Condensed Consolidated Interim Financial Statements

Points InternationalLtd.
September 30, 2018

Contents

Points International Ltd.
Condensed Consolidated Interim Statements of Financial Position

Expressed in thousands of United States dollars
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Points International Ltd.
Condensed Consolidated Interim Statements of Comprehensive Income

Expressed in thousands of United States dollars, except per share amounts
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Points International Ltd.
Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

Points International Ltd.
Condensed Consolidated Interim Statements of Cash Flows
Expressed in thousands of United States dollars
(Unaudited)

Amounts received for interest were reflected as operating cash flows in the condensed consolidated interim statements of cash flows.

The accompanying notes are an integral part of these condensed consolidated interim financial statements.

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

1. REPORTING ENTITY

Points International Ltd. (the “Corporation”) is a company domiciled in Canada. The address of the Corporation’s registered office is 111 Richmond Street West, Suite 700, Toronto, Ontario, Canada, M5H 2G5. The condensed consolidated interim financial statements of the Corporation as at and for the three and nine months ended September 30, 2018 comprise the financial results of the Corporation and its wholly-owned subsidiaries, Points International (US) Ltd., Points International (UK) Ltd., Points.com Inc., Points Development (US) Ltd. and Points Travel Inc. The Corporation’s 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):

The Corporation’s operations are not subject to significant seasonal fluctuations.

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

The condensed consolidated interim financial statements for the three and nine months ended September 30, 2018 have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”).

The notes presented in these third quarter 2018 condensed consolidated interim financial statements include only significant changes and transactions occurring since December 31, 2017, and are not fully inclusive of all disclosures required by International Financial Reporting Standards (“IFRS”) for annual financial statements. These condensed consolidated interim financial statements should be read in conjunction with the Corporation’s annual consolidated financial statements for the year ended December 31, 2017. All amounts are expressed in thousands of United States dollars, except per share amounts, or as otherwise indicated.

The condensed consolidated interim financial statements were authorized for issue by the Board of Directors on November 13, 2018.

3. SIGNIFICANT ACCOUNTING POLICIES

Except as described below, the condensed consolidated interim financial statements follow the same accounting policies and methods of application as those disclosed in the Corporation’s annual audited consolidated financial statements for the year ended December 31, 2017.

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

(a) New standards adopted

Effective January 1, 2018, the Corporation adopted the following standards issued by the IASB.

Effective January 1, 2018, the Corporation adopted the new standard and its amendments using the full retrospective transition method. As a result, all comparative information in these financial statements has been restated. The accounting policies set out in note 3(b) have been applied in preparing the condensed consolidated interim financial statements as at and for the three and nine months ended September 30, 2018, and the comparative information presented in these condensed consolidated interim financial statements as at and for the three and nine months ended September 30, 2017.

The application of IFRS 15 did not result in adjustments to the statement of financial position at January 1, 2017 or December 31, 2017, nor did it impact cash flow totals from operating, investing or financing activities. Certain adjustments were identified with respect to the classification and presentation of revenue and expenses which are summarized below:

Please refer to note 3(b) for the Corporation’s revised revenue recognition policy.

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

Reconciliation of condensed consolidated statement of comprehensive income for the three months ended September 30, 2017

Reconciliation of condensed consolidated statement of comprehensive income for the nine months ended September 30, 2017

IFRS 9 supersedes IAS 39 Financial Instruments Recognition and Measurement. The standard set out revised guidance for classifying and measuring financial instruments, introduced a new expected credit loss model for calculating impairment of financial assets and includes new guidance for the application of hedge accounting. The standard also requires that when a financial liability measured at amortized cost is modified or exchanged, and such modification or exchange does not result in derecognition, that the adjustment to the amortized cost of the financial liability is recognized in profit or loss. The Corporation has adopted IFRS 9 on a retrospective basis without restating comparative periods as it was not possible to do so without the use of hindsight.

The standard does not have an impact on the Corporation’s results and may allow for simplified effectiveness testing going forward. The Corporation has determined that there is no effect on the current or prior year financial statements with regards to the adoption of IFRS 9. Please refer to note 3(c) for the Corporation’s revised financial instrument policy.

