pethealth annual report 2011 final

a n n u a l r e p o r t 2 0 1 1 p e t h e a l t h 12011 AnnuAl RepoRt

pethealth 2 0 1 1 a n n u a l r e p o r t2

Pethealth is strategically positioned to benefit from changes in pet owner demographics leveraging a business model which combines the financial benefits of recurring revenue from the sale of pet health insurance and microchip technology with new revenue opportunities stemming from the development of innovative technological solutions and a growing national database of pet and pet owner information.

a n n u a l r e p o r t 2 0 1 1 p e t h e a l t h 5

highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

mAnAgement teAm . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

pResident’s messAge . . . . . . . . . . . . . . . . . . . . . . . . . . 11

CFo’s messAge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

mAnAgement disCussion & AnAlysis . . . . . . . . . . . . 21

FinAnCiAls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

diReCtoRs, oFFiCeRs And shAReholdeRs . . . . . . . . . 82


Consol idAted Revenues oF

$33.2 millionConsolidAted Adjusted eBitdA

34% to $5.09 million

1,323,235 miCRoChips sold By deCemBeR 31, 2011

24petWAtCh dAtABAse RegistRAtions 27% to over 5.26 million

over 2.25 million AnimAl intAkes &

890,000 Adoptions Completed thRough petpoint, An of 11% and 13% respectively1,773 petpoint-liCensed AnimAl WelFARe oRgAnizAtions, 13% from 2010


2011 highlights

2008 2009 2010 2011

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Adjusted eBitdA

2008 2009 2010 2011

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AFteR tAx net inCome

insurance revenues

non-insurance revenues us/CAd dollar

gBp/CAd dollar

2008 2009 2010 2011

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ConsolidAted Revenues vs . exChAnge RAtes

1 .20

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0 .70

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15


Andrei cornienco, Vice President, Information Technology

MArK WArren, President & Chief Executive Officer

Andy roche, Managing Director, Pet Protect Ltd., U.K.

Glen Tennison, Chief Financial Officer

John WArden, Vice President of Insurance

PeTer GAlosKA, Director, Finance

BrAd GrucelsKi, Vice President, PetPoint Solutions

mAnAgement teAm

Management Team

pethealth 2 0 1 1 a n n u a l r e p o r t1 0

a n n u a l r e p o r t 2 0 1 1 p e t h e a l t h 1 1

set out heRein FoR ouR shAReholdeRs ARe ouR FinAnCiAl Results FoR 2011 .

In addition to these top line numbers, some additional achieve-ments of note include:

1. Year-on-year revenue growth of 24% in our non-insurance business. Largely fuelled by database growth, changes to our client fees, and the good performance of the 24PetWatch call centre, our non-insurance business experi-enced solid growth over the year and positive EBITDA in Q4. The positive trending leads us to believe non-insurance rev-enues will continue to grow at an accelerated rate generating positive operating income and cash flow in 2012.

2. Over 5 million cats and dogs registered to the 24PetWatch database. Last year’s growth in the database was driven by organic growth in organisations using our PetPoint data management soft-ware. Extrapolating current growth rates we anticipate the database will reach 6 million registered cats and dogs midway through Q3.

3. A 17% increase in animal transfers through PetPoint licensed organisations. As transfers in the canine population increase as predicted, trends in our data also indicate growing movement within the feline population. Concurrent with declin-ing euthanasia, this activity indicates and contributes to a more

Presidents's Message to Shareholders

key elements inClude:•Totalrevenueof$33.2million,anincreaseof3%over2010.

•Year-on-yearEBITDAincreaseof34%to$3.7million.

•Pre-taxincomeofnearly$5.1million,up63%year-on-year.

•Over1.3millionmicrochipssoldforcompanionanimalusage,up7%over2010.

•A17%increaseinthenumberofanimalwelfareorgan-isationsusingourPetPointanimalmanagementsystem,toatotalof1,773.

pResident 's messAge to shAReholdeRs


dynamic marketplace for adoptable pets. As demand for adopt-able pets continues to rise, opportunities and demand for our in-surance programs and other products and services also increase.

4. Full repayment of debt incurred through the acquisi-tion of Pet Protect Limited. Through this accomplishment we strengthened our balance sheet in 2011 with the further effect of improving cash flow.

5. PetPoint takes a leading role in humane investigation and disaster response efforts. We have seen with increasing frequency over the course of 2011 how functionality within Pet-Point makes it the ideal solution for organisations participating in offsite rescue, humane investigation and seizure, and disaster response. The PetPoint Transfer Network played a prominent role in these efforts in 2011, assisting the organised transfer of displaced animals to participating groups across the country.

Year in ReviewUnited StatesWe intend to improve on U.S. policy growth in 2012 by focusing greater attention on our relationships with larger animal welfare partners, a number of which we believe are not yet maximizing the potential of our program with new pet adopters. Policy growth in our U.S. insurance business was not as strong as we would have liked last year, hindered over the first two quarters by the residual impact of changes to our ShelterCare Gift of Insurance program and adverse foreign exchange movements. We believe that adjust-ing our focus will provide a hedge against other variables.

Maximising the current relationship with Best Friends will also be a major focus over the course of 2012 as we seek to expand the reach of our insurance operations by capitalizing on the brand equity of our partner, in addition to exercising a more modern insurance pro-gram tailored to meet the growing demand for simplicity among the pet owning demographic. Best Friends was recently recognised for the second year in a row as a top not for profit brand in America.Despite a challenging first quarter, microchip sales in the U.S. gen-erated increasing momentum through the year. The acquisition of

Destron Fearing by our manufacturer, Allflex USA, Inc., last year leads us to believe we will have greater access to new technology in the years ahead, in many cases on an exclusive basis. Margin ex-pansion which increased each quarter is also expected to continue. We now believe with confidence we are the world’s largest provider of microchip technology to companion animals due largely to our strength in the U.S. companion animal market.

