EX-99.3 4 exhibit99-3.htm EXHIBIT 99.3 Points International Ltd.: Exhibit 99.3 - Filed by newsfilecorp.com

Exhibit 99.3

Points International Ltd.
CONSOLIDATED BALANCE SHEETS

          As at  
    NOTE     (Unaudited)     (Audited)  
(United States $ in thousands)         September 30, 2010     December 31, 2009  
                   
ASSETS                  
Current Assets                  
     Cash and cash equivalents   1c) $  21,313   $  26,414  
     Restricted cash         1,761     802  
     Funds receivable from payment processors         3,026     5,855  
     Security deposits         2,624     2,463  
     Accounts receivable         1,518     1,907  
     Future income tax assets         1,233     945  
     Current portion of deferred costs         102     139  
     Prepaid expenses and other assets         1,051     759  
          32,628     39,284  
Deferred costs         65     82  
Other assets         666     951  
Property and equipment         1,669     607  
Intangible assets         5,150     2,014  
Goodwill         4,205     4,205  
          11,755     7,859  
        $  44,383   $  47,143  
                   
LIABILITIES                  
Current Liabilities                  
     Accounts payable and accrued liabilities       $  3,055   $  3,087  
     Current portion of other liabilities         764     609  
     Payable to loyalty program partners         24,450     30,215  
          28,269     33,911  
Other liabilities         997     301  
          29,266     34,212  
                   
SHAREHOLDERS’ EQUITY                  
Accumulated other comprehensive loss         (2,445 )   (2,566 )
Accumulated deficit         (47,830 )   (49,463 )
          (50,275 )   (52,029 )
Capital stock   2     56,668     56,662  
Contributed surplus   3     8,724     8,298  
          15,117     12,931  
        $  44,383   $  47,143  

See Accompanying Notes

1

Points International Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited) (United States $ in thousands, except per share amounts)         For the three months ended     For the nine months ended  
    NOTE     September 30,     September 30,     September 30,     September 30,  
          2010     2009     2010     2009  
REVENUE                              
         Principal       $  22,038   $  18,886   $  63,938   $  57,886  
         Other partner revenue         1,468     1,841     4,727     5,267  
         Interest         3     5     9     49  
          23,509     20,732     68,674     63,202  
GENERAL AND ADMINISTRATION EXPENSES                              
         Direct cost of principal revenue         18,300     16,975     54,943     52,527  
         Employment costs         2,480     2,538     7,790     7,994  
         Marketing & communications         376     328     920     1,057  
         Technology services         270     253     705     695  
         Amortization         158     200     445     550  
         Foreign exchange gain         (77 )   (70 )   (112 )   (239 )
         Operating expenses         919     566     2,669     2,003  
         Restructuring         –     332     –     332  
          22,426     21,122     67,360     64,919  
OPERATING INCOME (LOSS) – before undernoted         1,083     (390 )   1,314     (1,717 )
         Interest and other charges   1b)   2     (28 )   23     (4 )
INCOME (LOSS) BEFORE INCOME TAXES         1,081     (362 )   1,291     (1,713 )
         Future income taxes (recovery) expense         –     (97 )   (342 )   122  
NET INCOME (LOSS)       $  1,081   $  (265 ) $  1,633   $  (1,835 )
OTHER COMPREHENSIVE LOSS:                              
         Gain on foreign exchange derivatives designated as cash flow
                  hedges, net of income taxes expense of $87 and $95

9


194


–


210


–
         Reclassification to net income of gain on foreign exchange
                  derivatives designated as cash flow hedges, net of income
                  taxes expense of $14 and $40


9






(32

)



–





(89

)



–

OTHER COMPREHENSIVE INCOME         162     –     121     –  
COMPREHENSIVE INCOME (LOSS)       $  1,243   $  (265 ) $  1,754   $  (1,835 )
Basic and diluted earnings (loss) per share   5   $  0.01   $  0.00   $  0.01   $  (0.01 )

CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS

    For the three months ended     For the nine months ended  
    September 30,     September 30,     September 30,     September 30,  
(Unaudited) (United States $ in thousands, except per share amounts)   2010     2009     2010     2009  
ACCUMULATED DEFICIT – Beginning of period $  (48,911 ) $  (51,097 ) $  (49,463 ) $  (49,527 )
         NET INCOME (LOSS)   1,081     (265 )   1,633     (1,835 )
ACCUMULATED DEFICIT – End of period $  (47,830 ) $  (51,362 ) $  (47,830 ) $  (51,362 )
                         
