Points International Ltd. - Exhibit 99.2 - 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 unaudited
condensed consolidated interim financial statements (including the notes
thereto) as at and for the three and six months ended June 30, 2019, the 2018
annual MD&A and the 2018 audited annual consolidated financial statements
and notes thereto and other recent filings with Canadian and US securities
regulatory agencies, which may be accessed at www.sedar.com or www.sec.gov.
All financial data herein has been prepared in accordance with
International Accounting Standard 34, Interim Financial Reporting, as issued by
the International Accounting Standards Board (“IASB”) and all dollar amounts
herein are in thousands of United States dollars unless otherwise specified.
This MD&A is dated as of August 1, 2019 and was reviewed by the Audit
Committee and approved by the Corporation’s Board of Directors.
FORWARD-LOOKING STATEMENTS
This MD&A contains or incorporates forward-looking
statements within the meaning of United States securities legislation and
forward-looking information within the meaning of Canadian securities
legislation (collectively, “forward-looking statements”). These forward-looking
statements relate to, among other things, revenue, earnings, 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; the financial obligations
with respect to revenue guarantees; and receipt of funds for tax rebates.
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 second quarter
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, annual consolidated financial statements and condensed consolidated
interim financial statements and the notes thereto. These documents are
available at www.sedar.com and www.sec.gov.
1
The forward-looking statements contained in this MD&A are
made as at the date of this MD&A and, accordingly, are subject to change
after such date. Except as required by law, 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, third
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, 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 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. Our sales process
begins with loyalty programs, of which we now have commercial agreements with
nearly 60 leading loyalty brands 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 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 60 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.
2
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 |
| • Amtrak Guest
Rewards |
• 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, United States,
London, United Kingdom and Singapore.
Points International Ltd.’s shares are dual listed on the
Toronto Stock Exchange under the trading symbol PTS and on the NASDAQ Capital
Market under the trading symbol PCOM.
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 increasingly seen not only as strategic
marketing assets of an organization, but also as highly profitable and
cash-generative 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
give to customers for every day spend. Likewise, 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 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 program operators 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. Given the size and
scale of some frequent flyer programs, many North American airlines have
generated significant revenues from their loyalty programs that 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 to be valued at roughly US$100 billion.
3
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 provide innovative value propositions in order to
drive activity in their programs.
As the loyalty market continues to change, we have been
evolving to meet our partners’ needs by leveraging our unique position in the
loyalty industry. We believe that a continued focus on innovation will maintain
our leading market 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 a 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 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 status miles services. These offerings
provide loyalty program members the ability to buy loyalty program currency
(such as frequent flyer miles or hotel points) for themselves, as gifts for
others, purchase status miles to reach a tier status, perform a transfer of
loyalty currency to another member within the same loyalty program or reinstate
previously expired loyalty currency.
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.
4
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 direct 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 condensed consolidated interim 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 condensed consolidated interim 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 condensed
consolidated interim 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 condensed consolidated interim financial statements. In addition,
we generate revenue from recurring monthly hosting fees on certain services,
which are recorded in Principal revenue in our condensed consolidated interim
financial statements.
Points Travel
The Points Travel segment
connects the world of online travel bookings with the broader loyalty industry.
In 2014, we acquired Accruity Inc., the San Francisco based start-up operator of
the PointsHound loyalty-based hotel booking service. Leveraging the PointsHound technology,
we developed our Points Travel product, the first white-label online travel
service specifically designed for loyalty programs.
5
We partner with loyalty programs 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 11 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 primarily 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. The majority of revenue in this segment is included in Other partner
revenue in our condensed consolidated interim 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 June 30, 2019, we had
commercial relationships with nearly 60 loyalty program partners. Approximately
80% of our current partners are travel based 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 and South American loyalty markets. We also
believe there is significant opportunity to partner with loyalty programs in
other verticals, specifically the financial services vertical. 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.
6
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 approximately 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.
Effective Margin
Effective margin is a
non-GAAP financial measure, which is calculated by dividing Adjusted EBITDA by
Gross Profit (defined below). We use Effective margin as a key internal measure
of operating efficiency. This measure demonstrates our ability to generate
profitability after we have funded operating expenses.
7
Reconciliation of Net Income to Adjusted EBITDA
| |
|
For the three months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Net income |
$ |
6,276 |
|
$ |
1,812 |
|
$ |
4,464 |
|
|
246% |
|
| Income tax expense |
|
2,325 |
|
|
684 |
|
|
1,641 |
|
|
240% |
|
| Finance costs |
|
36 |
|
|
- |
|
|
36 |
|
|
- |
|
| Depreciation and amortization |
|
1,126 |
|
|
900 |
|
|
226 |
|
|
25% |
|
| Foreign exchange loss |
|
398 |
|
|
85 |
|
|
313 |
|
|
368% |
|
| Equity-settled share-based
payment expense |
|
1,112 |
|
|
1,168 |
|
|
(56 |
) |
|
(5% |
) |
| Prior years tax rebate, net
of fees |
|
(6,027 |
) |
|
- |
|
|
(6,027 |
) |
|
- |
|
| Adjusted EBITDA |
$ |
5,246 |
|
$ |
4,649 |
|
$ |
597 |
|
|
13% |
|
| |
|
For the six months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
June 30, 2019 |
|
|
June 30, 2018 |
|
|
$Variance |
|
|
% Variance |
|
| Net income |
$ |
8,033 |
|
$ |
4,070 |
|
$ |
3,963 |
|
|
97% |
|
| Income tax expense |
|
3,010 |
|
|
1,546 |
|
|
1,464 |
|
|
95% |
|
| Finance costs |
|
112 |
|
|
- |
|
|
112 |
|
|
- |
|
| Depreciation and amortization |
|
2,268 |
|
|
1,766 |
|
|
502 |
|
|
28% |
|
| Foreign exchange loss (gain) |
|
154 |
|
|
(73 |
) |
|
227 |
|
|
(311% |
) |
| Equity-settled share-based
payment expense |
|
2,329 |
|
|
2,143 |
|
|
186 |
|
|
9% |
|
| Prior years tax rebate, net
of fees |
|
(6,027 |
) |
|
- |
|
|
(6,027 |
) |
|
- |
|
| Adjusted EBITDA |
$ |
9,879 |
|
$ |
9,452 |
|
$ |
427 |
|
|
5% |
|
Gross Profit and Gross Margin
Gross
profit, defined by management as total revenues less direct costs of revenue, is
a non-GAAP financial measure which does not have any standardized meaning
prescribed by IFRS and is therefore unlikely to be comparable to similar
measures presented by other issuers. 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.
Gross margin is a non-GAAP financial measure and is defined by
management as Gross profit as a percentage of Total revenue.