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

The Corporation also adopted new amendments to the following accounting standards effective for our interim and annual consolidated financial statements commencing January 1, 2018. These changes did not have a material impact on our financial results.

(b) Revenue recognition

The Corporation’s revenue is categorized as principal or other partner revenue, and is primarily generated through the sale of loyalty currencies, through services provided to loyalty partners’ program members, and through technology and marketing services provided to loyalty partners.

Contracts with customers
The Corporation records revenue from contracts with customers in accordance with the five steps in IFRS 15 as follows:

Principal Revenue
Principal revenue groups together several streams of revenue that the Corporation realizes in delivering goods or services to various loyalty programs and their customers. The following is a list of revenue streams and the related revenue recognition policy.

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

Other Partner Revenue
Other partner revenue is primarily transactional revenue for facilitating the sale of loyalty currencies or other goods or services to loyalty program members for which the Corporation takes an agency role. The Corporation’s role as an agent is determined by the contractual arrangement in place with the loyalty program partner and their members. In this instance, the Corporation has determined that it does not obtain control of the loyalty currency or other goods and services prior to transferring them to the customer, this is due in part to the absence of inventory risk. Other factors considered in making the determination include the fact that the Corporation is not primarily responsible for fulfilling the promise to provide the specified good and generally has limited discretion in establishing the prices for the specified goods. Revenue is recorded on a net basis.

When deciding the most appropriate basis for presenting revenue on either a gross or net basis, both the legal form and substance of the agreements between the Corporation, its partners and their program members are reviewed to determine each party’s respective role in the transaction. This determination requires the exercise of judgment. In making this assessment, management considers whether the Corporation:

(c) Financial instruments

All financial assets and financial liabilities are recognized on the Corporation’s consolidated statements of financial position when the Corporation becomes a party to the contractual provisions of the instrument.

(i) Classification and measurement of financial instruments

Under IFRS 9, the Corporation’s financial instruments are defined as follows:

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

Financial assets held at amortized cost require the asset to be measured using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.

Derivatives may be in an asset or liability position at a point in time historically or in the future. For derivatives designated as cash flow hedges for accounting purposes, the effective portion of the hedge is recognized in accumulated other comprehensive income and the ineffective portion of the hedge is recognized immediately in profit or loss.

(ii) Impairment of financial instruments

IFRS 9 requires impairment of financial assets to consider the expected lifetime credit losses at initial recognition, which is anticipated to result in earlier recognition of losses. IFRS 9 realigns hedge accounting to more closely reflect the Corporation’s risk management strategy.

(d) New standards and interpretations not yet adopted

The IASB has issued the following new standard. This standard has not yet been adopted by the Corporation and could have an impact on future periods.

This new standard is described in detail in the Corporation’s 2017 audited consolidated financial statements. The Corporation continues to assess the impact of this standard on its consolidated financial statements and the Corporation is progressing with its implementation of this standard.

Management is currently evaluating the implementation alternatives for the required January 1, 2019 implementation date. The application of IFRS 16 will result in an increase in leased assets and financial liabilities on the statement of financial position. The balances will primarily comprise of the leases for the three premises the Corporation leases for offices in Toronto, San Francisco and London. In the Statement of Comprehensive Income, there will be a reduction in Operating Expenses offset by an increase in amortization and interest costs, resulting in a minimal impact on Net Income.

4. OPERATING SEGMENT

The Corporation’s reportable segments are Loyalty Currency Retailing, Platform Partners, and Points Travel. These operating segments are organized around differences in products and services.

During the nine months ended September 30, 2018, the Corporation re-defined the measure of segment profit or loss to Contribution from Adjusted EBITDA. The Corporation determined that Contribution was the more appropriate measure of segment profit or loss used by the Chief Operating Decision Maker (“CODM”) in reviewing segment results and making resource allocation decisions. Contribution is defined as gross profit (total revenue less direct cost of principal revenue) for the relevant operating segment less direct adjusted operating expenses. Direct adjusted operating expenses are expenses which are directly attributable to each operating segment. 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. The Corporation has restated the disclosures for the three and nine months ended September 30, 2017 to reflect this change in segment performance measure. There have been no changes in the Corporation’s reportable segments.

