and this in the footer part:
Points International Ltd.: Form 40-F - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 40-F

[   ]

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, 2019

Commission File Number 0-51509


POINTS INTERNATIONAL LTD.

(Exact name of Registrant as specified in its charter)

 

Not Applicable

(Translation of Registrant's Name into English)

 

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 Registrant's 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

 

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, no par value

 

PCOM

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 issuer's classes of capital or common stock as of the close of the period covered by the annual report: 13,241,516 as of December 31, 2019.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of 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 every Interactive Data File required to be submitted 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 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 (this "Form 40-F").

 


DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed with, or submitted to, securities regulatory authorities is recorded, processed, summarized and reported within the time periods specified under Canadian and United States securities laws. As at December 31, 2019, an evaluation was carried out under the supervision of the Registrant's management of the effectiveness of the Registrant's disclosure controls and procedures, as defined in the applicable Canadian and United States securities laws.  The conclusion of the Registrant's Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the Registrant's disclosure controls and procedures is included in Management's Discussion and Analysis under the heading "Disclosure Controls and Procedures" and is filed herewith as Exhibit 99.3 and incorporated herein by reference.

MANAGEMENT'S ANNUAL REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING

Management's annual report on internal control over financial reporting is included in Management's Discussion and Analysis under the heading "Management's 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 Registrant's internal control over financial reporting is included with the Audited Consolidated Financial Statements of the Registrant for the fiscal year ended December 31, 2019 filed herewith as Exhibit 99.2 and incorporated herein by reference.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

The Registrant's management regularly reviews its system of internal control over financial reporting and makes changes to the Registrant's processes and systems to improve controls and increase efficiency, while ensuring that the Registrant maintains an effective internal control environment.  

On January 1, 2019, the Registrant implemented a new accounting system, which resulted in changes to controls and procedures pertaining to financial reporting. The Registrant completed the design and implementation of these controls and they have been operating effectively throughout and as of December 31, 2019. Management does not expect significant changes to internal controls over financial reporting due to the implementation of the new accounting system.

Other than the item described above, there was no change in the Registrant’s 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 Registrant’s internal control over financial reporting.

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, principal accounting officer, controller and persons performing similar functions.  The Registrant's Code of Business Conduct & Ethics is available at the Registrant's website at www.points.com and is available in print to any person upon written request to the Secretary of the Registrant at the address listed on the first page of this Form 40-F.


On November 13, 2019, the Registrant amended the Code of Business Conduct & Ethics to include a prohibition on the entering into by employees of the Registrant of financial instruments and/or derivatives that are designed to hedge or offset any decreases in the market value of the Registrant's securities.  The amended Code of Business Conduct & Ethics of the Registrant is filed herewith as Exhibit 99.7.

During the fiscal year ended December 31, 2019, the Registrant has not granted a waiver or implicit waiver from a provision of its Code of Business Conduct & Ethics to its Chief Executive Officer, Chief Financial Officer, principal accounting officer, controller, or persons performing similar functions.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

KPMG LLP served as the Registrant's independent public accountant for the fiscal years ended December 31, 2018 and 2019.  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 Registrant's external auditor in each of the last two fiscal years is disclosed in the Registrant's 2019 Annual Information Form under the heading "Audit Committee - External Auditor Service Fees" and is filed herewith as Exhibit 99.1 and incorporated herein by reference.

PRE-APPROVAL POLICIES AND PROCEDURES

A description of the audit committee's pre-approval policies and procedures is disclosed in the Registrant's 2019 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 Form 40-F.

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The Registrant's contractual obligations as of December 31, 2019 are disclosed in the notes to the 2019 Audited Consolidated Financial Statements and in Management's Discussion and Analysis for the fiscal year ended December 31, 2019 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 Securities Exchange Act of 1934 (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. John Thompson and Ms. Leontine van Leeuwen-Atkins.

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 Registrant's 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 Registrant's common stock is no less than 15% of the total number of the issued shares of the Registrant entitled to vote at the meeting.


 Rule 5605(d)(1) of the NASDAQ Rules requires that each listed company adopt a formal written compensation committee charter that specifies, among other things, the compensation committee's responsibilities and authority, as set forth in Listing Rule 5605(d)(3). The Registrant has adopted a formal written mandate setting out the duties and responsibilities of its Human Resources and Corporate Governance Committee (the "HRCGC"). Among other things, such mandate includes recommending for approval by the board the compensation of the chief executive officer, but not of all other executive officers. 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 Registrant's practices with regard to these requirements are permitted by Canadian law.

 Rule 5635 of the NASDAQ Rules sets forth circumstances under which shareholder approval is required prior to an issuance of securities in connection with: (i) the acquisition of the stock or assets of another company; (ii) equity-based compensation of officers, directors, employees or consultants; (iii) a change of control; and (iv) transactions other than public offerings. These circumstances are not identical to the circumstances under which shareholder approval is required under Canadian and TSX requirements. When the shareholder approval requirements under the NASDAQ Rules differ from the Canadian and TSX requirements, the Registrant follows the Canadian and TSX requirements. The Registrant's practices with regard to these requirements are permitted by Canadian law.

UNDERTAKING

Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

DISCLOSURE PURSUANT TO SECTION 13(r) OF THE EXCHANGE ACT

In accordance with Section 13(r) of the Exchange Act, the Registrant is required to include certain disclosures in its periodic reports if it or any of its affiliates knowingly engaged in certain specified activities during the period covered by the report.  Neither the Registrant nor its affiliates have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the year ended December 31, 2019.


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 4, 2020



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, 2019

 

 

99.2

Audited Consolidated Financial Statements for the fiscal year ended December 31, 2019

 

 

99.3

Management's Discussion and Analysis for the fourth fiscal quarter and fiscal year ended December 31, 2019

 

 

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

 

 

99.7

Registrant's Code of Business Conduct & Ethics

 

 

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 


 


Points International Ltd.: Exhibit 99.1 - Filed by newsfilecorp.com

 

POINTS INTERNATIONAL LTD.

 

Annual Information Form

 

March 4, 2020

 

 

Information presented herein is current as of March 4, 2020, unless otherwise indicated. All dollar amounts are in United States Dollars unless otherwise indicated.


Table of Contents

FORWARD-LOOKING STATEMENTS - 1 -
NON-GAAP FINANCIAL MEASURES - 2 -
CORPORATE STRUCTURE - 2 -
GENERAL DEVELOPMENT OF THE BUSINESS - 2 -
GENERAL DESCRIPTION OF THE BUSINESS - 4 -
Loyalty Currency Retailing - 5 -
Platform Partners - 5 -
Points Travel - 5 -
Method of Providing Services - 6 -
Specialized Skill and Knowledge - 6 -
Competitive Conditions - 6 -
Intangible Property - 6 -
Seasonality - 7 -
Economic Dependence - 7 -
Changes to Contracts - 7 -
Employees - 7 -
RISK FACTORS - 8 -
DIVIDENDS - 8 -
GENERAL DESCRIPTION OF CAPITAL STRUCTURE - 8 -
MARKET FOR SECURITIES - 9 -
DIRECTORS AND EXECUTIVE OFFICERS - 10 -
Current Directors - 10 -
Director Biographies - 11 -
Current Executive Officers - 14 -
Security Holdings - 15 -
Cease Trade Orders, Bankruptcies, Penalties or Sanctions - 15 -
Conflicts of Interest - 16 -
AUDIT COMMITTEE - 16 -
Audit Committee Charter - 16 -
Composition of the Audit Committee - 16 -
Relevant Education and Experience - 16 -
Audit Committee Pre-Approval Policies and Procedures - 17 -
External Auditor Service Fees (By Category) - 17 -
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS - 17 -
TRANSFER AGENT - 18 -
MATERIAL CONTRACTS - 18 -
INTEREST OF EXPERTS - 18 -
ADDITIONAL INFORMATION - 18 -
NON-GAAP FINANCIAL MEASURES - 18 -
APPENDIX A - AUDIT COMMITTEE MANDATE  


- 1 -

POINTS INTERNATIONAL LTD.

ANNUAL INFORMATION FORM

The following Annual Information Form ("AIF") of Points International Ltd. (which is also referred to herein as "Points", "we", "our" or "us") should be read in conjunction with our audited consolidated financial statements (including the notes thereon) for the year ended December 31, 2019 ("2019 Audited Consolidated Financial Statements"). Further information, including our Management Discussion and Analysis for the year ended December 31, 2019 ("2019 MD&A"), may be accessed at www.sedar.com or www.sec.gov.

FORWARD-LOOKING STATEMENTS

This AIF 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, our financial performance, our partnerships and the expected benefits from them, our role in the loyalty currency retailing market, future purchases of common shares under the 2019 Repurchase (as defined below), our intent to use retained earnings for general corporate purposes, our vision and strategic goals, the competitive environment in which we operate, 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," "continue," "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 our expectations, estimates and projections regarding future events.

Although we believe 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, our financial outlooks assume we will be able to maintain our existing contractual relationships and products, that such products continue to perform in a manner consistent with our past experience, that we will be able to generate new business from our pipeline at expected margins, in-market and newly launched products and services will perform in a manner consistent with our past experience and we will be able to contain costs. Our ability to convert our pipeline of prospective partners and product launches and cross-sell existing partners is subject to significant risk and there can be no assurance that we will launch new partners or new products with existing partners as expected or planned nor can there be any assurance that we will be successful in maintaining our existing contractual relationships or maintaining existing products with existing partners. Other important assumptions, factors, risks and uncertainties are included in our filings with applicable securities regulators, including our 2019 Audited Consolidated Financial Statements and 2019 MD&A.

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


- 2 -

NON-GAAP FINANCIAL MEASURES

This AIF contains certain non-GAAP financial measures. For additional details, see "Non-GAAP Financial Measures" below, as well as our most recently filed management's discussion and analysis.

CORPORATE STRUCTURE

Points International Ltd. is a corporation continued under the Canada Business Corporations Act. Our articles have been amended on various occasions, including most recently on May 13, 2016 to increase the maximum number of directors from seven to nine and to authorize the board to appoint additional directors by way of resolution between annual general meetings. Our head and registered office is 111 Richmond Street West, Suite 700, Toronto, Ontario, M5H 2G4.

The following organizational chart shows each of Points' subsidiaries, their jurisdiction of incorporation, and the percentage of votes attaching to all voting securities held directly or indirectly by Points.

GENERAL DEVELOPMENT OF THE BUSINESS

In February 2017, we expanded our 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, we signed a multi-year agreement with All Nippon Airways ("ANA"), Japan's 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 Latitude's 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, we launched our buy services with Etihad Airways, enabling Etihad Guest Reward members to buy miles.

In August 2017, we announced an additional normal course issuer bid pursuant to which we had the ability to repurchase up to 743,468 of our common shares (the "2017 Repurchase"), representing approximately 5% of our issued and outstanding common shares as of July 31, 2017. In connection with the 2017 Repurchase, we entered into an automatic share purchase plan with a broker to facilitate repurchases of our common shares. Under the automatic share purchase plan, our broker was permitted to repurchase common shares at times when we would ordinarily not be permitted to due to regulatory restrictions or self-imposed blackout periods. The 2017 Repurchase commenced on August 14, 2017 and terminated on August 13, 2018. Pursuant to the 2017 Repurchase, we purchased the maximum amount of 743,468 common shares, all for cancellation.


- 3 -

In November 2017, we announced a new partnership with Velocity Frequent Flyer, the loyalty program of Virgin Australia, to take 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.

In January 2018, we announced that Etihad Guest, the loyalty program of Etihad Airways, expanded its relationship with us to enable Etihad Guest members to earn miles through Travel Rewards when booking hotels and renting cars. In September, we announced that Etihad Guest expanded this relationship to offer its members more travel rewards when booking hotels and renting cars.

In April 2018, Emirates Airline engaged us to provide its Emirates Skywards members with a new way to Buy, Gift, Transfer and Reinstate Skywards miles.

In May 2018, we announced a partnership with Priceline which will permit us to leverage Priceline's hotel inventory providing access to leading hotels worldwide and enhancing the hotel options for our Points Travel services. In addition, Members of Singapore Airlines' KrisFlyer Program can now use KrisFlyer miles to redeem for hotels and car rental locations through the Points Travel platform.

In August 2018, we announced an additional normal course issuer bid pursuant to which we had the ability to repurchase up to 710,893 of our common shares (the "2018 Repurchase"), representing approximately 5% of our issued and outstanding common shares as of July 31, 2018. In connection with the 2018 Repurchase, we also renewed our automatic share purchase plan. The 2018 Repurchase commenced on August 14, 2018 and terminated on August 13, 2019. Pursuant to the 2018 Repurchase, we purchased 684,061 common shares, all for cancellation.

In December 2018, we announced a long-term strategic partnership with Amadeus, a world leader in loyalty offerings. Both new and existing airline customers of both companies will benefit from the combined portfolio as the partnership is designed to help airlines unlock greater economics from their loyalty programs by integrating our solutions within existing Amadeus Loyalty Management and Awards solutions at the click of a button. The integrated portfolio of services helps airlines further improve loyalty redemption and member engagement. In addition, we were also successful in expanding our relationship with Alaska Airlines to permit their Mileage Plan members the opportunity to purchase higher elite status.

In February 2019, we announced an expanded partnership with Frontier Airlines, enabling their members to redeem miles when booking hotels online.

In May 2019, we launched a new integration between the Hilton Honors program and Lyft, the popular ride sharing program, to power new functionality that enables their shared customers to earn Hilton Honors points for every Lyft ride taken. In November 2019, we added redemption functionality to this relationship, allowing Hilton Honors members the ability to pay for the Lyft rides using their points. Also in May 2019, we expanded our relationship with the Emirates Skywards program, launching our accelerator service. The service enables Skywards members the ability to boost their miles earned from completing a flight booking with Emirates.

In August 2019, we announced an additional normal course issuer bid pursuant to which we have the ability to repurchase up to 679,034 of our common shares (the "2019 Repurchase"), representing approximately 5% of our issued and outstanding common shares as of July 31, 2019. In connection with the 2019 Repurchase, we also renewed our automatic share purchase plan. The 2019 Repurchase commenced on August 14, 2019 and will terminate on August 13, 2020. As at December 31, 2019, we purchased 312,344 common shares, all for cancellation.


- 4 -

In September 2019, we announced an expansion of our Points Travel services with the AIR MILES Reward program. The expanded relationship enables AIR MILES members the ability to redeem their miles for online hotel bookings across the globe.