Despite slower than expected new policy growth, loss ratios in the U.S. improved, falling to just over 40%, an outstanding number. Additionally, we are implementing new strategies which will allow us in time to more effectively rate mix breed dogs, our largest source of new insurable pets.

Sales through the 24PetWatch database stood out as a major high-light in 2011 with overall performance up 70% from 2010. The increase in revenue can be attributed to both increasing pet and pet owner registrations and the implementation of a new program through which all pet owners registered as of January 1, 2011 are requested to pay for database services one year post-registration.

With respect to online retail, despite significant increases in year over year order volume and revenues, ThePetangoStore.com did not meet our expectations last year. To improve these figures, changes to the busi-ness model to leverage new customer acquisition through PetPoint, as well as increased focus on business-to-business sales to shelters to sat-isfy their own pet pharmacy needs, are priority initiatives for 2012.

We also believe ThePetangoStore.com will, for pet products, serve as a hedge against other parts of our business as higher gas prices push pet owners online, even as they cut back on their discretion-ary purchases including possibly pet insurance.

United KingdomOur insurance business in the U.K. experienced policy growth of 8% in the latter half of the year, fuelled by both an improvement to our un-derwriting profitability, carried out primarily through adjustments to underwriting guidelines concluding in June, and investment in growth. Rationalisation of the insurance market continued as expected with some companies exiting the market. We believe further rationalisation may provide acquisition opportunities over the course of the year.

pResident 's messAge to the shAReholdeRs

We noW Believe With ConFidenCe We ARe the WoRld’s lARgest pRovideR oF miCRoChip teChnology to CompAnion AnimAls .


Sales of microchips grew in conjunction with increasing market share developed through aggressive pricing. The introduction of exclusive new technology to the region is anticipated to further spur growth and market share through 2012.

CanadaOur plans to strengthen core policy growth over the course of 2012 will focus on expansion through the shelter channel and through new affiliate programs expected in the first half of the year. Policy growth in 2011 was below forecast but loss ratios remained steady. We intend to improve loss ratios by focusing more on the tie in between microchipping and in particular, the new MiniChip™, and pet insurance for cats, as cats represent a better class of risk.

The Company experienced modest growth in microchip sales in Canada last year, and we anticipate the access to new technology and exclusivity we also enjoy in the United States to be more pronounced in Canada.

Although we have no plans to offer pet pharmacy in Canada at this time we do plan to begin retailing selected products on a B2B basis through the shelter network and will be exploring these opportunities throughout the year.

Industry & Business OutlookLooking forward in 2012 and beyond, I believe the following observations are relevant to our business:

1. Corporate ownership of veterinary clinics in the U.K. has now reached 25% (versus roughly 5% in North America) and is expected to continue rising. At the same time, we believe this level of corporate concentration is helping to support increasing veterinary fees in excess of the U.K. inflation rate. As a result, corporate clinic owners have begun to experiment by providing various forms of pet insurance to their clients in an effort to bet-ter align their fee schedules with insurance coverage, as well as becoming involved in online pet pharmacy retail. Strategically, we believe this environment will generate opportunities to align our insurance and microchip data platforms with corporate clinic owners and online pet pharmacy providers.

2. Whereas in the past microchip technology was seen by many as a mature and commoditised technology, we now believe that we are in a development cycle which will see new microchip tech-nologies enter the marketplace. As the world’s largest provider of microchip technology for companion animal use, the opportu-


nity to retail new products at higher margins with the same down-stream opportunities as our current business is exciting.

We are very proud of our success in this area and our part-nership with Allflex, and in turn with their success in 2011 in acquiring one of their major competitors. We jointly believe significant opportunities will emerge over the coming years that will compel more pet owners (particularly cat owners) to microchip their pets. Our introduction of the MiniChip is only the first of a variety of new products and services.

3. There is a growing convergence between the companion ani-mal industry as a whole and animal welfare organisations specifically. Within the next 12-24 months, we expect that all publicly traded companies operating in the companion animal marketplace will see their valuations affected at least in part by their reach into the animal welfare community. Adoption as a source of new pet acquisition continues an upward trend which we see better than probably any other for profit company in North America. Analyst coverage of public companies, particularly in the United States, reference more and more trends in animal wel-fare and specifically our own data. We think there will be growing pressure on companies to work more closely with the animal wel-fare community and, given our unmatched presence in the space, we think we are well placed to partner with these companies.

4. Increasing online pet product purchasing, declining ship-ping and fulfilment costs, and the growing need among consumers for convenience (which could become more pronounced if gas prices continue to increase), means that for us to maximise the return on our investment in animal welfare we should place greater emphasis on our own on-line business both on a business-to-consumer and business-to-business basis. Rationalisation will inevitably occur and it will be those with effective distribution rather than simply price competitiveness which are most likely to succeed. With our link to over 1,810 licensed PetPoint users, which took in over 2.5-million animals last year, and our immediate access to nearly 900,000 new pet owners in 2011 alone, we are well

placed to take advantage of this shift away from a price arbi-trage online model to an online distribution model.

We continue to be on the lookout for strategic opportunities, in-cluding small to medium “bolt on” acquisitions, although we will likely refrain from large acquisitions this year unless signs of more robust consumer activity appears. Adhering to this strategy will lead to more free cash flow in 2012 as well as the opportunity to focus on more internal growth through our existing partners.

Despite the continued challenges of a stilted economic environ-ment characterised by unfavourable foreign exchange rates and the slow growth of returning consumer confidence, we are pleased with the Company’s performance last year and poised to develop further growth in the year ahead.

