PointsPoints International (PCOM) - Don't Be Fooled by This Former Canadian Penny Stock

COPPERFIELD RESEARCH
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Points International (PCOM) - Don't Be Fooled by this Former
Canadian Penny Stock

A misunderstood, grossly mis-valued, low-margin reseller being
promoted as an e-commerce platform

Fair Value - $5.50 per share, 75% downside

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IMPORTANT Disclaimer Please read this Disclaimer in its entirety before
continuing to read our research opinion. You should do your own research
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securities covered herein. We strive to present information accurately and
cite the sources and analysis that help form our opinion. As of the date this
opinion is posted, the author of this report has a short position in the
company covered herein and stands to realize gains in the event that the
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of our ability and belief, all information contained herein is accurate and
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any jurisdiction in which such offer would be unlawful under the securities
laws of such jurisdiction.

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We believe Points International's (PCOM) business model, economics, and value proposition have
beenmisrepresented by management and are grossly misunderstood by its retail investor base.The company's
history is littered with red flags, dubious accounting, and a promotional management team prone tomaking
misleadingstatements. It comes as no surprise that many of these issues have been obfuscated by ticker changes,
multiple listings (OTC to OTCBB to NASDAQ), a reverse stock split, financially conflicted sell-side analysts,
and a Canadian headquarters. Based on our deep dive, forensic analysis, we believe PCOM's intrinsic value is
closer to $5.50 per share, or nearly 75% below its current trading price. And this price target generously ignores
PCOM's $243 million of off-balance sheet liabilities. The significant downside should be realized as the PCOM
discussion refocuses on the facts, and away from "grossed-up" revenue and customer pipeline hype.

PCOM claims it is the global leader in loyalty currency management.The company says it brings "years of
industry experience, technological expertise, and a one-of-a-kind loyalty commerce platform to the world's top
loyalty brands."
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While this sounds impressive, we believe PCOM is nothing more than a simple reseller.Nearly
every metric the company reports (and some it tries to hide) resembles a low-margin, value-added reseller.For
example, in Q1'14, PCOM reported gross margins of just 14.2%.A Bloomberg screen found just 10 other
technology companies with gross margins this low, and nearly every one of the companies operates as some
form of value-added reseller.

It is our opinion PCOM's business model has beenmeticulously designed to permit the company to "gross-up"
its revenue, resulting in financial reports that appear to the investing public many times larger than its actual
economic size.As we discuss later, PCOM's accounting and disclosure previously came under the SEC's
microscope. According to FASB ASC 605-45, we believePCOM should be forced to restate its revenues,
potentially cutting previously reported numbers by up to 80%.

In addition to overstating its revenue, we believe PCOM has utilized aggressive accounting which should spook
any investor familiar with Groupon's infamous Adjusted Consolidated Segment Operating Income (CSOI).We
believe the company is in direct violation of SEC Regulation G regarding pro-forma accounting, and we believe
based on our report, an immediate investigation into PCOM's "grossed-up" revenue and inflated adjusted
EBITDA is warranted.

Based on the hype of new contract wins, sell-side analyst cheerleading, and "gross" revenue growth that screens
well for quants, PCOM's stock has nearly tripled since 2011. Yet over the same time period, PCOM's consensus
earnings estimates have been cut by at least 50%. Additionally, the company has never produced any
meaningful profit (despite management boasting high contribution margins), and we believe EPS estimates are
set to fall further in 2H'14 and 2015.

Finally, we believe PCOM's promotional management team has mischaracterized organic growth, hidden
substantial customer concentration, and promoted new partner wins that will have minimal actual impact on the
business. This aggressive story-telling has coincided with management selling stock via the Canadian
marketplace, thereby avoiding customary disclosure to the American investing public.

We believe this report will start the re-valuation process and remedy the multitude of misperceptions and hype
surrounding PCOM. The following sections are covered herein, highlighting:

The Birth of PCOM and its Sell-side Partners
PCOM is a former Canadian penny stock that has masked its true appearance with multiple ticker changes, a
capital raise at $0.68, and a reverse stock split needed to up-list from the Bulletin Board. The company added
the Principal owner of one of its investment banks to its Board of Directors, and he promptly resigned four
months later. Multiple financial conflicts exist with several of PCOM's sell-side analysts, while others have
used dubious valuation techniques to justify "buy" ratings and price target increases.
PCOM is not a Platform / SaaS business
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Despite buzz words and an obvious desire to be compared to ecommerce platforms, PCOM's financial profile
looks nothing like the purported comps. In its most recent quarter, PCOM reported gross margins of just 14.2%
and EBITDA margins 90% lower than a platform comp set. Out of nearly 2,500 technology related businesses
that trade on a US exchange, there are only 10 companies with a market cap over $100 million and gross
margins below 15%. At best, PCOM is a technology-enabled value-added reseller (VAR), which greatly alters
the "story" management and analysts have created.
PCOM reported revenues actually represent gross transaction volume
We believe PCOM reporting revenues on a gross basis is a violation of FASB ASC 605-45. Platform companies
typically report revenue "net" of the total volume of goods or services sold through its system. Platform
companies receive a transaction fee that is generally reported as revenue. PCOM actually includes aggregate
transaction volume in its revenues, which we believe has led to an approximate 650% overstatement of
revenues compared to net revenue accounting. This specious revenue recognition technique distorts the actual
scale of the business, and makes the revenue multiples the sell-side use appear baseless. The SEC previously
requested information on PCOM's decision to report other metrics on a gross basis.
Gross margins are imploding
Most platform companies increase gross margins over time as revenues scale over fixed platform costs. In direct
contradiction to a platform business model, PCOM's gross margins have declined by 860 basis points, from
22.8% to 14.2%. Our analysis indicates PCOM management has misled investors regarding the contribution
margin and economics of its large Southwest deal, including a slide in the investor deck insinuating Southwest
margins that don't reconcile with our calculations. We also show management's comments about organic growth
appear irreconcilable outside of its top four customers.
Profitless Revenue Growth - i.e. Negligible Contribution Margins
PCOM management appears so obsessed with being perceived as a growth company that new partner revenue
has been essentially profitless. In 2013, PCOM grew its grossed up revenue 45%, with a contribution margin of
just 1.8%. PCOM's contribution margins are a fraction of its purported platform peer group. Further, the
perpetual out-year story has already seen consensus EPS estimates fall by 48% in the last two quarters. We
believe revenue is not only overstated, but it actually carries de minimus contribution margin.
Revenue concentration risk (an important topic for the next section)
While PCOM boasts in its investor marketing materials that it works with "approximately 50 partners
worldwide,"
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the company neglects to mention in the slide deck that ~88% of revenue is derived from just four
customers. Customer concentration is increasing, making the potential loss of any large customer far more
material than its misleading marketing materials suggest.
History of customer loss and burning shareholders
In 2009, in the middle of a 3-year contract with PCOM, Delta abruptly restructured its deal and vastly reduced
its relationship. Management not only gave zero warning about the Delta debacle, they actually provided
multiple communications suggesting the relationship was strengthening. Until Delta restructured its contract,
management did not even disclose Delta was a top partner, let alone approximately 67% of the company's
revenues. PCOM lost 60% of its market value after the Delta confession. Based on recent comments from
American Airlines' CEO, we believe history may be repeating itself.
Mischaracterized organic growth and a European Tall Tale
Management has repeatedly stated PCOM's organic growth is 10%-20%, excluding the launch of new partners.
Based on our analysis, this level of "same store sales" growth across its existing customers is grossly overstated.
As detailed later, we believe organic growth outside of its top four customers may actually be negative. Further,
management publicly claimedEurope is returning to a "fairly significant growth phase."
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Yet, public documents
show revenue from Europe has declined in each of the last three quarters, and European business declines
accelerated to negative 35% year-over-year in Q1'14.
Profitability overstated, a likely violation of SEC Regulation G, and a pattern of missing guidance
In 2013, PCOM surreptitiously altered its EBITDA calculation, excluding certain investment spending from the
company's reported EBITDA. We believe these operating expenses are recurring in nature, which management
confirmed on a recent earnings call. As such, PCOM is directly violating SEC Regulation G. Further, their
profit definition is similar to Groupon's notorious CSOI. The net result is that PCOM has effectively over-stated
its Adjusted EBITDA by 50%.
The Value of recent partner wins & pipeline are overstated and misunderstood
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Two drivers of the bull case for PCOM hinge on recent partner wins with MasterCard and Hilton. We believe
the impact of these deals is greatly overstated and revenue generated will be minimal. MasterCard will generate
zero direct revenue while adding to expenses. Hilton will contribute only ~1% to PCOM's 2015 revenue based
on our analysis. Further, PCOM's highly touted pipeline, which was selectively disclosed at a recent sell-side
conference,is a mirage based on several years of hype and hyperbole. Even in the unlikely event PCOM were
able to convert 100% of its "pipeline," the stock would still be trading at 20x EV/EBITDA.
Is PCOM already facing major secular challenges?
We believe PCOM's CEO made an ominous confession on a recent earnings call regarding a shift in reward
program redemption structures. Despite minimal focus from the sell-side, most major airlinesbegan devaluing
their reward currencies this year, creating confusion in the market and increasing the number of points required
for award redemption. The likely result will be lower transactions (and revenues) for PCOM.
The misrepresentation of PCOM's balance sheetstrength
PCOM management and its sell-side friends consistently highlight a strong financial position, emphasizing the
company's significant cash position with no debt. However, the company generally neglects to mention its large
"payable to loyalty partners" liability, which creates a working capital timing benefit that overstates cash by
nearly 80%. Further, PCOM has an enormous off-balance sheet revenue guarantee of $243 million, which we
believe is analogous to debt.
Insiders quietly heading for the exit
Because PCOM is incorporated in Canada, insiders are not technically required to file Form 4's. While publicly
touting recent wins and a strong financial position, management has quietly been selling stock on the Toronto
Stock Exchange without the customary disclosures U.S. investors would likely view as red flags. In the last two
weeks of Q2'14, the Chairman of the Board sold over $1 million of stock, at a time insiders should have
presumably been in a blackout window.
Valuation
Based on our analysis, we believe PCOM is unequivocally a generic value-added reseller, and not a high-
margin platform. PCOM should trade at revenue and EBITDA multiples inline with its actual peer group. Using
more appropriate multiples on the actual underlying economics of the business, we believe PCOM's fair value is
between $4.89 and $5.86, representing roughly 75% downside.