In November 2019, we launched a new relationship with AIR MILES Middle East and its banking partner, HSBC Middle East. The new partnership will enable exchanges with two of our existing loyalty program partners, the Etihad Guest and Emirates Skywards programs, strengthening our growing footprint in the Middle East region.

In 2019, we opened regional offices in Singapore and Dubai. Resources in these offices bring regional business knowledge that will be beneficial in enabling us to more effectively service existing relationships in these regions, and more importantly, expand our business development presence. Geographic expansion is a key element of our long-term growth strategy and the addition of these regional offices represents an early milestone in support of this long-term growth driver.

GENERAL DESCRIPTION OF THE BUSINESS

We are the global leader in providing loyalty e-commerce and technology solutions to the loyalty industry, connecting loyalty programs, third party brands and end consumers across a global transaction platform. Our head office is in Toronto, Canada and we maintain offices in San Francisco, United States, London, England, Singapore and Dubai.

We partner with leading loyalty brands by providing solutions that help make their programs more valuable and engaging while driving revenue and increasing profitability to the program. We do not manage our own loyalty program nor do we offer the core technology that operates a loyalty program. Our business is focused on becoming an important strategic partner to the world's most successful loyalty programs by partnering with them on valuable, private label, ancillary services.

Our business combines attributes of both a platform and a marketing services business to offer a portfolio of consumer and business facing products and services that facilitate either the accrual or redemption of loyalty currency (points or miles). Accrual transactions are typically focused on generating revenue for loyalty program partners while redemption transactions are focused on offering additional engagement options for program members.

At its simplest, our products and services are designed to benefit loyalty programs by: (1) increasing loyalty program revenues and profitability through the sale of loyalty program currency or related travel and loyalty services direct to end consumers or third parties; (2) driving efficient cost management to loyalty program operators by offering non-core redemption options; and (3) enhancing loyalty program member engagement. We now have approximately 75 commercial agreements or integrations with loyalty programs or third parties globally. Most of our commercial contracts enable us to transact directly or indirectly with the loyalty programs member base to facilitate the sale, redemption or earning of loyalty currency online. Approximately 80% of our loyalty program partners are based out of either North America or Europe. The majority of our loyalty program partners are global, with end consumers and transactions originating from around the world.

Most of our contracts enable us to transact directly or indirectly with the loyalty programs' member base to facilitate the sale, redemption or earning of loyalty currency (such as frequent flyer miles or hotel points) online. Our commercial agreements with loyalty program partners are typically for fixed terms of three to five years. Contracts will generally renew with either an annual evergreen clause or a new contract extension for a set term.

Core to our operations is the Loyalty Commerce Platform ("LCP"), an open, Application Program Interface (API) based transaction processing platform that Points leverages for all aspects of the business. The key functions of the LCP include direct, real time, integrations into partners' loyalty program data bases that allow for customer validation and information sharing as well as debit and/or credit of loyalty program currency. Of growing importance is the marketing automation capability that continues to develop as part of the LCPs functionality. Lastly, security, fraud mitigation, auditing and reporting functions are also centralized via the LCP. Through the LCP, we have direct integrations with approximately 75 loyalty programs and third parties, including merchants and other technology companies in the loyalty and travel space.


- 5 -

Leveraging the LCP, we operate in three segments, each of which contain multiple loyalty products and services: (1) Loyalty Currency Retailing; (2) Platform Partners; and (3) Points Travel.

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 Points' buy, gift, transfer, reinstate, accelerator and status miles 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.

We have direct partnerships with over 30 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 our loyalty programs while increasing the member engagement by unlocking the value of loyalty currency in the members' accounts.

We may take a principal role in the retailing of loyalty currencies, whereby we sell points and miles at retail rates to end consumers while purchasing points and miles at wholesale rates from our loyalty program partners. Alternatively, we may assume an agency role in the retailing and wholesaling of loyalty currencies, where we take a less active role in the relationship and receive a commission on each transaction.

Platform Partners

Our 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.

Included in the Platform Partners segment are multiple third-party managed applications that are enabled by the LCP, many of which are redemption based services that offer efficient cost management solutions to loyalty programs. Also included in this segment are earn based services, where merchants who partner with Points can purchase loyalty currency to offer to their customers as an award for every day shopping.

Points Travel

The Points Travel segment connects the world of online travel bookings with the broader loyalty industry and consists of Points' Points Travel and PointsHound services.

In 2014, we 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, Points 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.


- 6 -

Method of Providing Services

Our services are generally delivered through web-enabled e-commerce solutions.

Specialized Skill and Knowledge

We currently employ nine 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. Our success is dependent upon the experience of such key personnel and loss of such personnel could adversely affect our business, operations and prospects.

In addition, our services are delivered using proprietary technology. As a result, we are also dependent upon our 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 our business, revenues, operating results and financial condition.

Competitive Conditions

Our loyalty currency retailing services 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 we do. The financial performance of Points may be adversely affected by such competition. In particular, no assurances can be given that additional direct competitors to Points may not be formed. In addition, no assurances can be given that we may not lose some or all of our arrangements with our loyalty program partners, including our key loyalty program partners, thereby decreasing our ability to compete and operate as a viable business.

With respect to the services included in the Platform Partners segment, direct and indirect competitors could include any organization seeking access to customers through direct marketing channels, as well as any technology solutions company that is capable of providing redemption and accrual options for loyalty programs. Redemption and accrual based products offered directly by Points or indirectly through third-parties that manage their applications on the LCP, face competition from other technology solutions providers that offer similar types of services to loyalty programs. Additional direct and indirect competitors may emerge in the future.

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 we 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 Points. Development of in-house solutions could impact us in a negative way and reduce our 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 our business, operations and prospects.

Intangible Property

Points has built a significant brand and reputation within the loyalty industry. Points' operating subsidiary, Points.com Inc., maintains certain trademark registrations for POINTS.COM which provide it with certain exclusive rights. These registrations are renewable in perpetuity. Points 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 Points' business.


- 7 -

As a technology enabled business, we maintain a significant software base that is continually evolving. This software base is critical to the operation of the business.

We have three issued patents: US Patent No. 8,595,055 titled an "Apparatus and method of facilitating the exchange of points between selected entities", US Patent No. 8,433,607 titled a "System and method for exchanging reward currency", and US Patent No. 10,445,759 titled "System and Method for a Loyalty Network". These patents relate to our website at www.points.com and the exchange and trade functions available on that site. We also maintain 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 our business.

Seasonality

Our operations can be moderately influenced by seasonality. Gross profit is typically highest in the fourth quarter in each year as certain product offerings and promotional activity in our Loyalty Currency Retailing segment peak during this time.

Economic Dependence

Points 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, 2019, there were three loyalty program partners for which sales to their members individually represented more than 10% of Points' total revenue. In aggregate these three partners represented 69% of our total revenue. The loss of any one or more of our key loyalty program partners could have a material adverse effect on our business, revenues, operating results and financial condition. It should be noted that, in respect of our Principal Revenue (as defined in our consolidated financial statements) we transact directly with loyalty program members and do not generate material revenue directly from loyalty partners. As it relates to the Loyalty Currency Retailing services we operate for these three partners, we act as principal where revenues are recognized on a gross basis. We believe gross profit is a more relevant metric to assess our level of economic dependence, as it represents the amount of revenues that are available to fund expenses and the economics we earn from our commercial arrangements with our loyalty program partners. Gross profit generated through commercial arrangements with our top 10 loyalty program partners represented 74% and 70% of our consolidated gross profit for the years ended December 31, 2019 and 2018, respectively.

Changes to Contracts

There can be no assurance that we will be successful in maintaining our existing contractual relationships with our loyalty program partners. Our 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 us or to negotiate from time to time more preferential financial and other terms than originally contracted for. We cannot ensure that such negotiations will not have an adverse effect on the financial condition or results of operations of Points.

Employees

As at December 31, 2019, we had 269 full-time employees.


- 8 -

RISK FACTORS

Investing in technology enabled service companies 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 2019 MD&A (which is incorporated into this AIF by reference) prior to making an investment decision with respect to Points.

DIVIDENDS

We have not declared or paid any dividends to our shareholders. With the exception of any funds used by us to buy back our shares, we will retain earnings for general corporate purposes to promote future growth. At this time, the board of directors of Points does not anticipate paying any dividends. The board of directors may review this policy from time to time, having regard to Points' financial condition, financing requirements and other relevant factors.

GENERAL DESCRIPTION OF CAPITAL STRUCTURE

Our 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 December 31, 2019, 13,241,516 common shares were outstanding. We have no preferred shares outstanding.

The common shares carry one vote per share, are entitled to dividends if, as and when declared by the board of directors of Points and participate equally on any liquidation, dissolution or winding up of Points.


- 9 -

MARKET FOR SECURITIES

Our common shares are listed on the Toronto Stock Exchange ("TSX") under the symbol "PTS" and on the NASDAQ Capital Market ("NASDAQ") 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 and through the NASDAQ in United States Dollars.

TSX(1)

 

NASDAQ(2)

Fiscal 2019

High (C$)

Low (C$)

Close (C$)

Volume

 

Fiscal 2019

High ($)

Low ($)

Close ($)

Volume

January

14.26

12.6

14.17

53,146

 

January

10.91

8.84

10.71

271,610

February

15.88

13.5

15.84

227,176

 

February

12.15

10.27

12.01

178,744

March

18.54

15.3

17.94

189,393

 

March

13.85

11.3

13.44

372,200

April

17.95

15.14

17.25

67,923

 

April

13.48

11.4

13.01

259,731

May

17.72

15.22

16.17

67,853

 

May

13.28

11.3

11.95

287,715

June

16.48

13.55

16.28

58,857

 

June

13.39

10.83

12.35

351,849

July

15.94

13.21

15.75

108,519

 

July

12.56

9.8

11.95

450,383

August

17.92

13.99

14.94

59,024

 

August

14.5

10.85

11.21

298,266

September

15.9

14

14.53

27,996

 

September

12.08

10.6

10.97

176,332

October

16.09

14.18

14.36

41,866

 

October

11.7

10.82

10.9

129,292

November

17.63

14.1

17.3

97,430

 

November

13.33

10.69

13.33

158,575

December

20.62

16.64

19.82

59,761

 

December

15.62

12.56

15.27

162,373

________

Source:
(1) TMX Datalinx.
(2) Bloomberg.


- 10 -

DIRECTORS AND EXECUTIVE OFFICERS

Current Directors

The following table provides certain background information with respect to each director of Points. Our directors will hold office for a term expiring at the conclusion of the next annual meeting of shareholders of Points 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

Committee Membership

David Adams
(Quebec)

May, 2016

Corporate Director
Former Chief Financial Officer, Aimia Inc.

Audit
HRCGC(1)

Christopher Barnard
(Ontario)

May, 2007
(and Feb. 2000 to April, 2005)

President, Points International Ltd. and Points.com Inc.

N/A

Michael Beckerman (Ontario)

May, 2010

President and CEO of MKTG Canada

Former Chief Executive Officer, Ariad Communications and Bluespire Marketing

HRCGC(1)

Douglas Carty
(Illinois, U.S.A.)

February, 2002

Corporate Director

Audit (Chair)

Bruce Croxon
(Ontario)

October, 2008

Investor and Advisor

HRCGC(1)

Robert MacLean
(Ontario)

February, 2002

Chief Executive Officer, Points International Ltd. and Points.com Inc.

N/A

Jane Skoblo
(Ontario)

May, 2019

Corporate Director

Vice President of Digital Operations, Rogers Communications

N/A

John Thompson
(Ontario)

February, 2002

Corporate Director

Audit
HRCGC(1) (Chair)

Leontine van Leeuwen-Atkins
(Alberta)

May, 2019

Corporate Director

Former Partner, KPMG Canada and KPMG Netherlands

Audit

________

Notes:

(1) The Human Resources & Corporate Governance Committee.


- 11 -

Director Biographies

David Adams

Mr. Adams was elected as Chair of Points in June of 2018. Mr. Adams served as the Executive Vice President and Chief Financial Officer of Aimia Inc. from 2007 until his retirement in March, 2016. At the time of his retirement, Aimia Inc. was a publicly traded global data driven marketing and loyalty analytics company which had close to 4,000 employees in 20 countries and owned and operated well known coalition loyalty programs such as Aeroplan in Canada and Nectar in the UK. 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. He is a non-executive director, Chair of the Audit Committee and a member of the Remuneration Committee of TCC Global, a private global loyalty company. 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. He is Chair of the Finance Committee and a member of the Board of Governors of the Stratford Festival, North America's largest classical repertory theater company. He is also a member of the Stratford Shakespearean Festival Endowment Foundation of Canada Board.

Until he resigned in December 2018, Mr. Adams served on the Board of Directors and Audit and Human Resource Committees of Club Premier, AeroMexico's frequent flyer program and previously was a board member of Nectar Italia and Prisma in Brazil.

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 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 Points. 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 Points 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 Points' 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 Points, including multiple equity financings and a strategic investment from InterActive Corp/IAC, a New York based, NASDAQ 100 leading internet firm. He also led Points' three corporate acquisitions of MilePoint, PointsHound and Crew Marketing as well as the recently announced strategic partnership with Amadeus IT Group S.A.

In 1998, Mr. Barnard co-founded Canada's first internet business incubator, Exclamation International, from which Points 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 Canada's most notable internet technology stories.


- 12 -

Mr. Barnard holds a Masters of Business Administration degree from the Richard Ivey School of Business in London, Ontario.

Michael Beckerman

Mr. Beckerman's 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 NIKE's 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 NIKE's European retail efforts.

Following NIKE, Mr. Beckerman served as Vice President, Marketing for Canadian Airlines. He led a comprehensive rebranding effort that touched everything from employee engagement, market research, product development and brand identify systems prior to heading up Marketing and International expansion for e-commerce site MVP.com. This was a high profile company that had Michael Jordan, Wayne Gretzky and John Elway as lead investors. Mr. Beckerman and his team were some of the pioneers of on-line metrics around basket size, cost per acquisition and on-line customer experience metrics. The MVP.com brand and web-site design and development are still used as benchmarks in the industry.

In 2001, Mr. Beckerman took on the role of Chief Marketing Officer for Bank of Montreal. He was responsible for increasing the marketing orientation and customer focus throughout that organization. While there, reporting to the CEO, he led the development of new brand identities for both its Canadian and U.S. operations which involved more than 1,000 retail locations and over 30,000 employees.