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

¹ Indirect adjusted operating expenses comprise costs that are shared among the Loyalty Currency Retailing, Platform Partners and Points Travel operating segments, including costs associated with various corporate functions, such as Finance, Human Resources, Legal and certain expenses associated with information technology infrastructure.

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

Enterprise-wide disclosures - Geographic information

¹restated, see Note 3(a)

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 Corporation’s loyalty partners. At September 30, 2018, substantially all of the Corporation's assets were in Canada.

Dependence on loyalty program partners

For the three month period ended September 30, 2018, there were three (2017 – three) loyalty program partners for which sales to their members individually represented more than 10% of the Corporation’s total revenue. In aggregate, sales to the members of these partners represented 75% (2017 – 70%) of the Corporation’s total revenue.

For the nine month period ended September 30, 2018, there were three (2017 – three) loyalty program partners for which sales to their members individually represented more than 10% of the Corporation’s total revenue. In aggregate, sales to the members of these partners represented 70% (2017 – 70%) of the Corporation’s total revenue.

5. CAPITAL AND OTHER COMPONENTS OF EQUITY

Authorized with no Par Value

Unlimited common shares
Unlimited preferred shares

Issued

At September 30, 2018, all issued shares are fully paid. The holders of common shares are entitled to receive dividends, if any are declared, and are entitled to one vote per share.

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income (loss) is comprised of the unrealized gains/losses on foreign exchange derivatives designated as cash flow hedges. The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred.

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

Normal Course Issuer Bid (“NCIB”)

On March 8, 2017, the Board of Directors of the Corporation approved a plan to repurchase the Corporation’s common shares. On August 9, 2017 the Toronto Stock Exchange ("TSX") accepted the Corporation’s notice of intention 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 has entered into an automatic share purchase plan with a broker in order to facilitate the 2017 Repurchase. By June 30, 2018, a total of 743,468 shares were repurchased and cancelled under this NCIB.

On August 14, 2018 the NCIB program was renewed with a total of 710,893 shares to be repurchased under this 2018 plan (the “2018 Repurchase”), representing 5% of its 14,217,860 shares issued and outstanding as of July 31, 2018. The Corporation has entered into an automatic share purchase plan with a broker in order to facilitate the 2018 Repurchase.

The primary purpose of the 2017 and 2018 Repurchases is for cancellation. Under the automatic share purchase plan, the Corporation may repurchase shares at times when the Corporation would ordinarily not be permitted to due to regulatory restrictions or self-imposed blackout periods. Repurchases will be made from time to time at the brokers' discretion, based upon parameters prescribed by the Corporation’s 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 will be determined by the broker considering market conditions, stock prices, the Corporation’s cash position, and other factors.

During the three months ended September 30, 2018, the Corporation repurchased and cancelled 39,000 common shares (2017 – 153,047) at an aggregate purchase price of $557 (2017 - $1,439), resulting in a reduction of stated capital and contributed surplus of $149 and $408 respectively (2017 - $608 and $831). These purchases were made under the 2018 Repurchase and are included in calculating the number of common shares that the Corporation may purchase pursuant to the 2018 NCIB.

During the nine months ended September 30, 2018, the Corporation repurchased and cancelled 457,556 common shares (2017 – 162,347) at an aggregate purchase price of $6,358 (2017 - $1,509), resulting in a reduction of stated capital and contributed surplus of $1,782 and $4,576 respectively (2017 - $644 and $865). These purchases were made under the 2017 and 2018 Repurchase and are included in calculating the number of common shares that the Corporation may purchase pursuant to the respective NCIB.

6. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

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 period.

b) Diluted earnings per share

Diluted earnings per share represents what the net income per share would be if instruments convertible into common shares had been converted at the beginning of the period, or at the time of issuance, if later. In determining diluted earnings per share, the average number of common shares outstanding is increased by the number of shares that would have been issued if all share options with a strike 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.