Reconciliation of Total Revenue to Gross Profit
| |
|
For the three months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Total Revenue |
$ |
100,230 |
|
$ |
97,859 |
|
$ |
2,371 |
|
|
2% |
|
| Less: |
|
|
|
|
|
|
|
|
|
|
|
|
| Direct cost of revenue |
|
79,778 |
|
|
84,158 |
|
|
(4,380 |
) |
|
(5% |
) |
| Gross profit |
$ |
20,452 |
|
$ |
13,701 |
|
$ |
6,751 |
|
|
49% |
|
| Gross margin |
|
20% |
|
|
14% |
|
|
|
|
|
|
|
8
| |
|
For the six months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Total Revenue |
$ |
196,173 |
|
$ |
186,969 |
|
$ |
9,204 |
|
|
5% |
|
| Less: |
|
|
|
|
|
|
|
|
|
|
|
|
| Direct cost of revenue |
|
162,355 |
|
|
159,752 |
|
|
2,603 |
|
|
2% |
|
| Gross profit |
$ |
33,818 |
|
$ |
27,217 |
|
$ |
6,601 |
|
|
24% |
|
| Gross margin |
|
17% |
|
|
15% |
|
|
|
|
|
|
|
Adjusted Operating Expenses
Adjusted operating expenses is a non-GAAP financial measure,
which is defined as Employment Costs, Marketing and Communications, Technology
Services and Other Operating Expenses, excluding equity-settled share-based
payment expense. Adjusted operating expenses are predominantly cash-based
expenditures. The closest GAAP measure is Total Operating Expenses in the
condensed consolidated interim financial statements and the reconciliation from
Total Operating Expenses to Adjusted Operating Expenses is shown below.
Reconciliation of Total Operating Expenses to Adjusted
Operating Expenses
| |
|
For the three months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Total Operating Expenses |
$ |
12,072 |
|
$ |
11,332 |
|
$ |
740 |
|
|
7% |
|
| Subtract (add): |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and
amortization |
|
1,126 |
|
|
900 |
|
|
226 |
|
|
25% |
|
| Foreign exchange loss |
|
398 |
|
|
85 |
|
|
313 |
|
|
368% |
|
| Equity-settled share-based payment expense |
|
1,112 |
|
|
1,168 |
|
|
(56 |
) |
|
(5% |
) |
| Adjusted Operating Expenses |
$ |
9,436 |
|
$ |
9,179 |
|
$ |
257 |
|
|
3% |
|
| |
|
For the six months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Total Operating Expenses |
$ |
23,182 |
|
$ |
21,805 |
|
$ |
1,377 |
|
|
6% |
|
| Subtract (add): |
|
|
|
|
|
|
|
|
|
|
|
|
| Depreciation and
amortization |
|
2,268 |
|
|
1,766 |
|
|
502 |
|
|
28% |
|
| Foreign exchange loss (gain) |
|
154 |
|
|
(73 |
) |
|
227 |
|
|
(311% |
) |
| Equity-settled share-based payment expense |
|
2,329 |
|
|
2,143 |
|
|
186 |
|
|
9% |
|
| Adjusted Operating Expenses |
$ |
18,431 |
|
$ |
17,969 |
|
$ |
462 |
|
|
3% |
|
Direct and Indirect Adjusted Operating
Expenses
Adjusted operating expenses are allocated to either direct
adjusted operating expenses or indirect adjusted operating expenses. Direct
adjusted operating expenses are expenses which are directly attributable to each
operating segment. 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.
9
| |
|
For the three months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Adjusted Operating Expenses |
$ |
9,436 |
|
$ |
9,179 |
|
$ |
257 |
|
|
3% |
|
| Less: |
|
|
|
|
|
|
|
|
|
|
|
|
| Indirect Adjusted Operating Expenses |
|
3,364 |
|
|
3,442 |
|
|
(78 |
) |
|
(2% |
) |
| Direct Adjusted Operating Expenses |
$ |
6,072 |
|
$ |
5,737 |
|
$ |
335 |
|
|
6% |
|
| |
|
For the six months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Adjusted Operating Expenses |
$ |
18,431 |
|
$ |
17,969 |
|
$ |
462 |
|
|
3% |
|
| Less: |
|
|
|
|
|
|
|
|
|
|
|
|
| Indirect Adjusted Operating Expenses |
|
6,664 |
|
|
6,693 |
|
|
(29 |
) |
|
- |
|
| Direct Adjusted Operating Expenses |
$ |
11,767 |
|
$ |
11,276 |
|
$ |
491 |
|
|
4% |
|
Contribution
Contribution is a non-GAAP financial measure and is defined as
Gross profit for the relevant operating segments less direct adjusted operating
expenses for those segments. We believe that contribution is a key financial
measure to assess the underlying profitability of our three operating segments,
as this metric excludes all indirect adjusted operating expenses that are shared
by the three operating segments. This is the measure used by the Chief Operating
Decision Maker when reviewing segment results and making resource allocation
decisions.
The presentation of contribution provides additional useful
information to investors and analysts and the measure does not have any
standardized meaning under IFRS. Contribution should therefore not be considered
in isolation and other issuers may calculate contribution differently.
Reconciliation of Gross Profit to Contribution
| |
|
For the three months ended |
|
| (In thousands of US dollars) |
|
June 30, |
|
|
|
|
|
|
|
|
|
|
| (unaudited) |
|
2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Gross profit |
$ |
20,452 |
|
$ |
13,701 |
|
$ |
6,751 |
|
|
49% |
|
| Less: |
|
|
|
|
|
|
|
|
|
|
|
|
| Direct adjusted operating expenses |
|
6,072 |
|
|
5,737 |
|
|
335 |
|
|
6% |
|
| Contribution |
$ |
14,380 |
|
$ |
7,964 |
|
$ |
6,416 |
|
|
81% |
|
| |
|
For the six months ended |
|
| (In thousands of US dollars) |
|
|
|
|
June 30, |
|
|
|
|
|
|
|
| (unaudited) |
|
June 30, 2019 |
|
|
2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Gross profit |
$ |
33,818 |
|
$ |
27,217 |
|
$ |
6,601 |
|
|
24% |
|
| Less: |
|
|
|
|
|
|
|
|
|
|
|
|
| Direct adjusted operating expenses |
|
11,767 |
|
|
11,276 |
|
|
491 |
|
|
4% |
|
| Contribution |
$ |
22,051 |
|
$ |
15,941 |
|
$ |
6,110 |
|
|
38% |
|
10
SELECTED FINANCIAL INFORMATION
The following information is provided to give context for the
broader comments elsewhere in this report.