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The Birth of PCOM and its Sell-side Partners
PCOM did not traversethe traditional road to become the boutique investment bank Wall Street darling it is
today. Some successful companies have unorthodox histories that can easily be dismissed as the outcome of
"prior management," but PCOM's history is relevant because its CEO and President were also its co-founders.
The company was originally formed in 1999, incorporating as Sportek Systems in Alberta, Canada. Less than
five months after incorporating, management changed the company's name to Sports Technologies Group Inc.
For reasons we do not fully understand, the Canadian company changed its name for a third time in early 2000
to Exclamation International Incorporated. The Articles of Continuance were amended again in December
2001, June 2002, and April 2003 to add a new series of preferred shares and to change the Corporation's name
to "Points International Ltd."
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Based on public records, PCOM's predecessor company was in the business of "investing in early stage Internet
based businesses, [providing] initial start up funds necessary to establish the business."
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Some time in late 2001,
after apparently minimal success with its business model, Exclamation International restructured and effectively
disposed all prior investments.

Shortly thereafter, the plan was laid to change Exclamation into a completely different story, otherwise known
as Points International, with the name change officially occurring in mid-2002. With PCOM as its only
remaining venture, the company dutifully changed its over-the-counter penny stock ticker from EXMTF to
PTSEF. After toiling in virtual obscurity on the OTC market for a couple years, a capital raise was announced
in 2005. Rob MacLean, who founded PCOM in 2000, and is still its CEO today, beamed, "This financing will
allow us to accelerate the development of our consumer offering and we are now even better positioned to
commence an aggressive marketing campaign, capitalizing on many of the new features that will augment our
members experience."
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We believe the financing was done to target an exchange"up-listing," or a circuitous
maneuver to move a penny stock to a more traditional exchange.

Enter Merriman Curhan & Ford (MCF). In 2005, MCF was the lead investment bank placement agent for a
PCOM private stock offering, raising $15.8 million of net proceeds through the issuance of 18.1 million shares
at $0.68 per share and one convertible preferred share for $3.5 million. To reward MCF for raising capital for
the company, PCOM management issued MCF broker warrants, thereby giving Merriman its initial financial
interest in the company.
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After the capital raise, PCOM (symbol still PTSEF) indeed managed to "up-list" to the
OTC Bulletin Board in November 2005. Despite these maneuvers, PCOM's stock languished in penny stock
territory for several more years. Never lacking creativity, PCOM management and its advisors initiated a 1:10
reverse stock split on 2/2/11, which finally paved the way for a NASDAQ listing on 2/10/11. Suffice to say, this
was not the traditional path to a NASDAQ listing.

Before diving into PCOM's troublesome business and financial model, it is worth noting how conflicted some
of the sell-side "partners" appear. The purpose is not to criticize the covering analysts, but instead illustrate how
skeptical we are of their research, as many of the plain as day issues we identify herein have yet to be discussed
by the sell-side community (we use the word "partners" because of the unabashed bullish coverage the Street
provides PCOM, with all eight covering analysts having a "buy" rating on the stock).

Merriman Curhan & Ford, now Merriman Capital (the firm changed its name after a run-in with the SEC
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), has
been arguably the most vocal advocate of PCOM, writing 34 research reports since April, 2011. It should be
noted PCOM is the second Merriman connected name with which we have found some "issues."
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The first
name was OCZ, who despite trivializing our fraud assertions as "irrelevant," was indeed a fraud that went
bankrupt and now trades for $0.014 as OCZTQ.
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To understand the Merriman connection, it is important to
delineate between the multiple MCF affiliates that had (or still have) a financial interest in PCOM and an
inherent conflict of interest.
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On August 8, 2006, after initially receiving warrants in the company, Merriman filed a 13D, disclosing a 12.7%
ownership of PCOM's outstanding shares. The group's ownership was spread between Jon Merriman (the CEO
of MCF), MCF (the investment bank), as well as two funds which appear to have been controlled or affiliated
with MCF (all the holders shared the same mailing address).
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It is worth noting that MCF's Internet analyst had
been promoting PCOM as a "buy" rated stock since 2005, and he continued to promote the stock with a "buy"
rating for over four years. Less than five months after disclosing his large ownership position, Jon Merriman
was welcomed onto PCOM's Board of Directors.
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Shortly thereafter, MCF (the investment bank) revealed in a
10Q that its PCOM position represented 20% of the firm's total assets (we believe this qualifies MCF as an
"interested party"). Then, in a maneuver that should go down as folk lore, Jon Merriman, after presumably
receiving Board financial packages, inexplicably resigned from the Board just three months after joining. It is
unclear what exactly Merriman learned in his brief stint with the company, but by the end of 2007, Merriman
and his affiliates sold enough stock to no longer be deemed a material PCOM shareholder.

Turning to the current regime at Merriman, it appears old habits are hard to kick. For several years, Joel
Achramowicz covered PCOM for Merriman Capital, always with a "buy" rating. Along side his "buy" rating, in
the disclosure section required by law at the very end of all research reports, the following line is written: "Joel
Achramowicz has a financial interest in the securities of Points International Ltd." The current analyst, Andrew
D'Silva, who worked directly for Achramowicz and also has a buy rating and $50 target, has a more opaque
disclosure in his reports, "From time to time, MCI, its affiliated entities, and the irrespective directors,
officers,employees, or members of their immediate families may have a long or short position in the securities
or other financial instrumentsmentioned in this report." Merriman clearly remains the biggest bull on PCOM.
Maybe there is a (financial) reason why.

In addition to conflicts at Merriman, objectivity issues appear to exist with PCOM's other sell-side firms. At
Royal Bank of Canada, which recently upgraded PCOM shares on 5/9/14 despite cutting its estimates by 23%,
the apparent financial conflicts go beyond the typical banking disclosure. The company states, "a member
company of RBC Capital Markets or one of its affiliates received compensation for products or services other
thaninvestment banking services from Points International Ltd. during the past 12 months. During this time, a
member company ofRBC Capital Markets or one of its affiliates provided non-securities services to Points
International Ltd." And at Craig Hallum, while the covering analyst may be more objective given no obvious
conflict disclosed, this individual could have a credibility issue considering he also promoted "buy" rated names
OMEX, NEON, UNXL, and ZAGG, all of which have battled fraud charges. And alas, B. Riley's analyst
"believe[s] switching to a revenue multiple for valuation would be prudent" despite previously deriving a price
target by valuing the company based on its EBITDA. As we demonstrate later, we believe using "revenue" as a
valuation technique for PCOM is completely inappropriate and intellectually dishonest.

To be clear, other than the initial warrant grant to MCF, we are not implying PCOM's management is
responsible for the potential conflicts of its covering analysts. Further, we only highlight these conflicts and
questionable valuation methods because we believe these inherent financial conflicts greatly jeopardize the sell-
side's ability to present balanced analysis to investors.

With that bit of business out of the way, let's turn to the real meat of the PCOM story.

PCOM is not a Platform / SaaS business
PCOM would like the investing public to believe it is an e-commerce platform and software-as-a-service (SaaS)
business. These two descriptions have had tremendous buzz, and the desired association is understandable.
Accordingly, in the "About Points" sectionat the end of each PCOM press release, the company generously
crams buzz words in, describing itself as follows: "Via a state-of-the-art loyalty commerce platform, Points
provides loyalty eCommerce and technology solutions to the world's top brands to enhance their consumer
offerings and streamline their back-end operations. In addition to these services, Points' unique SaaS products
allow eCommerce merchants to add loyalty solutions directly to their online stores, rewarding customers for
purchases at the point-of-sale."
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Despite the high-tech characterization, PCOM's financials tell a strikingly different story. Platform companies
such as eBay (EBAY) and OpenTable (OPEN) typically trade at high multiples of both sales and EBITDA
because of the high flow-through of incremental revenue to profits. PCOM looks nothing like the comp group
the company and its sell-side cadre of supporters have used. As of Q1'14, PCOM's gross margins are 80% lower
than its supposed comparable group, and its EBITDA margins are 90% lower than the broader group. Even
lowly Groupon (GRPN) has EBITDA margins double those of PCOM. Amazingly, despite clearly inferior
economics, PCOM actually trades at a premium to this group, with an EV/EBITDA multiple nearly 50% greater
than the more desirable comp group.