Lastly, I am pleased to welcome two new members to the Warren and Pethealth families, Romulus and Remus, two stately Great Dane/Mastiff mix brothers adopted as nine week old pups from the SPCA Serving Erie County in December. I would like to thank Executive Director Bar-bara Carr, a dear friend and long-time client of the Company, and her staff for their hard work and assistance through the adoption process.

As always, I am grateful to our staff here at Pethealth who continue through their support and diligent efforts to assist us in achieving our goals and, of course, to the Board of Directors for their leadership and insights.

pResident 's messAge to the shAReholdeRs

mARk WARRenPresident & Chief Executive OfficerApril 3, 2012

AdheRing to this stRAtegy Will leAd to moRe FRee CAsh FloW in 2012 As Well As the oppoRtunity to FoCus on moRe inteRnAl gRoWth thRough ouR existing pARtneRs .


ouR 2011 FinAnCiAl yeAR sAW solid gRoWth in key FinAnCiAl And opeRAting metRiCs .

Consolidated revenues grew year over year by 3% with ac-celerated growth in the fourth quarter of 12%, represent-ing the fourth consecutive quarter of sequential and third consecutive quarter of year-over-year consolidated rev-

enue growth. Revenue growth was muted by both a 4% appreciation of the Canadian dollar vs. U.S. dollar and a structural change made in mid-2010 to our ShelterCare program which had the effect of reducing year-on-year non-cash revenues over the first half of 2011.

Despite negative foreign exchange implications, our non-insurance business recorded a strong 24% growth rate while our insurance busi-ness, when normalized for the impacts of foreign exchange and changes to our ShelterCare program, remained flat. The strong growth in non-insurance revenues can be primarily attributed to both an increase in the number of microchips sold and a significant increase in the cross sale of products and services to our 24PetWatch database of pet owners.

The 63% increase in pre-tax earnings was driven by strong revenue growth and cost containment on our non-insurance business. In addi-tion to the year-on-year 24% revenue growth, operating costs decreased by 4%, largely due to reduced marketing expenditures with pay-per-click advertising campaigns scaled back during 2011 as organic traffic and revenues driven by our shelter partners continued to build.

CFo's messAge to shAReholdeRs

CFO's Message to Shareholders

yeAR oveR yeAR highlights inClude:

•Consolidatedrevenuegrowthof3%to$33.3million.

•Consolidatedpre-taxearningsgrowthof63%to3.3million.

•Netincomegrowthof17%to$2.8million.

•ConsolidatedEBITDAgrowthof34%to$5.1million.

•Freecashflowgrowthof228%to$2.3million.

•EPSgrowthof20%to$0.06pershare.


In 2011, we generated consolidated operating cash flows of $5.1 million while investing $2.8 million on the purchase and develop-ment of both capital and intangible assets related primarily to our internal Enterprise Resource Planning (ERP) system, deployed April 1, 2012, and PetPoint, our cloud-based management appli-cation for animal welfare organisations. As a result, we generated free cash flow of $2.3 million, an increase of 228% when compared to free cash flow generated in 2010. Our non-insurance business reached cash flow breakeven for the first time in the fourth quarter of 2011 and is expected to again be cash flow positive and contrib-ute to earnings in 2012, further improving free cash flow.

We further strengthened our balance sheet in 2011 through the full repayment of our Pet Protect acquisition term debt entered into in 2008 which left the Company debt free and enhanced our cash position over the latter half of the year, reaching an unre-stricted $5.8 million by year-end.

Our insurance operations, which generated $22.3 million in revenue and $5.6 million in operating cash flow for the year, saw modest com-mission and fee growth in our business in the United States and Can-ada and a decline in commission and fee revenue for our business in the United Kingdom. As part of our U.K. underwriting profitability plan put in place upon acquiring Pet Protect, we made several adjust-ments to our underwriting guidelines which ultimately reduced our in-force policy count and revenues in the U.K. Satisfied with our ad-justed policy structure, we began to invest in new policy acquisition during the latter half of 2011, adding 8% to our net in-force policy count over the last six months of the year. In addition, and partially as a result of the U.K. underwriting profitability plan, we returned to positive underwriting participation in 2011, adding $123,000 in un-derwriting profit sharing compared to a $233,000 return of commis-sion in 2010, a $353,000 swing over the year.

Rapid growth continues throughout our non-insurance operations, driven by PetPoint, our cloud-based data management application for animal welfare organisations. By the date of this report, the number of PetPoint licensed organisations had grown to over 1,800 groups. PetPoint Professional and PetPoint Lite remain free to organisations

participating in our 24PetWatch microchip program and promoting our ShelterCare insurance program. During 2011 we began the devel-opment of additional fee based modules, collectively called PetPoint Enterprise. Deployment began in Q4 and will be completed by June. Over time we expect fees generated from PetPoint Enterprise to cover the operating costs of supporting the PetPoint suite.

Revenue from the sale of microchip technology continued its dou-ble digit growth in 2011 with a 19% increase to $7.71 million result-ing from both combined sales of over 1.32 million microchips in the U.S., Canada, and the U.K and North American price increases.

In addition to strong sales growth, the sale of microchip technology continued to realise expanding gross margins, growing from 38% in 2010 to 42% in 2011. Microchip technol-ogy revenues and gross margins are set for further growth through 2012, despite aggressive pricing in the U.K. which will continue as we build

market share, by virtue of a continued expansion of the network of animal welfare organisations operating PetPoint, price adjustments, and the introduction of the MiniChipTM. Manufactured by Allflex, the MiniChip is currently available to us on an exclusive basis in North America and is approximately one third the size of the stan-dard microchip. We began distributing the MiniChip in January 2012 and believe that it will expand the microchipping market as pets previously perceived as too small for standard microchip injec-tion will now be able to take advantage of the MiniChip.