| |
|
For the three months ended |
|
| (In thousands of US dollars, except
share |
|
|
|
|
|
|
|
|
|
|
|
|
| and per share amounts) (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
| |
|
2019 |
|
|
2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
| Principal revenue |
$ |
94,289 |
|
$ |
91,398 |
|
$ |
2,891 |
|
|
3% |
|
| Other partner
revenue |
|
5,941 |
|
|
6,461 |
|
|
(520 |
) |
|
(8% |
) |
| Total revenue |
|
100,230 |
|
|
97,859 |
|
|
2,371 |
|
|
2% |
|
| Gross profit |
|
20,452 |
|
|
13,701 |
|
|
6,751 |
|
|
49% |
|
| Gross margin |
|
20% |
|
|
14% |
|
|
|
|
|
|
|
| Adjusted
operating expenses |
|
9,436 |
|
|
9,179 |
|
|
257 |
|
|
3% |
|
| Finance income |
|
257 |
|
|
127 |
|
|
130 |
|
|
102% |
|
| Adjusted EBITDA |
|
5,246 |
|
|
4,649 |
|
|
597 |
|
|
13% |
|
| Effective margin |
|
26% |
|
|
34% |
|
|
|
|
|
|
|
| Total operating
expenses |
|
12,072 |
|
|
11,332 |
|
|
740 |
|
|
7% |
|
| Net income |
$ |
6,276 |
|
$ |
1,812 |
|
$ |
4,464 |
|
|
246% |
|
| Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
$ |
0.46 |
|
$ |
0.12 |
|
$ |
0.34 |
|
|
283% |
|
| Diluted |
$ |
0.45 |
|
$ |
0.12 |
|
$ |
0.33 |
|
|
275% |
|
| Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
13,777,844 |
|
|
14,410,539 |
|
|
(632,695 |
) |
|
(4% |
) |
| Diluted |
|
13,957,009 |
|
|
14,512,883 |
|
|
(555,874 |
) |
|
(4% |
) |
| Total assets |
$ |
118,848 |
|
$ |
115,763 |
|
$ |
3,085 |
|
|
3% |
|
| Total liabilities |
|
76,522 |
|
|
78,333 |
|
|
(1,811 |
) |
|
(2% |
) |
| Total shareholders’ equity |
$ |
42,326 |
|
$ |
37,430 |
|
$ |
4,896 |
|
|
13% |
|
11
| |
|
For the six months ended |
|
| (In thousands of US dollars, except share
|
|
|
|
|
|
|
|
|
|
|
|
|
| and per share amounts) (Unaudited) |
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
| |
|
2019 |
|
|
2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
| Principal revenue |
$ |
184,295 |
|
$ |
174,705 |
|
$ |
9,590 |
|
|
5% |
|
| Other partner
revenue |
|
11,878 |
|
|
12,264 |
|
|
(386 |
) |
|
(3% |
) |
| Total revenue |
|
196,173 |
|
|
186,969 |
|
|
9,204 |
|
|
5% |
|
| Gross profit |
|
33,818 |
|
|
27,217 |
|
|
6,601 |
|
|
24% |
|
| Gross margin |
|
17% |
|
|
15% |
|
|
|
|
|
|
|
| Adjusted
operating expenses |
|
18,431 |
|
|
17,969 |
|
|
462 |
|
|
3% |
|
| Finance income |
|
519 |
|
|
204 |
|
|
315 |
|
|
154% |
|
| Adjusted EBITDA |
|
9,879 |
|
|
9,452 |
|
|
427 |
|
|
5% |
|
| Effective margin |
|
29% |
|
|
35% |
|
|
|
|
|
|
|
| Total operating
expenses |
|
23,182 |
|
|
21,805 |
|
|
1,377 |
|
|
6% |
|
| Net income |
$ |
8,033 |
|
$ |
4,070 |
|
$ |
3,963 |
|
|
97% |
|
| Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
$ |
0.58 |
|
$ |
0.28 |
|
$ |
0.30 |
|
|
107% |
|
| Diluted |
$ |
0.57 |
|
$ |
0.28 |
|
$ |
0.29 |
|
|
104% |
|
| Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
13,890,236 |
|
|
14,442,405 |
|
|
(552,169 |
) |
|
(4% |
) |
| Diluted |
|
14,036,297 |
|
|
14,518,621 |
|
|
(482,324 |
) |
|
(3% |
) |
| Total assets |
$ |
118,848 |
|
$ |
115,763 |
|
$ |
3,085 |
|
|
3% |
|
| Total liabilities |
|
76,522 |
|
|
78,333 |
|
|
(1,811 |
) |
|
(2% |
) |
| Total shareholders’ equity |
$ |
42,326 |
|
$ |
37,430 |
|
$ |
4,896 |
|
|
13% |
|
12
FINANCIAL INFORMATION BY SEGMENT
| |
|
For the three months ended |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands of US dollars) (Unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Loyalty Currency
Retailing |
|
|
|
|
|
|
|
|
|
|
|
|
| Principal revenue |
|
93,673 |
|
|
90,737 |
|
|
2,936 |
|
|
3% |
|
| Other partner
revenue |
|
4,111 |
|
|
4,769 |
|
|
(658 |
) |
|
(14% |
) |
| Total revenue |
|
97,784 |
|
|
95,506 |
|
|
2,278 |
|
|
2% |
|
| Gross profit |
|
18,203 |
|
|
11,508 |
|
|
6,695 |
|
|
58% |
|
| Direct adjusted operating
expenses |
|
3,326 |
|
|
3,366 |
|
|
(40 |
) |
|
(1% |
) |
| Contribution |
|
14,877 |
|
|
8,142 |
|
|
6,735 |
|
|
83% |
|
| Platform Partners |
|
|
|
|
|
|
|
|
|
|
|
|
| Principal
revenue |
|
616 |
|
|
638 |
|
|
(22 |
) |
|
(3% |
) |
| Other partner revenue |
|
1,285 |
|
|
1,268 |
|
|
17 |
|
|
1% |
|
| Total revenue |
|
1,901 |
|
|
1,906 |
|
|
(5 |
) |
|
- |
|
| Gross profit |
|
1,704 |
|
|
1,770 |
|
|
(66 |
) |
|
(4% |
) |
| Direct adjusted
operating expenses |
|
981 |
|
|
982 |
|
|
(1 |
) |
|
- |
|
| Contribution |
|
723 |
|
|
788 |
|
|
(65 |
) |
|
(8% |
) |
| Points Travel |
|
|
|
|
|
|
|
|
|
|
|
|
| Principal revenue |
|
- |
|
|
23 |
|
|
(23 |
) |
|
(100% |
) |
| Other partner
revenue |
|
545 |
|
|
424 |
|
|
121 |
|
|
29% |
|
| Total revenue |
|
545 |
|
|
447 |
|
|
98 |
|
|
22% |
|
| Gross profit |
|
545 |
|
|
423 |
|
|
122 |
|
|
29% |
|
| Direct adjusted operating
expenses |
|
1,765 |
|
|
1,389 |
|
|
376 |
|
|
27% |
|
| Contribution |
|
(1,220 |
) |
|
(966 |
) |
|
(254 |
) |
|
26% |
|
| |
|
For the six months ended |
|
| (In thousands of US dollars) (Unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Loyalty Currency Retailing |
|
|
|
|
|
|
|
|
|
|
|
|
| Principal
revenue |
|
183,153 |
|
|
173,389 |
|
|
9,764 |
|
|
6% |
|
| Other partner revenue |
|
8,249 |
|
|
8,724 |
|
|
(475 |
) |
|
(5% |
) |
| Total revenue |
|
191,402 |
|
|
182,113 |
|
|
9,289 |
|
|
5% |
|
| Gross profit |
|
29,388 |
|
|
22,667 |
|
|
6,721 |
|
|
30% |
|
| Direct adjusted
operating expenses |
|
6,511 |
|
|
6,620 |
|
|
(109 |
) |
|
(2% |
) |
| Contribution |
|
22,877 |
|
|
16,047 |
|
|
6,830 |
|
|
43% |
|
| Platform Partners |
|
|
|
|
|
|
|
|
|
|
|
|
| Principal revenue |
|
1,125 |
|
|
1,270 |
|
|
(145 |
) |
|
(11% |
) |
| Other partner
revenue |
|
2,667 |
|
|
2,673 |
|
|
(6 |
) |
|
- |
|
| Total revenue |
|
3,792 |
|
|
3,943 |
|
|
(151 |
) |
|
(4% |
) |
| Gross profit |
|
3,455 |
|
|
3,673 |
|
|
(218 |
) |
|
(6% |
) |
| Direct adjusted operating
expenses |
|
1,928 |
|
|
1,997 |
|
|
(69 |
) |
|
(3% |
) |
| Contribution |
|
1,527 |
|
|
1,676 |
|
|
(149 |
) |
|
(9% |
) |
| Points Travel |
|
|
|
|
|
|
|
|
|
|
|
|
| Principal
revenue |
|
17 |
|
|
46 |
|
|
(29 |
) |
|
(63% |
) |
| Other partner revenue |
|
962 |
|
|
867 |
|
|
95 |
|
|
11% |
|
| Total revenue |
|
979 |
|
|
913 |
|
|
66 |
|
|
7% |
|
| Gross profit |
|
975 |
|
|
877 |
|
|
98 |
|
|
11% |
|
| Direct adjusted
operating expenses |
|
3,328 |
|
|
2,659 |
|
|
669 |
|
|
25% |
|
| Contribution |
|
(2,353 |
) |
|
(1,782 |
) |
|
(571 |
) |
|
32% |
|
13
SEGMENTED RESULTS AND OPERATING HIGHLIGHTS
Loyalty Currency Retailing
Total revenue for
the Loyalty Currency Retailing segment increased $2,278 or 2%, to $97,784 for
the quarter ended June 30, 2019, primarily due to organic growth from our
existing principal partnerships and to a lesser extent, new partners added over
the last twelve months.