As evidenced by its financial model, PCOM is not a SaaS business, nor is it a platform business (scale is not a
valid excuse either as we will clearly illustrate later). Looking only at its financial model, we wondered whether
there was a more appropriate comparable group. To answer this question, we ran a search for technology
companies with market capitalizations of at least $100 million and gross margins under 15%. Out of 2,500 such
companies that trade on a U.S. Exchange, only 10 businesses actually met these criteria. With the exception of
semiconductor manufacturers suffering from cyclical challenges, each of the companies with financial models
similar to PCOM is a value-added reseller (VAR). A deep dive into PCOM's actual economic customer
proposition leads to a simple conclusion - despite all of the hand waiving and buzzwords, PCOM does little
more than resell miles and loyalty points. By extension, there is little doubt that PCOM's financial profile
resembles a VAR because it actually is a value-added reseller. Despite having incredibly similar financial
characteristics, PCOM trades at more than 700% and 500% the comp groups' revenue and EBITDA multiples,
respectively.

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Platform companies not only have significantly higher gross margins and EBITDA margins, but they also invest
heavily in their core asset - their platform. Research and development spend and capital expenditures at
SaaS/Platform companies are vital to protecting intellectual property and maintaining a compelling value
proposition for platform users. Resellers on the other hand, often minimize both R&D and capex. The reseller
business model usually operates with razor thin margins and minimal competitive differentiation. As such, the
return on R&D and capex investments rarely justifies the expenditures. In fact, most resellers do not even break
out R&D spend in their corporate filings because the line item is simply not material. As can be seen below,
PCOM'stechnology spendas a percentage of revenue is directly comparable to the "reseller" group, while
representing a mere fraction of the ratio found with the true "platform" companies.

We have long believed that stories are stories, and financials are facts and if it walks like a duck (i.e., VAR),
quacks like a duck (i.e., VAR), then it is probably a duck (i.e., VAR). Despite the myriad of sell-side analysts
and investor presentations that state otherwise, PCOM is a VAR.

PCOM reported revenues actually represent gross transaction volume
With the help of sell-side analysts that emphasize EV/revenues as justification for price targets, PCOM
management has done a miraculous job fooling investors into believing GAAP revenue is a meaningful metric.
While GAAP revenue is rarely misleading, we believe in the case of PCOM, it does not represent actual sales,
but instead gross transaction value. Let us explain.

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In Q1'14, eBay posted transaction volume of $58.5 billion (gross merchandise volume, or GMV) and net
revenue of $4.3 billion, effectively taking a transaction fee of 7.3%. eBay discloses both GMV and its "take"
which corresponds with GAAP revenue. GrubHub (GRUB), the fast growing platform for restaurant delivery,
reported Q1'14 take-rate (or transaction fee) of 13.5%. Interestingly, over the same time period, PCOM reported
gross revenue of $58.3 million, which we believe is almost entirely equivalent to eBay's GMV. Said another
way, PCOM's principal revenue, which represented 96.4% of revenue in its most recent quarter, is effectively
the total dollar volume of loyalty reward points sold. PCOM buys and sells these reward points, capturing a
small "take" or spread in the process. We believe the appropriate revenue metric for PCOM is its reported gross
profit dollars. On the $58.5 million of revenue PCOM reported in Q1'14,it only generated $8.3 million of gross
profit, representing a gross margin of 14.2%. Even the VAR-esque 14.2% gross margin is actually misleading,
on the high side. PCOM's smaller revenue segments ("Other Partner Revenue" and "Interest Income") generate
an effective gross margin close to 100% (PCOM only reports cost of revenue as "Direct Cost of Principal
Revenue"). As such, PCOM's effective gross margin on its primary business (Principal Revenue) is closer to
11.0%. In essence, PCOM's reported revenue is gross transaction value, and the company's effective gross
margin of 11.0% is much more akin to eBay, GrubHub, and other platform companies' "net" revenues.

PCOM Gross Margin Analysis
$ 000s
Mar-14
Principal Revenue 56,162
Other Partner Revenue 2,076
Interest Income 19
Total Revenues 58,257
Cost of Principal Revenue (49,989)
Total Gross Profit 8,268
Total Gross Margin 14.2%
Principal Revenue 56,162
Cost of Principal Revenue (49,989)
Principal Gross Profit 6,173
Principal Gross Margin 11.0%
Source: Company filings

Our assertion of PCOM's aggressive revenue recognition policies presents a problem for PCOM because
management has conditioned the sell-side and investors to focus on its revenue growth. While other investors
have yet to catch on to the aggressive revenue recognition interpretation (even if obvious when looking at
margins), we believe the SEC questioned PCOM regarding its revenue recognition practices in the past. While
the focus of SEC correspondence was on revenue sharing agreements (at the time, PCOM did not generate
material principal revenues), it appears PCOM has a history of attempting to overstate its economic revenue.

Source: https://www.sec.gov/Archives/edgar/data/1204413/000120445907001058/filename1.htm

We contend PCOM's "principal" revenue should not qualify for "gross" revenue treatment. According to FASB
ASC 605-45 - Principal versus Agent Considerations, a clear indication that a party is an agent to a transaction
rather than a principal (and therefore must recognize revenue "net" of the transaction amount) is as follows:

"The entity does not have latitude in establishing prices for the other partys goods or services and,
hence, the benefit that the entity can receive from those goods or services is constrained."
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Based on industry research, as well as PCOM's own public commentary, it is not PCOM that determines the
price and value of loyalty points, but instead its partners. Supporting this view, PCOM's management recently
admitted its partners have changed redemption structures, thereby impacting PCOM's business. It is our opinion
this admission/confession unequivocally demonstrates that PCOM does not control pricing. And intuitively,
how could it? No airline or hotel would let a third party determine the value of their own reward currencies. As
such, PCOM's aggressive revenue recognition appears to not only be misleading, but also a violation of
reporting standards.

Gross margins are imploding
PCOM's gross margins are multiple standard deviations below the typical platform businessand continue to
erode. Over the last two years, gross margins have declined by an astonishing 860 basis points, from 22.8% in
Q1'12 to 14.2% in Q1'14. If PCOM were a platform business, this 37.7% absolute decline in margin levels
would defy all business logic, even when considering up-front costs. SaaS/platform companies generally incur
significant fixed costs to develop their platforms, but the cost of an incremental transaction is minimal. As such,
platform companies typically demonstrate expanding margins as revenue scales over a fixed cost base. This is
clearly not the case at PCOM. As we will repeatedly argue, PCOM management has gone to great lengths to
focus investor attention on top-line growth and a nebulous pipeline, rather than the abysmal profitability of new
contracts. The success of this redirect is obvious when considering PCOM's stock price has nearly doubled over
the past two years, despite gross margins and earnings estimates that have collapsed.
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The lack of understanding behind the gross margin drivers seems to be another problem for investors and sell-
side analysts. As shown in detail below, we believe basic analysis irrefutably debunks the critical bullish story
arguing new contracts will be accretive to overall margins. A recent Seeking Alpha PRO article promoting
PCOM's stock, illustrates the errant bullish thesis we easily disprove:

"The biggest reason for PCOM's (lack of) profitability is its gross margin, which last year was only
16%. One of the causes of this is some old legacy contracts that are based on a cost-plus model. The
newer contracts are based on a revenue-sharing model, which results in higher margins for the
company. So as the old contracts eventually roll over, it will provide some nice support for the gross
margin."
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While every investor is entitled to an opinion, we must point out new contracts have not driven margins higher.
In fact, the exact opposite has occurred. Even management has admitted new contracts have lower margins. On
its Q4'12 conference call, PCOM's CFO, Anthony Lam, stated, "Looking at 2013, while we expect gross margin
dollars to remain strong, we do anticipate a decline in our gross margin percentage. As previously noted, the on-
boarding of large partners generally carries lower gross margins in the range of 10% to 20%."
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Incidentally, we
show later that Mr. Lam's 10% - 20% guidance appears wildly inaccurate.

It seems obvious that if new contracts were being priced at better margins, then blended gross margins would
not have declined by 860 bps over the last two years, considering newcontracts have been driving the top line
(not old legacy contracts).

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PCOM Gross Margin Analysis
$ 000s
Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Principal Revenue 25,340 34,208 32,172 38,139 34,600 39,891 52,479 66,910 56,162
Other Partner Revenue 2,689 2,112 2,159 2,657 2,304 2,023 1,947 2,157 2,076
Interest Income 9 9 8 7 14 10 15 20 19
Total Revenues 28,038 36,329 34,339 40,803 36,918 41,924 54,441 69,087 58,257
Cost of Principal Revenue (21,632) (29,192) (27,300) (32,825) (30,259) (34,515) (45,707) (58,785) (49,989)
Total Gross Profit 6,406 7,137 7,039 7,978 6,659 7,409 8,734 10,302 8,268
Total Gross Margin 22.8% 19.6% 20.5% 19.6% 18.0% 17.7% 16.0% 14.9% 14.2%
Principal Revenue 25,340 34,208 32,172 38,139 34,600 39,891 52,479 66,910 56,162
Cost of Principal Revenue (21,632) (29,192) (27,300) (32,825) (30,259) (34,515) (45,707) (58,785) (49,989)
Principal Gross Profit 3,708 5,016 4,872 5,314 4,341 5,376 6,772 8,125 6,173
Principal Gross Margin 14.6% 14.7% 15.1% 13.9% 12.5% 13.5% 12.9% 12.1% 11.0%

While management has insinuated new contracts come at lower margins, we believe PCOM has been
disingenuous about how low the gross margins actually are on new contracts. In the middle of 2013, PCOM
added Southwest Airlines (LUV) as a large new principal partner. As a result, revenue growth accelerated from
22.5% in the first half to 64.4% in the second half of the year. Despite the impressive "revenue" growth, gross
margins have declined every quarter since Southwest launched, falling as low as 14.2% in Q1'14. Management
claims new large partners like Southwest carry gross margins between "10% and 20%,"but our analysis
indicates gross margins on Southwest are a fraction of management's guidance levels.