Strong revenue growth was also realised through cross sales to the nearly 5.5 million pets and pet owners registered in the 24PetWatch da-tabase. For 2011, we generated $1.9 million in revenue from such sales consisting primarily of change of address fees, pet tags and Emergency-Care insurance coverage, a 70% growth over revenue generated in 2010. For 2012, the 24PetWatch membership subscription program was ex-panded whereby annual or lifetime membership fees are promoted to all U.S. pet owners registered on the database after January 1, 2011 and upon the first anniversary date of their registration. Continued growth in the 24PetWatch database coupled with this new marketing initiative is expected to continue driving significant revenue growth.

During 2011, we continued the transition from paid traffic to organic traffic for our adoptable search website Petango.com. This transition was accelerated as the number of animal welfare organisations using Petango.com to power their own adoptable search grew 34%, to 697 by December 31. As a result, organic traffic to Petango.com increased

stRong Revenue gRoWth WAs Also ReAlised thRough CRoss sAles to the neARly 5 .5 million pets And pet oWneRs RegisteRed in the 24petWAtCh dAtABAse .

CFo's messAge to shAReholdeRs


77% year over year and accounted for 56% of total traffic, up 22% over 2010. We expect traffic from organic sources will continue to build in 2012, driven again through growth in the number of organisations powering their own adoptable search with Petango.com, and from a more robust search engine optimisation program.

Sales through ThePetangoStore.com grew by 166% for the year. While falling short of expectations, additional opportunities were identified during 2011, including business to business sales, which position the ThePetangoStore.com for accelerated sales growth in 2012 and beyond.

In addition to increasing shareholder value through increased net cash flows, we regularly review our businesses both on a stand alone basis and in certain combinations to ensure an appropriate return will be realised. As and when opportunities present them-selves to enhance returns, by acquisition or otherwise, sharehold-ers can expect management to pursue them.

Our 2011 audited financial statements represent our first year-end reported under International Financial Reporting Standards (“IFRS”). There was no impact from the transition on our opera-tions or our cash flows while the overall impact on our accounting policies was minimal. We encourage all investors to review our December 31, 2011 Management Discussion and Analysis, which has been included in this annual report, for a detailed analysis on our transition and its impact on our reported financial results. While this impact was minimal, considerable effort was required by our finance team to reach that conclusion. Led by Peter Ga-loska, Director of Finance, and Suryakant Bheem, Corporate Con-troller, I want to thank our finance group for their hard work and dedication in producing an impressive set of reporting documents which will form the basis of our reporting long into the future.

Lastly, I would like to thank the Audit Committee, chaired by Mr. David Atkins, for their leadership and guidance during 2011 and look forward to working with them and reporting to you during 2012.

glen tennisonChief Financial OfficerApril 3, 2012


Management Discussion & Analysis

CompanyOverview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

OverallPerformance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

SelectedAnnualInformation&TrendAnalysis . . . . . . . . . . . . 25

InsuranceSegment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Non-insuranceSegment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Liquidity&CapitalResources . . . . . . . . . . . . . . . . . . . . . . . . . . 32

ForeignExchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

OustandingShareData . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

RelatedPartyTransactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

CriticalAccountingEstimates . . . . . . . . . . . . . . . . . . . . . . . . . . 35

NonIFRSAccountihngMeasures . . . . . . . . . . . . . . . . . . . . . . . 36

SignificantAccountingChangesonTransitiontoIFRS . . . . . . 36

Risks&Uncertainties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Controls&Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40


ManageMent discussion & analysis

The following Management Discussion and Analysis (“MD&A”) provides additional analysis of the operations and financial posi-tion for the fiscal period ended December 31, 2011 for Pethealth Inc. (“Pethealth” or the “Company”) and includes information up to March 7, 2012. The MD&A is supplementary information and should be read in conjunction with the consolidated financial state-ments, including the accompanying notes, management’s report and the auditors’ report available on SEDAR at www.sedar.com and on the Company’s website at www.pethealthinc.com.

Certain statements contained in this MD&A may constitute forward-looking information as defined under securities laws. Forward-looking information may relate to the Company’s fu-ture outlook and anticipated events or results and may include statements regarding the Company’s future financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, taxes, plans and objectives. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “an-ticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue”, or other similar expressions concerning matters that are not historical facts.

To the extent that any forward-looking information constitutes future-oriented financial information or financial outlooks, as those terms are defined under securities laws, such information is being provided to enable a reader to assess the Company’s fi-nancial condition, material changes in the Company’s financial condition, and its results of operations including liquidity and capital resources for the year ended and quarter ended Decem-ber 31, 2011 compared with the year ended and quarter ended December 31, 2010. Readers are cautioned that this informa-tion may not be appropriate for any other purpose, including investment decisions.

Forward-looking information contained in this MD&A is based on certain factors and assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While the Company considers these assumptions to be reasonable, based on information currently available, they may prove to be incorrect.

Forward-looking information is also subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what the Company currently expects. These factors, some of which are more fully described in the “Risks and Uncertainties” section of this MD&A, include: the

timing and market acceptance of future products, competition in the Company’s markets, the Company’s reliance on customers, fluctuations in currency and exchange rates, commodity prices or interest rates, the broad economy, access to or the provision of credit, the Company’s ability to maintain good relations with its employees, changes in the law or regulations regarding the environment or other environmental liabilities, the Company’s ability to integrate acquisitions and the Company’s ability to protect its intellectual property. For more exhaustive informa-tion on these risks and uncertainties the reader should refer to the Company’s filings with the securities regulatory authorities, including the Company’s most recently filed Annual Information Form, which is available on SEDAR at www.sedar.com and on the Company’s website at www.pethealthinc.com.