Gross profit for the second quarter of 2019 was $18,203, an
increase of $6,695 or 58% over the prior year period. The primary driver of this
increase was the impact of a tax rebate of $6,027 related to prior years that
was confirmed in the second quarter of 2019.
We believe it is appropriate to exclude the impact of this tax
rebate related to prior years from gross profit when assessing the performance
of the loyalty currency retailing segment. Gross profit in the second quarter of
2019, after excluding the impact of the prior years tax rebate, was $12,176, an
increase of 6% over the second quarter of 2018. Gross profit during the period
was adversely impacted by two factors: (1) stronger performance in the first
half of 2018 from one of our hotel partners due to heightened promotional
activity ahead of a scheduled merger with another hotel loyalty program partner;
and (2) the departure of a long-time Middle East partner in the back half of
2018 resulting from geopolitical issues beyond our control. These two factors
were more than offset by underlying growth in the segment from new partners
launched over the last twelve months and organic growth experienced from
existing partnerships.
Direct adjusted operating expenses in the second quarter of
2019 was relatively flat compared to the same period in 2018, decreasing 1% or
$40. Contribution for the second quarter of 2019 was $14,877, an increase of
$6,735 or 83% over the second quarter of 2018. Similar to the increase in gross
profit, the primary driver of this increase was the impact of a tax rebate of
$6,027 related to prior years that was confirmed in the second quarter of 2019.
Excluding the impact of this tax rebate related to prior periods, contribution
for the segment was $8,850, an increase of $708 or 9% relative to the second
quarter of 2018, in line with the change in gross profit.
From a business development perspective, we expanded our
relationship with the Emirates Skywards program, launching our accelerator
service in the second quarter of 2019. Skywards members can now boost their
miles earned from completing a flight booking with Emirates.
Platform Partners
Total revenue for the
platform partners segment was $1,901 for the quarter ended June 30, 2019, flat
with the comparable prior year period. Similarly, gross profit in the second
quarter of 2019 was $1,704, a decrease of $66 or 4% from the prior year period.
Gross profit in the second quarter was impacted by new economics associated with
a contract renewal with one of our larger partners in this segment that came
into effect at the beginning of 2019. The new contract structure is more heavily
weighted to a transaction fee based model compared to a fixed fee model, which
lessened the overall contribution from this partner in the short term but has
greater long-term economic potential over the term of the contract. Direct
adjusted operating expenses attributable to the segment were $981 in the second
quarter of 2019, flat with the second quarter of 2018. The Platform Partners
segment generated contribution of $723 in the second quarter of 2019, a decrease
of $65, inline with the year-over-year decrease in gross profit.
In the second quarter of 2019, we leveraged the LCP to connect
existing loyalty program partners with strong retail brands. First, we expanded
our Wyndham hotels partnership by adding them to the Marathon Fuel program
offering and launching an online earn mall, enabling program members the ability
to earn Wyndham Rewards for online shopping activity. In addition, we connected the
Hilton Honours program with the popular ride sharing service Lyft, to
incentivize riders with Hilton Honours points. Lastly, we connected the United
Airlines’ MileagePlus program with Home Chef, a popular meal kit delivery
service. Mileage plus members can now earn frequent flyer miles when they sign
up and make their first purchase with Home Chef.
14
Points Travel
Total revenue in the Points
Travel segment in the second quarter of 2019 increased 22% to $545. Similarly,
gross profit in the second quarter of 2019 was $545, an increase of 29% over the
second quarter of 2018.
The increase in gross profit was largely driven by a temporary
shut down of a Points Travel site for a portion of the prior year period, which
adversely impacted gross profit in the second quarter of 2018. The shut down
resulted from compliance issues encountered by our largest loyalty program
partner in the segment which were outside of our control. During the second
quarter of 2019, we continued to fund customer acquisition costs with a higher
than normal portion of our available margin, which partially offset the impact
of the prior period site shutdown. This has resulted in compressed per
transaction margins and lower gross profit growth in the second quarter of 2019,
but resulted in increased overall booking volume relative to the prior year
period.
Direct adjusted operating expenses for the quarter ended June
30, 2019 were $1,765, an increase of 27% over the comparable prior year quarter,
mainly due to increased personnel related expenses attributable to the Points
Travel segment. As a result, a contribution loss of $1,220 was generated in the
second quarter of 2019 compared to a contribution loss of $966 in the same
period in 2018.
REVIEW OF CONSOLIDATED PERFORMANCE
Revenue, Gross Profit, and Gross Margin
Consolidated revenue for the three months ended June 30, 2019
was $100,230, an increase of $2,371 or 2% over the comparable prior year period.
Consolidated revenue for the six month period ended June 30, 2019 was $196,173,
an increase of $9,204 or 5% over the six month period ended June 30, 2018. The
year- over-year increase in consolidated revenue in both periods was primarily
driven by organic growth from existing principal partnerships in the Loyalty
Currency Retailing segment, and to a lesser extent, the impact of new partner
launches in 2018. Organic revenue growth in the second quarter of 2019, which we
calculate as the year-over-year growth in revenue from existing partnerships and
products that have been in market for at least one year, was approximately 4% on
the consolidated business, after adjusting for the departure of a middle east
carrier in the latter half of 2018.