ACCUMULATED OTHER COMPREHENSIVE LOSS – Beginning of period $  (2,607 ) $  (2,566 ) $  (2,566 ) $  (2,566 )
         Other comprehensive income   162     –     121     –  
ACCUMULATED OTHER COMPREHENSIVE LOSS – End of period $  (2,445 ) $  (2,566 ) $  (2,445 ) $  (2,566 )

See Accompanying Notes

2

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (United States $ in thousands)                           For the three months ended     For the nine months ended  
          September 30,     September 30,     September 30,     September 30,  
    NOTE     2010     2009     2010     2009  
                               
Net income (loss)                       $  1,081   $  (265 ) $  1,633   $  (1,835 )
Items not affecting cash                              
     Amortization of property and equipment         104     92     251     266  
     Amortization of deferred costs         –     –     –     2  
     Amortization of intangible assets         54     108     194     282  
     Future income tax (recovery) expense         –     (97 )   (342 )   122  
     Unrealized foreign exchange (gain) loss         (389 )   (80 )   104     (491 )
     Employee stock option expense   4     133     176     427     499  
     Unrealized gain on derivative contracts designated as                              
         cash flow hedges   9     236     –     176     –  
Changes in non–cash balances related to operations   1a)   (1,221 )   3,939     (1,842 )   5,882  
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES         (2 )   3,873     601     4,727  
     Additions to property and equipment         (432 )   (14 )   (1,313 )   (224 )
     Additions to intangible assets         (1,081 )   (443 )   (3,330 )   (620 )
     Changes in restricted cash         6     –     (944 )   –  
CASH FLOWS USED IN INVESTING ACTIVITIES         (1,507 )   (457 )   (5,587 )   (844 )
     Issuance of capital stock on exercise of stock options         3     –     5     –  
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES         3     –     5     –  
EFFECT OF EXCHANGE RATE CHANGES ON CASH HELD IN
   FOREIGN CURRENCY




433


34


(120
)

407
                               
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS         (1,073 )   3,450     (5,101 )   4,290  
                               
CASH AND CASH EQUIVALENTS – Beginning of period         22,386     23,694     26,414     22,854  
CASH AND CASH EQUIVALENTS – End of period     $ 21,313   $  27,144   $  21,313   $  27,144  

See Accompanying Notes

3


Points International Ltd.
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2010
(United States $ in thousands, unless otherwise noted, and except for share and per share amounts)

The unaudited interim consolidated financial statements of Points International Ltd. (the “Corporation”) include the financial position, results of operations and cash flows of the Corporation and its wholly–owned subsidiaries, Points International (US) Ltd., Points International (UK) Limited, and Points.com Inc.

The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) using accounting policies consistent with those used in the preparation of the audited consolidated financial statements for the year ended December 31, 2009. These interim consolidated financial statements do not contain all the annual disclosures required by Canadian GAAP and, accordingly, should be read in conjunction with the Corporation’s audited consolidated financial statements including the notes thereto for the year ended December 31, 2009, as outlined in the Corporation’s 2009 Annual Report. Note disclosures have been presented for material updates to the information previously reported in the annual audited consolidated financial statements.

The Corporation’s operations are moderately influenced by seasonality. Historically, revenues are highest in the fourth quarter in each year as redemption volumes typically peak at this time. During July and August, the Corporation experiences a slight decline in activity on the majority of its products as fewer consumers are online transacting miles and points.

1. STATEMENT OF CASH FLOWS
   
Disclosures with respect to the Consolidated Statements of Cash Flows are as follows:

  a) Changes in non–cash balances related to operations are as follows:

      Three months ended     Nine months ended  
      September 30,     September 30,     September 30,     September 30,  
  For the period ended   2010     2009     2010     2009  
  (Increase) decrease in funds receivable 
   from payment processors
$
(530
)
$
(341
)
$
2,829

$
1,990
  Decrease (increase) in security 
   deposits

22


(234
)

(161
)

(168
)
  (Increase) decrease in accounts 
   receivable

(230
)

191


389


1,083
  Decrease (increase) in deferred costs   47     (82 )   54     57  
  (Increase) decrease in prepaid and 
   other assets

(159
)

143


(7
)

545
  Increase (decrease) in accounts payable 
   and accrued liabilities

324


801


(32
)

(750
)
  Increase (decrease) in other liabilities   292     (134 )   851     (260 )
  (Decrease) increase in payable to 
   loyalty program partners

(987
)

3,595


(5,765
)

3,385
    $  (1,221 ) $  3,939   $  (1,842 ) $  5,882  

4


Points International Ltd.
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2010
(United States $ in thousands, unless otherwise noted, and except for share and per share amounts)

  b) Interest and taxes classified as operating activities
     
  During the three month period ended September 30, 2010, interest of $2 (2009 – $7) was received during the period and interest of nil (2009 – $5) was paid.
     