For the three and nine months ended September 30, 2018, 106,239 options that were out of the money (2017 – 563,995 and 577,131 for the three and nine month periods, respectively) 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 Corporation’s 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 during the three and nine months ended September 30, 2018 and 2017, respectively.

7. SHARE-BASED PAYMENTS

As at September 30, 2018, 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 for the preceding five consecutive days prior to the date of the grant. The options generally vest over a period of up to three years and expire at the end of five years from the date of grant. Under the plan, share options can only be settled in equity. Under the share option plan the number of net options available to grant is 10% of the larger of the outstanding shares as at March 2, 2016 or any time thereafter.

The options available to grant as at September 30, 2018 are shown in the table below:

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

The options available to grant as at September 30, 2017 are shown in the table below:

The fair value of each option grant is estimated at the date of grant using the Black-Scholes option pricing model. The Corporation did not grant any share options during the three and nine month periods ended September 30, 2018 or September 30, 2017. Expected volatility is generally determined by the historical amount the Corporation’s daily share price fluctuated over the expected life of the option.

A summary of the status of the Corporation’s share option plan as of September 30, 2018 and 2017, and changes during the nine months ended on those dates is presented below.

As at September 30, 2018:

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

As at September 30, 2017:

Share unit plan

On March 7, 2012, the Corporation implemented an employee share unit plan, under which employees are periodically granted Restricted Share Units (“RSUs”). The RSUs vest either immediately, over a period of up to three years or in full on the third anniversary of the grant date. A total of 6,076 and 420,509 RSUs have been granted for the three and nine months ended September 30, 2018 (2017 – 16,719 and 371,592 RSUs). As at September 30, 2018, 675,456 RSUs were outstanding (2017 – 724,447 RSUs).

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 RSU’s 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 Corporation’s 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 purchase shares from the open market on a periodic basis through a share purchase trust. There were no share units purchased by the trust during the three months ended September 30, 2018 (2017 – 76,500 share units purchased at a cost of $857) and 437,343 share units purchased by the trust at a cost of $2,956 for the nine months ended September 30, 2018 (2017 – 97,437 share units purchased at a cost of $1,053). In addition, commencing in March, 2018, the Corporation paid withholding taxes in cash rather than reselling shares held in trust into the market. The Corporation paid $53 and $2,589 for the three and nine months ending September 30, 2018, (2017 - $0 and $0). As of September 30, 2018, 200,154 of the Corporation’s common shares were held in trust for this purpose (2017 – 83,649 shares held in trust).

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

The Corporation accounts for the share-based awards granted under both the share option and share unit 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 for the three and nine month periods ended September 30, 2018 is $1,054 and $3,197 (2017 - $1,321 and $3,057).

8. GUARANTEES AND COMMITMENTS

9. SUPPLEMENTAL CASH FLOW INFORMATION

10. FINANCIAL INSTRUMENTS

Determination of fair value

The fair value of funds receivable from payment processors, accounts receivable, accounts payable and accrued liabilities and payable to loyalty program partners, approximate their carrying values at September 30, 2018 due to their short-term maturities.

Fair value hierarchy

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

The Corporation has determined the estimated fair values of its financial instruments based on appropriate market inputs and valuation methodologies and assumptions, as disclosed below. Considerable judgment is required to develop certain of these estimates. The estimated fair value amounts can be materially affected by the use of different assumptions or methodologies.

The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Quoted market prices for an identical asset or liability represent a Level 1 valuation. When quoted market prices are not available, the Corporation maximizes the use of observable inputs within valuation models. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the use of significant unobservable inputs are considered Level 3. The fair value of financial assets and financial liabilities measured at fair value in the consolidated balance sheet as at September 30, 2018 and December 31, 2017 are as follows:

There were no material financial instruments categorized in Level 1 or Level 3 as at September 30, 2018 and December 31, 2017 and there were no transfers of fair value measurement between Levels 2 and 3 of the fair value hierarchy in the respective periods.