Forward-looking information contained in this commentary is based on the Company’s current estimates, expectations and projections, which it believes are reasonable as of the current date. Readers should not place undue importance on forward-looking information and should not rely upon this information as of any other date.

Other than as required under securities laws, the Company does not undertake to update any forward-looking information at any particular time.

As of January 1, 2011, Pethealth adopted International Finan-cial Reporting Standards (IFRS). The following disclosure, as well as the associated consolidated financial statements, have been prepared in accordance with IFRS. Pethealth’s effective transition date is January 1, 2010, and the 2010 IFRS compara-tive figures have been presented under IFRS. The Company has provided information within this document and within other publicly filed documents to assist a reader in understanding Pethealth’s transition from Canadian Generally Accepted Ac-counting Principles (GAAP). A comprehensive summary of all the changes, including various reconciliations from Canadian GAAP financial statements to IFRS, is included in Note 23 in the Company’s audited consolidated financial statements for the year ended and quarter ended December 31, 2011.

All financial information is presented in Canadian dollars un-less otherwise specified. All references to a quarter refer to the fiscal quarter of the Company ended December 31, 2011 unless otherwise specified. All forward-looking information con-tained in this MD&A is expressly qualified in its entirety by this cautionary statement.



COmPANY OveRvIeW

Pethealth is a leading provider of companion animal services and the second largest provider of medical insurance for dogs and cats to pet owners in North America, operating in the United States, Cana-da and the United Kingdom. The Company offers a unique range of products and services for animal welfare organisations, pet owners, and veterinarians through a number of wholly owned subsidiaries. Through its cloud-based application PetPointTM, the Company is the leading provider of management software to North American animal welfare organisations, providing exclusive data management and reporting capabilities to licensed groups while significantly re-ducing, if not eliminating, their IT-related infrastructure costs.

Under the brand 24PetWatchTM, the Company is the number one provider of lost pet recovery database management services and RFID microchip technology to the North American companion animal market, an industry it entered in 2003.

The Company entered the U.K. pet insurance and RFID microchip technology markets through the acquisition of Pet Protect Limited in 2008.

Expanding on the capabilities of its shelter management software, in 2009 the Company launched Petango.com, the only adoptable pet search site that exclusively publishes pets available for adoption with a real-time live feed powered by PetPoint. The Petango brand has evolved from an adoptable search portal to an online destination for pet lovers to learn about pets, search for pets, engage with other pet lovers as well as purchase pet supplies and medications through ThePetangoStore.com.

Pethealth’s common shares trade on the TSX under the symbol “PTZ”.

Core CompetenciesSoftware: Launched in 2005, PetPoint was the first software-as-a-service (SaaS) management application for animal welfare or-ganisations and today leverages cloud-computing technologies to provide the most comprehensive database management and logistical support system available to the North American animal welfare community, including animal control agencies, shelter or-ganisations (SPCAs and Humane Societies) and rescue groups in both the United States and Canada. PetPoint is currently available in two versions, PetPoint 4.0 and PetPoint Lite, both of which are provided free to animal welfare organisations that participate in the Company’s 24PetWatch microchip program and actively promote its shelter-branded ShelterCare insurance program to their adopters.

The Company has recently begun development of an additional fee-based product called PetPoint Enterprise with new modules and functionality for those organisations seeking higher levels of IT efficiency, elastic scalability, and enterprise-class quality of service.

Database management: The Company has two primary, distinct and unique databases, which it leverages to increase both its busi-ness-to-business and its business-to-consumer revenues through an enhanced customer experience:

i. PetPoint database: The PetPoint database is the aggregate of the operational data compiled by the nearly 1,800 ani-mal welfare organisations running PetPoint, all of which is stored on the Company’s servers. Data includes, but is not limited to, intake data (animals entering animal welfare or-ganisations), health records, animal profiles and pictures and outcome data (including all contact information of adopters). The Company uses this data in aggregate and on an individual basis in several ways including the following:

a. Individual adopter information: PetPoint data facili-tates timely and personalised marketing messages to pet adopters from the point of adoption and through the pet’s lifecycle, allowing the Company to inform adopters about both its own and third parties’ available products and ser-vices and influence when and where they purchase them;

b. Individual animal profiles and pictures: PetPoint data fa-cilitates Petango.com, the Company’s portal for next gen-eration adoptable search. Petango is the only pet portal that exclusively publishes pets available for adoption with a real-time live feed thereby reducing, if not eliminating, inefficiencies created by stale content. The Company ex-pects to generate media and advertising revenues as its audience continues to build;

c. Aggregate shelter data: PetPoint’s significant data capture facilitates the publication of the only comprehensive na-tional, state and community information related to ani-mal welfare. The Company monetises this aggregate data through its provision to interested third parties.

ii. 24PetWatch database: The 24PetWatch database contains pet and pet owner contact information necessary to fulfil the lost pet recovery service directly related to the provision of RFID



microchip products and is the Company’s primary business-to-consumer lead source for the marketing of its business-to-consumer products. The primary source for new registrations is from adoptions occurring at those animal welfare organisa-tions running PetPoint. By virtue of its full integration with PetPoint, these new registrations occur at the point of adoption providing the Company with “first mover advantage” over any competitors or to those third parties wishing to create a com-petitive edge by influencing the purchasing decisions of new pet owners. Collecting and maintaining accurate pet owner and pet information tied to the microchip is fundamental to successful pet reunification. Regular data analysis is conducted, overlaying consumer information with third party census data, to identify trends in the adopter demographic with respect to income, wealth, purchasing power, and product purchasing habits. Via the PetPoint application and 24PetWatch microchip program, the Company has the only platform from which na-tional brands and retailers can present their offers to targeted new pet adopters throughout the life cycle of pet ownership. According to an independent third-party study the Company “had a significantly higher percentage of animals registered” than either of its two main competitors.(1) This accuracy can largely be attributed to the integration of the 24PetWatch mi-crochip program into the adoption process whereby registra-tion occurs at point of adoption.