Mr. Beckerman is currently the President and CEO of MKTG Canada, a global lifestyle marketing agency. Prior to this role, Mr. Beckerman was the CEO of Ariad Communications and Bluespire Marketing. Ariad enjoyed record growth during his tenure. Ariad was an agency specializing in branding and on-line communications. Ariad won numerous domestic and international awards and was named as one of the Top Places to Work in Canada.

Mr. Beckerman is a sought after speaker on marketing trends, branding and consumer behaviour. He is a frequent judge for industry events and asked to sit on numerous industry panels. He also enjoys taking his marketing experience to help some charities and foundations sharpen their strategic focus, clearly articulate their cause and generate more funds for their charity.

Douglas Carty

Mr. Carty is currently Chair 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 Audit & Ethics Committee (Chair) and the Compensation Committee.

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.


- 13 -

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 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 Food Allergy Canada and Helping Hands Jamaica.

Robert MacLean

Mr. MacLean is a founder of Points and has served as Chief Executive Officer of Points since its beginnings in February 2000. As CEO, Mr. MacLean champions the vision for Points and directs an exceptional team of executives. Mr. MacLean has led his team to deliver a suite of innovative solutions for the global loyalty industry, earning a growing number of partnerships with the world's leading loyalty programs as well as numerous industry technology providers.

Prior to founding Points, 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 International, Mr. MacLean led a team throughout North America, delivering over $2 billion in annual revenue. Mr. MacLean was also responsible for the airline's award-winning Canadian Plus loyalty program and also served as Canadian Airlines' senior representative on the Oneworld™ Alliance's 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 a member of the board of directors of Prodigy Ventures, a TSXV listed technology company, and is a past member of the board of directors of Hope Air. Hope Air is a national charity that helps Canadians get to medical treatment when they cannot afford the flight costs. Mr. MacLean also sits on multiple advisory boards in the technology industry.

Mr. MacLean is a graduate of Acadia University.

Jane Skoblo

Ms. Skoblo is currently the Vice President, Digital Operations at Rogers Communications, a position she has held since October 2017. Ms. Skoblo has extensive financial and business experience having acted in various senior financial positions through her career, including as CFO of AMEX Bank of Canada and Vice President Finance, Consumer and Small Business Cards. Previously, she was CFO and COO of myNext Mortgage Company and Mortgage Architects Inc. She also has experience in the loyalty industry, having acted as CFO, Global Rewards Finance for American Express (USA).

Ms. Skoblo currently sits on the board of Allstate Canada Group, a wholly owned Canadian subsidiary of Allstate Corporation (USA), and also sits on the board of the Community Trust Company, a privately held federally regulated Canadian financial institution. Ms. Skoblo also is a member of the Advisory Board at the University of Waterloo School of Accounting and Finance. Ms. Skoblo was previously a board member of AMEX Bank of Canada between 2011 and 2016.


- 14 -

Ms. Skoblo holds a Bachelor of Business Administration from the Schulich School of Business, York University. She also holds a CPA, CITP designation (from the AICPA), as well as an ICD.D designation from the Institute of Corporate Directors and has completed the Director's Education Program.

John Thompson

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, Canada's leading grocery chain, last serving as Executive Vice President and prior to that as Senior Vice President, Finance and Administration. Mr. Thompson's responsibilities at Loblaws included, amongst other things, responsibility for human resources and President's 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 Chair of the Finance Committee of The Corporation of Roy Thomson Hall and Massey Hall, two of Canada's 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.

Leontine van Leeuwen-Atkins

Ms. van Leeuwen-Atkins (Atkins) is a board member of Seven Generations Energy, Canada's largest condensate and Montney natural gas producer. She also serves on the Board of Directors of Calgary Economic Development (Chair of the Audit Committee).

Ms. Atkins previously served, until the end of 2018, as a board member of KPMG Canada LLP's Board of Directors, and served on the Acquisitions and Admissions and Succession committees. Ms. Atkins served as a Partner at KPMG Canada from 2006 until early 2019 and was previously a Partner at KPMG Netherlands until she moved to Canada in 2006.

Ms. Atkins has extensive experience in M&A and post-merger integration, as well as transaction and deal advisory.

Ms. Atkins is a member of the Executive Committee of the Calgary Chapter of the Institute of Corporate Directors (ICD) and is an Alumni of, and guest speaker with, ICD's Director Education programme at the University of Calgary, Haskayne School of Business.

In addition to her CPA, CA and ICD.D designations, Ms. Atkins holds a Bachelor of Business Administration in Finance from Acadia University and a Masters of Business Administration from Dalhousie University.


- 15 -

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 Points.

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.

Erick Georgiou
Chief Financial Officer

Ontario

Chief Financial Officer, Points International Ltd. and Points.com Inc. (Mar. 2018 to present)

Vice President, Finance and other previous roles, Points International Ltd. and Points.com Inc. (prior to Mar. 2018)

Peter Lockhard
Chief Operating Officer

Ontario

Chief Operating Officer, Points International Ltd. and Points.com Inc.

Inez Murdoch
Chief People Officer

Ontario

Chief People Officer, Points International Ltd. and Points.com Inc.

Chris Boyd
Head of Product

Ontario

Head of Product, Points International Ltd. and Points.com Inc. (Sept. 2019 to present)

Vice President, Product Management and other previous roles, Points International Ltd. and Points.com Inc. (prior to Sept. 2019)

Jay Malowney
Chief Commercial Officer

Ontario

Chief Commercial Officer, Points International Ltd. and Points.com Inc. (Jan. 2019 to present)

Senior Vice President, Partner Relationships, Points International Ltd. and Points.com Inc. (prior to Jan. 2019)

Don Dew
Chief Technology Officer

Ontario

Chief Technology Officer, Points International Ltd. and Points.com Inc. (Sept. 2019 to present)

Senior Vice President, Engineering and other previous roles, Intelex Technologies Inc. (prior to Jun. 2019)

Danielle Brown
Chief Marketing Officer

Ontario

Chief Marketing Officer, Points International Ltd. and Points.com Inc. (Dec. 2019 to present)

Chief Marketing Officer, Knixwear (Nov. 2018 to Nov. 2019)

Chief Marketing Officer, Hubba (Mar. 2017 to Nov. 2018)

Vice President, Marketing, Points International Ltd. (prior to Mar. 2017)

Security Holdings

As of December 31, 2019, as a group, the directors and executive officers of Points beneficially owned, directly or indirectly, or exercised control or direction over, an aggregate of 810,516 common shares representing approximately 6.1% of the issued and outstanding common shares.

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

To the knowledge of Points, no director or executive officer of Points 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.


- 16 -

To the knowledge of Points, no director or executive officer of Points is, as at the date of this AIF, or within the last ten years before the date of this AIF has been, a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

To the knowledge of Points, no director or executive officer of Points has been subject to: (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

To the knowledge of Points, no director or executive officer of Points 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 Points, no director or executive officer of Points has an existing or potential material conflict of interest with Points.

AUDIT COMMITTEE

Audit Committee Charter

A copy of the Audit Committee's mandate is attached hereto as Appendix A.

Composition of the Audit Committee

The Audit Committee is currently comprised of Douglas Carty (Chair), David Adams, John Thompson and Leontine van Leeuwen-Atkins. Each member of the Audit Committee is independent and has represented to us that they are 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 Queen's 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.


- 17 -

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.

Ms. van Leeuwen-Atkins holds a Bachelor of Business Administration in Finance from Acadia University, a Master's of Business Administration from Dalhousie University and is also a CPA, CA. As described in the section above on "Directors and Executive Officers", she has significant financial experience through her years as a Partner of KPMG Canada and KPMG Netherlands.

Audit Committee Pre-Approval Policies and Procedures

The Audit Committee is required to pre-approve all audit and non-audit services performed by our external auditor in order to ensure these services do not impair the external auditor's independence.

In accordance with applicable Canadian and U.S. securities rules and regulations, services provided by our 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 auditor's annual audit services engagement, which includes, the external auditor's attestation report on the effectiveness of our 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 Chair 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 our external auditor in the last two fiscal years are as follows:

 

2019 (CAD$)

2018 (CAD$)

Audit Fees

580,686

657,399

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 Points, 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 Points' 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 Points.


- 18 -

TRANSFER AGENT

Computershare Trust Company of Canada
100 University Ave., 9th Floor
Toronto, ON M5J 2Y1
Canada

MATERIAL CONTRACTS

Below is a description of the material contracts of Points filed on SEDAR and EDGAR during 2019 or which were entered into prior to 2019 and are still in effect. Copies are available at www.sedar.com and www.sec.gov.

On December 10, 2019, Points and its subsidiary Points.com Inc. entered into a credit agreement (the "Credit Agreement") with the Royal Bank of Canada, as agent, lead arranger and sole bookrunner and the Bank of Nova Scotia, as lenders, to borrow up to an aggregate amount of $50 million (which may be increased to $65 million at the option of Points) in accordance with the terms of the Credit Agreement.

INTEREST OF EXPERTS

KPMG LLP, our external auditor, reported on the 2019 Audited Consolidated Financial Statements. KPMG LLP have confirmed that they are independent with respect to Points 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 Points under all relevant US professional and regulatory standards.

ADDITIONAL INFORMATION

Additional information about us can be found at www.sedar.com or www.sec.gov.

Additional information, including directors' and officers' remuneration and indebtedness, principal holders of our securities, options to purchase securities and interests of insiders in material transactions, if applicable, is contained in our most recent Management Information Circular.

Additional financial information can also be found in our 2019 Audited Consolidated Financial Statements and the 2019 MD&A.

NON-GAAP FINANCIAL MEASURES

Our financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). We use certain non-GAAP measures, which are defined below, to better assess our underlying performance. These measures are reviewed regularly by management and the Board of Directors in assessing our performance and in making decisions about ongoing operations. In addition, we use these measures to determine components of management compensation. We believe that these measures are also used by investors, analysts and other interested parties as an indicator of our 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. The reconciliations for these non-GAAP measures from the closest GAAP measure are contained below.


- 19 -

Gross Profit

Gross profit, defined by management as total revenues less direct costs of principal revenue, is a non-GAAP financial measure which does not have any standardized meaning prescribed by IFRS and is therefore unlikely to be comparable to similar measures presented by other issuers. We view gross profit as an integral measure of financial performance as it represents an internal measure of ongoing growth and the amount of revenues that are available to fund ongoing operating expenses, including incremental spending that is in line with our long-term strategic goals. Gross profit is a component of our management incentive plan and is used by management to assess our operating performance. In general, we seek to maximize the gross profit generated from each loyalty partner relationship.

Reconciliation of Revenue to Gross Profit

 

For the year ended

(In thousands of US dollars)

Dec. 31, 2019

Dec. 31, 2018

$ Variance

% Variance

Total Revenue

$  401,177

$  376,245

$  24,932

7%

Less:

Direct cost of revenue

335,722

322,341

13,381

4%

Gross profit

$  65,455

$  53,904

$  11,551

21%




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:

"Board" means the board of directors of Points;

"Chair" means the chair of the Committee;

"Committee" means the audit committee of the Board;

"Director" means a member of the Board;

"External Auditor" means the person occupying the office of auditor of the Corporation in accordance with the Canada Business Corporations Act;

"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;

"NI 52-110" means National Instrument 52-110 - Audit Committees, and any companion policies thereto of the Canadian Securities Administrators, as amended from time to time, or any successor legislation or rule thereto; and

"Points" or the "Corporation" means Points International Ltd.

2 Purpose and Objective

2.1 Purpose

The Committee's purpose is to assist the Board in the discharge of its obligations in connection with:

(a) the integrity of the Corporation's 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 Corporation's compliance with legal and regulatory requirements;

(c) the External Auditor's qualifications and independence;


- 2 -

(d) the performance of the External Auditor and the performance of the Corporation's internal audit function; and

(e) the adequacy and integrity of the Corporation's internal controls over financial reporting and disclosure controls and procedures.

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 Corporation's financial statements.


- 3 -

4.4 Financial Expert

Unless approved by the Board, the Committee shall have at least one financial expert as defined under Item 407 of Regulation S-K under the Securities Exchange Act of 1934.

4.5 Annual Appointment of Members

The members of the Committee shall be appointed by the Board. The appointment of members of the Committee shall take place annually at the first meeting of the Board after a meeting of the shareholders at which Directors are elected, provided that if the appointment of members of the Committee is not so made, the Directors who are then serving as members of the Committee shall continue as members of the Committee until their successors are appointed.

4.6 Vacancy

The Board may appoint a member to fill a vacancy which occurs in the Committee between annual elections of Directors.

5 Committee Chair

5.1 Board to Appoint Chair

The Board shall appoint the Chair from the members of the Committee (or if it fails to do so, the members of the Committee shall appoint the Chair from among its members). If, at any meeting, the Chair is not in attendance, then the directors present shall be responsible for choosing one of their number to be chair of the meeting and for delivering a casting vote, as necessary.

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.


- 4 -

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 (the "CEO") and the Chief Financial Officer (the "CFO") of Points 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 or any other person to attend meetings of the Committee to assist in the discussion and examination of the matters under consideration by the Committee.

6.6 In Camera Sessions with External Auditor

As part of each meeting of the Committee at which the Committee recommends that the Board approve the annual audited financial statements or at which the Committee reviews the interim financial statements, the Committee shall meet separately with each of:

(a) the CFO; 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 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 and its affiliates.

8 Duties and Responsibilities of the Committee

8.1 Financial and Related Information


- 5 -

(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 CFO 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 Corporation's public disclosure of financial information extracted or derived from the Corporation's 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' annual and interim financial statements and related MD&A and report thereon to the Board before the Board approves those statements.

(c) Accounting Treatment - The Committee shall review and discuss with management and the External Auditor on a timely basis:

(i) major issues regarding accounting policies, principles and financial statement presentations, including any significant changes in Points' selection or application of accounting principles and major issues as to the adequacy of Points' 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 of regulatory and accounting initiatives and issues, as well as off-balance sheet transactions, structures, obligations (including contingent obligations) and other relationships of Points 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;

(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 to any governmental body, or the public.


- 6 -

(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

(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 Auditor's 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;


- 7 -

(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 Auditor's report to satisfy itself of the External Auditor's 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

(iv) establish, approve and periodically review the Corporation's 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 Corporation's 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 Auditor's 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 Corporation's 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:


- 8 -

(A) the External Auditor's 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

(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.