POINTS  INTERNATIONAL LTD.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

11. CREDIT FACILITIES

On May 30, 2018, the Corporation amended its bank credit facility agreement with Royal Bank of Canada to extend the expiry date of the credit facility. The following two facilities are available to the Corporation as of September 30, 2018:

• Revolving operating facility (“Facility #1”) of $8,500 available until May 31, 2019. 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, 2019. The interest rate charged on borrowings from Facility #2 ranges from 0.40% to 0.80% per annum over the bank base rate.

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 three months ended September 30, 2018.

POINTS INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS

INTRODUCTION

The following management’s discussion and analysis (‘‘MD&A’’) of the performance and financial condition of Points International Ltd. and its subsidiaries (which are also referred to herein as “Points” or the “Corporation”) should be read in conjunction with the Corporation’s unaudited condensed consolidated interim financial statements (including the notes thereto) as at and for the three and nine months ended September 30, 2018, the 2017 annual MD&A and the 2017 audited annual consolidated financial statements and notes thereto and other recent filings with Canadian and US securities regulatory authorities, which may be accessed at www.sedar.com or www.sec.gov.

All financial data herein has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”) and all dollar amounts herein are in thousands of United States dollars unless otherwise specified. This MD&A is dated as of November 13, 2018 and was reviewed by the Audit Committee and approved by the Corporation’s Board of Directors.

FORWARD-LOOKING STATEMENTS

This MD&A contains or incorporates forward-looking statements within the meaning of United States securities legislation and forward-looking information within the meaning of Canadian securities legislation (collectively, “forward-looking statements”). These forward-looking statements relate to, among other things, revenue, earnings, changes in costs and expenses, capital expenditures and other objectives, strategic plans and business development goals, and may also include other statements that are predictive in nature, or that depend upon or refer to future events or conditions, and can generally be identified by words such as “may”, “will”, “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates” or similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These statements are not historical facts but instead represent only the Corporation’s expectations, estimates and projections regarding future events. Certain significant forward-looking statements included in this MD&A include statements regarding: revenue growth and guidance; the size of the Corporation’s pipeline opportunities; evolving the Corporation’s open platform strategy; improving data and transactional capabilities; expected gross profit and gross margin; the Corporation’s ability to generate cash through normal course operations to fund capital expenditure needs and current operating and working capital requirements, including under current operating leases; and the financial obligations with respect to revenue guarantees.

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

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risks and uncertainties that are difficult to predict. Undue reliance should not be placed on such statements. Certain material assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. Known and unknown factors could cause actual results to differ materially from those expressed or implied in the forward-looking statements. In particular, the financial outlooks herein assume the Corporation will be able to maintain its existing contractual relationships and products, that such products continue to perform in a manner consistent with the Corporation’s past experience, that the Corporation will be able to generate new business from its pipeline at expected margins, in-market and newly launched products and services will perform in a manner consistent with the Corporation’s past experience and the Corporation will be able to contain costs. The Corporation’s ability to convert its pipeline of prospective partners and product launches is subject to significant risk and there can be no assurance that the Corporation will launch new partners or new products with existing partners as expected or planned nor can there be any assurance that the Corporation will be successful in maintaining its existing contractual relationships or maintaining existing products with existing partners. Other important assumptions, factors, risks and uncertainties are included in the press release announcing the Corporation’s second quarter 2018 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 and interim consolidated financial statements and the notes thereto. These documents are available at www.sedar.com and www.sec.gov.

The forward-looking statements contained in this MD&A are made as at the date of this MD&A and, accordingly, are subject to change after such date. Except as required by law, Points does not undertake any obligation to update or revise any forward-looking statements made or incorporated in this MD&A, whether as a result of new information, future events or otherwise.

USE OF NON-GAAP MEASURES

The Corporation’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). Management uses certain non-GAAP measures, which are defined in the appropriate sections in the body of this MD&A, to better assess the Corporation’s underlying performance. These measures are reviewed regularly by management and the Corporation’s Board of Directors in assessing the Corporation’s performance and in making decisions about ongoing operations. These measures are also used by investors as an indicator of the Corporation’s operating performance. Readers are cautioned that these terms are not recognized GAAP measures and do not have a standardized GAAP meaning under IFRS and should not be construed as alternatives to IFRS terms, such as net income.

