indicators and Non-GAAP financial measures section for definition
and explanation.
3 Adjusted operating expenses is a non-GAAP
financial measure and is defined as Total Expenses less Direct Cost of Principal
Revenue, Depreciation and Amortization, Foreign Exchange Loss (Gain), Stock
Based Compensation and Impairment. Refer to the Performance indicators and
Non-GAAP financial measures section for definition and explanation.
4 Adjusted EBITDA is a non-GAAP financial measure and is defined
as Gross Profit less Adjusted Operating Expenses. Refer to the
Performance indicators and Non-GAAP financial measures section for definition
and explanation.
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The Corporation generated consolidated revenue of $87,723 for the three months ended December 31, 2017, an increase of $5,768 or 7% over the fourth quarter of 2016. The increase was primarily driven by organic growth in the Loyalty Currency segment, which was approximately 7%. Consolidated gross profit for the fourth quarter of 2017 was $13,081, an increase of $1,160 or 10% from the fourth quarter of 2016, with growth from the Loyalty Currency Retailing and Points Travel segments more than offsetting a decline in the Platform Partners segment.
The Corporation incurred consolidated total expenses of $86,167 for the fourth quarter of 2017, an increase of $1,166 or 1% over the comparable prior year period.
The Corporation incurred consolidated adjusted operating expenses of $9,031 in the fourth quarter of 2017, an increase of $773 or 9% compared to the fourth quarter of 2016.
Consolidated Adjusted EBITDA for the fourth quarter of 2017 was $4,050, an increase of $387 or 11% compared to the prior year quarter. The increase was largely due to increased gross profit in the Loyalty Currency Retailing and Points Travel segments, with adjusted operating expenses across Platform Partners and Points Travel remaining relatively flat year over year. The Loyalty Currency Retailing segment continued to demonstrate strong profitability, generating Adjusted EBITDA of $5,919 in the fourth quarter of 2017, while as expected, the Points Travel and Platform Partners segments generated negative Adjusted EBITDA during the same period.
REVIEW OF QUARTERLY CONSOLIDATED PERFORMANCE
This section discusses the Corporations consolidated net income and other expenses that do not form part of the segment discussions above.
For the three months ended | ||||||||||||
(In thousands of US dollars) (unaudited) | December 31, 2017 |
December 31, 2016 |
Variance $ | Variance % | ||||||||
Adjusted EBITDA | $ | 4,050 | $ | 3,663 | 387 | 11% | ||||||
Deduct (add): | ||||||||||||
Stock based compensation | 1,398 | 570 | 828 | 145% | ||||||||
Depreciation and amortization | 971 | 1,078 | (107 | ) | (10% | ) | ||||||
Foreign exchange loss (gain) | 125 | 61 | 64 | 105% | ||||||||
Income tax expense | 365 | 628 | (263 | ) | (42% | ) | ||||||
Impairment Loss | - | 5,000 | (5,000 | ) | (100% | ) | ||||||
Net income (loss) | $ | 1,191 | $ | (3,674 | ) | 4,865 | 132% |
During the fourth quarter of 2017, stock based compensation expense was $1,398, an increase of $828 or 145% over the same period in 2016. The increase in stock based compensation expense compared to the prior year reflects the increased number of Restricted Share Units granted during the period and outstanding at the end of the period and the fact that in 2017 annual performance bonuses for certain officers were settled in RSUs rather than cash.
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Depreciation and amortization expense in the fourth quarter of 2017 decreased $107, or 10% to $971, from the fourth quarter of 2016. This decrease was due to certain depreciable assets being fully depreciated in 2017, prior to Q4.
The Corporation recorded an income tax expense of $365 for the quarter ended December 31, 2017 compared to $628 in the prior year quarter due to increased deferred tax recoveries in 2017 compared to 2016.