(e) Improper Influence on Auditors. SOX prohibits improper influence on auditors which results in financial statements that are materially misleading. The Corporation's directors and officers, and persons under their direction, may not directly or indirectly act to fraudulently influence, coerce, manipulate or mislead any auditor engaged in the performance of an audit or review of the Corporation's financial statements that are required to be filed with the SEC if they knew or should have known that such action could, if successful, result in rendering such financial statements materially misleading.

8.3 Management Response

The Committee shall obtain management's 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 is involved or which Points proposes to enter into.

8.5 Risk Assessment, Risk Management and Internal Control

(a) The Committee shall gain an understanding of Points' business and shall discuss Points' major financial risk exposures and the steps management has taken to monitor and control such exposures.

(b) The Committee shall assess and evaluate management's internal control plan.

(c) The Committee shall obtain regular updates from management and legal counsel regarding compliance matters.


- 9 -

8.6 Other Matters

The Committee shall perform any other activities consistent with this Mandate, Points' 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 Corporation's 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.

10 Hiring Practices

10.1 Hiring Policies

The Committee shall review and approve the Corporation's 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.

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.



Points International Ltd.: Exhibit 99.2 - Filed by newsfilecorp.com

 

 

 

Consolidated Financial Statements

Points International Ltd.

December 31, 2019


 

 

KPMG LLP

Telephone (416) 777-8500

 

333 Bay Street

Fax (416) 777-8818

 

Suite 4600

www.kpmg.ca

 

Toronto ON

 

 

M5H 2S5

 

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Points International Ltd.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of Points International Ltd. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of comprehensive income, cash flows, and changes in shareholders’ equity for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and its financial performance and cash flows for each of the years in the two-year period ended December 31, 2019, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 4, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the

PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Chartered Professional Accountants, Licensed Public Accountants

We have served as the Company’s auditor since 2011.

Toronto, Canada

March 4, 2020


 

KPMG LLP

Telephone (416) 777-8500

 

333 Bay Street

Fax (416) 777-8818

 

Suite 4600

www.kpmg.ca

 

Toronto ON

 

 

M5H 2S5

 

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Points International Ltd.

Opinion on Internal Control Over Financial Reporting

We have audited Points International Ltd.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, Points International Ltd. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of December 31, 2019 and 2018, the related consolidated statements of comprehensive income, cash flows, and changes in shareholders’ equity for each of the years in the two-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 4, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included under the heading Management’s Report on Internal Control Over Financial Reporting in Management’s Discussion & Analysis for the year ended December 31, 2019. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Canada

March 4, 2020


Contents

Page

Consolidated financial statements  
   
Consolidated statements of financial position 5
   
Consolidated statements of comprehensive income 6
   
Consolidated statements of changes in shareholders' equity 7
   
Consolidated statements of cash flows 8
   
Notes to the consolidated financial statements 9-41

 


Points International Ltd.

Consolidated Statements of Financial Position

Expressed in thousands of United States dollars

As at December 31 Note   2019     2018 (a)  
               
ASSETS              
Current assets              
Cash and cash equivalents   $ 69,965   $ 69,131  
Cash held in trust and restricted cash 5   2,534     500  
Funds receivable from payment processors     14,302     13,512  
Accounts receivable 6   21,864     9,318  
Prepaid taxes     194     383  
Prepaid expenses and other assets 7   2,153     3,618  
Total current assets   $ 111,012   $ 96,462  
Non-current assets              
Property and equipment 8   2,371     2,351  
Right-of-use assets 3(a), 9    3,060     -  
Intangible assets 10   12,806     13,952  
Goodwill 11   7,130     7,130  
Deferred tax assets 12   2,105     2,645  
Other assets 7   216     -  
Total non-current assets   $ 27,688   $ 26,078  
Total assets   $ 138,700   $ 122,540  
               
LIABILITIES              
Current liabilities              
Accounts payable and accrued liabilities   $ 13,766   $ 9,489  
Income taxes payable                                                                                              2,326     117  
Payable to loyalty program partners     78,270     69,749  
Current portion of lease liabilities 3(a), 13   1,323     -  
Current portion of other liabilities 14   797     1,680  
Total current liabilities   $ 96,482   $ 81,035  
               
Non-current liabilities              
Lease liabilities 3(a), 13   2,209     -  
Other liabilities 14   95     495  
Deferred tax liabilities 12   722     -  
Total non-current liabilities   $ 3,026   $ 495  
Total liabilities   $ 99,508   $ 81,530  
               
SHAREHOLDERS' EQUITY              
Share capital     45,799     53,886  
Contributed surplus     -     4,446  
Accumulated other comprehensive income (loss)     184     (646 )
Accumulated deficit     (6,791 )   (16,676 )
Total shareholders' equity   $ 39,192   $ 41,010  
Total liabilities and shareholders' equity   $ 138,700   $ 122,540  
Guarantees and Commitments 20            
Credit Facilities 23            

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

(a) The Corporation has initially applied IFRS 16 at January 1, 2019, using the modified retrospective approach. Under this approach comparative information is not restated. See Note 3(a).

APPROVED ON BEHALF OF THE BOARD:

/s/ David L Adams                             Chairman 
/s/ Robert MacLean                                                                 Director and Chief Executive Officer 


Points International Ltd.

Consolidated Statements of Comprehensive Income

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

For the year ended December 31 Note    2019     2018(a)  
REVENUE              
Principal   $ 374,484   $ 351,743  
Other partner revenue     26,693     24,502  
Total Revenue 4 $ 401,177   $ 376,245  
Direct cost of revenue 4   335,722     322,341  
Gross Profit   $ 65,455   $ 53,904  
               
 OPERATING EXPENSES              
Employment costs     31,860     27,890  
Marketing and communications     1,608     1,460  
Technology services     2,577     2,210  
Depreciation and amortization     4,668     3,364  
Foreign exchange loss (gain)     401     (36 )
Other operating expenses 18   7,994     8,786  
Total Operating Expenses   $ 49,108   $ 43,674  
               
Finance income     (908 )   (666 )
Finance costs 13   211     -  
               
INCOME BEFORE INCOME TAXES   $ 17,044   $ 10,896  
               
Income tax expense 12   5,155     3,104  
               
NET INCOME   $ 11,889   $ 7,792  
               
OTHER COMPREHENSIVE INCOME (LOSS)              
  Items that will subsequently be reclassified to profit or loss:              
  Unrealized gain (loss) on foreign exchange derivatives designated as cash flow hedges     556     (1,394 )
  Income tax effect     (147 )   369  
  Reclassification to net income of loss on foreign exchange derivatives designated as cash flow hedges     550     7  
  Income tax effect     (146 )   (2 )
  Foreign currency translation adjustment     17     -  
Other comprehensive income (loss) for the period,  net of income tax   $ 830   $ (1,020 )
               
TOTAL COMPREHENSIVE INCOME   12,719   $ 6,772  
               
EARNINGS PER SHARE              
Basic earnings per share 16 $ 0.87   $ 0.54  
Diluted earnings per share 16 $ 0.86   $ 0.54  

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

(a) The Corporation has initially applied IFRS 16 at January 1, 2019, using the modified retrospective approach. Under this approach comparative information is not restated. See Note 3(a).


Points International Ltd.

Consolidated Statements of Changes in Shareholders' Equity

Expressed in thousands of United States dollars except number of share

                  Attributable to equity holders of the Company  
      Share Capital                          
  Note   Number of Shares     Amount     Contributed Surplus     Accumulated other comprehensive income (loss)     Accumulated deficit     Total shareholders' equity   
                                       
Balance at December 31, 2018     14,111,864   $ 53,886   $ 4,446   $ (646 ) $ (16,676 ) $ 41,010  
Net income     -     -     -     -     11,889     11,889  
Other comprehensive income, net of tax     -     -     -     830     -     830  
Total comprehensive income     -     -     -     830     11,889     12,719  
Effect of share option compensation plan 17   -     -     782     -     -     782  
Effect of RSU compensation plan 17   -     -     4,390     -     -     4,390  
Share issuances - options exercised     2,338     28     (7 )   -     -     21  
Settlement of RSUs 17   -     1,504     (4,626 )   -     -     (3,122 )
Shares purchased and held in trust 17   -     (6,350 )   -     -     -     (6,350 )
Shares repurchased and cancelled 15   (872,686 )   (3,269 )   (4,985 )   -     (2,004 )   (10,258 )
Balance at December 31, 2019     13,241,516   $ 45,799   $ -   $ 184   $ (6,791 ) $ 39,192  
                                       
Balance at December 31, 2017     14,561,450   $ 56,394   $ 10,647   $ 374   $ (24,468 ) $ 42,947  
Net income     -     -     -     -     7,792     7,792  
Other comprehensive loss, net of tax     -     -     -     (1,020 )   -     (1,020 )
Total comprehensive income     -     -     -     (1,020 )   7,792     6,772  
Effect of share option compensation plan 17   -     -     72     -     -     72  
Effect of RSU compensation plan 17   -     -     4,309     -     -     4,309  
Share issuances - options exercised     119,521     1,385     (1,034 )   -     -     351  
Settlement of RSUs 17   -     1,377     (4,099 )   -     -     (2,722 )
Shares purchased and held in trust 17   -     (3,062 )   -     -     -     (3,062 )
Shares repurchased and cancelled 15   (569,107 )   (2,208 )   (5,449 )   -     -     (7,657 )
Balance at December 31, 2018     14,111,864   $ 53,886   $ 4,446   $ (646 ) $ (16,676 ) $ 41,010  

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


Points International Ltd.

Consolidated Statements of Cash Flows

Expressed in thousands of United States dollars

               
For the year ended December 31 Note   2019     2018(a)  
               
Cash flows from operating activities                
Net income for the period   $ 11,889   $ 7,792  
Adjustments for:              
Depreciation of property and equipment 8   1,211     981  
Amortization of right-of-use assets 9   1,164     -  
Amortization of intangible assets 10   2,293     2,383  
Unrealized foreign exchange loss (gain)     394     (960 )
Equity-settled share-based payment transactions 17   5,172     4,381  
Finance costs 13   211     -  
Deferred income tax expense 12   969     279  
Loss (gain) on derivative contracts designated as cash flow hedges     1,106     (1,387 )
Changes in cash held in trust and restricted cash balance     (2,034 )   -  
Changes in non-cash balances related to operations                21   2,200     6,552  
Interest paid 13   (211 )   -  
Net cash provided by operating activities   $ 24,364   $ 20,021  
               
Cash flows from investing activities              
Acquisition of property and equipment 8   (1,231 )   (1,204 )
Additions to intangible assets 10   (1,147 )   (1,070 )
Net cash used in investing activities   $ (2,378 ) $ (2,274 )
               
Cash flows from financing activities              
Payment of lease liabilities 13   (1,229 )   -  
Proceeds from exercise of share options     21     351  
Shares repurchased and cancelled 15   (10,258 )   (7,657 )
Purchase of share capital held in trust 17   (6,350 )   (3,062 )
Taxes paid on net settlement of RSUs 17   (3,122 )   (2,722 )
Net cash used in financing activities   $ (20,938 ) $ (13,090 )
               
Effect of exchange rate fluctuations on cash held     (214 )   960  
Net increase in cash and cash equivalents   $ 834   $ 5,617  
Cash and cash equivalents at beginning of the period   $ 69,131   $ 63,514  
Cash and cash equivalents at end of the period   $   69,965   $   69,131  
               
Interest Received   $ 930   $ 595  
Taxes Received   $ -   $ 110  
Taxes Paid   $ (1,601 ) $ (2,838 )

Amounts received and paid for interest and taxes 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.                           

(a) The Corporation has initially applied IFRS 16 at January 1, 2019, using the modified retrospective approach. Under this approach comparative information is not restated. See Note 3(a).


POINTS INTERNATIONAL LTD.
NOTES TO THE 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 Corporation's registered office is 111 Richmond Street West, Suite 700, Toronto, ON, Canada M5H 2G4. The consolidated financial statements of the Corporation as at and for the year ended December 31, 2019 comprise the Corporation and its wholly-owned subsidiaries: Points International (US) Ltd., Points International (UK) Ltd., Points.com Inc., Points Travel Inc., Points Development (US) Ltd, Points Holdings Ltd. and its wholly-owned subsidiaries, Points International (Singapore) Private Limited and Points International FZ-LLC. 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.)

Segment

Principal Activities

Loyalty Currency Retailing

Consists primarily of products and services that facilitate the sale or transfer of loyalty currency direct to loyalty program members.

Platform Partners

A portfolio of technology solutions that enables the broad distribution of loyalty currencies across loyalty programs and third party channels.

Points Travel

White-label travel booking solution for the loyalty industry that allows consumers to earn and redeem their loyalty currency while making hotel bookings and car rentals online.

The Corporation's operations can be moderately influenced by seasonality. Historically, gross profit is highest

in the fourth quarter in each year as certain product offerings and promotional activity in the Loyalty Currency Retailing segment peak during this time.

The consolidated financial statements of the Corporation as at and for the year ended December 31, 2019 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 4, 2020.

(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 Corporation's 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 where otherwise indicated.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

(d) Basis of consolidation

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.

(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 judgment in the following areas:

The Corporation also uses significant estimates in the following areas:

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 judgment noted above are discussed in Note 3.

3. SIGNIFICANT ACCOUNTING POLICIES

(a) New standards adopted in 2019

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 standards issued by the IASB in 2019:


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

IFRS 16, Leases ("IFRS 16")

Effective January 1, 2019, the Corporation adopted IFRS 16 which specifies how to recognize, measure, present and disclose leases. The standard introduces a single, on-balance sheet lessee accounting model, requiring lessees to recognize right-of-use assets and lease liabilities representing its obligation to make lease payments, unless the underlying leased asset has a low value or is considered short term.

The Corporation adopted IFRS 16 using a modified retrospective approach. Accordingly comparative information presented for 2018 has not been restated. On transition to IFRS 16, the Corporation elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Corporation applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17, Leases and IFRIC 4, Determining whether an Arrangement contains a Lease were not reassessed. As at January 1, 2019, the Corporation's leases primarily consist of leases for office premises with terms ranging from 2 to 4 years. The lease term includes periods covered by an option to extend if the Corporation is reasonably certain to exercise that option.

At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of remaining lease payments, discounted at the Corporation's incremental borrowing rate as at January 1, 2019. Right-of-use assets are measured at an amount equal to the lease liabilities, adjusted for any prepaid or accrued lease payments relating to that lease.