For the second quarter of 2019, consolidated gross profit was
$20,452, an increase of 49% over the comparable prior year period. Consolidated
gross profit for the six month period ended June 30, 2019 was $33,818, an
increase of 24% over the comparable prior year period. A primary driver of the
year over year increases was the impact of a tax rebate of $6,027 related to
prior years that was confirmed in the second quarter of 2019. We believe it is
appropriate to exclude the impact of this tax rebate related to prior years from
gross profit when assessing our performance. Excluding the impact of the tax
rebate related to prior years, gross profit for the second quarter of 2019 was
$14,425, a quarterly record and represents an increase of 5% over the comparable
prior year period. For the six months ended June 30, 2019, gross profit was
$27,791 after excluding the impact of the prior years tax rebate, an increase of
2% over the six months ended June 30, 2018.
15
The primary driver of the growth in gross profit, after
excluding the impact of the prior years’ tax rebate, was organic growth from in
market deployments in the loyalty currency retailing segment, and the impact of
new partnerships launched over the last twelve months. As expected, the
year-over-year growth was partially offset by two main factors: (1) stronger
performance in the first half of 2018 from one of our hotel partners due to
heightened promotional activity ahead of a scheduled merger with another hotel
loyalty program partner; and (2) the departure of a long time Middle East
partner in the back half of 2018 resulting from geopolitical issues beyond our
control.
Gross margin for the second quarter of 2019 increased to 20%
compared to 14% in the same period in 2018, largely due to the impact of the
prior years’ tax rebate. Excluding the impact of the tax rebate related to prior
years, gross margin was 14% in the second quarter of 2019, relatively flat with
the comparable prior year period. Gross margin for the six months ended June 30,
2019 was 17% compared to 15% for the six months ended June 30, 2018, largely due
to the impact of the prior years tax rebate. Excluding the impact of the prior
years’ tax rebate, gross margin for the six months ended June 30, 2019 was 14%,
a slight decline from 15% for the six month period ended June 30, 2018. This
slight decline was primarily due to a higher proportion of sales from our agency
partnerships in the Loyalty Currency Retailing segment for the six months ended
June 30, 2018, driving consolidated gross margin higher in the prior year
period.
Total Operating Expenses and Adjusted Operating
Expenses
For the second quarter of 2019, we incurred consolidated total
operating expenses of $12,072, an increase of $740 or 7% over the comparable
prior year period. Total operating expenses for the six month period ended June
30, 2019 was $23,182, an increase of $1,377 or 6% over the comparable period in
2018. The increase over the prior year periods was primarily due to increased
employment costs from increasing resource levels relative to the prior year. In
addition, depreciation and amortization expense increased in the three and six
month periods ended June 30, 2019 on a year-over-year basis, which was offset by
lower operating expenses, both resulting from the implementation of IFRS 16,
Leases.
For the second quarter of 2019, consolidated adjusted operating
expenses were $9,436, an increase of 3% over the comparable prior year period.
For the six month period ended June 30, 2019, consolidated adjusted operating
expenses were $18,431, an increase of $462 or 3% over the comparable six month
period in 2018. The increase was primarily attributable to increased employment
costs associated with the impact of additional resources added throughout 2018
and the first half of 2019. The increase in employment was partially offset by a
reduction to other operating expenses, which was due to lower professional fees
incurred in the second quarter of 2019 combined with the impact of the new IFRS
16, Leases standard. Under the new standard, straight-line operating
lease expenses are replaced with depreciation charges for right-of-use assets
and interest expense on lease liabilities, which resulted in a decrease in
adjusted operating expenses compared to the prior year quarter.
Finance income
Finance income is derived from interest earned on cash and cash
equivalents. Finance income for the second quarter of 2019 was $257, an increase
of $130 over the prior year quarter. Finance income for the six month period
ended June 30, 2019 was $519, an increase of $315 over the comparable prior year
period. The increase was primarily due to the investment of funds in higher
yield accounts relative to the prior year.
16
Adjusted EBITDA and Effective Margin
Adjusted EBITDA in the second quarter of 2019 was $5,246, an
increase of $597 or 13% over the second quarter of 2018. Adjusted EBITDA for the
six months ended June 30, 2019 was $9,879, an increase of $427 or 5% over the
comparable prior year period. The increase in Adjusted EBITDA was primarily the
result of increased gross profit combined with a slight increase in adjusted
operating expenses relative to the prior year periods. Effective margin in the
second quarter of 2019 was 26% compared to 34% in the second quarter of 2018.
After excluding the impact of the tax rebate related to prior years from gross
profit for the second quarter of 2019, effective margin was 36%, an increase of
2% over the prior year quarter.
Equity-settled share-based payment expense
We incur certain employment related expenses that are settled
in equity-based instruments. During the second quarter of 2019, equity-settled
share-based payment expenses decreased $56 or 5%, compared to the prior year
quarter, due to the timing of Restricted Share Units (“RSUs”) settlements.
Year-to-date equity-settled shared-based payment expenses was $2,329, an
increase of $186 or 9% over the comparable prior year period. The year-over-year
increase was due to the impact of performance-based options issued to management
at the end of 2018.
Prior years tax rebate, net of fees
The Corporation filed for a tax rebate of $6,027, net of fees,
related to prior years and was accepted by the tax authorities during the second
quarter of 2019. We anticipate receiving the funds related to the tax rebate in
the third quarter of 2019.
Depreciation and amortization
For the second quarter of 2019, depreciation and amortization
expense was $1,126, an increase of 25% compared to the prior year period.
Year-to-date depreciation and amortization was $2,268, an increase of 28% over
prior year. The increase was primarily due to the impact of IFRS 16,
Leases, which resulted in additional depreciation expense on right-of-use
assets for the three month and six month period ended June 30, 2019 of $295 and
$578, respectively.
Foreign exchange gain/loss
We are exposed to Foreign Exchange (“FX”) risk as a result of
transactions in currencies other than our main functional currency, the US
dollar. Unrealized FX gains and losses arise from the revaluation of our balance
sheet at the period end rate and realized FX gains and losses arise from the
settlement of non-US dollar transactions. We hold balances in foreign currencies
(e.g. non-US dollar denominated cash, accounts payable and accrued liabilities,
and deposits) that give rise to exposure to FX risk.
The majority of our revenues in the second quarter of 2019 were
transacted in US dollars. We also generate revenues in EUROs, British Pounds,
and other currencies. The direct cost of revenue is primarily denominated in the
same currency as the revenue earned, minimizing the FX exposure related to these
currencies. Adjusted operating expenses are incurred predominantly in Canadian
dollars, exposing us to FX risk. We enter into FX forward contracts to mitigate
our exposure to the Canadian dollar.
17
For the quarter ended June 30, 2019, we recorded a foreign
exchange loss of $398 compared with a foreign exchange loss of $85 in the
comparable prior year period. For the six month period ended June 30, 2019, we
recorded a foreign exchange loss of $154, compared with a foreign exchange gain
of $73 in the comparable prior year period. Foreign exchange gains and losses
fluctuate from period to period due to movements in foreign currency rates.
Income tax expense
We are subject to income tax in multiple jurisdictions and
assess our taxable income to ensure eligible tax deductions are fully utilized.
For the second quarter of 2019, we incurred income tax expense of $2,325,
compared to $684 in the second quarter of 2018. Year-to-date income tax expense
was $3,010, compared to $1,546 in the comparable prior year period. The increase
was primarily attributable to higher income before taxes, as the effective
consolidated tax rate remained consistent at 27% in each of the reported
periods.