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In the second quarter of 2018, the Corporation changed its performance measure of segment profit or loss to Contribution¹ from Adjusted EBITDA². This change was made as the Corporation determined that Contribution is the more appropriate measure of segment profit or loss and is now used by the Chief Operating Decision Maker (“CODM”) when reviewing the segment results and making resource allocation decisions. The Corporation continues to report Adjusted EBITDA within the MD&A as the Corporation believes that this non-GAAP financial measure may be useful to investors and analysts in their evaluation of corporate performance and results.

BUSINESS OVERVIEW

Points International Ltd.

Points 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 Corporation’s 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 third party 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 approximately 60 loyalty program partners and access to over 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.

^{_________________________________________________
1} Contribution is a non-GAAP financial measure and is defined as Gross Profit for the relevant operating segment less direct adjusted operating expenses³.
² Adjusted EBITDA is a non-GAAP financial measure and is defined as net income as presented in the consolidated statement of comprehensive income but excludes income taxes, depreciation, amortization, foreign exchange gains and losses and share-based compensation. Refer to the “Performance indicators and Non-GAAP financial measures” section for definition and explanation.
³ Direct adjusted operating expenses is a non-GAAP measure and is defined as expenses which are directly attributable to each operating segment.

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The Corporation is directly integrated with and provides e-commerce solutions to leading loyalty programs, including:

The Corporation’s headquarters are located in Toronto, Canada and its shares are dual listed on the Toronto Stock Exchange as PTS and on the NASDAQ Capital Market as PCOM.

UNDERSTANDING OUR BUSINESS AND THE LOYALTY INDUSTRY

The Corporation has three operating segments which are organized based on how Management views business activities:

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 Corporation’s 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 or as gifts to 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 approximately 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 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 may have a contractual obligation to fulfill a revenue guarantee to

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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 the 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 Corporation’s 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 Corporation’s consolidated financial statements.

Platform Partners:
The Corporation’s 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 3^rd 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 Corporation’s 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 Corporation’s Points Travel product and its PointsHound product.

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 in whole or with cash for hotel stays and car rentals. To date, the Corporation has 10 loyalty program partners in market leveraging a combination of earn and redemption functionality for online hotel and car bookings.

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

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currencies delivered to the consumers and other directly related costs for online hotel and car rental bookings or redemptions. Revenue in this segment is recorded on the date of check-out for hotel bookings, and on the last day of rental for car bookings. This revenue is included in Other Partner Revenue in the Corporation’s 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 program 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 Report, 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.

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SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following information is provided to give a context for the broader comments elsewhere in this report.

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) and Share-Based Compensation. Refer to the “Performance indicators and Non-GAAP financial measures” section for definition and explanation.
⁴ Results for the three months ended September 30, 2017 have been restated under IFRS 15.

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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) and Share-Based Compensation. Refer to the “Performance indicators and Non-GAAP financial measures” section for definition and explanation.
⁴ Results for the nine months ended September 30, 2017 have been restated under IFRS 15.

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BUSINESS DEVELOPMENTS AND OUTLOOK

• Total revenue increased 3% to $94,358 in Q3 2018 compared to $91,589 in Q3 2017. Year to date 2018 total revenue increased 8% to $281,327 compared to $260,511 in year to date 2017.
• Gross profit increased $1,261 or 11% to $12,582 in Q3 2018 compared to $11,321 in Q3 2017. Year to date 2018 gross profit increased 19% to $39,799 compared to $33,541 in year to date 2017.
• Adjusted EBITDA increased 29% to $4,121 in Q3 2018 compared to $3,190 in Q3 2017. Year to date 2018 adjusted EBITDA increased $4,397 or 48% to $13,573 compared to year to date 2017 adjusted EBITDA of $9,176.
• Quarterly net income increased $871 or 144% to $1,476 in Q3 2018 compared to $605 in Q3 2017. Year to date 2018 net income increased $3,357 or 153% to $5,546 compared to $2,189 year to date 2017 net income.