  During the nine month period ended September 30, 2010, interest of $8 (2009 – $65) was received during the period and interest of $9 (2009 – $8) was paid.
     
  c) Cash and cash equivalents consist of:

      September 30,     December 31,  
      2010     2009  
  Cash $  20,204   $  23,914  
  Cash equivalents   1,109     2,500  
    $  21,313   $  26,414  

Cash equivalents represent short–term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. They represent term deposits with original maturity dates between 3 and 12 months.
   
2. CAPITAL STOCK
   
Authorized
     Unlimited common shares
   
Issued
     The balance of capital stock is summarized as follows:

  Common Shares   Number     Amount  
  Balance December 31, 2009   149,820,940   $  56,662  
  Exercise of stock options (i)   11,110     6  
  Balance September 30, 2010   149,832,050   $  56,668  
   (i) 11,110 options previously issued to employees were exercised at CAD$0.46 per share.        

3. CONTRIBUTED SURPLUS
   
The changes in contributed surplus are as follows:

  Contributed surplus – January 1, 2009 $  7,615  
     Employee stock option expense   683  
  Contributed surplus – December 31, 2009   8,298  
     Employee stock option expense   427  
     Employee stock option exercise   (1 )
  Contributed surplus – September 30, 2010 $  8,724  

5


Points International Ltd.
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2010
(United States $ in thousands, unless otherwise noted, and except for share and per share amounts)

4. STOCK OPTIONS
   
During the three and nine month periods ended September 30, 2010, 182,500 and 2,505,548 (2009 – 366,089 and 1,864,540) options were granted, respectively. The weighted average fair value of these grants was calculated using the Black–Scholes option pricing model with the following weighted average assumptions:

      Three month period     Nine month period  
  For the period ended September 30,   2010     2009     2010     2009  
  Number of options granted   182,500     366,089     2,505,548     1,864,540  
  Assumptions:                        
     Risk free rate   2.22%     2.60%     2.72%     2.20%  
     Expected volatility   81.0%     79.2%     81.7%     68.9%  
     Expected life of options in years   3     3     3     3  

The compensation cost that has been charged against income and included in employment costs is $133 (2009 – $176) for the three month period ended September 30, 2010, and $427 for the nine month period ended September 30, 2010 (2009 – $499).

During the three month period ended September 30, 2010, 1,777,223 (2009 – 317,633) options previously granted were forfeited or expired and 5,555 options were exercised (2009 – nil).

A summary of option activity since December 31, 2009 is shown below:

            Weighted average  
            exercise price  
      Number of options     (in CAD$)  
  Balance January 1, 2010   9,215,031   $ 1.11  
     Granted   2,505,548     0.49  
     Expired   (561,335 )   0.87  
     Forfeited   (2,099,723 )   1.26  
     Exercised   (11,110 )   0.46  
  Balance September 30, 2010   9,048,411   $  0.91  
  Exercisable at September 30, 2010   3,978,786   $  1.17  
  Options available to grant   2,128,161     n/a  

6


Points International Ltd.
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2010
(United States $ in thousands, unless otherwise noted, and except for share and per share amounts)

5. EARNINGS (LOSS) PER SHARE
   
The following table sets forth the computation of basic and diluted earnings per share:

      For the three months ended     For the nine months ended  
      September 30,     September 30,     September 30,     September 30,  
      2010     2009     2010     2009  
  Net income (loss) for basic and 
   diluted earnings per share 
   available to common 
   shareholders


$


1,081





$


(265


)


$


1,633





$


(1,835


)
  Weighted average number of 
   common shares outstanding – 
   basic



149,826,797





149,820,940





149,823,056





149,820,940

  Effect of dilutive securities – 
   stock–based compensation

675,130


–


697,709


–
  Weighted average number of 
   common shares outstanding – 
   diluted



150,501,927





149,829,940





150,520,765





149,820,940

  Earnings (loss) per share – 
   reported











  Basic $  0.01   $  (0.00 ) $  0.01   $  (0.01 )
  Diluted $  0.01   $  (0.00 ) $  0.01   $  (0.01 )

Earnings per share is calculated based on the weighted average number of shares outstanding during the period. The treasury stock method is used for the calculation of the dilutive effect of stock options.