Net income (loss) and earnings (loss) per share
For the three months ended | ||||||||||||
(In thousands of US dollars, | ||||||||||||
except per share amounts) | December 31, | December 31, | ||||||||||
(unaudited) | 2017 | 2016 | $ Variance | % Variance | ||||||||
Net income (loss) | $ | 1,191 | $ | (3,674 | ) | 4,865 | 132% | |||||
Earnings (loss) per share | ||||||||||||
Basic | $ | 0.08 | $ | (0.24 | ) | 0.32 | 133% | |||||
Diluted | $ | 0.08 | $ | (0.24 | ) | 0.32 | 133% |
The Corporation reported net income of $1,191 for the quarter ended December 31, 2017 compared with a net loss of $3,674 for the quarter ended December 31, 2016. The difference is due to the write-off of China Rewards in the prior year, with no comparable write-off in the current year. Basic and diluted earnings (loss) per share for the three month period December 31, 2017 were $0.08, as compared to ($0.24) for the three month period December 31, 2016.
Sources and Uses of Cash
For the three months ended | ||||||||||||
(In thousands of US | December 31, | December 31, | ||||||||||
dollars) (unaudited) | 2017 | 2016 | $ Variance | % Variance | ||||||||
Operating activities | $ | 12,360 | $ | 10,722 | 1,638 | 15% | ||||||
Investing activities | (681 | ) | (10,659 | ) | 9,978 | 94% | ||||||
Financing activities | (3,205 | ) | (2,028 | ) | (1,177 | ) | (58% | ) | ||||
Effects of exchange rates | 91 | 625 | (534 | ) | (85% | ) | ||||||
Change in cash and cash equivalents | $ | 8,565 | $ | (1,340 | ) | 9,905 | 739% |
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THREE YEAR SUMMARY OF SELECTED FINANCIAL RESULTS
(in thousands of US dollars, except per share amounts)
Three month period ended | Total Revenue | Net income | Basic earnings per share |
Diluted earnings per share |
December 31, 2017 | $ 87,723 | $ 1,191 | $ 0.08 | $ 0.08 |
September 30, 2017 | 91,198 | 605 | 0.04 | 0.04 |
June 30, 2017 | 85,767 | 732 | 0.05 | 0.05 |
March 31, 2017 | 82,858 | 852 | 0.06 | 0.06 |
December 31, 2016 | 81,955 | (3,674) | (0.24) | (0.24) |
September 30, 2016 | 82,442 | 335 | 0.02 | 0.02 |
June 30, 2016 | 83,864 | 931 | 0.06 | 0.06 |
March 31, 2016 | 73,560 | 893 | 0.06 | 0.06 |
December 31, 2015 | 80,228 | 961 | 0.06 | 0.06 |
September 30, 2015 | 81,133 | 768 | 0.05 | 0.05 |
June 30, 2015 | 67,898 | 1,721 | 0.11 | 0.11 |
March 31, 2015 | 67,117 | 1,715 | 0.11 | 0.11 |
Generally, increases in transaction levels, revenues and gross profit will drive higher overall profitability. The Corporations revenues are primarily impacted by retention of existing partnerships and products, new partnerships and products launched during the year, and the level and type of promotional activity offered to loyalty program members during the year. In the absence of any new partner or products launched, quarterly revenues will be impacted by the level of marketing and promotional activity carried out with loyalty program members which will vary quarter to quarter.
Through the addition of new partnerships year after year, the Corporation has been able to generate increased revenues on a consistent basis. In addition to this, the Corporation has been able to grow revenues with existing partnerships year over year, as it increases its understanding of the drivers and actions of loyalty program members through the use of direct marketing techniques and effective consumer analytics. Revenue growth has also come from the ability to sell additional loyalty products and services to existing partners.
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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.
When the Corporations role in a transaction is that of an agent, revenue is recognized on a net basis with revenue representing the margin earned.
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 judgment 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 judgment. These include the anticipated cash flows from the specific partner relationships, the likelihood that these partners will renew existing contracts and enter into 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 determine the value in use of the CGU or group of CGUs to which goodwill has been allocated.
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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 judgments 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 judgment 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 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 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 (loss). 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.