Distribution: In addition to more traditional methods of distri-bution, the Company has established an exclusive distribution network of nearly 1,800 animal welfare organisations in North America for the distribution of both its business-to-business products as well as its business-to-consumer products. The

network is connected via PetPoint, which provides real-time access to both the animal welfare organisations themselves as well as all those who adopt an animal from these organisations which, the Company estimates, represents greater than 50% of all pet adoptions that occur in North America. Through the de-velopment of mutually beneficial programs, which improve the efficiency of the animal welfare organisations’ operations and/or save them money, the Company has created a deeply rooted, mutually beneficial relationship with this network.

The North American Companion Animal marketAccording to Packaged Facts, a consumer market research group, the dog and cat population in North America is approximately 185 million and approximately 62% of households in the U.S. and Canada own at least one pet. In addition, the Company estimates that there are 9,000 animal welfare organisations and 19,000 vet-erinary clinics in North America. Based on the Company’s own data and the disclosure of its competitors, the Company believes that less than 2% of dogs and cats are insured and less than 10% are microchipped and registered with a pet recovery service.

The United Kingdom Companion Animal marketAccording to Datamonitor, a market research firm, the U.K. companion animal market is estimated to include 15.3 million domestic dogs and cats of which it is estimated by market partici-pants that 20% to 22% are insured. Datamonitor also finds that the pet insurance market has experienced an average premium growth of 11.7% per annum since 2006, reaching £587 million in premiums for fiscal 2010, and forecasts industry premiums to reach £903 million in 2015. Pet Protect currently accounts for approximately 2% of the pet insurance market share in the U.K.

OveRALL PeRFORmANCe

yeAR ended quARteR ended

($’000sexceptpershareamounts) dec . 31, 2011 dec . 31, 2010 Change dec . 31, 2011 dec . 31, 2010 Change

Revenue 33,204 32,208 3% 8,758 7,817 12%

eBitdA(2) 5,091 3,790 34% 1,491 1,043 43%

Netincomebeforetaxes 3,259 2,003 63% 1,023 612 67%

Basiceffectivetaxrate 13% (21%) - 11% (22%) -

Netincomeaftertaxes 2,827 2,423 17% 906 748 21%

Basicearningspershare 0.07 0 .06 - 0.03 0 .02 -

Fullydilutedearningspershare 0.06 0 .05 - 0.02 0 .02 -

(1) LindaK.Lord,WalterIngwersen,JanetL.Gray,andDavidJ.Wintz."CharacterizationofAnimalswithMicrochipsEnteringAnimalShelters." JournaloftheAmericanVeterinaryMedicalAssociation235.2(2009):160–67.Print.

(2) SeeNon-IFRSMeasurespage36.



Full Year 2011Consolidated revenue increased 3% to $33.2 million for the full year end-ed December 31, 2011. The growth in consolidated revenue was muted by the 4% appreciation of the Canadian dollar vs. the U.S. dollar over the course of the year, which reduced current year revenue by $921,000. In addition to foreign exchange, consolidated revenue was also impacted by a 5% decline in insurance segment operating revenues, which was offset by the 24% growth in the Company’s non-insurance segment operating revenues. The results from the insurance segment were primarily owing to (i) a restructuring of its ShelterCare insurance program and (ii) a de-cline in U.K. commission revenue, both of which are discussed in greater detail under the heading “Insurance Segment”. The non-insurance seg-ment revenues continued strong growth are attributed to (i) the increase in the number of microchips sold coupled with expanding microchip margins and (ii) a significant increase in the cross selling of products and services to the 24PetWatch database, both of which are discussed in greater detail under the heading “Non-Insurance Segment”.

Consolidated net income before tax increased 63% to $3.3 mil-lion. The increase is primarily the result of the 51% decrease in the

pre-tax operating loss in the non-insurance business due primar-ily to (i) a 24% increase in revenues as discussed above and (ii) a decrease of 4% in operating costs due largely to reduced marketing expenditures related to Petango.com.

Fourth QuarterConsolidated revenue increased 12%, as compared to 3% for the year as a whole, to $8.8 million for the quarter. The increase is due in large part to the 32% growth in non-insurance segment operating revenues which, similar for the full year, was the result of expanded microchip and 24PetWatch database cross sales. The insurance seg-ment operating revenue grew by 4% to $5.9 million as the Com-pany reported $123,000 in underwriting profit participation vs. a $233,000 return of commission in the prior year, which is discussed in greater detail under the heading “Insurance Segment”.

Consolidated net income before tax increased 67%, as compared to 63% for the year as a whole, to $1.02 million for the same re-sons outlined above.

SeLeCTeD ANNUAL INFORmATION AND TReND ANALYSIS

Unless otherwise indicated, all comparisons of the results for full year 2011 are against the results of full year 2010.

($’000sexceptpershareamounts) 2011 2010 2009(1)

Insurancecommissionsandfees 22,263 23,430 27,865

Microchiptechnologyandnon-insurancerevenue 10,911 8,778 7,335

Otherincome 30 - -

Totalrevenue 33,204 32,208 35,200

Netincomebeforetaxes 3,259 2,003 4,635

Incometax 432 (420) 487

Netincomeaftertaxes 2,827 2,423 4,148

NetIncome(loss)pershare 0.07 0 .06 0 .12

NetIncome(loss)pershareonafullydilutedbasis 0.06 0 .05 0 .12

(1) Basisofaccountingfor2009isCanadianGAAP.