Management has stated organic growth excluding new partners is 15% (more on this later).
18
Knowing this, we
can easily calculate revenue growth excluding Southwest, and by default, we can also back into Southwest
stand-alone revenue. Next, if we assume margins on the legacy business are consistent year-over-year, we can
also calculate the gross margin on legacy revenues, as well as the implied Southwest gross profit and gross
margin. Based on this analysis, guided by management's own public commentary, Southwest revenue appears to
carry a gross margin of just 4% - 5%. Assuming our analysis is correct, then PCOM's Southwest contract, which
played such an integral role in the stock promote, is producing gross margins below even the least profitable
technology VARs. Our rudimentary analysis below blows a huge hole in the PCOM bull story.

Finally, the apparent extent to which management has gone to obfuscate the actual economics of its new
partnerships is extremely troubling. PCOM actually utilizes Southwest in its investor marketing materials as an
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13
example of customer economics. While management claims new partners carry a 10% -20% gross margin (and
by our calculation even this amount is a gross overstatement), the company specificallyimplies that it achieves a
20% gross margin on its Southwest business. As can be seen below, PCOM states that it buys miles from
Southwest at $0.020 per mile and resells to consumers at $0.025 per mile, which would be a 20% margin. We
were unable to find any disclaimer that the slide below was for illustration purposes only, and it was explicitly
titled "Buy Miles" Economics for the Consumer. If our analysis of PCOM economics is accurate, then we
believe PCOM has potentially misrepresented its organic growth, or the actual profitability of legacy contracts,
or the Southwest economics/margins, or all of the above!

Source: PCOM investor presentation.

Profitless Revenue Growth - i.e. Negligible Contribution Margins
Revenue is often the key performance metric associated with growth companies. As we illustrated above, we
believe PCOM's reported revenues are not analogous to economic reality. Along these same lines, we believe
"take rates," or PCOM's economic capture on principal transactions, has collapsed. Therefore, it is no surprise
that on investor calls, PCOM management has instructed investors to evaluate the company on incremental
margins, or contribution margins, rather than absolute gross margins. For example, on PCOM's Q2'12 earnings
call, CEO MacLean said, "while we anticipate some minor reduction in gross margin percentage, we would
expect the incremental margin dollar generated to be significant and thus represent a better measure to focus on
when evaluating the profitable growth of our business."
19

However, even using management's preferred evaluation metric, the company has failed to deliver. Serving as
just one more example of how different PCOM is from platform companies, its 2013 EBITDA contribution
margin was a negligible 1.8%.In the first half of 2013, before the launch of Southwest, PCOM's contribution
margin was actually negative on revenue growth of $14.5 million year-over-year. This is completely
incongruous with a platform business model. For example, Xoom (XOOM), an online money transfer platform,
had a ~37% EBITDA contribution margin in 2013, while OpenTable (OPEN), the well known restaurant
reservation platform being acquired by Priceline (PCLN), boasted nearly a 40% contribution margin in
2013.We believe PCOM is so focused on revenue growth it is essentially selling new business at zero margin,
which is evident in its lousy incremental gross and EBITDA profit margin.

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14

PCOM's profitless revenue growth, and the sell-side's lack of understanding of the actual economics of the
company's business model, is clearly illustrated bythe incessant negative consensus earnings revisions. At the
beginning of 2012, analysts expected PCOM's earnings to more than triple in 2013 to $0.70 per share.
However,over the following eight quarters, PCOM repeatedly missed estimates and pushed out material
earnings. When Q4'13 was finally reported in March 2014, PCOM's full year earnings for 2013 were only
$0.23, missing the original analyst estimates by 67%. Amazingly, despite two years of uninterrupted negative
earnings revisions, PCOM's stock price nearly tripled. We believe the stock rallied due to management's ability
to redirect the conversation from profits to (profitless) revenue growth, while also tickling the Street with
"pipeline" hype (more on this later). The chart below clearly shows the consistent step-down in earnings
estimates over the last two years. The red line is the 2013 consensus EPS estimate (right hand axis), while the
blue line is the 2014 consensus EPS estimate (right hand axis), and the black line is the stock price (left hand
axis).

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15
PCOM Consensus EPS Revisions
2013 & 2014
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
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$0.90
$1.00
Share Price (LHA) 2013 Consenus EPS (RHA) 2014 Consenus EPS (RHA)

Source: Bloomberg.

Despite the clear trend in 2013, and the abysmal profit growth over the last 3 years (see analysis below),
analysts appear overly optimistic about earnings all over again in 2014. At the beginning of 2013, when analysts
first provided out-year (2014) earnings estimates, the sell-side again assumed material EPS flow-through on the
large "gross" revenue growth expectations. In fact, in the middle of 2013, likely due to the imminent launch of
Southwest as a partner, PCOM's 2014 consensus earnings estimate approached $0.90 per share. PCOM has
failed to generate any material earnings, resulting in a 2014 EPS estimate that has declined by 48% in the last
eight months. We believe estimates still remain too high, as PCOM's reseller business model is fundamentally
unable to generate meaningful earnings.We believe that our report, exposing PCOM for what it actually is, may
mark the first time earnings matter in the PCOM discussion.At approximately 103x trailing earnings, we
understand why the sell-side and management are so focused on revenue.

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16
PCOM EPS Analysis
$ 000s
2011 2012 2013 2014E 2015E
Earnings before taxes 3,545 3,493 4,272
Normalized tax rate
1
15.6% 15.6% 15.6%
Net Income 2,992 2,948 3,606
Diluted shares out 15,533 15,307 15,531
EPS $0.19 $0.19 $0.23 $0.47 $0.84
1. Normalized tax rate based on applying 2013 rate to prior years

Revenue concentration risk (an important topic for the next section)
We believe the Southwest economics are not the only area in which PCOM's marketing materials have been
highly misleading. According to PCOM's website, "More than 45 of the world's leading loyalty brands partner
with us to increase program flexibility, drive greater member engagement, and grow revenue."
20
Indeed, the list
of customers on the company's website looks impressive:

Source: https://www.points.com/company/our-partners.html

However, what PCOM typically fails to share, outside of its required quarterly 6K and Annual Report risk
disclosures, is that significant customer concentration exists. As we discuss later, PCOM previously burned
investors with the loss of a large partner, and we believe the tea leaves point to risk of another large partner
defection. In the company's Annual Report, PCOM discloses:
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17

For the year ended December 31, 2013, there were four loyalty program partners for which sales to
their members individually represented more than 10% of the Corporations total revenue. For the
2012 year, there were three loyalty program partners for which sales to their members individually
represented more than 10% of the Corporations total revenue. In 2013, in aggregate, these four
partners represented 83% of the Corporations revenues. In 2012, in aggregate, these three partners
represented 76% of the Corporations revenues. The loss of any one or more of the Corporations key
loyalty program partners could have a material adverse affect on the Corporations business,
revenues, operating results and financial condition.
21

While 83% customer concentration is already a substantial risk, concentration is actually intensifying. In both
Q1'14 and Q4'13, the top four partners accounted for 88% of revenue.
22
We were unable to find any
"platform"business with customer concentration of this magnitude (based on an analysis of the "platform" group
presented earlier). On the contrary, most platform companies highlight revenue diversity and lack of
concentration as key strengths in their public filings.

PCOM Revenue Concentration Analysis
$ 000s
Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Top 4 Partners 74.0% 79.0% 86.0% 87.9% 88.0%
Other Partners 26.0% 21.0% 14.0% 12.1% 12.0%
Source: Company filings and internal estimates.
NOTE: Q1'14 includes estimate for 4th partner at 9% of total revenue.

We believe the loss of one of PCOM's top 4 customers would not only be a complete surprise to investors, but
would likely result in a devastating decline in the bubbly stock price. While management boasts strong
customer retention, it is worth noting PCOM lost a large customer a few years ago, surprising investors and
resulting in a significant stock price collapse. It is our opinion history may repeat itself.

History of customer loss and burning shareholders
The background with PCOM and Delta should serve as a harrowing reminder to investors of the inherent risks
of PCOM's customer concentration, and in our opinion, also call into question management's sincerity. In late
2007, PCOM announced a renewed and expanded partnership with Delta Air Lines (DAL). According to the
PCOM press release, "The companies have signed a new three-year agreement, retroactive to September 1,
2007, reflecting a more comprehensive partnership where Points takes a principal role and accepts greater
responsibility in the operation of the Buy, Gift and Transfer miles programs available to Deltas SkyMiles
customers."
23
That sounded great.