For the Corporations accounting policies and critical accounting estimates and judgments, refer to the Corporations consolidated financial statements for the year ended December 31, 2017 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
The IASB has issued the following new standards and amendments to existing standards:
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|
Amendments to IAS 12, Income Taxes In January 2016, the IASB issued Recognition of Deferred Tax Assets for Unrealized Losses to clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The Corporation adopted the amendments to IAS 12 in its financial statements for the annual period beginning on January 1, 2017. The amendments did not have a material impact on the consolidated financial statements. |
|
Amendments to IAS 7, Statement of Cash Flows (IAS 7) In January 2016, the IASB issued amendments that require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non cash changes. The Corporation adopted the amendments to IAS 7 in its financial statements for the annual period beginning on January 1, 2017. The amendments did not have a material impact on the consolidated financial statements. |
New accounting standards and interpretations not yet adopted by the Corporation are listed below:
|
IFRS 15, Revenue from Contracts with Customers (IFRS 15) - In May 2014, the IASB issued IFRS 15 which supersedes existing standards and interpretations including IAS 18, Revenue and IFRIC 13, Customer Loyalty Programmes. |
IFRS 15 introduces a single comprehensive 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. |
Under IFRS 15, an entity recognizes revenue when a performance obligation is satisfied and the goods or services underlying the particular performance obligation are transferred to the customer. The Corporation will adopt IFRS 15 in its financial statements for the annual period beginning on January 1, 2018. With a view to enhancing the clarity, comparability and utility of our financial information post-implementation of the standard, we will apply the standard retrospectively, subject to permitted and elected practical expedients.
25
The Corporation has assessed the impact of IFRS 15 on the Corporations revenue recognition. Key differences between IFRS 15 and IAS 18 that are expected to impact the consolidated financial statements are as follows:
(a) Certain revenues previously classified as net for the Transfer and Reinstate services, will be recognized as gross revenue under IFRS 15. The Corporation expects that the net effect of this change will increase revenues and direct costs reported under IAS 18 in 2017 by approximately $1,500.
(b) Under IAS 18, the Corporation classified certain Points Travel bonus costs to marketing expenses as the Corporation offers promotional offers as it is growing the business. This classification is not permissible under IFRS 15, and therefore the Corporation will record these costs as a reduction to revenue after transition to IFRS 15. The Corporation expects that the net effect of this change will decrease revenue and marketing costs reported under IAS 18 in 2017 by approximately $210.
(c) Interest earned on funds held as part of the sales process does not meet the definition of revenue under IFRS 15 and therefore these amounts will be reclassified to Finance Income in the consolidated statements of comprehensive income. The Corporation expects that this change will decrease revenues and total expenses reported under IAS 18 in 2017 by approximately $210.
The Corporation continues to finalize its evaluation of the impact of IFRS 15 but does not expect the standard to have further material adjustments to the consolidated financial statements or on revenue recognition.
|
Amendments to IFRS 2, Sharebased Payment (IFRS 2) In June 2016, the IASB issued amendments that provide requirements on the accounting for the effects of vesting and non vesting conditions on the measurement of cashsettled sharebased payments, sharebased payment transactions with a net settlement feature for withholding tax obligations, and a modification to the terms and conditions of a sharebased payment that changes the classification of the transaction from cashsettled to equitysettled. The Corporation intends to adopt the amendments to IFRS 2 in its financial statements for the annual period beginning on January 1, 2018. The Corporation does not expect the amendments to have a material impact on the consolidated financial statements. |
| |
|
IFRS 9, Financial Instruments (IFRS 9) 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 does not expect the standard to have a material impact on the consolidated financial statements. |
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|
IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration In December 2016, the IASB issued an interpretation which clarifies the date that should be used for translation when a foreign currency transaction involves an advance payment or receipt. The Corporation intends to adopt the Interpretation in its financial statements for the annual period beginning on January 1, 2018. The Corporation does not expect the adoption of this interpretation to have a material impact on the consolidated financial statements. |
| |
|
IFRS 16, Leases (IFRS 16) 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.
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 endcustomers is what drives the business activity of the Corporation. The Corporation generates the majority of its revenue from endcustomers 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 globally may adversely affect the Corporations ability to generate ongoing revenue from transactions.
27
Consolidation activity in the airline industry is common and has been part of an industrywide solution to address structural financial problems. 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 shortterm 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 longterm 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. 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 may not be able to convert the Corporations pipeline of prospective partners or launch new products with new or existing partners as expected or planned
There can be no assurance that the Corporation will be successful in launching new partnerships with existing products or launching new products with new or existing partnerships as expected or planned. There is a risk that revenue and profitability targets will not be achieved if expected new partner launches or new product launches does not materialize.