The Corporation generated strong year over year growth in gross profit and adjusted EBITDA for the quarter ended and nine months ended September 30, 2018, driven by the strength of the Corporation’s Loyalty Currency Retailing segment. Given the Corporation’s strong year to date performance, Management remains confident regarding its previously provided full year expectations. For the year ended 2018, the Corporation expects to generate year over year gross profit growth between 10% and 20%. From a profitability perspective, the Corporation expects to increase full year 2018 adjusted EBITDA between 30% and 40% over 2017 levels.

Loyalty Currency Retailing

Revenue for the Loyalty Currency Retailing segment increased $2,624 or 3%, to $91,950 for the quarter ended September 30, 2018, as compared to Q3 2017. Gross profit for the third quarter of 2018 increased $1,157 or 13% to $10,378 on year over year basis. Organic growth from existing partnerships and the impact of new partnerships and products launched over the last twelve months were the primary drivers of the year over year growth in revenue and gross profit. Direct adjusted operating expenses in Q3 2018 increased 7% or $208 compared to Q3 2017, largely due to increased employment costs that were attributed to the segment. The segment continues to generate strong bottom line profitability, with contribution of $7,330 for the quarter ended September 30, 2018, an increase of 15% over Q3 2017.

To date in 2018, the Corporation has continued to launch new loyalty program partnerships and products in this segment. In the third quarter of 2018, the Corporation broadened its service offering with the Emirates Skywards program, the loyalty program of Emirates Airline, by extending the reach of its Buy functionality into the flight booking path. In addition, Points launched its new Extend service with Emirates, allowing members to extend the expiration date on existing, non-expired Skywards miles. These new launches expand on an already broad set

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of services utilized by Emirates, a new long-term partner of the Corporation that was launched in the second quarter of 2018. Earlier in the year, the Corporation expanded its product offering with LATAM Airlines in the second quarter of 2018, an existing partner within the Loyalty Currency Retailing segment. Points launched its Accelerator product with LATAM in the second quarter, enabling LATAM Pass members to receive specialty price offers to double or triple the number of miles earned from flights and other eligible accrual transactions.

Platform Partners

Platform Partners revenue of $1,940 for the quarter ended September 30, 2018 increased 6% relative to the prior year quarter. In line with revenue, gross profit for the segment increased 6% to $1,773, compared to $1,672 in Q3 2017. Direct adjusted operating expenses attributable to the segment decreased by $269, or 24% in Q3 2018 to $831, mainly due to lower employment costs attributable to this segment. Overall, the Platform Partners segment generated contribution of $942 in Q3 2018, an improvement of 65%, or $370 relative to Q3 2017.

Early in the second quarter, Points announced a new partnership with Drop Tank, a leading fuel loyalty technology company under which Points will power Marathon Petroleum Company LP’s new rewards program, MakeItCount. By leveraging Points’ LCP, MakeItCount members can now earn loyalty currency on fuel and featured non-fuel items, including points in Southwest Airlines Rapid Rewards and La Quinta Returns programs.

Points Travel

Revenue in the Points Travel segment for the quarter ended September 30, 2018 increased 7% to $468 compared to $439 for the similar period in 2017. Gross profit was $431 in the third quarter 2018, relatively flat with Q3 2017 gross profit of $428. During the second quarter and into the third quarter of 2018, the Corporation’s largest loyalty program partner in this segment temporarily shut down their Points Travel site due to operational issues with one of their third party providers relating to the new General Data Protection Regulations (“GDPR”). This shut down was entirely out of the Corporation’s control. The Points Travel site was brought back online at the beginning of August 2018. This temporary shut down adversely impacted gross profit for this segment in the third quarter of 2018 and is expected to have a negative impact on gross profit in the fourth quarter of 2018.

Direct adjusted operating expenses for the quarter ended September 30, 2018 increased $269 or 24% year over year, largely due to increased employment costs attributable to the segment. As a result, a contribution loss of $959 was generated in the segment in Q3 2018 compared to a contribution loss of $693 in Q3 2017.