6. SEGMENT DISCLOSURES
   
The Corporation provides technology solutions to the loyalty program industry and is organized and managed as a single reportable business segment with its operating results regularly reviewed by the Corporation’s chief operating decision maker.
   
Select financial information is as follows:

      For the three months ended     For the nine months ended  
      September 30,     September 30,     September 30,     September 30,  
      2010     2009     2010     2009  
  Revenue                        
     United States $  19,203   $  17,046   $  53,503   $  58,108  
     Europe   4,206     3,469     13,950     4,732  
     Canada and other   100     217     1,221     362  
    $  23,509   $  20,732   $  68,674   $  63,202  
  Revenue                        
     United States   82%     82%     78%     92%  
     Europe   18%     17%     20%     7%  
     Canada and other   –     1%     2%     1%  
      100%     100%     100%     100%  

7


Points International Ltd.
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2010
(United States $ in thousands, unless otherwise noted, and except for share and per share amounts)

As at September 30, 2010 and December 31, 2009, substantially all of the Corporation’s assets were in Canada.
   
7. DEPENDENCE ON LOYALTY PROGRAM PARTNERS
   
For the three month period ended September 30, 2010, there were three (2009 – three) loyalty program partners for which sales to their members individually represented more than 10% of the Corporation’s total revenue. In aggregate, these three partners represented 82% (2009 – 84%) of the Corporation’s revenues.
   
For the nine month period ended September 30, 2010, there were three (2009 – two) loyalty program partners for which sales to their members individually represented more than 10% of the Corporation’s total revenue. In aggregate, these three partners represented 82% (2009 – 79%) of the Corporation’s revenues.
   
8. COMMITMENTS

      Total     2010 (3)   2011     2012     2013     2014+  
  Operating leases(1) $  4,896   $  402   $  875   $  906   $  609   $  2,104  
  Principal revenue guarantees(2)   102,527     5,594     33,908     28,086     16,638     18,301  
    $  107,423   $  5,996   $  34,783   $  28,992   $  17,247   $  20,405  
  (1) The Corporation is obligated under various operating leases for premises, purchase commitments and equipment and service agreements for web hosting services.
  (2) In relation to principal revenue, the Corporation has made contractual guarantees on the minimum value of transactions processed over the term of its agreements with certain loyalty program partners.
  (3) Amounts shown represent contractual obligations and guarantees for the remainder of 2010.

The Corporation is involved in various claims and litigation in the normal course of its business. While management cannot predict the final outcome of the claims pending at September 30, 2010, based on the information currently available and management’s assessment of the merits of such claims and litigation, management believes that the resolution of such claims and litigation will not have a material and negative effect on the consolidated financial position or results of operations.
   
9. FINANCIAL INSTRUMENTS
   
Determination of fair value
   
For financial assets and liabilities that are valued at other than fair value on the balance sheet: restricted cash, funds receivable from payment processors, security deposits, accounts receivable, accounts payable and accrued liabilities, and payable to loyalty program partners, fair value approximates their carrying value at September 30, 2010 and December 31, 2009 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 can be 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.
   
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 significant use of unobservable inputs are considered Level 3. The fair value of financial assets and financial liabilities measured at fair value in the consolidated balance sheet as at September 30, 2010 are as follows:

8


Points International Ltd.
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2010
(United States $ in thousands, unless otherwise noted, and except for share and per share amounts)

      Level 1     Level 2     Total  
  Cash $  21,313   $  –   $  21,313  
  Canadian dollar forward contracts(1)   –     176     176  
  Total $  21,313   $  176   $  21,489  
  (1) The carrying values of the Corporation’s forward contracts is included in prepaid expenses and other assets in the consolidated balance sheets.

Credit risk

The Corporation’s term deposits and short–term investments held as collateral subject the Corporation to credit risk. The Corporation has guaranteed investment certificates, as per 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 as 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 these 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 which means the Corporation’s exposure to bad debts is not significant.