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, inhouse business solutions departments that could take responsibility for services currently provided by the Corporation, as well as, significant competition from the online travel agency industry including existing and new online travel agencies that directly competes against the Corporations Points Travel product
With respect to the Corporations Points Loyalty Wallet 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 Loyalty Wallet.
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, inhouse business solutions such as a cash and points product that could replace or compete with the products and services offered 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.
Further, with respect to the Points Travel product, the Corporation may face significant competition from other online travel agencies. Many existing and potential competitors do or could have greater technical or financial resources than the Corporation in the online travel agency industry. Therefore, the financial performance of the Corporation may be adversely affected by such competition.
Our brand, revenue and profitability are affected by our ability to control cyber security risks
29
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 and their membership. 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 endcustomer 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 our 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, valueadded 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 valueadded 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.
PERFORMANCE INDICATORS AND NON-GAAP FINANCIAL MEASURES
REVENUE, DIRECT COSTS OF REVENUE AND GROSS PROFIT
The Corporations revenue is primarily generated by transacting points and/or 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.
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Other Partner Revenue:
Other partner revenue includes
transactional revenue that is realized when the Corporation assumes an agency
role in the retailing and wholesaling of loyalty currencies for loyalty program
partners and other revenue received from partners which is not transactional in
nature. The Corporation also earns Other Partner Revenue through commissions per
transaction charges, and recurring fixed fees from the products and services it
provides through its Platform Partners segment and commission for online
bookings or redemptions of hotel accommodations or car rentals through its
Points Travel segment.
Interest Income:
As part of its operating economics, the
Corporation earns interest income on the cash flows generated by its products
and services.
Gross profit, defined by management as total revenues less direct costs of revenue, is a non-GAAP financial measure which does not have any standardized meaning prescribed by IFRS and is therefore unlikely to be comparable to similar measures presented by other issuers. Gross profit is viewed by management to be an integral measure of financial performance as it represents an internal measure of ongoing growth and the amount of revenues retained by the Corporation that are available to fund ongoing operating expenses, including incremental spending that is in line with the long term investment strategy of the Corporation. Management continues to drive a shift in the Corporations revenue mix toward reseller relationships (with higher partner engagement) that are expected to lead to sustained profitability for the Corporation. In general, the Corporation seeks to maximize the gross profit generated from each loyalty partner relationship. For this reason, these new deals and products are expected to be accretive to overall profitability.
Direct cost of principal revenue consists of variable direct costs incurred to generate principal revenues earned under the reseller model, which include the wholesale cost of loyalty currency paid to partners for the purchase and resale of such currency, and credit card processing fees.
Revenue and gross profit growth is dependent on various factors, including the timing and size of promotional campaigns that are placed in market by the Corporation, the growth in loyalty program partners membership base, and the effectiveness of merchandising and marketing efforts and channels initiated by the Corporation to generate incremental revenues.
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Reconciliation of Revenue to Gross Profit
For the three months ended | For the year ended | |||||||||||
(In thousands of US dollars) (unaudited) |
Dec. 31, 2017 | Dec. 31, 2016 | Dec. 31, 2017 | Dec. 31, 2016 | ||||||||
Revenue | $ | 87,723 | $ | 81,955 | $ | 347,546 | $ | 321,821 | ||||
Less: | ||||||||||||
Direct cost of principal revenue | 74,642 | 70,034 | 300,570 | 278,483 | ||||||||
Gross profit | $ | 13,081 | $ | 11,921 | $ | 46,976 | $ | 43,338 |
ADJUSTED OPERATING EXPENSES
Adjusted operating expenses is a nonGAAP financial measure, which is defined as Employment Costs, Marketing and Communications, Technology Services and Operating Expenses, excluding equity-settled share-based payment expense. Adjusted operating expenses are predominantly cash based expenditures. The closest GAAP measure is Total Expenses in the consolidated financial statements and the reconciliation from Total Expenses to Adjusted Operating Expenses is shown below.