On April 15, 2008, Delta announced it would merge with Northwest Airlines.
24
Regarding the merger
announcement and its impact on PCOM's business, CEO MacLean stated, "I know our investors are watching
the proposed merger between Delta and Northwest with interest as well as following merger talks between other
airlines. As you know, both Delta and Northwest are our partners and we have very strong relationships with
both parties. Today, we operate more services with Delta and work very closely with that team in growing their
business."
25
That sounded great.

In late 2008, PCOM hired the former president and COO of the Delta Sky Miles Program as the company's
chief marketing officer.
26
This announcement alleviated concerns regarding its Delta relationship, while also
presumably providing PCOM an inside track on a long-term contract. That sounded great (this person did not
last very long at PCOM; he left after a little over one year).

Finally, on its Q1'09 conference call on May 6, 2009, management had the following dialogue with a sell-side
analyst, which of course sounded great:

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18
Question Tanya Messenger: Hi, have you seen any impact from the integration of the Delta-
Northwest merger?

Answer Christopher Barnard: We have not seen anything yet. They're obviously right in the very
early stages of merging those carriers. The loyalty programs today are looking -- they're doing some
things to try to coordinate some of their efforts, but they're really still today running two independent
programs. So, it's had very little impact on our business today.
27

On August 13, 2009, just three months after management indicated there was "very little impact" on its business
from the merger, PCOM dropped a bombshell. Effectively a confession to misrepresenting the state of the Delta
relationship in every previous investor correspondence since the Northwest merger, PCOM issued the following
press release:

On August 12, 2009, the Corporation agreed to a restructured relationship with Delta Air Lines
(Delta) in conjunction with Delta SkyMiles and Northwest Worldperks programs planned
unification into a single frequent flier program. Commencing on or about October 1, 2009, Delta has
elected to leverage existing internal capabilities to provide the retail mileage sale and transfer
programs currently being operated by the Corporation. It is expected that this repatriation will be
effective on or about October 1, 2009 and that it will have a material adverse impact on the
Corporations revenue. For both the three and six month periods ended June 30, 2009, these products
represented approximately 60% (2008 approximately 60% for the three and six month periods ended
June 30, 2008) of the Corporations revenue.
28

NOT GREAT.

PCOM's management had continuously reassured investors all was well with Delta and Northwest. While they
were clearly wrong on the health of the Delta relationship, losing a large customer is a natural risk when
investing in companies with customer concentration. The more problematic pattern was management's seeming
desire to conceal the magnitude of its revenue concentration with Delta. To the best of our ability, we have been
unable to find any disclosure relating to Delta's revenue concentration prior to the August 13 press release.
What should be most concerning for investors is the fact the SEC actually questioned PCOM's lack of partner
disclosure in 2009. Despite requests for more clarity by the SEC around customer concentration disclosures,
PCOM managementdecided against disclosing this vital information to its shareholders for "competitive
reasons."
29

Source: https://www.sec.gov/Archives/edgar/data/1204413/000120445909001562/filename1.htm

The day after the delta confession, PCOM's share price dropped 32%, while extending the decline to nearly
60% in a matter of weeks.

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19

Source: Capital IQ

We believe investors should be very cognizant of the Delta debacle, including management's erroneous (or
perhaps misleading) reassurances, as well as the losses that followed. History may very well be repeating itself.

On February 14, 2013, American Airlines (AAL) and US Airways announced the two companies would merge.
Both companies are major customers of PCOM. While we do not know the ultimate outcome of the merger, the
tea leaves appear to be indicating a real risk for PCOM. On its Q1'14 earnings call, American Airlines President
Scott Kirby stated, "As to the frequent flyer program, we've started making some changes already. We did
anticipate when we merged that we would get some synergies from the frequent flyer program. Actually, that's a
big part of the synergies."
30

We believe there is a real possibility, based in part on Kirby's quote, that PCOM could once again lose a
massive customer.

Mischaracterized organic growth and a European Tall Tale
A key tenet of the bull case for PCOM is the belief two levers exist for future growth: greater penetration of
existing customers and new program/customer wins. Management has repeatedly stated that organic growth,
excluding new partner launches, is solidly in the double digits. With investors believing double digit organic
growth is a base, new partner wins and launches are gravy.

Management has explicitly said 2012 organic revenue growth was in the double digits, declaring, "We expect
organic year-over-year revenue growth in the 15% to 20% range."
31
On its Q4'13 earnings call, PCOM CEO
MacLean made a similar proclamation when discussing 2013 and 2014 organic growth, although his words
were couched carefully:

Question Pardeep Sangha: Historically, you have had roughly 15%, kind of in that range, of organic
year-over-year growth. So we can kind of expect that, still, and then the rest above that is the --
typically, 25% to 40% is new stuff, right? And that is how we can think about it?

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20
Answer Rob MacLean: Yes. We have said -- I think I said a few minutes ago that we saw double-digit
growth in the organic business here in 2013. And that core business just continues to be very healthy.
So I wouldn't call it a specific percentage, but we like where the organic growth is.
32

Based on our own analysis, we believe PCOM's public statements misrepresent organic revenue growth. Our
analysis concludes that outside of its top 4 customers, organic growth has declined the last three quarters.
Because PCOM's top 4 partners represent the vast majority of its revenues, and because these top partners have
not changed over roughly the last four years (with the exception of Southwest in Q2'14), it is possible to
calculate an approximation for "organic" growth from the other 40-45 partners. As can be seen below, organic
growth outside of its top 4 partners appears to have been significantly below the 15% -20% rate indicated by
management. Not only do we believe organic growth has been below the 15% - 20% range, we believe it was
negative in Q3'13 and Q4'13, with downsideacceleration to negative 27.2% in Q1'14.

We readily admit our calculation for organic growth requires rough approximations (leaving management some
wiggle room on interpretation). However, the same wiggle room does not exist concerning public comments
management has made about its European business, which we believe is misleading at best. On its Q4'13
earnings call, management made a series of assertions about its European business which appear irreconcilable
when compared to later financial disclosures. Below is an exchange between a sell-side analyst and CEO
MacLean from the Q4'13 earnings call (emphasis ours):

Question Sameet Sinha: Okay. And finally, just in terms of Europe, has that turned around, or is it
still kind of lagging?

Answer Rob MacLean: Yes, we had a better fourth quarter in Europe, for sure. When we think about
a year-over-year basis, it was essentially flat, [with] back half of the year performing much better.
Early part of 2014 we are seeing good signs. So we're optimistic that that positive trend recovery in
Europe is moving in the right direction. So early days here in 2014, but I think the signs are positive on
that becoming -- getting back into a fairly significant growth phase."
33

Two months later, on PCOM's Q1'14 earnings call, CEO MacLean again led the investment community to
believe Europe was growing (although not as much as the U.S.) "The European proposition and those programs
[are] doing well, just not growing as certainly strong as the North American marketplace. So we that will be
the kind of single thing I would point out, but nothing really material beyond that."
34

While choosing his words carefully, but acknowledging growth from Europe, it was clear management was
communicating that Europe was not only stable, but actually growing again. Given the numerous examples of
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________________________________________________________________________
21
management's questionable credibility, the fact PCOM actually reports revenue by geography in its quarterly
and annual filings should only serve to further dent the story. Much to our surprise, the situation in Europe
could not be more different than the healthy depiction management outlined. According to public disclosures,
European revenue was down materially in 2H'13, despite management explicitly stating the second half had
performed better with a "positive" trend. Removing the possibility management simply misspoke, the European
decline hasaccelerated into 2014, with that segment down 35% year-over-year in Q1'14. The business was
clearly not "growing" as strong as North America it was not growing at all! A year-over-year decline of 35%
is a far cry from returning to the "fairly significant growth phase" management outlined on March 5, 2014,
which incidentally meant the CEO had results already for all but four weeks of the quarter.

Profitability overstated, a likely violation of SEC Regulation G, and a pattern of missing guidance
The SEC has made a concerted effort to reign in manipulative adjustments companies use under the auspices of
pro-forma reporting. The SEC's adoption of Reg. G. clearly delineates requirements for pro-forma reporting.
35
It
is our opinion that PCOM has violated several SEC reporting requirements of Reg. G.