($’000sexceptpershareamounts) 2011 2010 2009

Totalassets 27,777 24,904 26,775

Totalcashandcashequivalents 5,828 5,082 7,310

Loansandborrowings(includingcurrentportion) 186 1,911 4,589

Loansandborrowings(excludingcurrentportion) 62 142 1,908

CashdividendsdeclaredperSeries1ConvertiblePreferredShares(annualdividend-payableinJanuary) 0.12 0 .12 0 .12



Insurance Segment Trends:Excluding the effects of foreign exchange and the restructuring of its ShelterCare insurance program, the Company’s U.S. and Cana-dian insurance business have been relatively stable over the past three years despite macroeconomic headwinds. As part of its underwriting profit improvement plan, put in place upon acquiring Pet Protect in the U.K., the Company made several adjustments to its underwriting guidelines, which reduced the in-force policy count and commission revenues in the U.K. Having completed the process, the Company be-gan investing in U.K. new policy acquisition, which saw a 8% increase in in-force policies during the last six months of 2011. In addition, during 2011, the Company returned to positive underwriting partici-pation of $123,000 after returning $233,000 of commission in 2010.

Non-Insurance Segment Trends:Rapid growth continues in the non-insurance segment. Central to the non-insurance segment is PetPoint, which has seen a two-year increase in licensed users of 36%, intakes of 22% and adoptions of 31%. During the same period, the 24PetWatch database has grown by 2.18 million records or 70%. In concert with its database growth, the Company has increased the products and services available for both business-to-business and business-to-consumer sales.

Consolidated Capital and Development expenditure Trends:Capital and development expenditures for the year end totalled $2.86 million, a decrease of 9% compared to the prior year. The Company is set to deploy the final phase of its companywide En-terprise Resource Planning (ERP) system and the completion of PetPoint 4.0, its free version of PetPoint, during the first half of 2012. Future development in software applications for its animal welfare organisations will be on a pay-as-you-go basis, either from these groups directly or from corporate sponsors wishing to have their brand more closely associated with animal welfare.

Consolidated Debt Repayment Trends:During the year, debt repayments of $1.56 million were made

retiring the term debt associated with the Company’s 2008 ac-quisition of Pet Protect Limited.

economic Trends: U.S.Trends in U.S. consumer confidence during the fourth quarter and into the first quarter of 2012 are encouraging as the purchase of veterinary services, where the consumer is seeing little upward pressure on fees, and other pet-related discretionary products and services, appears to be improving. However, with energy prices forecasted to increase sub-stantially by mid-year, the Company remains cautious as it relates to consumer discretionary spending for the latter half of the year.

CanadaConditions in Canada remain relatively stable although pet own-ers would appear to be continuing to extend the periods between visits to veterinary clinics except for needed treatments and sur-geries. The Ontario Veterinary Medical Association has recom-mended Ontario veterinary fees increase by 2.6% in 2012, which is in line with the 3% increase experienced in 2011.

U.K.Consumer spending in the U.K. remains challenged and earnings reports of companies operating in the companion animal mar-ketplace indicate continued reluctance on the part of pet owners to make discretionary purchases and continued trading down to lower end products and services for their pets as double-digit vet-erinary inflation persists.

Seasonal Trends:Seasonality is best illustrated in the non-insurance business rev-enues where Q2 and Q3 tend to be the stronger quarters due in large part to the breeding cycles and thus the adoption patterns of dogs and cats. New policy acquisition in the insurance business follows this same trend although the recurring revenue nature of the insurance business mutes seasonal impacts.

($’000sexceptpershareamounts) q4 2011 q3 2011 q2 2011 q1 2011 q4 2010 q3 2010 q2 2010 q1 2010

insurance revenues 5,864 5,466 5,461 5,472 5,632 5,784 5,693 6,321

non-insurance revenues 2,864 2,852 2,704 2,491 2,185 2,397 2,165 2,031

Otherincome 30 - - - - - - -

Totalrevenue 8,758 8,318 8,165 7,963 7,817 8,181 7,858 8,352

Netincomebeforetaxes 1,023 785 705 746 612 538 208 645

eBitdA 1,491 1,239 1,153 1,208 1,043 984 659 1,104

Earnings(loss)pershare 0.03 0.02 0.02 0.00 0 .02 0 .01 0 .02 (0 .002)

Earnings(loss)pershareonafullydilutedbasis 0.02 0.02 0.02 0.00 0 .02 0 .01 0 .02 (0 .001)



INSURANCe SegmeNT

OverviewInsurance operations currently consist of the distribution and ad-ministration of the 24PetWatch, PetCare, ShelterCare, Pet Protect, Petpals Direct, and other co-branded, white-labelled or private-la-belled pet insurance programs including Best Friends Animal So-ciety, the Ontario SPCA, Union Privilege, the Pennsylvania SPCA, and the Wisconsin Humane Society.

The Company’s insurance policies are designed to cover unex-pected accidents and illnesses, providing major medical coverage to pet owners of dogs and cats in 49 U.S. states, all 10 Canadian provinces and throughout the U.K.

New policy sales in North America are generated via animal wel-fare organisations, direct-to-consumer advertising, co-branded and white-labelled programs, the Company’s own advertising plat-form, and veterinary clinics, in that order. Currently the Company focuses limited attention on the veterinary clinic channel in North America as a means of distributing its insurance except where it cross sells its insurance to pet owners who are clients of clinics using its 24PetWatch microchip program. In addition to organic growth, the Company intends to compete for North American pet insurance acquisitions as and when they become available.

New policy sales in the U.K. are primarily generated through on-line offerings and veterinary clinics, both through exclu-sive relationships with selected veterinary clinics and hospi-tals as well as through the Company’s microchip program. In addition to organic growth, the Company intends to compete for U.K. pet insurance acquisitions as and when they become available. The U.K. market consists of approximately 16 pet insurance underwriters operating, in aggregate, 82 brands. The Company believes that the current macro economic con-ditions in the U.K., and in particular the current condition of the U.K. financial services industry, should lead to future acquisition opportunities.