To date in 2018, the Corporation focused on adding new loyalty programs to its suite of Points Travel services and expanding its hotel distribution offering on its Points Travel sites. In the third

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quarter of 2018, the Corporation added mileage earning capabilities on both Hotel and Car rental bookings to the Etihad Points Travel service to compliment the previously launched redemption service in the fourth quarter of 2017. In the second quarter of 2018, the Corporation announced and launched a new partnership with the Singapore Airlines KrisFlyer frequent flyer program, enabling members the ability to redeem their miles for hotel and car bookings across the globe. In addition, the Corporation launched a new partnership with Air Europa’s SUMA loyalty program in May of 2018, enabling SUMA members the ability to earn and redeem miles when booking hotels

In addition to adding new loyalty program partners, the Corporation announced a new hotel distribution partnership with the Priceline Partner Network in the second quarter of 2018. With this new partnership, Points has increased its wholesale access to a broader range of hotels around the world, strengthening its competitive position in the marketplace.

KEY CHANGES IN FINANCIAL RESULTS COMPARED TO 2017

REVENUE, GROSS PROFIT AND GROSS MARGIN

The Corporation generated consolidated revenue of $94,358 for the three months ended September 30, 2018, an increase of $2,769 or 3% over the third quarter of 2017. Consolidated revenues for the nine month period ended September 30, 2018 were $281,327, an increase of $20,816 or 8% over the nine month period ended September 30, 2017. The increase in consolidated revenue was primarily driven by organic growth from existing partnerships in the Loyalty Currency Retailing segment, which saw strong consumer response to promotional activities during the quarter with specific partners. Organic revenue growth across all segments in the third quarter, which is defined as the growth in existing partnerships and products that have been in market for at least one year, was approximately 1%.

Consolidated gross profit for the third quarter of 2018 was $12,582, an increase of $1,261 or 11% from the third quarter of 2017. Consolidated gross profit for the nine month period ended September 30, 2018 was $39,799, an increase of $6,258 or 19% over the nine month period ended September 30, 2017. The majority of the year over year growth was generated in the Loyalty Currency Retailing segment, resulting from organic growth from existing partners and products and the impact of new partners and products launched in 2017 and to date in 2018. The Corporation also generated increased gross profit in the Points Travel segment in the nine month period ended September 30, 2018, increasing $483 or 59%. Gross profit from the Platform Partners segment was $5,446 in the nine month period ended September 30, 2018, relatively flat with the prior year period.

Gross margin for the third quarter of 2018 was 13% compared to 12% in the same period in 2017. The increase was primarily due to the relative mix of partner and product revenue in the Loyalty Currency Retailing segment and increased gross profit in the Points Travel segment.

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Gross margin for the nine month period ended September 30, 2018 was 14% versus 13% in the prior year period, due to the relative mix of partner and product revenue.

Total Expenses and Adjusted Operating Expenses

The Corporation incurred consolidated total expenses, as disclosed in the condensed consolidated interim financial statements, of $92,431 for the third quarter of 2018, an increase of $1,686 or 2% over the comparable prior year period. For the nine month period ended September 30, 2018, the Corporation incurred total expenses of $273,988, an increase of $16,604 or 6% over the comparable nine month period in 2017. The majority of this increase was driven by higher direct costs of principal revenue, in line with the increase in principal revenue.

The Corporation incurred consolidated adjusted operating expenses of $8,703 in the third quarter of 2018, an increase of $501 or 6% compared to the third quarter of 2017. For the nine month period ended September 30, 2018, consolidated adjusted operating expenses were $26,672, an increase of $2,149 or 9% over the comparable nine month period in 2017. The increases were primarily due to increased employment expenses across all three segments resulting from increased resourcing levels, and to a lesser extent, increased professional fees.

Net Income and Adjusted EBITDA

The Corporation generated consolidated net income of $1,476 for the third quarter of 2018, an increase of $871 or 144% compared to the prior year quarter.

The Corporation generated consolidated Adjusted EBITDA of $4,121 during the third quarter of 2018, an increase of $931 or 29% compared to the third quarter in 2017, primarily due to the growth in gross profit outpacing the growth in adjusted operating expenses.

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REVIEW OF CONSOLIDATED PERFORMANCE

This section discusses the Corporation’s consolidated net income and other expenses that do not form part of the discussion above.