The Corporation has elected to use the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:

The Corporation has elected not to separate non-lease components and will instead account for the lease and non-lease component as a single lease component. In addition, the Corporation has elected not to recognize right-of-use assets and lease liabilities for some leases of low value assets. The lease payments associated with these leases are recognized as an expense on a straight-line basis over the lease term.

The impact on transition to IFRS 16 is summarized below:

    Jan. 1, 2019  
Prepaid expenses and other assets $ (109 )
Right-of-use assets $ 4,102  
Current portion of other liabilities $ (120 )
Current portion of lease liabilities $ 1,203  
Lease liabilities $ 3,272  
Other liabilities $ (362 )

When measuring lease liabilities for leases that were classified as operating leases under IAS 17, the Corporation discounted lease payments using its incremental borrowing rate at January 1, 2019. The weighted average rate applied is 5.30%.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted


    Jan. 1, 2019  
Operating lease commitment at December 31, 2018 as disclosed in the Corporation's 2018 consolidated financial statements $ 7,401  
Discounted using the incremental borrowing rate at January 1, 2019 $ 6,573  
Recognition exemption for leases of low-value assets   (6 )
Extension options reasonably certain to be exercised   365  
Certain costs for which the Corporation is contractually committed under lease contracts but are not accounted for as a lease liability, such as variable lease payments not tied to an index or rate   (2,457 )
Lease liabilities recognized at January 1, 2019 $ 4,475  

IFRS 16 replaces the straight-line operating lease expense recorded under IAS 17 with a depreciation charge for right-of-use assets and interest expense on lease liabilities, which resulted in a decrease in operating expenses, an increase in depreciation expense and an increase in finance costs.

The Corporation has applied judgment to determine the lease term for some lease contracts that include renewal options. The assessment of whether the Corporation is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and right-of-use assets recognized.

The Corporation also make judgements in determining the incremental borrowing rate used in measuring the lease liabilities, reflecting the rate that the Corporation would have to pay for a loan of similar term, with similar security, to obtain an asset of similar value.

Other accounting standards adopted in 2019

The following standards or amendments are also effective from January 1, 2019, but they did not have a material impact on the Corporation's consolidated financial statements:

(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, Revenue from Contracts with Customers, as follows:

1. Identify the contract with a customer;

2. Identify the performance obligations in the contract;

3. Determine the transaction price, which is the amount the Corporation expects to be entitled to;

4. Allocate the transaction price among the performance obligations in the contract based on their relative stand-alone selling prices; and

5. Recognize revenue when or as the goods or services are transferred to the customer.

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 CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

(i) Reseller revenue is transactional revenue for the sale of loyalty currencies that occurs in contracts for which the Corporation takes a principal role in the retailing or wholesaling of loyalty currencies to loyalty program customers. The customer obtains control of the loyalty currency, and hence the performance obligation is satisfied on completion of the transaction which aligns with the point in time the loyalty currency is transferred and payment is received. The Corporation's role as the principal in the transaction is determined by the contractual arrangements in place with the loyalty program partner and their members. In this instance, the Corporation has determined that it obtains control of the loyalty currency prior to transferring it to the customer, due in part to inventory risk that is assumed by the Corporation. Other factors considered in making the determination include the fact that the Corporation is primarily responsible for fulfilling the promise to provide the specified good, and often has discretion in establishing the prices for the specified goods. 

(ii) Service revenue is transactional revenue for the provision of transfer and reinstate services provided to loyalty program members.  The Corporation is primarily responsible for fulfilling the promise to provide the services. Transfer and reinstate service revenue is recognized at the point in time the transaction is completed, which is also when payment is received.

(iii) Hosting services are provided to loyalty program partners throughout the term of the loyalty program partner agreement. The hosting services begin, and hence revenue recognition commences when the loyalty program partner website is functional. Revenue is recognized on a straight-line basis over the life of the term of the partner agreement. Costs that relate directly to the contract are capitalized to the extent that they are expected to be recovered and are amortized as the services are transferred.

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. It also includes certain redemption based and earn based transactions facilitated by the Corporation on behalf of loyalty program partners.  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, 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. 

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.

Where the Corporation's role in a transaction is that of a principal, revenue is recognized on a gross basis, where the gross value of the transaction billed to the customer is recognized as revenue and the costs incurred to purchase the points or miles sold in the transaction are recognized as direct cost of revenue. When the Corporation's role in a transaction is that of an agent, revenue is recognized on a net basis with revenue approximating the margin earned and is recorded in other partner revenue in the consolidated statement of comprehensive income. This determination of whether the Corporation is acting as principal or agent requires the exercise of judgment.  In making this assessment, management considers whether the Corporation:


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

(c) Foreign currency translation

(i) Foreign currency transactions

Transactions in currencies other than the Corporation's or its subsidiaries' respective functional currency are recognized at the exchange rates in effect on the transaction date. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated 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 translated 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 translated.

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 19.

(ii) Foreign operations

The assets and liabilities of the Corporation's non-USD functional currency subsidiary are translated to USD at exchange rates at the reporting date. The income and expenses of this subsidiary are translated to USD using average exchange rates for the month during which the transactions occurred. Foreign currency differences resulting from translation are recognized in other comprehensive income ("OCI") within the cumulative translation account.

(d) 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

The Corporation's financial instruments as a result of adopting IFRS 9, Financial Instruments, ("IFRS 9") are classified and measured as follows:

Asset/Liability Measurement under IFRS 9
Cash and cash equivalents Amortized cost
Cash held in trust and restricted cash Amortized cost
Funds receivable from payment processors Amortized cost
Accounts receivable Amortized cost
Accounts payable and accrued liabilities Amortized cost
Payable to loyalty program partners Amortized cost
   
Derivatives Measurement
Foreign exchange forward contracts Fair value, with changes in fair value for hedges recorded in OCI and ineffective portion recorded in profit or loss.

 


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

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. Finance 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 the expected lifetime credit losses at initial recognition to be considered when assessing impairment of financial assets, which is anticipated to result in earlier recognition of losses. 

(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.

Authorized with no Par Value

Unlimited common shares

Unlimited preferred shares

Issued

As at December 31, 2019, 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 2019 (2018 - nil).

(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 OCI, 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 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. 


POINTS INTERNATIONAL LTD.
NOTES TO THE 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, is expired, sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in OCI 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 OCI 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. They 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) Cash held in trust and restricted cash

Cash held in trust represents funds received from customers, primarily Canadian, not yet remitted to service providers for the Points Travel segment in accordance with certain geographic regulatory requirements. Restricted cash includes cash held as collateral for forward contracts entered into during the normal course of business.

(g) 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 Corporation's bank account within three business days from the date of sale. 

(h) 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 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:


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

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.

(i) Right-of-use assets and Lease liabilities

At inception of a contract, the Corporation assesses whether a contract is or contains a lease based on whether the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

The Corporation recognizes right-of-use assets and lease liabilities at the lease commencement date. After the initial adoption date, the right-of-use asset is initially measured at cost, which comprises:

Subsequent to initial measurement, right-of-use assets are measured at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability. The right-of-use asset are depreciated on a straight-line basis over the term of the lease, or the estimated useful life of the right-of-use assets if the Corporation expects to obtain the ownership of the leased asset at the end of the lease. The lease term includes the non-cancellable period of the lease and optional renewable periods that the Corporation is reasonably certain to extend.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Corporation's incremental borrowing rate. Generally, the Corporation uses its incremental borrowing rate as the discount rate.

After initial recognition, the lease liability is measured at amortized cost using the effective interest method. The lease liability is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or if the Corporation changes its assessment of whether it will exercise a purchase option, extension option or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset.

The lease liability is also remeasured when the underlying lease contract is amended. When there is a decrease in contract scope, the lease liability and right-of-use asset will decrease relative to this change with the difference recorded in net income prior to the remeasurement of the lease liability.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

(j) Goodwill & Intangible assets

(i) Goodwill

Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the identifiable 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(k).

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:

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) Internally developed software

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:

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.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

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 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.

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:

(k) Impairment

Financial Assets

IFRS 9 requires the use of an expected credit loss  ("ECL") model for calculating impairment of financial assets.  A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

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 and equipment, right-of-use assets 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 Intangible Assets

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 asset's 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 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 CGU or group of CGUs that are expected to benefit from the synergies of the combination.

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.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

The Corporation evaluates impairment losses for potential reversals, other than goodwill impairment, when events or changes in circumstances warrant such consideration. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, provided that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. 

(l) Share-based payment transactions

The Corporation has two share-based compensation plans: a share option plan and a share unit plan. The Corporation accounts for the grants under both plans as equity settled share-based compensation arrangements per IFRS 2, Share-based Payment, and accordingly are not re-measured subsequent to the initial grant date.

Share option plan

The share option plan allows employees to acquire shares of the Corporation through the exercise of share options. Share options have a maximum life of ten years. Under the share option plan, performance options are granted from time to time to certain employees of the Corporation. Vesting of performance options is based on the achievement of specified non-market performance conditions with a life of six years after the date of grant. On grant date, the Corporation estimates the expected vesting date for purpose of estimating the option life. Additionally, options other than performance options can be granted under the share option plan, which generally vest over a period of three years and expire at the end of five years from the grant date.

For options with graded vesting, each grant in an award is considered a separate grant with a different vesting date, expected life and fair value. The fair value of each grant is recognized in profit or loss as employment costs over its respective expected vesting period with a corresponding increase in contributed surplus. The fair value of each grant 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 Corporation's 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 plan, share options can only be settled in equity. The share option expense incorporates an expected forfeiture rate, estimated based on expected employee turnover.

Annually, the Corporation reassesses the forfeiture rate and the probability of achieving the specified performance metrics for performance options and calculates the cumulative compensation cost of each grant and recognizes an adjustment to the employment cost (recovery) in the current period in the consolidated statement of comprehensive income.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

(i) Significant judgments, estimates and assumptions

Share options are measured at grant date fair value. Estimating fair value requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield. The assumptions and models used for estimating fair value for share options are disclosed in Note 17.

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.

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 Restricted Share Units ("RSUs"). Under the share unit plan, the Corporation grants RSUs to its employees and the Board of Directors. The RSUs vest on grant date, over a period of up to three years after the grant date or in full on the third anniversary of the grant date. The fair value of a RSU, determined at the grant date 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 as employment costs with a corresponding increase in contributed surplus.

 

(m) 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. 

(n) Deferred revenue

Deferred revenue includes proceeds received in advance for technology design and development work and is recognized over the expected life of the partner agreement (see Note 3(b) (iii)). Deferred revenue is comprised of bookings made through the Points Travel platform, which have 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 current portion of other liabilities and other liabilities in the consolidated statements of financial position.

(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 OCI.

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:

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.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

In determining the amount of current and deferred tax, the Corporation takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Corporation believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of 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.

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 dividing the profit or loss attributable to common shareholders by the weighted average number of common shares outstanding adjusted for the effects of all dilutive potential common shares.

(q) Segment reporting

The Corporation determines its reportable segments based on, among other things, how the Corporation's chief operating decision maker ("CODM"), the Chief Executive Officer, regularly reviews the Corporation's 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 Contribution, which is defined as gross profit for the relevant operating segment less direct adjusted operating expenses 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.  Direct adjusted operating expenses are expenses which are directly attributable to each operating segment and 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 Corporation's 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 amendments not yet adopted

The IASB has issued amendments to the following standards:


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

These amendments have not yet been adopted by the Corporation. Although the Corporation is currently assessing the impacts of these amendments it does not expect them to have a material impact on the Corporation's consolidated financial statements.

4. OPERATING SEGMENTS

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.

The Corporation's measure of segment profit or loss is Contribution, which is defined as gross profit (total revenue less direct cost of 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.  There have been no changes in the Corporation's reportable segments.

For the year ended December 31, 2019:   Loyalty Currency Retailing     Platform Partners     Points Travel     Total  
Total revenue $ 391,045   $ 7,577   $ 2,555   $ 401,177  
Direct cost of revenue   335,032     665     25     335,722  
Gross profit   56,013     6,912     2,530     65,455  
Direct adjusted operating expenses   13,830     3,871     6,838     24,539  
Contribution $ 42,183   $ 3,041   $ (4,308 ) $ 40,916  
Indirect adjusted operating expenses1                     14,328  
Finance income                     (908 )
Finance costs                     211  
Equity-settled share-based payment expense                     5,172  
Income tax expense                     5,155  
Depreciation and amortization                     4,668  
Foreign exchange loss                     401  
Net income                   $ 11,889  

For the year ended December 31, 2018(a):
 
  Loyalty Currency Retailing     Platform Partners     Points Travel     Total  
Total revenue $ 366,421   $ 7,979   $ 1,845   $ 376,245  
Direct cost of revenue   321,615     615     111     322,341  
Gross profit   44,806     7,364     1,734     53,904  
Direct adjusted operating expenses   12,941     3,784     5,522     22,247  
Contribution $ 31,865   $ 3,580   $ (3,788 ) $ 31,657  
Indirect adjusted operating expenses1                     13,718  
Finance income                     (666 )
Equity-settled share-based payment expense                     4,381  
Income tax expense                     3,104  
Depreciation and amortization                     3,364  
Foreign exchange gain                     (36 )
Net income                   $ 7,792  

(a) The Corporation has initially applied IFRS 16 at January 1, 2019, using the modified retrospective approach. Under this approach comparative information is not restated. See Note 3(a).

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 CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

Enterprise-wide disclosures - Geographic information

For the year ended December 31   2019     2018  
Revenue                        
United States $ 358,993     90%   $ 331,625     88%  
Europe   21,832     5%     25,661     7%  
Other   20,352     5%     18,959     5%  
  $ 401,177     100%   $ 376,245     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 Corporation's loyalty partners. As at December 31, 2019, substantially all of the Corporation's assets were in Canada.

Transaction price allocated to the remaining performance obligations

The following table provides information about the nature and timing of the satisfaction of performance obligations in contracts with customers.

    Total     Year 1     Year 2     Year 3     Year 4     Year 5+  
Hosting and other $ 633   $ 259   $ 259   $ 115   $ -   $ -  

The Corporation has elected to apply the practical expedient to not disclose information about remaining performance obligations that have original expected durations of one year or less.

Dependence on loyalty program partners

For the year ended December 31, 2019, there were three (2018 - 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 69% (2018 - 70%) of the Corporation's total revenue.