Finance costs
Finance costs consist of interest expense related to lease
liabilities. On January 1, 2019, we implemented IFRS 16, on a modified
retrospective basis, which replaced straight-line operating lease expenses with
depreciation charges for right-of-use assets and interest expense on lease
liabilities. Finance costs for the three months and six months ended June 30,
2019 was $36 and $112, respectively (2018 - nil and nil).
Net Income and earnings per share
| |
|
For the three months ended |
|
| (In thousands of US dollars, |
|
|
|
|
|
|
|
|
|
|
|
|
| except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
| (Unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Net income |
$ |
6,276 |
|
$ |
1,812 |
|
$ |
4,464 |
|
|
246% |
|
| Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
$ |
0.46 |
|
$ |
0.12 |
|
$ |
0.34 |
|
|
283% |
|
| Diluted |
$ |
0.45 |
|
$ |
0.12 |
|
$ |
0.33 |
|
|
275% |
|
| |
|
For the six months ended |
|
| (In thousands of US dollars, |
|
|
|
|
|
|
|
|
|
|
|
|
| except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
| (Unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Net income |
$ |
8,033 |
|
$ |
4,070 |
|
$ |
3,963 |
|
|
97% |
|
| Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
$ |
0.58 |
|
$ |
0.28 |
|
$ |
0.30 |
|
|
107% |
|
| Diluted |
$ |
0.57 |
|
$ |
0.28 |
|
$ |
0.29 |
|
|
104% |
|
Net income for the three month period ended June 30, 2019 was
$6,276, an increase of $4,464 or 246% compared to the prior year period.
Year-to-date net income was $8,033, an increase of $3,963 or 97% over prior
year. The primary driver of the increases to net income was due to a tax rebate
related to prior years that was recorded during the quarter. Excluding the
impact of the prior years tax rebate, net income for second quarter of 2019 was
$1,846, flat compared to same period in the prior year. Excluding the impact of
the prior years tax rebate, net income for the six month period ended June 30,
2019 was $3,603, a decrease of $467 from prior year comparable period. The
decline was attributable to higher employment costs due to additional resources
added throughout 2018 and first half of 2019.
18
Basic earnings per share are calculated on the basis of the
weighted average number of outstanding common shares for the period, which
amounted to 13,777,844 common shares for the three month period ended June 30,
2019, compared with 14,410,539 common shares for the three month period ended
June 30, 2018. The weighted average number of outstanding common shares for
diluted earnings per share was 13,957,009 common shares for the three month
period ended June 30, 2019, compared with 14,512,883 common shares for the three
month period ended June 30, 2018. Basic and diluted earnings per share was $0.46
and $0.45 respectively for the period ended June 30, 2019 compared to $0.12
basic and diluted earnings per share for the same period ended 2018. Excluding
the impact of the prior years tax rebate, basic and diluted earnings per share
was $0.13 for the three month period ended June 30, 2019.
LIQUIDITY AND CAPITAL RESOURCES
| Consolidated Balance Sheet Data as at
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands of US dollars) (unaudited) |
|
June 30, 2019 |
|
|
Dec
31, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Cash and cash equivalents |
$ |
58,301 |
|
$ |
69,131 |
|
$ |
(10,830 |
) |
|
(16% |
) |
| Restricted cash |
|
- |
|
|
500 |
|
|
(500 |
) |
|
(100% |
) |
| Funds receivable from payment processors |
|
9,256 |
|
|
13,512 |
|
|
(4,256 |
) |
|
(32% |
) |
| Total funds available |
$ |
67,557 |
|
$ |
83,143 |
|
$ |
(15,586 |
) |
|
(19% |
) |
Our sources of liquidity are primarily our total funds
available, cash provided from operating activities, and any borrowings we may
have under our credit facility. Total funds available, which we calculate as
cash and cash equivalents, funds receivable from payment processors, and any
restricted cash, was $67,557 as at June 30, 2019. Total funds available can
fluctuate between periods due to changes in working capital balances, the timing
of promotional activity and partner payments, and the timing of receipts from
our payment processors. Our credit facility agreement with the Royal Bank of
Canada expired on May 31, 2019. For the six months ended June 30, 2019, we had
no borrowings under the credit facilities.
We have been able to generate sufficient cash through normal
course operations to fund capital expenditure needs, current operating and
working capital requirements, and purchases of shares under our Normal Course
Issuer Bid (“NCIB”). Our ability to generate sufficient cash flows and/or obtain
additional sources of funding may be affected by the risks and uncertainties
discussed within this MD&A.
Sources and Uses of Cash
| |
|
For the three months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (Unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Operating activities |
$ |
(5,596 |
) |
$ |
6,234 |
|
$ |
(11,830 |
) |
|
(190% |
) |
| Investing activities |
|
(400 |
) |
|
(650 |
) |
|
250 |
|
|
(38% |
) |
| Financing activities |
|
(3,967 |
) |
|
(6,694 |
) |
|
2,727 |
|
|
(41% |
) |
| Effects of exchange rates |
|
(57 |
) |
|
851 |
|
|
(908 |
) |
|
(107% |
) |
| Change in cash and cash equivalents |
$ |
(10,020 |
) |
$ |
(259 |
) |
$ |
(9,761 |
) |
|
3,769% |
|
19
| |
|
For the six months ended |
|
| (In thousands of US dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| (Unaudited) |
|
June 30, 2019 |
|
|
June
30, 2018 |
|
|
$Variance |
|
|
%
Variance |
|
| Operating activities |
$ |
465 |
|
$ |
18,775 |
|
$ |
(18,310 |
) |
|
(98% |
) |
| Investing activities |
|
(1,207 |
) |
|
(1,261 |
) |
|
54 |
|
|
(4% |
) |
| Financing activities |
|
(10,178 |
) |
|
(10,942 |
) |
|
764 |
|
|
(7% |
) |
| Effects of exchange rates |
|
90 |
|
|
431 |
|
|
(341 |
) |
|
(79% |
) |
| Change in cash and cash equivalents |
$ |
(10,830 |
) |
$ |
7,003 |
|
$ |
(17,833 |
) |
|
(255% |
) |
Operating Activities
Cash flows used in operating activities were $5,596 for the
second quarter of 2019, a decrease from the comparable prior year period. Cash
flows from operating activities are primarily generated from funds collected
from miles and points transacted from the various products and services we offer
and are reduced by cash payments to loyalty partners, and payment of operating
expenses. Cash flows from operating activities may vary significantly between
periods due to changes in working capital balances and the timing of our
promotional activity. In the second quarter of 2019, the Corporation experienced
a $11,830 decrease in cash flows from operating activities compared to the prior
year quarter, primarily due to the receivable related to the prior year tax
rebate and timing of payments to loyalty program partners. We anticipate
receiving the funds related to the tax rebate in the third quarter of 2019.
Investing Activities
Cash used in investing activities during the second quarter and
year-to-date of 2019 included cash used for the purchase of property and
equipment and internally developed intangible assets. We continue to invest our
research and development efforts on creating new features and functionality to
our existing services.