In 2013, when PCOM provided its initial outlook for the year, the company quietly altered its definition of
Adjusted EBITDA to a Pro-Forma Adjusted EBITDA (basically an Adjustment to the Adjustments). The
company stated the following:

The Company expects EBITDA to be in the range of $10 million to $13 million prior to strategic
investments
The Company plans to re-invest a portion of its incremental profitability in 2013 in the range of $2-$3
million
36

While the language around this change appears innocuous, the implications are dramatic. First, PCOM
effectively increased its Adjusted EBITDA guidance by nearly 30% through financial chicanery ($11.5 million
midpoint of guide prior to "strategic investments" vs. $9.0 million midpoint of actual guidance). This is clearly
a material difference and is misleading to investors. Further, management does not even give an explanation for
the change, and we believe PCOM attempted to avoid the topic on its conference calls. Second, and more
importantly, we believe this financial manipulation is illegal and in direct violation of SEC Regulation G.
Regulation G was adopted in 2003 to prohibit material misstatements or omissions that would make the
presentation of a material non-GAAP financial measure misleading to investors.
37
The regulation prohibits
companies from "adjusting a non-GAAP performance measure to eliminate or smooth items identified as non-
recurring, infrequent or unusual if such items occurred in the past two years or are likely to occur in the ensuing
two years."
38

This is the exact same regulatory issue the SEC highlighted when Groupon (GRPN) filed its registration
statement and introduced its own measure of profit before investments. In GRPN's case, the company
introduced "Adjusted Consolidated Segment Operating Income," or CSOI. In its S1 filing, GRPN stated, "This
metric is our consolidated segment operating income before our new subscriber acquisition costs and certain
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________________________________________________________________________
22
non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term
growth."
39
We believe Groupon's manipulated earnings metric is no different than PCOM's. In both cases, the
companies seem to be saying, "Here is our profit if we exclude certain on-going operating expenses essential to
our future growth." The concept is absolutely preposterous. Groupon, which underwent a highly publicized
IPO, immediately received scrutiny and backlash from the SEC and financial community. In correspondence
with GRPN prior to its IPO, the SEC stated:

We note your use of the non-GAAP measure Adjusted Consolidated Segment Operating Income, which
excludes, among other items, online marketing expense. It appears that online marketing expense is a
normal, recurring operating cash expenditure of the company. Your removal of this item from your
results of operations creates a non-GAAP measure that is potentially misleading to readers. Please
revise your non-GAAP measure accordingly. Refer to Rule 100(b) of Regulation G.
40

It is our belief that PCOMhas temporarily flown under the SEC's radar because it is a smaller, Canadian-
domiciled business, and initiated the reporting change long after its IPO (when there is less scrutiny on investor
communication).

Further supporting our view of a blatant violation of SEC guidelines, the CEO brazenly admits the spend
excluded from Adjusted EBITDA is indeed recurring in nature. When discussing this new form of guidance, the
CEO had the following exchange with a sell-side analyst:

Drew McReynolds: And just on the $2 million to $3 million in kind of recurring or in investments into
the business for 2013. I mean, presumably that's kind of a recurring layer of costs looking into 2014. Is
that the correct assumption?

Rob MacLean: Yeah. I think we're a growth company. We feel very strongly about the opportunities in
front of us. You've heard us speak at length about this core business that we operate in today. We think
the opportunities closer to $2 billion to $2.5 billion, so a lots of upsides. You'll continue to see us
invest. As we mentioned, the $2 million to $3 million investment here in 2013 really will be oriented
around enhancing our mobile activity, broadening our payment functionality, the B2B business that we
see great opportunities for growth, and then obviously, expanding on that the open platform strategy
that I talk through. So, those kinds of things you'll continue to see us expand upon as we move into
2014 and beyond. I think from we're a bit reticent to provide broad 2014 and 2015 guidance. But I
wouldn't expect those investment numbers to be dramatically different than what we're talking about
here in 2013, but in the same themes in terms of what we pursue.
41

Could it be any clearer that the excluded investments are in fact recurring? But PCOM management took their
disregard towards SEC guidelines one step further in 2014. When initiating 2014 guidance on its Q4'13 earnings
call, PCOM more than doubled the "strategic investments" excluded from Adjusted EBITDA to a range of $5 to
$7 million. In addition to violating Reg. G, the 2014 guidance for $5 to $7 million of "strategic investments"
was in direct contrast to the CEO's prior comments that investment spend would stay relatively constant in
2014.Given that PCOM's EBITDA guidance prior to these on-going investments was $16 million to $20
million, the company effectively increased EBITDA guidance by 50% by using new definitions the SEC
appears to prohibit.
42

PCOM EBITDA Guidance
$ 000s
Low High Mid-point
EBITDA prior to strategic investments 16,000 20,000 18,000
Strategic investments 5,000 7,000 6,000
EBITDA after investments 11,000 13,000 12,000
% Increase 45.5% 53.8% 50.0%

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23

In addition to using adjustments that overstate profitability, management has a habit of missing the inflated
numbers to which they guide, while redirecting attention to some story in the future. The most obvious case in
point is the company's Q4'12 earnings report. In order to focus investor attention away from a large ~12%
revenue miss for the quarter, management included the following statement in its earnings release:

We are confident that our progress in 2012 coupled with the strategic investments slated for 2013 will
position the platform for growth in both revenues and profitability in 2014 and beyond. Based on the
expected growth of existing business we have in market today, coupled with the annualized
performance of partners and products announced to-date and slated to launch in 2013, well exit 2013
with an annualized revenue run-rate of approximately $300 million. On a pre-investment basis we
would expect this run rate to generate over $20 million in EBITDA.
43

As late as August '13, when questionsarose regarding PCOM's ability to hit its revenue target, management
continued to adamantly reiterate its view:

Pardeep S. Sangha: In the past, you mentioned this $300 million revenue run rate by the end of 2013. I
didn't hear any of that mentioned today. Is that still holding true?

Rob MacLean: Yes, we're still right on track with that.
44

Then, on a follow-up question:

Question: Okay. And then, just I know you clarified this on the call slightly, but there's a question. At
one point, you had talked about sort of $300 million being I think it was the run rate of current
business on a go-forward basis. Is that correct?

Rob MacLean: Yes. I think we talked about that as the deals that we've announced or launched, we
see that really driving approximately $300 million run rate as we exit 2013, yes.

Question: Okay. And so, that does not include anything you are currently working on at all?

Rob MacLean: That's correct.
45

Basic algebra contemplates that if PCOM were "right on track" to exit 2013 at a $300 million revenue and $20
million EBITDA run-rate, and these numbers only include announced business to-date, then clearly PCOM
should generate well in excess of Q4'13 run-rates in 2014.But basic algebra does not hold with PCOM. Despite
announcing new agreements with MasterCard, Hilton, and Spirit Airlines (more on this shortly), PCOM guided
2014 revenue to only ~ $280 million at its mid-point (with the high-end of range only ~$291 million). Pro-
forma Adjusted EBITDA "prior to strategic investments" was guided to just $18 million at the mid-point. Not
only did PCOM miss its estimated run-rate, but somehow by adding new clients, the company became even less
profitable.

The Value of recent partner wins & pipeline are overstated and misunderstood
Two additional components of the bull case for PCOM are a large pipeline of new customers that should close
imminently, and recently signed partnership agreements with MasterCard and Hilton. We believe MasterCard
carries absolutely zero direct revenue, the Hilton deal is a non-factor, and the customer pipeline is nonsensical.

On 2/18/14, PCOM announced a partnership with MasterCard (MA) to offer MA cardholders enhanced
rewards.
46
The stated goal of the partnership is enabling card issuing bank consumers to exchange and trade
airline miles, hotel points, and other loyalty currencies. In the three days following this announcement, PCOM's
stock price increased by nearly 25%. While MA is clearly a behemoth in the financial services sector, the deal
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24
with PCOM carries zero incremental revenue. In essence, it is nothing more than a PCOM hunting license.
PCOM still needs to win individual bank customers, bearing all expenses required to build and convert a
pipeline. In the nearly five months since the initial announcement of the MA deal, PCOM has publicly
converted zero new bank partners. In a rare case of conservatism, CEO MacLean admitted, "With respect to
MasterCard in particular, we expect limited near-term monetization on the partnership."
47

On PCOM's Q4'13 earnings call, the company announced Hilton as a new customer. Despite failing to quantify
the size of the opportunity, CEO MacLean proclaimed, "With approximately 4,000 hotels across 10 unique
brands in 9 different countries, the Hilton HHonors program is one of the world's largest loyalty programs,
offering its approximately 38 million members extensive opportunities to earn and redeem loyalty points."
48

Given the impressive size of the Hilton HHonors membership base, it is not surprising the market viewed this
deal as a significant win for the company. In fact, one aggressive sell-side analyst told institutional clients, "We
anticipate this partnership could generate $30-$35MM in revenues annually." Based on our analysis, we believe
Hilton will contribute a small fraction of the revenue expected by the market. First, while many consumers sign
up for hotel rewards (consumers are typically automatically enrolled simply by staying at a hotel property),
these programs are significantly less active than airline programs. As the Wall Street Journal highlighted in a
recent article on the subject, "consumers are often loyal to a particular airline for frequent-flier miles, yet
agnostic about hotel brands, shopping by price, location, ratings and reviews."
49
Second, the math once again
does not support the bull case. In 2012, Hilton said HHonors members redeemed 4.3 million reward nights.
50

According to NerdWallet, which tracks airline and hotel reward programs, it requires 30,000 to 40,000
HHonors points to redeem a mid-tier (category 5) room.
51
Therefore, at 4.3 million room nights, 35,000 points
per night, and $0.025 revenue per point for PCOM (which appears aggressive given the company's precipitously
falling gross margins), the Hilton contract may only add ~$3.8 million of incremental annual revenue, or 1.1%
of the consensus 2015 revenue estimate.

Hilton HHonors Estimated Contribution
$ 000s
2012 Reward nights 4,300
Points per night 35
Total Points 150,500
PCOM revenue per point $0.025
PCOM Revenue 3,763
Source: Internal estimates.

Finally, we believe it is incredibly important to understand the unaudited and promotional nature of PCOM's
"robust" customer pipeline. Over the last decade, management has consistently discussed the strength of its
pipeline. During good years and bad, through fast and slow growth, and despite minimal profits as revenue
grows, management never wavers regarding the strength of the pipeline. At some point, shouldn't this
perpetually "robust" pipeline begin to translate to real profits?