5. CASH HELD IN TRUST AND RESTRICTED CASH

Cash held in trust and restricted cash are comprised of:

    2019     2018  
             
Cash held in trust $ 2,534   $ -  
Restricted cash   -     500  
Cash held in trust and restricted cash $ 2,534   $ 500  


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

6. ACCOUNTS RECEIVABLE

The Corporation's accounts receivable are comprised mainly of tax rebate receivables, amounts owing to the Corporation by loyalty program partners for transactions carried out on the Points.com website and amounts owing to the Corporation by companies that perform loyalty program transactions where the Corporation is a partner in facilitating such transactions.  The amount is presented net of an allowance for doubtful accounts.  Accounts receivable are comprised of:

    2019     2018  
             
Accounts receivable before allowance for doubtful accounts $ 22,052   $ 9,472  
Allowance for doubtful accounts   (188 )   (154 )
Accounts receivable $ 21,864   $ 9,318  

The Corporation's exposure to credit and currency risks related to accounts receivable is disclosed in Note 19.

7. PREPAID EXPENSES AND OTHER ASSETS

Prepaid expenses and other assets are comprised of:

    2019     2018  
             
Prepaid expenses $ 1,735   $ 1,464  
Foreign exchange forward contracts designated as cash flow hedges   229     -  
Loyalty reward currency inventory   189     2,154  
Prepaid expenses and current portion of other assets $ 2,153   $ 3,618  
             
Non-current portion of loyalty reward currency inventory $ 216   $ -  
Other assets $ 216   $ -  

8. PROPERTY AND EQUIPMENT

    Computer Hardware     Computer Software     Furniture & Fixtures     Leasehold Improvements     Total  
Cost                              
Balance at January 1, 2018 $ 3,135   $ 2,209   $ 1,078   $ 1,214   $ 7,636  
Additions   664     433     26     81     1,204  
Balance at December 31, 2018 $ 3,799   $ 2,642   $ 1,104   $ 1,295   $ 8,840  
Additions   705     409     103     14     1,231  
Balance at December 31, 2019 $ 4,504   $ 3,051   $ 1,207   $ 1,309   $ 10,071  
                               
    Computer Hardware     Computer Software     Furniture & Fixtures     Leasehold Improvements     Total  
Depreciation and impairment losses                              
Balance at January 1, 2018 $ 2,547   $ 1,967   $ 743   $ 251   $ 5,508  
Depreciation for the year   369     263     110     239     981  
Balance at December 31, 2018 $ 2,916   $ 2,230   $ 853   $ 490   $ 6,489  
Depreciation for the year   537     326     108     240     1,211  
Balance at December 31, 2019 $ 3,453   $ 2,556   $ 961   $ 730   $ 7,700  
Carrying amounts                              
At December 31, 2018 $ 883   $ 412   $ 251   $ 805   $ 2,351  
At December 31, 2019 $ 1,051   $ 495   $ 246   $ 579   $ 2,371  


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted


9. RIGHT OF USE ASSETS

    Office     Office Equipment     Total  
Cost                  
Balance at January 1, 2019 $ 4,102   $ -   $ 4,102  
Additions   36     86     122  
Balance at December 31, 2019 $ 4,138   $ 86   $ 4,224  
                   
    Office     Office Equipment     Total  
Depreciation and impairment losses                  
Balance at January 1, 2019 $ -   $ -   $ -  
Depreciation for the year   1,151     13     1,164  
Balance at December 31, 2019 $ 1,151   $ 13   $ 1,164  
Carrying amounts                  
At December 31, 2019 $ 2,987   $ 73   $ 3,060  

10. INTANGIBLE ASSETS

    Customer Relationships     Domain Names(1)     Technology(2)     Other (1)     Total  
Cost                              
Balance at January 1, 2018 $ 8,500   $ 4,300   $ 19,947   $ 205   $ 32,952  
Additions   -     -     1,070     -     1,070  
Balance at December 31, 2018 $ 8,500   $ 4,300   $ 21,017   $ 205   $ 34,022  
Additions   -     -     1,147     -     1,147  
Balance at December 31, 2019 $ 8,500   $ 4,300   $ 22,164   $ 205   $ 35,169  
Amortization and impairment losses                              
Balance at January 1, 2018 $ 2,621   $ -   $ 15,066   $ -   $ 17,687  
Amortization for the year   850     -     1,533     -     2,383  
Balance at December 31, 2018 $ 3,471   $ -   $ 16,599   $ -   $ 20,070  
Amortization for the year   850     -     1,443     -     2,293  
Balance at December 31, 2019 $ 4,321   $ -   $ 18,042   $ -   $ 22,363  
Carrying amounts                              
At December 31, 2018 $ 5,029   $ 4,300   $ 4,418   $ 205   $ 13,952  
At December 31, 2019 $ 4,179   $ 4,300   $ 4,122   $ 205   $ 12,806  

(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 Corporation's 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 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 internally designed software.



POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

During the year ended December 31, 2019, an amount of $3,879 was recognized as research and development expenses in employment costs in the consolidated statement of comprehensive income (2018 - $3,768).

11. GOODWILL

Cost      
Balance at January 1, 2018 $ 7,130  
Additions   -  
Impairments   -  
Balance at December 31, 2018 $ 7,130  
Additions   -  
Impairments   -  
Balance at December 31, 2019 $ 7,130  

Impairment testing for cash-generating units containing goodwill as at December 31, 2019

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 2019 annual impairment test, management has determined that the Corporation has three CGUs, being Loyalty Currency Retailing, Platform Partners and Points Travel.  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 value in use, the model which Management believes to result in a higher recoverable amount. Value in use is estimated by discounting estimated future cash flows to their present value. Management estimates the discounted future cash flows and a terminal value. The future cash flows are based on  estimates of expected future operating results of the CGUs after considering economic conditions and a general outlook for the CGU's industry. Discount rates consider market rates of return, debt to equity ratios and certain risk premiums, among other things. The terminal value is the value attributed to the 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.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

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 value of goodwill     Carrying value of indefinite-life intangible assets     Recoverable amount method     Period used (years)     Terminal growth rate %     Pre-tax discount rate %  
Loyalty Currency Retailing $ 5,681   $ 4,505     Value in Use     5     2.0%     19.4%  
Points Travel $ 1,449     -     Value in Use     5     2.0%     26.0%  

The annual testing was completed in 2019 and 2018, and was concluded that there was no impairment.

12. INCOME TAXES

    2019     2018  
Current tax expense            
             
Current year $ 3,999   $ 2,640  
Prior years   187     185  
Total current tax expense $ 4,186   $ 2,825  
             
Deferred tax expense            
Current year movement in recognized temporary differences and losses     841      279  
Prior years   128        
Total deferred tax expense $ 969   $ 279  
             
Total income tax expense $ 5,155   $ 3,104  

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:

    2019     2018  
Income tax expense at statutory rate of 26.5% (2018 - 26.5%) $ 4,517   $ 2,887  
Increase in taxes resulting from:            
Non-deductible items   292     124  
Other differences   346     93  
Income tax expense $ 5,155   $ 3,104  


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

Recognized deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

2019   Deferred Tax Assets     Deferred Tax Liabilities  
             
Forward exchange contracts $ -   $ (60 )
Property and equipment and Intangible assets   2,175     (2,181 )
Accrued liabilities   938     -  
Investment tax credits   -     (27 )
Restricted Share Units   504     -  
Tax losses   34     -  
    3,651     (2,268 )
Reclassification   (1,546 )   1,546  
  $ 2,105   $ (722 )

2018   Deferred Tax Assets     Deferred Tax Liabilities  
             
Forward exchange contracts $ 233   $ -  
Property and equipment and Intangible assets   1,521     (545 )
Accrued liabilities   237     -  
Investment tax credits   -     (59 )
Restricted Share Units   1,043     -  
Tax losses   215     -  
    3,249     (604 )
Reclassification   (604 )   604  
  $ 2,645   $ -  

The Corporation has capital losses of $10,456 (2018 - $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 for income tax purposes in the amount of approximately $125 (2018 - $813). The losses may be used to reduce future years' taxable income and expire approximately as follows:

    Total  
2037 $ 41  
2038   5  
Total $ 46  

Non-capital losses of $79 can be carried forward indefinitely.

Management has concluded the deferred tax asset meets the relevant recognition criteria under IFRS. Management's conclusion is supported by management's 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:

    2019     2018  
Capital losses $ 1,385   $ 1,385  

The capital losses of $10,456 (2018 – $10,456) can be carried forward indefinitely.

Temporary differences associated with Points International Ltd. investments

The temporary difference associated with the investments in the Corporation's subsidiaries is $2,384 (2018 - $369). 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.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

As at December 31, 2019 and 2018, 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.

13. LEASE LIABILITIES

Reconciliation of movements of lease liabilities to cash flows arising from financing activites:

    2019  
Balance at January 1, 2019 $ 4,475  
New leases   122  
Interest expense   211  
Interest paid   (211 )
Payment of lease liabilities   (1,229 )
Effect of changes in foreign exchange rates   164  
Balance at December 31, 2019 $ 3,532  

During 2019, the expense related to variable lease payments not included in the measurement of lease obligations was $845.

The following table sets out a maturity analysis of lease payments, showing the undiscounted lease payments to be made as at December 31, 2019:

    December 31, 2019  
Year 1 $ 1,472  
Year 2   1,182  
Year 3   1,112  
Year 4   18  
Year 5+   9  
Total undiscounted lease payments $ 3,793  
       
Carrying value of lease liabilities $ 3,532  

14. OTHER LIABILITIES

    2019     2018  
Foreign exchange forward contracts designated as cash flow hedges $ 1   $ 878  
Current portion of lease inducements   -     120  
Current portion of deferred revenue   796     682  
Current portion of other liabilities $ 797   $ 1,680  
             
Non-current portion of lease inducements   -     362  
Non-current portion of deferred revenue   95     133  
Other liabilities $ 95   $ 495  


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

Deferred Revenue

The following table presents changes in the deferred revenue balances:

Balance at December 31, 2018 $ 815  
Amounts invoiced and revenue deferred   5,401  
Recognition of deferred revenue   (5,325 )
Balance at December 31, 2019 $ 891  

15. CAPITAL AND OTHER COMPONENTS OF EQUITY

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 subsidiary 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 settled.

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 TSX accepted the Corporation’s notice of intention to make a NCIB 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 entered into an automatic share purchase plan with a broker in order to facilitate the 2018 Repurchase.

On August 14, 2019, the NCIB program was renewed with a total of 679,034 shares to be repurchased under this 2019 plan (the "2019 Repurchase"), representing 5% of its 13,580,692 shares issued and outstanding as of July 31, 2019. The Corporation entered into an automatic share purchase plan with a broker in order to facilitate the 2019 Repurchase.

The primary purpose of the 2018 and 2019 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 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 year ended December 31, 2019, the Corporation repurchased and cancelled 872,686 common shares (2018 - 569,107) at an aggregate purchase price of $10,258 (2018 - $7,657), resulting in a reduction of share capital and contributed surplus of $3,269 and $4,985 respectively (2018 - $2,208 and $5,449), in addition to an increase in accumulated deficit of $2,004 (2018 - nil).


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

16. EARNINGS PER SHARE

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

    2019     2018  
Net income available to common shareholders for basic and diluted earnings per share $ 11,889   $ 7,792  
Weighted average number of common shares outstanding - basic   13,665,593     14,321,186  
Effect of dilutive securities   146,473     90,817  
Weighted average number of common shares outstanding - diluted   13,812,066     14,412,003  
Earnings per share - reported            
                       Basic $ 0.87   $ 0.54  
Diluted $ 0.86   $ 0.54  

a) 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 weighted 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 weighted 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 period 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.

As at December 31, 2019, 158,000 options (2018 - 101,014) were excluded from the diluted weighted average number of common shares outstanding 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.

17. SHARE-BASED PAYMENTS

Share option plan

Under the share option plan, employees  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. During the year ended 2019, the Corporation granted 288,000 performance options to certain employees to acquire shares of the Corporation (2018 - 930,000). 

The Corporation did not grant any share options other than performance-based options during 2018 and 2019.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

The share option plan authorized the number of options 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, 2019 are shown in the table below:

    December 31, 2019  
Shares outstanding as at March 2, 2016   15,298,602  
    Percentage of shares outstanding   10%  
Number of options authorized   1,529,860  
    Less: options issued & outstanding   (1,321,288 )
Options available for grant   208,572  

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 Corporation's daily share price fluctuated over the expected life of the options. The fair value of options granted in 2019 and 2018 were calculated using the following assumptions. 

 

2019

2018

Dividend yield

NIL

NIL

Risk free rate

1.39% - 1.67%

2.06% - 2.09%

Expected volatility

40.79% - 44.75%

40.59% - 44.51%

Expected life of options in years

2.46 - 6.00

3.10 - 6.00

Weighted average fair value of options granted (CAD)

$4.37 - $8.95

$4.24 - $6.16 

A summary of the status of the Corporation's share option plan as of December 31, 2019 and 2018, and changes during the years ended on those dates is presented below.

 

2019

2018

 

Number of Options

Weighted Average Exercise Price

(in CAD$)

Number of Options

Weighted Average Exercise Price

(in CAD$)

Beginning of year

1,229,040

$15.00

615,843

$16.00

Granted

288,000

$16.76

930,000

$13.93

Exercised

(2,338)

$12.34

(308,711)

$13.51

Expired and forfeited

(193,414)

$22.69

(8,092)

$25.56

End of year

1,321,288

$14.26

1,229,040

$15.00

Exercisable at end of year

195,688

$12.00

299,040

$18.32



POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

For the year ended December 31, 2019:

 

Options outstanding

Options exercisable

Range of Exercise Prices (in CAD$)

Number of options

Weighted average remaining contractual life (years)

Weighted average exercise price (in CAD$)

Number of options

Weighted average exercise price (in CAD$)

$5.00 to $9.99

22,280

1.19

$  9.89

22,280

$  9.89

$10.00 to $14.99

1,011,008

4.15

$ 13.65

173,408

$ 12.27

$15.00 to $19.99

288,000

5.58

$ 16.76

-

-

 

1,321,288

 

 

195,688

 

For the year ended December 31, 2018:

 

Options outstanding

Options exercisable

Range of Exercise Prices (in CAD$)

Number of options

Weighted average remaining contractual life (years)

Weighted average exercise price (in CAD$)

Number of options

Weighted average exercise price (in CAD$)

$5.00 to $9.99

22,280

2.19

$  9.89

22,280

$  9.89

$10.00 to $14.99

1,105,746

5.21

$ 13.67

175,746

$ 12.27

$15.00 to $19.99

1,169

0.75

$ 19.82

1,169

$ 19.82

$20.00 and over

99,845

0.21

$ 30.84

99,845

$ 30.84

 

1,229,040

 

 

299,040

 

Share unit plan

During 2019, 392,898 RSUs were granted (2018 - 442,353). As at December 31, 2019, 496,942 RSUs were outstanding (2018 - 657,727 RSUs).