The aging of accounts receivable is as follows:

      September 30, 2010     December 31, 2009  
  Current $  1,215   $  1,269  
  Past due 31–60 days   132     367  
  Past due 61–90 days   112     127  
  Past due over 90 days   75     152  
  Trade accounts receivable   1,534     1,915  
  Less: allowance for doubtful accounts   (16 )   (8 )
    $  1,518   $  1,907  

The following table provides the change in allowance for doubtful accounts for trade accounts receivable:

      Three month     Nine  
  For the period ended September 30, 2010   period     month period  
  Balance, beginning of period $  17   $  8  
  (Decrease) increase in provision for doubtful accounts   (1 )   8  
  Balance, end of period $  16   $  16  

The provision for doubtful accounts has been included in operating expenses in the consolidated statements of operations and deficit, and is net of any recoveries of amounts that were provided for in a prior period.

9


Points International Ltd.
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2010
(United States $ in thousands, unless otherwise noted, and except for share and per share amounts)

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.

Liquidity risk

Liquidity risk is the risk that the Corporation may not have cash available to satisfy financial liabilities as they come due. 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 September 30, 2010:

            Contractual Cash Flow Maturities  
      Carrying     Total     Within 1 year     1 year to     3 years to  
      Amount                 3 years     5 years  
  Accounts payable and accrued liabilities $  3,055   $  3,055   $  3,055   $  –   $  –  
  Payable to loyalty program partners   24,450     24,450     24,450     –     –  
  Operating leases   –     4,896     402     1,781     2,713  
  Principal revenue guarantees   –     102,527     5,594     61,994     34,939  
    $  27,505   $  134,928   $  33,501   $  63,775   $  37,652  

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 and the Euro. The Corporation enters into foreign exchange forward contracts to reduce the foreign exchange risk with respect to Canadian dollar denominated disbursements. Revenues earned from the Corporation’s partners stationed 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.

On January 28, 2010, the Corporation entered into foreign exchange forward contracts to reduce the foreign exchange risk with respect to the Canadian dollar. As at September 30, 2010, forwards with a notional value of $9,020, a carrying value of $176, and settlement dates extending to August 2011, have been designated as cash flow hedges for hedge accounting treatment under CICA Handbook Section 3865, “Hedges” (“Section 3865”). These contracts are intended to reduce the foreign exchange risk with respect to anticipated Canadian dollar denominated expenses. As at September 30, 2010, all hedges were considered effective with no ineffectiveness recognized in income.

The change in fair value of cash flow hedges are recognized in the statement of comprehensive income, except for any ineffective portion, which is recognized immediately in income. Realized gains and losses in accumulated other comprehensive income are reclassified to the statement of operations in the same period as the corresponding hedged items are recognized in income. Cash flow hedges that mature within one year are included in accounts payable and accrued 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 of translating certain non–US dollar balance sheet accounts, a strengthening U.S. dollar will lead to a FX loss while a weakening U.S. dollar will lead to a FX gain. Sensitivity to a +/– 10% movement in all currencies held by the Corporation versus the U.S. dollar would affect the Corporation’s loss and other comprehensive loss by $26 (2009 – $85).

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Points International Ltd.
Notes to Unaudited Interim Consolidated Financial Statements
September 30, 2010
(United States $ in thousands, unless otherwise noted, and except for share and per share amounts)

Balances denominated in foreign currencies that are considered financial instruments are as follows:

  As of September 30, 2010   USD Total     CAD     GBP     EUR     CHF  
  FX Rates used to translate to USD         0.97     1.58     1.36     1.02  
  Financial assets                              
  Cash and cash equivalents $  21,313     557     1,563     2,085     46  
  Restricted cash   1,761     376     –     –     –  
  Funds receivable from payment processors   3,026     –     327     476     3  
  Security deposits   2,624     –     53     186     1  
  Accounts receivable   1,518     –     324     14     –  
    $  30,242     933     2,267     2,761     50  
  Financial liabilities                              
  Accounts payable and accrued liabilities $  3,055     1,361     281     38     –  
  Payable to loyalty program partners   24,450     –     1,650     2,632     25  
    $  27,505     1,361     1,931     2,670     25  

10. COMPARATIVE FIGURES
   
Certain fiscal 2009 comparative figures have been reclassified to conform with the financial statement presentation adopted in fiscal 2010.

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