"Our pipeline is solid""our pipeline continues to build""our robust product pipeline" - Q3'06
earnings call
"Our pipeline is solid" - Q4'06 earnings call
"Needless to say, our pipeline is very robust" - Q1'07 earnings call
"Our pipeline of reseller deals among both new and current partnerships, is greater than ever before,
which is an extremely encouraging sign""our pipeline remains extremely robust" - Q2'07 earnings
call
"We have a large pipeline of opportunities" - Q4'07 earnings call
"Our new business pipeline remains very strong." - Q1'08 earnings call
"Our pipeline is quite robust" - Q2'08 earnings call
"Our pipeline has been and continues to be very robust" - Q3'08 earnings call
--------------------------------------------------------------------------------------------------------------------------

________________________________________________________________________
25
"We'll execute on new business pipeline to sign and launch new deals that will provide strong revenue
and margin in the coming years." - Q1'09 earnings call
"Very healthy pipeline of new opportunities" - Q3'09 earnings call
"Our new business pipeline is quite strong" - Q1'10 earnings call
"The overall pipeline remains very strong" - Q2'10 earnings call
"We look at the pipeline as being more valuable today then it has been at any point as we look out" -
Q3'10 earnings call
"Looking to the remainder of 2011 our partner pipeline remains very robust" - Q4'10 earnings call
"We have already entered the third quarter with a strong pipeline of perspective products and partner
deployments" - Q2'11 earnings call
"Pipeline today is larger than it's ever been since we started the company." - Q3'11 earnings call
"Our new partner pipeline remains robust, with Points engaged in several active conversations with
leading loyalty programs across a number of different verticals and geographies" - Q2'13 earnings
call
"The new partner and product pipeline remains robust" - Q4'13 earnings call

Our point in displaying this deluge of management quotes is simply to illustrate that over nearly an eight year
period, not once was the pipeline anything other than "robust," "solid," or "strong." Even when the company
signed new deals, removing the prospect from the pipeline, the pipeline description was not once described as
anything but "larger than it's ever been."

Second, only once in a public forum has management quantified the value of the pipeline. On PCOM's Q2'12
earnings call, CEO MacLean said, "Our pipeline of prospective new business is now well over $50 million
having grown significantly over the past quarter as we continue to pursue larger relationships."
52
On the same
earnings call, MacLean also admitted something we subsequently learned - these new deals come at minimal
incremental margins. MacLean said, "As we go forward and execute against our growing pipeline pursuing
larger opportunities, we expect to see some lower gross margin percentages on certain deals."
53
While $50
million sounded like a decent revenue opportunity, if we consider the company's 1.8% incremental EBITDA
margin on new business,
54
PCOM's entire pipeline from 2012 represented only $877 thousand of incremental
profits. Despite avoiding public quantification of the pipeline's size (since Q2'12), a sell-side analyst now claims
the pipeline was selectively disclosed to institutional investors. In a note to investors, this analyst wrote the
following: "During the presentation at B. Rileys Annual Conference in Santa Monica, PCOMs CEO, Rob
McLean announced that PCOM could triple its business if they close the business in the current pipeline.
During Q&A he reaffirmed his statement and indicated that [the] pipeline was at least $600MM."
55
Unlike most
public companies, PCOM does not allow its presentations at investor conferences to be webcast or recorded, so
we cannot corroborate this selective disclosure. However, even in a best case scenario, in which PCOM's
pipeline were in fact $600 million, and if we further assume the entire pipeline is converted, it would only
contribute $10.5 million in additional EBITDA at PCOM's most recent contribution margin. If we give PCOM
credit for its entire pipeline and add the incremental $10.5 million of EBITDA to the $7.4 million generated in
2013, then PCOM would have a pro forma, fully converted pipeline EBITDA of $17.9 million. At the
company's current $365 million enterprise value, under this perfect scenario, PCOM would still be trading at
20.3x EV / EBITDA.

Is PCOM already facing major secular challenges?
Open-ended growth companies make beating-and-raising a way of life. PCOM missed its $300 million run-rate
guidance exiting 2013 by 8%, while also providing initial guidance for 2014 that was roughly 8% below
consensus estimates. While sell-side analysts justified the big miss as conservative initial guidance (one analyst
stated, "We anticipate management could be taking a conservative approach to guidance due to the Q3'13
shortfall to Consensus"
56
), we believe the serial disappointments stem from a more ominous structural
challenge. It is our belief that management has already begun signaling the business may be suffering. When
discussing visibility into 2014 guidance, CEO MacLean alluded to new structural risks with this nebulous
statement on visibility (emphasis ours): "In addition to the timing of existing partner activities throughout the
year, various changes in redemption structures among certain loyalty program partners experienced in 2013 and
planned for 2014 adds complexity to our business forecasting."
57

--------------------------------------------------------------------------------------------------------------------------

________________________________________________________________________
26

While the sell-side was extremely supportive in its post-earnings notes (all eight analysts have "buy" ratings),
MacLean's remarks did prompt a question from one analyst. When askedfor clarification about his structural
comment, MacLean said the following:

Over the years, programs along the way will make adjustments on, for example, how many miles may
take for a flight to Europe or a domestic flight or those types of things. And the programs will do that
kind of periodically in restructuring or updating the redemption structures. And we typically see some
dips in performance or growth slowing in some of those periods. And then it sort of used to be a fairly
short-term issue for us and we start to see pretty quick rebounds through that. So we know we've seen
some of that in the back half of 2013 and we know there are some more of that activity happening in
kind of industry wide in 2014. So that's really the reference point there.
58

We believe Mr. MacLean was effectively admitting PCOM's end market is changing, yet unsurprisingly, not
one sell-side analystsaddressed the issue in their post-quarter reports. Our research suggests the challenges
PCOM faces are very real and present just one more material risk, in a very long list, for PCOM's business.
Most of the major airlines arein varying stages ofaltering their rewards programs. By increasing the number of
points or miles necessary to redeem a flight, airlines are effectively devaluing their loyalty currencies. We
believe this structural challenge is one reason PCOM missed 2H'13 so severely. These changes should continue
to have a material impact on PCOM in the future.

On 2/1/14, United changed its loyalty program by increasing the number of miles required for the most popular
award tickets. Since 2011, a roundtrip business class ticket between the U.S. and Europe required 100,000
miles. After the most recent changes, that same ticket will cost 140,000 miles, or 40% more than prior to the
change.
59
Demonstrating its commitment to the permanence of these changes, United responded to customer
backlash by explaining, "We're increasing miles required in these marketsto account for the increased cost of
providing transportation."
60

Southwest, one of PCOM's largest customers, followed United's changes by implementing its own version of
loyalty currency devaluation on March 31, 2014. Specifically, Southwest increased the number of points
necessary to redeem a "Wanna Get Away" ticket from 60 points per dollar to 70 points per dollar, or a 16.7%
increase.
61
Rapid Rewards members were notified of the change in late 2013, which may have led to a short
burst in redemptions during Q1'14 ahead of the Q2'14 implementation.

Finally, the newly merged American and US Airways, both current customers of PCOM, implemented its
change on 6/1/14, increasing the number of points required for flights on busy travel days.
62
The impact on
PCOM should be felt over the coming quarters. Our understanding is the broader "synergies" about which
American's president cryptically alluded are NOT part of the loyalty currency changes implemented in June.

These structural changes appear to be only just beginning. Tim Winship, editor of FrequentFlier.com says, "A
mile earned today is worth less than a mile earned a year ago. I think it's a pretty fair bet that a mile earned a
year from now will be worth less than today's miles. That is very much the trend. There's no sign that it is going
to turn around any time in the future."
63
We believe theloyalty rewards industry changes present a significant
challenge for PCOM. The bottom line is the more points required to redeem rewards equates to fewer
transactions, and ultimately, less revenue for PCOM.

The misrepresentation of PCOM's balance sheetstrength
In addition to mischaracterizing PCOM's growth profile, we believe management has also done a masterful job
embellishing the company's financial position. On earnings calls and in correspondences with investors,
management makes a point to highlight PCOM is cash rich with "zero debt."
64
This characterization ignores, and
arguably misrepresents, PCOM's significant financial liabilities in the form of loyalty point payables to its
program partners and off-balance-sheet contractual revenue guarantees. As such, we believe management's
balance sheet comments, which are unsurprisingly parroted by sell-side analysts, are highly misleading.

--------------------------------------------------------------------------------------------------------------------------

________________________________________________________________________
27
First, PCOM excludes the material liability on the company's balance sheet titled "Payable to loyalty program
partners" from its definition of debt. The definition of this balance sheet line item is as follows: "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."
65
As of 3/31/14, PCOM's payables due to loyalty
partners represented a $47.9 million liability. Make no mistake; while not labeled as such, this is $47.9 million
of effective debt. PCOM's partners provide loyalty currency that PCOM may or may not resell; regardless of the
outcome, PCOM must pay its partners for the value of these points. So, while PCOM recently reported $58.9
million of cash at the end of Q1'14 and zero debt, the net effective unrestricted cash balance was just $11
million. As such, we believe the sell-side price targets that are based on enterprise value, are $3.17 too high
(holding all of the silly multiple assumptions constant).