Financing Activities
Cash flows used in financing activities during the second
quarter of 2019 primarily related to 232,548 shares repurchased for cancellation
under our NCIB in the amount of $2,856. In addition, $861 of cash was used to
acquire shares held in trust for the future settlement of RSUs. On a
year-to-date basis, 452,189 shares were repurchased for cancellation under our
NCIB in the amount of $5,312, $1,460 of cash was used to acquire shares held in
trust for future settlement of RSUs, and $2,969 of withholding taxes was paid on
the net settlement of RSUs.
Contractual Obligations and Commitments
| |
|
Total |
|
|
Year 1 |
|
|
Year 2 |
|
|
Year 3 |
|
|
Year 4 |
|
|
Year 5+ |
|
| (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Direct cost of revenue(1) |
$ |
320,848 |
|
$ |
29,756 |
|
$ |
84,392 |
|
$ |
81,211 |
|
$ |
50,679 |
|
$ |
74,810 |
|
(1) For certain loyalty partners, we guarantee a minimum level
of points/miles purchases for each contract year, over the duration of the
contract term with the loyalty partner. We evaluate each guarantee at each
reporting date and at the end of each contract year, to determine if the
guarantee will be 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.
20
Our principal revenue obligations represent contractual
commitments on the minimum value of transactions processed over the term of our
agreements with certain loyalty program partners in our Loyalty Currency
Retailing segment. Under this type of guarantee, in the event that the sale of
loyalty program currencies is less than the guaranteed amounts, we would be
obligated to purchase additional miles or points from the loyalty program
partner equal to the value of the revenue commitment shortfall. As at June 30,
2019, loyalty currency held for future resale of $1,971 was recorded as prepaid
expenses and other assets on the condensed consolidated interim statement of
financial position. We fund our principal revenue obligations through working
capital.
Financial Instruments
We have customers and suppliers that transact in currencies
other than the US dollar which gives rise to a risk that earnings and cash flows
may be adversely affected by fluctuations in FX exchange rates. We are primarily
exposed to the Canadian dollar, the EURO and the British Pound. Revenues earned
from our partners based in Canada are contracted in and paid in Canadian
dollars. We use these funds to fund the Canadian operating expenses thereby
reducing our exposure to foreign currency fluctuations. As part of our risk
management strategy, we enter into FX forward contracts extending out to
approximately one year to reduce the FX risk with respect to Canadian dollar
denominated disbursements. These contracts have been designated as cash flow
hedges. We do not use derivative instruments for speculative purposes.
For a derivative instrument designated as a cash flow hedge,
the effective portion of the derivative’s gain or loss is initially reported as
a component of other comprehensive income and is subsequently recognized in
income when the hedged exposure affects income. Any ineffective portion of the
derivative’s gain or loss is recognized in current income. For the second
quarter of 2019, we reclassified a loss of $117, net of tax, from other
comprehensive income into net income (2018 – a gain of $110, net of tax). On a
year-to-date basis, we reclassed a loss of $300, net of tax, from other
comprehensive income into net income (2018 – a gain of $236, net of tax). The
cash flow hedges were effective for accounting purposes during the quarter ended
June 30, 2019. Realized losses from our hedging activities in the three months
ended June 30, 2019 were driven by the changes in the relative strength of the
US dollar compared to the Canadian dollar.
As at June 30, 2019, forward contracts with a notional value of
$14,580, and in a net asset position of $14 (December 31, 2018 – $878 in net
liability position), with settlement dates extending to April 2020, have been
designated as cash flow hedges for hedge accounting treatment under IFRS 9,
Financial Instruments. These contracts are intended to reduce the FX risk
with respect to anticipated Canadian dollar denominated expenses.
Cash from Exercise of Options
Certain options are due to expire within 12 months from the
date of this MD&A. If exercised in full, issued and outstanding common
shares will increase by 163,046 shares.
Securities with Near-Term Expiry Dates –
Outstanding Amounts as at June 30, 2019
| Security Type |
Date of Expiry |
Number |
Exercise Price (CAD$) |
| Option |
September 29,
2019 |
1,169 |
$19.82 |
| Option |
March 16, 2020 |
161,877 |
$12.34 |
| Total |
|
163,046 |
|
21
BALANCE SHEET
| (In thousands of US dollars) (unaudited) |
|
|
|
|
|
|
| Consolidated
Balance Sheet Data as at |
|
June 30, 2019 |
|
|
Dec
31, 2018 |
(1) |
| Cash and cash equivalents |
$ |
58,301 |
|
$ |
69,131 |
|
| Restricted cash |
|
- |
|
|
500 |
|
| Funds receivable from payment processors
|
|
9,256 |
|
|
13,512 |
|
| Accounts receivable |
|
18,707 |
|
|
9,318 |
|
| Prepaid taxes |
|
202 |
|
|
383 |
|
| Prepaid expenses
and other assets |
|
3,452 |
|
|
3,618
|
|
| Total current assets |
$ |
89,918 |
|
$ |
96,462 |
|
| Property and equipment |
|
2,441 |
|
|
2,351 |
|
| Right-of-use assets |
|
3,610 |
|
|
- |
|
| Intangible assets |
|
13,379 |
|
|
13,952 |
|
| Goodwill |
|
7,130 |
|
|
7,130 |
|
| Deferred tax
assets |
|
2,370 |
|
|
2,645
|
|
| Total non-current assets |
$ |
28,930 |
|
$ |
26,078 |
|
| |
|
|
|
|
|
|
| Accounts payable and accrued liabilities
|
$ |
10,478 |
|
$ |
9,489 |
|
| Income taxes payable |
|
1,270 |
|
|
117 |
|
| Payable to loyalty program partners |
|
59,379 |
|
|
69,749 |
|
| Current portion of lease liabilities |
|
1,260 |
|
|
- |
|
| Current portion of other liabilities |
|
801 |
|
|
1,680 |
|
| Total current
liabilities |
$ |
73,188 |
|
$ |
81,035 |
|
| |
|
|
|
|
|
|
| Lease liabilities |
|
2,844 |
|
|
- |
|
| Other liabilities |
|
87 |
|
|
495 |
|
| Deferred tax
liabilities |
|
403 |
|
|
- |
|
| Total non-current liabilities |
$ |
3,334 |
|
$ |
495 |
|
| Total
shareholders’ equity |
$ |
42,326 |
|
$ |
41,010 |
|
| (1) |
The Corporation has initially applied IFRS 16 at January
1, 2019, using the modified retrospective approach. Under this approach
comparative information is not restated. |
Cash and cash equivalents
Cash and cash equivalents balance decreased $10,830 as at June
30, 2019 compared to the end of 2018. The decrease in cash and cash equivalents
was largely due to changes in working capital balances, shares repurchased and
cancelled under our NCIB and purchases of shares held in trust for future
settlements of RSUs.
Funds receivable from payment processors
Funds receivable from payment processors represents the gross
value of retail transactions, or gross sales, charged to and paid by end
consumers that are held with our payment processors. On average, cash collected
from end consumers is typically deposited into our bank accounts by our payment
processors two days from the date of sale. This balance decreased $4,256
compared to the end of 2018, which is largely attributable to the timing of
sales activity at the end of the period relative to the prior year period and
the timing of receipts from our payment processors. In general, this balance can
vary significantly depending on the timing and richness of promotional activity
at the end of a given period. Generally, if the end of a period contains a high
level of promotional activity, the receivable from payment processors
balance will be higher relative to a period with lower promotional activity at
the end of a period.