Reconciliation of Total Expenses to Adjusted Operating Expenses
For the three months ended | For the year ended | |||||||||||
Dec. 31, | Dec. 31, | Dec. 31, | Dec. 31, | |||||||||
(In thousands of US dollars)(unaudited) | 2017 | 2016 | 2017 | 2016 | ||||||||
Total Expenses | $ | 86,167 | $ | 85,001 | $ | 342,705 | $ | 321,791 | ||||
Subtract (add): | ||||||||||||
Direct cost of principal revenue | 74,642 | 70,034 | 300,570 | 278,483 | ||||||||
Depreciation and amortization | 971 | 1,078 | 3,988 | 4,529 | ||||||||
Foreign exchange loss (gain) | 125 | 61 | (58 | ) | 230 | |||||||
Stock-based compensation | 1,398 | 570 | 4,455 | 2,317 | ||||||||
Impairment loss | - | 5,000 | - | 5,000 | ||||||||
Adjusted Operating Expenses | $ | 9,031 | $ | 8,258 | $ | 33,750 | $ | 31,232 |
ADJUSTED EBITDA AND ADJUSTED EBITDA AS A PERCENTAGE OF GROSS PROFIT
Adjusted EBITDA is a non-GAAP financial measure, which is defined as earnings before income tax expense, depreciation and amortization, share-based compensation, impairment charges 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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Adjusted EBITDA as a percentage of gross profit 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 strategic investments.
Reconciliation of Net Income to Adjusted EBITDA
For the three
months ended |
For the year
ended |
|||||||||||
(In thousands of US dollars) | December 31, | December 31, | December 31, | December 31, | ||||||||
(unaudited) | 2017 | 2016 | 2017 | 2016 | ||||||||
Net income (loss) | $ | 1,191 | $ | (3,674 | ) | $ | 3,380 | $ | (1,515 | ) | ||
Income tax expense | 365 | 628 | 1,461 | 1,545 | ||||||||
Depreciation and amortization | 971 | 1,078 | 3,988 | 4,529 | ||||||||
Foreign exchange loss (gain) | 125 | 61 | (58 | ) | 230 | |||||||
Stock-based compensation | 1,398 | 570 | 4,455 | 2,317 | ||||||||
Impairment loss | - | 5,000 | - | 5,000 | ||||||||
Adjusted EBITDA | $ | 4,050 | $ | 3,663 | $ | 13,226 | $ | 12,106 |
WORKING CAPITAL
Management defines Working Capital as total current assets less total current liabilities. Management believes that this non-GAAP financial measure provides a useful measure of the Corporations liquidity. Other issuers may include other items in their definition of Working Capital therefore it may not be comparable to similar measures presented by other issuers.
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.
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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.
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 reports 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 52109 Certification of Disclosure in Issuers Annual and Interim Filings) as of December 31, 2017. 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.
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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Corporation is responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting, as those terms are defined in rules adopted by the SEC and National Instrument 52109 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, 2017 that have materially affected, or are reasonably likely to materially affect, the Corporations internal control over financial reporting.
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, 2017.
The effectiveness of the Corporations internal control over financial reporting as of December 31, 2017, 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, 2017.
37
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 8, 2018 |
/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 8, 2018 |
/s/ Michael DAmico |
Michael DAmico |
Chief Financial Officer |
Rule 13a-14(b) Certification - CEO
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, 2017, to which this certification is attached (the Report):
1. | fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and | |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. |
Date: March 8, 2018 |
/s/ Robert MacLean |
Robert MacLean |
Chief Executive Officer |
Rule 13a-14(b) Certification - CFO
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, 2017, to which this certification is attached (the Report):
1. | fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and | |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. |
Date: March 8, 2018 |
/s/ Michael DAmico |
Michael DAmico |
Chief Financial Officer |
KPMG LLP | Telephone (416) 777-8500 | |
333 Bay Street | Fax (416) 777-8818 | |
Suite 4600 | www.kpmg.ca | |
Toronto ON | ||
M5H 2S5 |
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Points International Ltd.:
We consent to the use of:
|
our Report of Independent Registered Public Accounting Firm dated March 8, 2018 on the consolidated financial statements of Points International Ltd., which comprise the consolidated statements of financial position as at December 31, 2017 and December 31, 2016, the consolidated statements of comprehensive income (loss), 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; and | |
|
our Report of Independent Registered Public Accounting Firm dated March 8, 2018 on Points International Ltd.s internal control over financial reporting as of December 31, 2017, |
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, 2017.
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 8, 2018 |
Toronto, Canada |
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KPMG Canada
provides services to KPMG LLP
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