While PCOM's partner liability is misrepresented, a bigger concern is PCOM's massive off-balance-sheet
liability in the form of principal revenue guarantees toits partners. Similar to capitalizing leases when analyzing
a retailer's capital structure, it would be ignorant to dismiss PCOM's enormous off-balance sheet future
liabilities. We believe partners do not work with PCOM because of a unique platform or technology, but instead
because PCOM offers very large revenue guarantees, thereby transferring risk from the partner (i.e., airline or
hotel) to PCOM. Based on public disclosures, PCOM has guaranteed an astonishing ~$243 million in revenue
to its partners over the next four years, which represents 731% of its shareholder's equity. If PCOM were to
lose a customer, or if the industry's shift in redemption patternsintensifies, PCOM would still be liable for these
large guarantees (we have yet to find disclosures that suggest otherwise).

Source: https://www.sec.gov/Archives/edgar/data/1204413/000106299314002687/exhibit99-1.htm

Insiders quietly heading for the exit
Given the significant uncertainty facing PCOM's business, combined with the company's exorbitant valuation, it
is unsurprising management wants to take some "chips" off the table. However, we are troubled by the lack of
investor transparency into management sales, especially juxtaposed to the promotional posturing of PCOM at
recent conferences. Because PCOM is domiciled in Canada, management is not technically subject to Section
16 of the Securities Exchange Act of 1934, which requires directors and officers to notify the SEC of any
transactions resulting in a change of beneficial ownership.
66
And because PCOM trades on both the
U.S.(Nasdaq) and Canadian (TSE) exchanges, insiders can sell shares in Canada without the same disclosures
U.S. investors are accustomed to receiving. And sell stock is exactly what the CEO, and the Chairman of the
Board, have done in the last few months. Notably, PCOM's Chairman of the Board sold over $1 million of
stockas Q2'14 was winding down, during what intuitively should have been a black-out window.
67

--------------------------------------------------------------------------------------------------------------------------

________________________________________________________________________
28

Source: http://www.canadianinsider.com/node/7?ticker=PTS

Source: http://www.canadianinsider.com/node/7?menu_tickersearch=Points+International+Ltd.+%7C+PTS

Valuation
Using a more reasonable valuation approach illustrates the extreme overvaluation of PCOM's stock.Given that
PCOM's gross revenues are effectively gross transaction volume, we believe it makes little sense to value the
business based on a multiple of reported revenue (does EBAY get valued based on its GMV?). Incredibly,
several sell-side analysts have justified price targets by using a multiple on the gross transaction value PCOM
reports (i.e., a revenue multiple). If an analyst wanted to use an EV/Revenue multiple, it at least makes sense to
utilize the proper comparable group multiple, which would be VARs. On this basis, PCOM should trade at an
enterprise value to gross revenue multiple of 0.24x. Applying this multiple to PCOM's estimated 2014 revenue
yields an enterprise value of $65.7 million. Adding $11 million of net unrestricted cash (after deducting loyalty
partner payables), PCOM would have an intrinsic equity value of $76.8 million, or $4.90 per share, ~80%
below PCOM's recent trading price.

EV / Gross Revenue Valuation
$ 000s
2014E Revenue 276,857
Multiple 0.24x
EV 65,748
Cash 58,945
Payable to loyalty partners (47,896)
Equity Value 76,797
FD Shares 15,663
Intrinsic Value $4.90
Source: Bloomberg and company filings.

--------------------------------------------------------------------------------------------------------------------------

________________________________________________________________________
29
A second, more traditional method to valuing the business is based on a multiple of the company's earnings, or
EBITDA (adjusted in this case). Again, it is our belief that an appropriate multiple should be based on the
economics of the underlying business model rather than the story perpetuated by management and the sell-side.
Given that PCOM operates a business with razor-thin gross and EBITDA margins, and containsoutsized risk
associated with nearly 90% customer concentration, we believe PCOM should at best trade inline with the
EBITDA multiple of its reseller peer group (if it looks like a reseller, acts like a reseller, then maybe PCOM is
indeed a reseller). Using the 6.3x average technology VAR multiple and applying this to the consensus PCOM
2014 EBITDA estimate, we calculate an intrinsic value of $5.86 per share, or ~75% below the current share
price.

EV / EBITDA Valuation
$ 000s
2014E EBITDA 12,800
Multiple 6.31x
EV 80,716
Cash 58,945
Payable to loyalty partners (47,896)
Equity Value 91,765
FD Shares 15,663
Intrinsic Value $5.86
Source: Bloomberg and company filings.

--------------------------------------------------------------------------------------------------------------------------

________________________________________________________________________
30

1
https://www.points.com/company/about-us.html
2
http://investor.points.com/releasedetail.cfm?ReleaseID=846650
3
Q4'13 earnings call, 3/5/14
4http://www.sec.gov/Archives/edgar/data/1204413/000095012306004023/y19192exv99w1.txt
5
http://www.sec.gov/Archives/edgar/data/1204413/000095012305010513/y12219exv99w1.txt
6
http://www.sec.gov/Archives/edgar/data/1204413/000095012305010513/y12219exv99w36.txt
7
media.integratir.com/t.pts/PressReleases/private%20placement0329.pdf
8
https://www.sec.gov/litigation/admin/2009/34-60976.pdf
9
http://seekingalpha.com/instablog/890075-copperfield-research/166874-ocz-the-master-of-ssd-shady-suspect-deceitful
10
http://www.theregister.co.uk/2011/04/27/ocz_ceo/
11
http://www.secinfo.com/d12TC3.vuNm.htm
12
http://apps.shareholder.com/sec/viewerContent.aspx?companyid=AMDA-HWAC8&docid=4814568
13
14
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175823564392&blob
header=application/pdf
15
http://finance.yahoo.com/echarts?s=PCOM+Interactive#symbol=PCOM;range=1d
16
http://seekingalpha.com/article/2271803-points-international-a-great-company-a-wide-moat-and-an-undervalued-
stock#comments_header
17
18
Q4'13 earnings call
19
20
https://www.points.com/company/our-partners.html
21
http://www.sec.gov/Archives/edgar/data/1204413/000106299314002216/exhibit99-1.htm
22
Q1'14 includes estimate for 4th partner at 9% of total revenue.
23
http://investor.points.com/secfiling.cfm?filingID=1204459-07-1662&CIK=1204413
24
http://en.wikipedia.org/wiki/Delta_Air_Lines%E2%80%93Northwest_Airlines_merger
25
26
27
28
http://www.sec.gov/Archives/edgar/data/1204413/000120445909001444/exh994.htm
29
https://www.sec.gov/Archives/edgar/data/1204413/000120445909001562/filename1.htm
30
AAL Q1'14 earnings call, 4/25/14
31
32
Q4'13 Earnings Call, 3/5/14
33
Ibid.
34
35
http://www.sec.gov/rules/final/33-8176.htm
36
37
http://www.debevoise.com/files/Publication/1a8b6eca-af5c-475e-af38-
b51b4c4dbe49/Presentation/PublicationAttachment/b47782ad-331d-4091-8d3a-
33048cbfe2c1/Major%20Changes%20Memo.pdf
38
http://www.sec.gov/rules/final/33-8176.htm#P157_26120
39
https://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm
40
https://www.sec.gov/Archives/edgar/data/1490281/000104746911006336/filename1.htm
41
42
43
https://www.sec.gov/Archives/edgar/data/1204413/000106299313001077/exhibit99-1.htm
44
45
Ibid.
46
http://newsroom.mastercard.com/press-releases/mastercard-teams-with-points-international-to-offer-cardholders-
enhanced-rewards/
47
Ibid.
48
Ibid.
49

http://online.wsj.com/news/articles/SB10001424052702303834304579519693340342478?mod=WSJ_qtoverview_wsjlatest
&mg=reno64-wsj
50
http://news.hiltonhhonors.com/index.cfm/page/9001
51
http://www.nerdwallet.com/blog/reward-program-reviews/hilton-honors-points/
--------------------------------------------------------------------------------------------------------------------------

________________________________________________________________________
31

52
53
Ibid.
54
Based on 2013 incremental EBITDA margin.
55
Sameet Sinha, B. Riley, 5/21/14
56
Andrew D'Silva, Merriman Capital, 3/6/14
57
58
Ibid.
59
http://www.forbes.com/sites/andrewbender/2014/01/24/united-airlines-is-about-to-make-mileage-award-travel-a-lot-
more-expensive/
60
http://www.usatoday.com/story/todayinthesky/2013/11/01/united-ups-mileage-needed-for-many-frequent-flier-
tickets/3344437/
61
http://www.frequentflier.com/blog/southwest-plans-to-devalue-rapid-rewards-points/
62
http://www.valuewalk.com/2014/04/american-airlines-us-airways-change-flyer-rewards/
63
http://www.dailybreeze.com/business/20131207/frequent-flier-miles-worth-less-as-airlines-roll-back-benefits
64
Ibid.
65
http://www.sec.gov/Archives/edgar/data/1204413/000106299314001176/exhibit99-2.htm
66
https://www.sec.gov/about/forms/form4data.pdf
67
Fortunately, an obscure Canadian website called CanadianInsider.com tracks SEDI (System for Electronic Disclosure by
Insiders) filings in Canada.

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