22
Accounts receivable
Accounts receivable increased $9,389 compared to the end of
2018, primarily due to the receivable related to the tax rebate that was
confirmed in the second quarter of 2019.
Right-of-use assets
On January 1, 2019, we adopted IFRS 16 and recognized
right-of-use assets on our condensed consolidated interim statement of financial
position, representing our control of and the right to use the underlying
assets. As at June 30, 2019, right-of-use assets was $3,610 (2018 – nil).
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities increased $989
compared to the end of 2018. The increase was primarily due to the accrual for
consulting fees related to the prior years’ tax rebate, partially offset by the
payment of our annual employee incentive in the first quarter of 2019.
Lease liabilities
On January 1, 2019, we adopted IFRS 16 and recognized lease
liabilities on our condensed consolidated interim statement of financial
position, representing our obligation to make future lease payments. As at June
30, 2019, the current and non-current portion of lease liabilities were $1,260
and $2,844, respectively (2018 – nil and nil).
Income taxes payable
Income taxes payable increased by $1,153 compared to the end of
2018, largely due to a $6,105 year-over-year increase in income before taxes
which resulted primarily from the prior years tax rebate, resulting in a higher
income tax provision in the second quarter of 2019.
Payable to loyalty program partners
Payable to loyalty program partners decreased $10,370 compared
to the end of 2018, which is primarily attributable to the timing of payments
made to loyalty program partners and the timing of sales activity in the
previous month. On average, we remit funds to loyalty program partners for
monthly sales activity approximately 30 days after the end of the month.
OUTSTANDING SHARE DATA
As of July 26, 2019, there were 13,591,792 common shares
outstanding.
As of July 26, 2019, there were outstanding options exercisable
for up to 1,142,457 common shares. The options have exercise prices ranging from
$9.89 CAD to $19.82 CAD with a weighted average exercise price of $13.90 CAD.
The expiration dates of the options range up to March 18, 2025.
23
The following table lists the common shares issued and
outstanding as at July 26, 2019 and the securities that are currently
convertible into or exercisable for common shares along with the maximum number
of common shares issuable on conversion or exercise.
| (Unaudited)
|
Common Shares |
Proceeds |
| Common Shares Issued & Outstanding |
13,591,792 |
|
|
Convertible Securities: Share options |
1,142,457 |
CAD$
15,880,319 |
| Common Shares Issued & Potentially Issuable |
14,734,249 |
CAD$ 15,880,319 |
| Securities Excluded from Calculation: |
|
|
| Options Available for grant from
ESOP(1) |
387,403 |
|
(1) “ESOP” is defined as the Employee Stock Option Plan. The
number of options available for grant is calculated as the total share option
pool less the number of outstanding share options.
THREE YEAR SUMMARY OF QUARTERLY RESULTS
| (in thousands of US dollars, except per share amounts)
(Unaudited) |
| Three month period ended |
Total |
|
Basic earnings |
Diluted earnings |
| |
Revenue |
Net income |
per share |
per share |
| June 30, 2019 |
$ 100,230 |
$ 6,276 |
$ 0.46 |
$ 0.45 |
| March 31, 2019 |
95,943 |
1,757 |
0.13 |
0.12 |
| December 31, 2018 |
94,918 |
2,246 |
0.16 |
0.16 |
| September 30, 2018 |
94,358 |
1,476 |
0.10 |
0.10 |
| June 30, 2018 |
97,859 |
1,812 |
0.12 |
0.12 |
| March 31, 2018 |
89,110 |
2,258 |
0.16 |
0.16 |
| December 31, 2017 |
88,133 |
1,191 |
0.08 |
0.08 |
| September 30, 2017 |
91,589 |
605 |
0.04 |
0.04 |
| June 30, 2017 |
85,807 |
732 |
0.05 |
0.05 |
| March 31, 2017 |
83,115 |
852 |
0.06 |
0.06 |
| December 31, 2016 |
81,955 |
(3,674) |
(0.24) |
(0.24) |
| September 30,
2016 |
82,442 |
335 |
0.02 |
0.02 |
Generally, increases in transaction levels, revenues and gross
profit will drive higher overall profitability. Our operations are not subject
to significant seasonal fluctuations. Our revenues are primarily impacted by
retaining loyalty program partners and growing the performance of products
deployed with these partners, adding new loyalty program partners, and
cross-selling new products to existing loyalty program partners during the year.
In the absence of launching any new loyalty program partners or new products,
quarterly revenues will be impacted by the level of marketing and promotional
activity carried out, which will vary quarter to quarter.
Historically, we have been able to consistently grow revenue by
adding new loyalty program partnerships year after year. In addition, we have
been able to grow revenues with existing partnerships year over year by
improving our ability to consume loyalty data across the LCP to drive and inform
our marketing efforts. Revenue growth has also come from our ability to sell
additional loyalty products and services to existing partners.
Dependence on loyalty program partners
We depend on a
limited number of large clients for a significant portion of our consolidated
revenue. There were three loyalty program partners for which sales to their
members represented 69% and 70% of our consolidated revenues for the three and
six month period ended June 30, 2019 respectively (2018 – 67% and 67%). A
decrease in revenue or gross profit from these partner relationships for any
reason, including a fundamental change in their loyalty program, a change in
contractual pricing, a significant shift in their redemption chart, or a
decision to no longer outsource some or all of the products and services we
provide, could have a material adverse effect on our consolidated revenue. As it
relates to the LCR 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 partner concentration, 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. For
both the second quarter of 2019 and year-to-date, gross profit generated through
commercial arrangements with 12 loyalty program partners represented
approximately 80% of our consolidated gross profit.
24
CONTROLS AND PROCEDURES
On January 1, 2019, we implemented a new accounting system,
which resulted in changes to controls and procedures pertaining to financial
reporting.
Other than the item described above, there have been no changes
in our internal controls over financial reporting this quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND
JUDGMENTS
For the Corporation’s accounting policies and critical
accounting estimates and judgments, refer to the Corporation’s MD&A and
audited annual consolidated financial statements for the year ended December 31,
2018. The preparation of the consolidated financial statements in accordance
with IFRS, requires management to make judgments, estimates and assumptions that
affect the application of policies and the reported amounts of assets and
liabilities, income and expenses. 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.
In 2019, we adopted the following new standards and amendments
to existing standards:
- 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. 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.
25
The Corporation has elected to use the following practical
expedients when applying IFRS 16 to leases previously classified as operating
leases under IAS 17:
- applied a single discount rate to a portfolio of leases with reasonably
similar characteristics;
- excluded initial direct costs from the measurement of the right-of-use
assets at the date of initial application; and
- relied upon the Corporation’s assessment of whether leases are onerous
under the requirements of IAS 37, Provisions, contingent liabilities and
contingent assets as at December 31, 2018 as an alternative to reviewing our
right-of-use assets for impairment.
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:
| (Unaudited)
|
|
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 |
) |
The following standards are also effective from January 1,
2019, but they do not have a material impact on our condensed consolidated
interim financial statements:
- IAS 28, Investments in Associates and Joint Ventures;
- IAS 19, Employee Benefits; and
- IFRIC 23, Uncertainty over Income Tax Treatments.
26