  Number of RSUs

Weighted Average Fair Value (in CAD$)

Balance at January 1, 2019

657,727

$  11.50

Granted

392,898

$  17.01

Vested

(497,284)

$  12.42

Forfeited

(56,399)

$  14.14

Balance at December 31, 2019

496,942

$  14.63


  Number of RSUs

Weighted Average Fair Value (in CAD$)

Balance at January 1, 2018

711,936

$  10.16

Granted

442,353

$  13.83

Vested

(457,408)

$  11.67

Forfeited

(39,154)

$  11.62

Balance at December 31, 2018

657,727

$  11.50

 


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

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 through a share purchase trust on a periodic basis. During the year ended December 31, 2019, 540,000 share units (2018 - 272,067) were purchased by the trust at a cost of $6,350 (2018 -$3,062).  The Corporation paid certain withholding taxes in cash rather than reselling shares held in trust into the market. During the year ended December 31, 2019, 497,284 RSUs (2018 - 457,408) vested, for which the Corporation settled 252,394 RSUs (2018 - 266,610) through the issuance of shares held in trust and paid $3,122 (2018 - $2,722) of withholding taxes. As at December 31, 2019, 487,314 of the Corporation's common shares were held in trust for this purpose (2018 - 199,708).

During the year ended 2019, the Corporation recognized employment costs of $5,172 (2018- $4,381) related to all its share-based payment awards.

18. OPERATING EXPENSES

    2019      2018   
Office expenses $ 1,286   $ 2,409  
Travel and entertainment   2,345     2,118  
Professional fees   3,105     2,988  
Insurance, bank fees and governance   1,258     1,271  
Operating expenses $ 7,994   $ 8,786  

19. FINANCIAL INSTRUMENTS

The Corporation has exposure to the following risks from its use of financial instruments:

This note presents information about the Corporation's exposure to each of the above risks, the Corporation's objectives, policies and processes for measuring and managing risk, and the Corporation's 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 Corporation's risk management framework. The Corporation's 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 Corporation's 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 Corporation's Audit Committee oversees how management monitors compliance with the Corporation's risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Corporation.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

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 Corporation's receivables from customers.

The Corporation's cash and cash equivalents 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 from financial institutions 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 Corporation's exposure to bad debts has not been significant.

The aging of accounts receivable is as follows:

 

December 31, 2019

December 31, 2018

Current

$    8,411

$  7,992

Past due 31-60 days

1,051

475

Past due 61-90 days

352

108

Past due 91-120 days

41

228

Past due over 120 days(1)

12,197

669

Trade accounts receivable

22,052

9,472

Less allowance for doubtful accounts

(188)

(154)

 

$  21,864

$  9,318

(1) Amount includes receivables for prior year tax rebate, which was received from the tax authorities subsequent to year end. Refer to Note 24.

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

    2019     2018  
Balance, beginning of year $ 154   $ 91  
Provision for doubtful accounts   69     105  
Bad debts written off, net of recoveries   (35 )   (42 )
Balance, end of year $ 188   $ 154  

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 Corporation's 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, 2019 and 2018:


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted


          Contractual Cash Flow Maturities  
As at December 31, 2019   Carrying Amount     Total     Within 1 year     1  year to 3 years     3 years and beyond  
Accounts payable and accrued liabilities $ 13,766   $ 13,766   $ 13,766              
Foreign exchange forward contracts designated as cash flow hedges   1     1     1   $ -   $ -  
Income taxes payable   2,326     2,326     2,326     -     -  
Payable to loyalty program partners   78,270     78,270     78,270     -     -  
  $ 94,363   $ 94,363   $ 94,363   $ -   $ -  

          Contractual Cash Flow Maturities  
As at December 31, 2018   Carrying Amount     Total     Within 1 year     1  year to 3 years     3 years and beyond  
Accounts payable and accrued liabilities $ 9,489   $ 9,489   $ 9,489              
Foreign exchange forward contracts designated as cash flow hedges   878     878     878   $ -   $ -  
Income taxes payable   117     117     117     -     -  
Payable to loyalty program partners   69,749     69,749     69,749     -     -  
  $ 80,233   $ 80,233   $ 80,233   $ -   $ -  

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 Corporation's 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 USD 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 Corporation's 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, 2019, forward contracts with a notional value of $19,860 (December 31, 2018 - $15,110), and in a net asset position of $228 (2018 - $878 in net liability position), with settlement dates extending to December 2020, have been designated as cash flow hedges for hedge accounting treatment under IFRS 9, Financial Instruments. 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 OCI, except for any ineffective portion, which is recognized immediately in the foreign exchange gain or loss. As at December 31, 2019 and 2018, 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 2019, total realized losses of $550 were reclassified to employment costs for Canadian dollar currency hedges (2018 - $7 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. 


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

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-USD balance sheet accounts, a strengthening US dollar will lead to an FX loss on assets and a gain on liabilities and vice versa. Sensitivity to a +/- 10% movement in all currencies held by the Corporation versus the USD would affect the Corporation's net income by $41 (2018 - $632) excluding the effect of hedging. Significant balances denominated in foreign currencies that are considered financial instruments are as follows:

As at December 31, 2019   CAD     GBP     EUR     JPY  
FX Rates used to translate to USD   0.76750     1.31710     1.12170     0.009213  
Balances below in source currency (in thousands)                        
Financial assets                        
Cash and cash equivalents   3,814     4,256     2,826     183,018  
Cash held in trust and restricted cash   3,302     -     -     -  
Funds receivable from payment processors   422     862     867     26,241  
Accounts receivable   1,653     3,129     859     62,993  
    9,191     8,247     4,552     272,252  
Financial liabilities                        
Accounts payable and accrued liabilities   5,239     3,221     102     8,773  
Payable to loyalty program partners   4,456     6,111     5,345     89,531  
    9,695     9,332     5,447     98,304  

As at December 31, 2018   CAD     GBP     EUR     JPY  
FX Rates used to translate to USD   0.73361     1.27356     1.14449     0.00909  
Balances below in source currency (in thousands)                        
Financial assets                        
Cash and cash equivalents   3,667     8,430     5,660     97,455  
Funds receivable from payment processors   221     740     1,556     30,043  
Accounts receivable   691     2,597     774     68,795  
    4,579     11,767     7,990     196,293  
Financial liabilities                        
Accounts payable and accrued liabilities   1,370     2,547     774     18,515  
Payable to loyalty program partners   1,380     8,237     5,382     71,868  
    2,750     10,784     6,156     90,383  

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. 


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

Determination of fair value

For financial assets and liabilities that are valued at other than fair value on the consolidated statement of financial position (funds receivable from payment processors, accounts receivable, accounts payable and accrued liabilities and payable to loyalty program partners), fair value approximates the carrying value at December 31, 2019 and 2018 due to their short-term maturities.

A number of the Corporation's 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) 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 into account the credit risk of the Corporation and the derivative counterparty when appropriate.

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:

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 carrying value of financial assets and financial liabilities measured at fair value in the consolidated statement of financial position as at December 31, 2019 and 2018 are as follows:


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted


2019   Carrying Value     Level 2  
Assets:            
Foreign exchange forward contracts designated as cash flow hedges(i) $ 229   $ 229  
             
 Liabilities:            
Foreign exchange forward contracts designated as cash flow hedges(i)   (1 )   (1 )
  $ 228   $ 228  
2018   Carrying Value     Level 2  
Assets:            
Foreign exchange forward contracts designated as cash flow hedges(i) $ -   $ -  
             
 Liabilities:            
Foreign exchange forward contracts designated as cash flow hedges(i)   (878 )   (878 )
  $ (878 ) $ (878 )

(i) The carrying values of the Corporation's 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, 2019 and December 31, 2018 and there were no transfers of fair value measurement between Levels 2 and 3 of the fair value hierarchy in the respective periods.

20. GUARANTEES AND COMMITMENTS

 

Total

Year 1(2)

Year 2

Year 3

Year 4

Year 5+

Direct cost of revenue(1)

$ 649,283

$  176,595

$  162,504

$  130,679

$ 130,116

$ 49,389

(1) 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. 

(2) 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 disclosure above.

21. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash balances related to operations are as follows:

    2019     2018  
Decrease (Increase) in funds receivable from payment processors $ (790 ) $ 1,717  
Increase in accounts receivable   (12,546 )   (1,577 )
Decrease in prepaid taxes   189     74  
Decrease (Increase) in prepaid expenses and other assets(1)   1,356     (1,655 )
Decrease (Increase) in other assets   (216 )   2,661  
Increase in accounts payable and accrued liabilities   4,277     1,491  
Increase (Decrease) in income taxes payable   2,209     (578 )
Increase (Decrease) in other liabilities(1)   (800 )   237  
Increase in payable to loyalty program partners   8,521     4,182  
  $ 2,200   $ 6,552  

(1) The Corporation has adopted IFRS 16 at January 1, 2019, using the modified retrospective approach. Refer to note 3(a) for the transitional impact of adopting IFRS 16.


POINTS INTERNATIONAL LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All amounts in thousands of U.S. dollars, except per share figures, unless otherwise noted

22. 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 Corporation's share-based compensation plans (see Note 17).

Key management personnel compensation comprised the following:

In thousands of Canadian dollars   2019     2018  
             
Short-term employee salaries and benefits $ 2,260   $ 2,382  
Share-based payments   4,119     3,232  
Total compensation $ 6,379   $ 5,614  

23. CREDIT FACILITIES

On December 10, 2019, the Corporation entered into a $50.0 million senior secured revolving credit facility with the Royal Bank of Canada and the Bank of Nova Scotia. With the approval of the lenders, the credit facility can be expanded to a total of $65.0 million. The new credit facility is available for general corporate purposes, including the financing of working capital, capital expenditures, and acquisitions. The credit facility has a three-year maturity with no fixed repayment dates prior to the end of the three-year term ending December 2022. Borrowings under the credit facility are secured by a first charge over substantially all of the Corporation's assets. Depending on the type of advance, interest rates under the credit facility are based on Canada prime rate, US base rate, Banker Acceptance (BA), London Interbank Offered Rate (LIBOR) or Euro Interbank Offered Rate (EURIBOR) plus an additional 0.75% to 2.00%. The Corporation did not have any borrowings under the credit facility as at or during the year ended December 31, 2019. The credit facility contains customary representations and warranties, events of default, and certain financial and non-financial covenants the Corporation is required to comply with. As at December 31, 2019, the Corporation was in compliance with all applicable covenants.

On May 31, 2019, the Corporation's previous credit facilities with Royal Bank of Canada expired. The following were the two facilities available to the Corporation prior to the expiration:

The Corporation had no borrowing under these previous credit facilities in 2019.

Capital management

The Corporation's 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 could issue new shares, repurchase shares, approve regular or special dividends or issue debt. The Corporation's senior management is responsible for managing capital through regular reviews of financial information to ensure sufficient resources are available to meet operating requirements and investments to support its long term growth strategy. The Board of directors is responsible for overseeing this process. The Corporation's financing and refinancing decisions are made on a specific transaction basis and depend on such things as the Corporation's 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 those required to maintain its credit facility. There were no changes in the Corporation's approach to capital management during the year.

24. PRIOR YEAR TAX REBATE

During the second quarter of 2019, the Corporation filed for a tax rebate of $6,027, net of fees, related to prior years and was accepted by the tax authorities. The amount was included as a reduction of direct cost of revenue in the consolidated statements of comprehensive income. The related receivable and associated fees payable are recorded in accounts receivable and accounts payable and accrued liabilities in the consolidated statements of financial position, respectively. Subsequent to year end, the Corporation received the tax rebate from the tax authorities. 


Points International Ltd.: Exhibit 99.3 - Filed by newsfilecorp.com

POINTS INTERNATIONAL LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS

INTRODUCTION

Our Management's Discussion and Analysis ("MD&A") of financial condition and results of operations contains references to Points International Ltd. and its subsidiaries using words "we," "our," and "us."

This MD&A should be read in conjunction with our audited consolidated financial statements (including the notes thereto) for the years ended December 31, 2019 and 2018. Further information, including the Annual Information Form ("AIF") and Form 40-F for the year ended December 31, 2019, may be accessed at www.sedar.com or www.sec.gov.

We have prepared the MD&A with reference to the Form 51-102F1 MD&A disclosure requirements established under National Instrument 51-102 "Continuous Disclosure Obligations" of the Canadian Securities Administrators.

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 4, 2020 and was reviewed by our Audit Committee and approved by our 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, gross profit, Adjusted EBITDA, contribution, 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," "continue," "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 our expectations, estimates and projections regarding future events. Certain significant forward-looking statements included in this MD&A include statements regarding: revenue growth and expected gross profit and Adjusted EBITDA; our pipeline opportunities including expected cross-selling opportunities; our ability to generate cash through normal course operations to fund capital expenditure needs and current operating and working capital requirements, including current lease obligations; and the financial obligations with respect to revenue guarantees.


Although we believe 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 we will be able to maintain our existing contractual relationships and products, that such products continue to perform in a manner consistent with our past experience, that we will be able to generate new business from our pipeline at expected margins, in-market and newly launched products and services will perform in a manner consistent with our past experience and we will be able to contain costs. Our ability to convert our pipeline of prospective partners and product launches and cross-sell existing partners is subject to significant risk and there can be no assurance that we will launch new partners or new products with existing partners as expected or planned nor can there be any assurance that we will be successful in maintaining our existing contractual relationships or maintaining existing products with existing partners. Other important assumptions, factors, risks and uncertainties are included in the press release announcing our fourth quarter and 2019 financial results, and those described in our other filings with applicable securities regulators, including our AIF, Form 40-F, annual and interim MD&A, and annual consolidated financial statements and interim condensed consolidated financial statements and the notes thereto. These documents are available at www.sedar.com and www.sec.gov.

The forward-looking statements contained in this MD&A are made as at the date of this MD&A and, accordingly, are subject to change after such date. Except as required by law, we do 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.

BUSINESS OVERVIEW

We are the global leader in providing loyalty e-commerce and technology solutions to the loyalty industry, connecting loyalty programs, 3rd party brands and end consumers across a global transaction platform. We partner with leading loyalty brands by providing solutions that help make their programs more valuable and engaging, while driving revenue and increasing profitability to the program. We do not manage our own loyalty program nor do we offer the core technology that operates a loyalty program.  Our business is focused on becoming an important strategic partner to the world's most successful loyalty programs by cooperating with them on valuable, private label and ancillary services.

At its simplest, our products and services are designed to benefit loyalty programs by: (1) increasing loyalty program revenues and profitability through the sale of loyalty program currency (such as frequent flyer miles or hotel points) or related travel and loyalty services direct to end consumers or third parties; (2) driving efficient cost management to loyalty program operators by offering non-core redemption options; and (3) enhancing loyalty program member engagement. We now have approximately 75 commercial agreements or integrations with loyalty programs or third parties globally. Most of our commercial contracts enable us to transact directly or indirectly with the loyalty programs' member base to facilitate the sale, redemption or earning of loyalty currency online. Our commercial agreements with loyalty program partners are typically for fixed terms of three to five years. Contracts will generally renew with either an annual evergreen clause or a new contract extension for a set term.


Our Loyalty Commerce Platform ("LCP") is the backbone of our product and service offerings. The LCP offers a consistent interface for loyalty programs and third parties, providing broad access to loyalty transaction capabilities, program integration, analytics, reporting, security and real-time fraud services. We have direct integrations with approximately 75 loyalty programs and third parties, including merchants and other technology companies in the loyalty and travel space. 

Collectively, our network of loyalty program partners represents over 1 billion loyalty program accounts. Our platform and integrations typically provide us with full debit and credit functionality, enabling us to deposit or withdraw loyalty currency from each of these accounts.  We view these integrations as a strategic asset that uniquely positions us to connect third party channels with highly engaged loyalty program members and the broader loyalty market. In addition, our platform is positioned to collect transaction related insights that we can leverage to increase online conversion percentages, transactions, and ultimately revenues for us and our partners. 

Our loyalty partner network includes the following leading loyalty brands:

 

 

·      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

·      World of Hyatt

·      Delta Air Lines SkyMiles

·      InterContinental Hotels Group

·      JetBlue TrueBlue 

·      Wyndham Rewards         

·      LATAM Pass

·      Emirates Skywards

·      Lufthansa's Miles & More

·      Chase Ultimate Rewards

·      Marriott Bonvoy

·      Citi ThankYou

·      Etihad Guest

·      Velocity Frequent Flyer

Our organization integrates extensive knowledge and expertise in the loyalty and travel sectors with the agility and innovation of a technology start up, allowing us to better serve our loyalty program partners while maintaining our technical and marketing leadership. We are headquartered in Toronto, Canada with regional offices in San Francisco, London, Singapore and Dubai.


Points International Ltd.'s shares are listed on both the Toronto Stock Exchange ("TSX") under the trading symbol PTS and on the NASDAQ Capital Market under the trading symbol PCOM.

The Loyalty Industry

Since their inception, loyalty programs have changed the way consumers interact with their associated brands and how they purchase products and services. Businesses have leveraged loyalty to strengthen their brand, enrich relationships with existing customers, and attract and engage new customers. Loyalty programs are seen both as strategic marketing assets of an organization, and as highly profitable cash-generating businesses, particularly in the travel and financial services sectors.

As the prominence of loyalty program co-branded credit cards has increased, the size and profitability of the loyalty industry has grown significantly. Many loyalty programs, particularly in the airline and hospitality verticals, have long-term contracts with banks in which they sell significant volumes of points and miles to credit cards on an annual basis to award to customers. Similar commercial arrangements now exist with loyalty programs and retailers who are looking to add loyalty as a consumer incentive to their brand.

These types of commercial arrangements have established a massive global loyalty industry fueled by the sale and redemption of loyalty currency. Today, it is estimated that the majority of loyalty currency issued in North America is now sold by loyalty program operators to third parties, including credit card companies and other merchants. While loyalty programs must account for the issuance of this currency as a future obligation on their balance sheet to account for its eventual redemption, the cost of each mile or point is significantly lower than what they are sold for. Many North American airlines have generated significant revenues from their loyalty programs which can account for a significant proportion of overall airline profits. At the same time, there is a need for loyalty programs to actively manage the resulting loyalty liability with cost-effective redemption options. According to Bond Brand Loyalty's "The Loyalty Report 2017", the cumulative points liability for all US loyalty programs was estimated at US$100 billion.

Overall loyalty program membership continues to grow. 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 innovate in order to drive customer activities. 


As the loyalty market continues to change, we are uniquely positioned to meet our loyalty program partners' needs.  We believe that our continued focus on innovation will maintain our leading position in technology and marketing services, enabling us to enhance existing products and services while delivering new loyalty solutions to market that meet the needs of our partners and their members.

OUR OPERATING STRUCTURE

Our business combines attributes of both an e-commerce platform and a marketing services business to offer a portfolio of consumer or business facing products and services that facilitate either the accrual or redemption of loyalty currency (points or miles). Accrual transactions are typically focused on generating revenue for our loyalty program partners while redemption transactions are focused on offering additional engagement options for program members.

Core to our operations is the LCP, an open, Application Program Interface (API) based transaction processing platform that we leverage for all aspects of the business. The key functions of the LCP include direct, real time integrations into our partners' loyalty program databases that allow for customer validation and information sharing as well as debit and/or credit of loyalty program currency.  Of growing importance to our business is the marketing automation capability that we continue to develop as part of the LCP's functionality. Lastly, security, fraud mitigation, auditing and reporting functions are also centralized via the LCP. 

All of the products and services we offer benefit from this unified operating infrastructure in two key ways.  First, they allow us to launch and manage multiple products and services with increased efficiency. Secondly, our ability to aggregate and anonymize the consolidated data flowing across the platform from many programs, regions and transaction types facilitates our automated marketing and merchandising efforts.

Leveraging the LCP, we operate in three segments, each of which contain multiple loyalty products and services.

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 buy, gift, transfer, reinstate, accelerator and elite services.  These offerings provide loyalty program members the ability to buy loyalty program currency for themselves, as gifts for others, perform a transfer of loyalty currency to another loyalty program member, reinstate previously expired loyalty currency, accelerate purchases of loyalty currency in conjunction with other transactions, or to access a higher tier status.


Loyalty Currency Retailing services provide high margin revenue to our loyalty program partners while increasing member engagement by unlocking the value of loyalty currency in the members' accounts. We have direct partnerships with over 30 loyalty program partners who leverage at least one of our Loyalty Currency Retailing solutions. All loyalty program partners who leverage our Loyalty Currency Retailing services are within the airline or hospitality verticals. Typically, we find our solutions competing with the internal technology departments of loyalty programs, leading to a "buy vs. build" decision. We have had success in becoming an outsourcing solution to loyalty programs that previously provided these same services in-house. Given this dynamic, the length of our sales cycle for these solutions can be difficult to predict.

We take a principal role in the retailing of loyalty currencies in approximately two thirds of our loyalty program partnerships in this segment. As principal, we will sell loyalty program currency directly to the program members at a retail rate while purchasing points and miles at a wholesale rate from the program partner. Under a principal arrangement, we will typically provide the loyalty program partner an annual revenue guarantee for the term of the commercial agreement. In addition, we will pay for all credit card related fees and assume all credit risk by providing real-time fraud detection and risk mitigation services. We also have a substantial level of responsibility with respect to marketing, analytics, pricing and commercial transaction support. Revenue earned under a principal arrangement is included in Principal revenue in our consolidated financial statements and represents the gross amount of the retail transaction collected from loyalty program members. Wholesale costs paid to loyalty programs for loyalty currency are included in Direct cost of revenue in our consolidated financial statements.

Alternatively, we may assume an agency role in the retailing and wholesaling of loyalty currencies, which is determined by the contractual arrangement in place with the loyalty program partner and their members. In these arrangements, we typically take a less active role in the retailing of loyalty currency and earn a commission on each transaction.  Revenue earned under an agency arrangement is included in Other partner revenue in our consolidated financial statements and represents the amount of the commission earned. In these arrangements, we typically take less risk in the relationship and have less control as it relates to the sale of loyalty currency to end consumers.

Platform Partners

The Platform Partners segment is comprised of a broad range of applications that are connected to and enabled by the functionality of the LCP.  The LCP provides third parties transaction level access to loyalty program members and the ability to access the loyalty currencies of our program partners. Loyalty programs, merchants, and other consumer service applications leverage the LCP to broadly distribute loyalty currency and loyalty commerce transactions through multiple channels.

Included in Platform Partners are multiple third-party managed applications that are enabled by the LCP, many of which are redemption-based services that offer efficient cost management solutions to loyalty programs.  Also included in this segment are earn-based services, where merchants who partner with us can purchase loyalty currency to offer to their customers as an award for every day shopping.  The majority of revenue in this segment is earned on a commission or transaction fee basis, which is included in Other partner revenue in our consolidated financial statements. In addition, we generate revenue from recurring monthly hosting fees on certain services, which are recorded in Principal revenue in our consolidated financial statements.


Points Travel

The Points Travel segment connects the world of online travel bookings with the broader loyalty industry. To facilitate this, we developed the Points Travel product, the first white-label online travel service specifically designed for loyalty programs.  The Points Travel product allows us to partner with loyalty programs in order to provide a seamless travel booking experience for loyalty program members, enabling members to earn and redeem their loyalty currency while making hotel bookings and car rentals online. 

We currently have commercial arrangements with 10 travel-based loyalty programs who leverage at least one of our white-label Points Travel services.  Our external competition for winning loyalty programs' business for these services is high, as we typically compete against the major online travel agencies ("OTAs"). When we win new business and deploy these services to market, the sales ramp is typically slower than that experienced with our other loyalty solutions, mainly due to increased online competition for booking hotels or car rentals from OTAs or direct with hotels and car rental companies. However we believe the opportunity for financial growth within this segment is high given the continued growth and overall size of the online travel market.

Revenue in this segment is generated from commissions, which are typically the gross amount charged to end consumers for hotel bookings or car rental, less the wholesale cost to acquire the hotel room or car rental, cost of loyalty currencies delivered to the consumers and paid to the loyalty program, and other direct costs for online hotel bookings and car rentals.  This revenue is included in Other partner revenue in our consolidated financial statements.

KEY GROWTH DRIVERS

Growing the Number of Loyalty Program Partners

Throughout most of our history, adding new loyalty program partners has been an important source of growth. Continuing to grow the number of loyalty program partners connected to our platform remains a key growth factor and important part of our strategy. As of December 31, 2019, we have a network of nearly 60 global loyalty programs integrated into the LCP. Approximately 90% of our current loyalty program partners are frequent flyer or hospitality loyalty programs. In addition, approximately 80% of our loyalty program partners are based out of either North America or Europe.

The majority of our loyalty program partners are global, with end consumers and transactions originating from around the world. For that reason, the LCP was designed and operates as a global e-commerce platform, providing multiple currency and payment options as well as language specific end user experiences. We feel the investments we have made on our platform and products position us well to acquire new loyalty program partners in other geographic markets.


While we currently have a broad set of relationships with travel-based programs in North America and Europe, we believe there are substantial growth opportunities to add additional loyalty program partners, particularly in the Asia Pacific, Middle Eastern and South American loyalty markets. We also believe there is significant opportunity to partner with loyalty programs in other verticals, specifically financial services. We continue to focus on adding business development resources with travel and loyalty expertise combined with specific geographic and vertical experience to further diversify our revenue and loyalty program network.

Cross-sell Existing Partners

We believe our existing network of loyalty program partners represents a significant opportunity to cross-sell additional products and services. At the beginning of a new loyalty program partnership, most programs will typically deploy a small subset of our total products and services. As we demonstrate the benefits of our platform, we focus sales efforts with these partners on additional products and services that best fit their program, typically with limited incremental marketing and sales expense. As we launch new functionality and products across our three operating segments, we expect that our opportunity to cross-sell additional services to existing partners that do not currently leverage our full platform will increase. 

Retaining and Growing Existing Loyalty Program Partner Deployments

The ability to retain and grow our in-market products and services with existing loyalty program partners remains an important growth driver for us and underlines many of the investments we make in our product and data capabilities. We believe our continued focus on product, technology and data analytics has been and will continue to be a critical driver of growth. With integrations into nearly 60 leading loyalty programs, the LCP has positioned us to continually improve our ability to consume loyalty data and personalize offers, increasing the effectiveness of our marketing campaigns and our partners' profitability while minimizing member communications. We believe the market awareness for our products and services among loyalty program members is generally low and that increasing this awareness through effective marketing and product innovation can increase the penetration of our products and services. Lastly, we indirectly benefit from the growth in our loyalty program partners membership bases as well as the growth in the loyalty market in general.

HOW WE ASSESS PERFORMANCE AND NON-GAAP FINANCIAL MEASURES

Our financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). We use certain non-GAAP measures, which are defined below, to better assess our underlying performance. These measures are reviewed regularly by management and the Board of Directors in assessing our performance and in making decisions about ongoing operations. In addition, we use these measures to determine components of management compensation. We believe that these measures are also used by investors, analysts and other interested parties as an indicator of our 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. The reconciliations for these non-GAAP measures from the closest GAAP measure are contained below.


Adjusted Earnings before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA")

We believe that Adjusted EBITDA is useful to management and investors as a supplemental measure to evaluate our operating performance.

Adjusted EBITDA is a non-GAAP financial measure, which is defined as earnings before income tax expense, finance costs, depreciation and amortization, equity-settled share-based payment expense, foreign exchange and other one-time costs or benefits such as a tax rebate related to prior periods. We exclude these items because they affect the comparability of our financial results and could potentially distort the analysis of trends in our business performance. Adjusted EBITDA is a component of our management incentive plan and is used by management to assess our operating performance. The presentation of Adjusted EBITDA is to provide additional useful information to investors and analysts and the measure does not have any standardized meaning under IFRS. Adjusted EBITDA should therefore not be considered in isolation or used in substitute for measures of performance prepared in accordance with IFRS. Other issuers may calculate Adjusted EBITDA differently.

Reconciliation of Net Income to Adjusted EBITDA

    For the three months ended   
(In thousands of US dollars) (unaudited)   Dec 31, 2019     Dec 31, 2018     $ Variance     % Variance  
Net income $ 2,758   $ 2,246   $ 512     23%  
Income tax expense   1,475     865     610     71%  
Finance costs   48     -     48     -  
Depreciation and amortization   1,269     740     529