Structure of Insurance OperationsIn the United States, the Company currently operates its pet insurance business under a Managing General Agency Agree-ment (“mgA Agreement”) with Praetorian Financial Group Inc. (“Praetorian”), a subsidiary of QBE Insurance Group Lim-ited (“QBe”). The Company earns a base commission of 36% on those policies underwritten by Praetorian. Under the MGA Agreement, the Company is responsible for all product develop-

ment, marketing and sales, claims adjudication, medical under-writing and premium collection including the management of Praetorian’s premium trust account.

The Company currently operates its United Kingdom pet insur-ance business under an MGA Agreement with QBE Insurance (Europe) Limited (“QBe (europe)”), a subsidiary of QBE. The Company earns a base commission of 33% on those policies un-derwritten by QBE (Europe). The MGA Agreement in place with QBE (Europe) is similar in nature to the MGA Agreement in place in the U.S. Policies are sold in the U.K. under the Pet Protect and the Petpals Direct brands.

The Company participates in a portion of the underwriting results for its core pet insurance program in the U.S. and the U.K. The Company participates positively in the underwriting results when the actual annual accident year loss ratio (claims paid as a percent-age of premiums earned by the carrier) for its core program in ag-gregate with Praetorian and QBE (Europe), on a weighted average basis, is less than 50% and negatively when the weighted average annual accident year loss ratio exceeds 50%. Pethealth’s participa-tion is banded between 45% and 55% and, as such, is limited to +/- 2.5% of gross earned premium. The relative weighting is based on geographical earned premium generated by each entity.

In Canada, the Company operates its pet insurance business under an MGA Agreement with Lombard General Insurance Company (“Lombard”), a subsidiary of Fairfax Financial Holdings Limited. The Company earns a base commission of 35% on those policies underwritten by Lombard. The Canadian MGA Agreement is similar in nature to the MGA Agreements described above. The Company does not, however, participate in any portion of the un-derwriting results for policies placed in Canada.



Insurance Segment ResultsyeAR ended quARteR ended

($’000s) dec . 31, 2011 dec . 31, 2010 Change dec . 31, 2011 dec . 31, 2010 Change

Operatingrevenue 22,278 23,430 (5)% 5,879 5,632 4%

Operatingexpenses 16,328 17,147 (5)% 4,288 4,070 5%

Amortisationanddepreciation 765 838 (8)% 187 193 (3)%

Foreignexchange 160 (30) - 13 (66) -

Other 176 59 179% 93 27 244%

Operatingexpenses 17,429 18,014 (3)% 4,581 4,224 8%

Operatingprofitbeforetax 4,849 5,416 (10)% 1,298 1,408 (8)%

Netfinancerevenue/(cost) 41 (105) - 11 (12) -

Profitbeforetax 4,890 5,311 (8)% 1,309 1,396 (6)%

Incometaxexpense/(recovery) 379 (420) - 64 (136) -

Profit 4,511 5,731 (21)% 1,245 1,532 (19)%

eBitdA 5,614 6,254 (10)% 1,485 1,601 (7)%

Additional Operating measuresyeAR ended

($’000s)exceptforpoliciesin-force dec . 31, 2011 dec . 31, 2010 Change

Policiesin-force 199,696 200,921 (1)%

AggregateU.S./U.K.corelossratio 49.4% 51.1% -

Administrationcostsasapercentageofpremiumsearnedbycarriers 12.8% 12.3% -

Marketingcosts—newcustomeracquisition 4,090 5,572 (27)%

The insurance segment results were primarily influenced by the following:

Full Year 2011(1) The appreciation of the Canadian dollar against the U.S. dollar.For the year ended December 31, 2011, the Canadian dollar appre-ciated by 4% against its U.S. counterpart while remaining relatively flat against the pound sterling. For the year, the Canadian dollar’s appreciation reduced insurance segment revenues by $517,000.

(2) The restructuring of the Company’s insurance program via animal welfare organisations in the U.S. and Canada. On May 1, 2010, the Company restructured its insurance program de-livered through North American animal welfare organisations which reduced both the non-cash component of its insurance revenue and the program’s marketing expenses. The restructuring was fully com-pleted at April 30, 2011. The change in the ShelterCare program re-duced, on a foreign exchange adjusted basis, non-cash revenues by $631,000 for the year and increased net income and cash flows by

$516,000 by virtue of lower associated marketing costs.

(3) The year-on-year decline in average net policies in the U.K.The decline in the average U.K. in-force policies, excluding the impact of foreign exchange, accounted for approximately a $568,000 compar-ative decline in commission and fee revenue for the year. As part of its underwriting profit improvement plan, put in place upon acquiring Pet Protect in the U.K., the Company eliminated certain unprofitable policyholders reducing the in-force policy count and commission revenues in the U.K. Having completed the process, the Company be-gan investing in U.K. new policy acquisition, which saw a 8% sequen-tial increase in in-force policies during the last six months of 2011.

(4) Participation in underwriting results.The U.S. and U.K. core underwriting results for policies under-written by Praetorian and QBE (Europe) in aggregate were 49.4% consisting of 40.6% in the U.S. and 64.4% in the U.K. During the year, underwriting profit participation of $123,000 was recorded compared to $233,000 in returned commission in 2010.



(5) Tax expense/recovery.For the year, comparative net income after taxes was impacted by tax differences of $852,000, being the net of current year tax ex-pense of $432,000 and the prior year’s tax recovery of ($420,000).

Fourth Quarter (1) The year-on-year decline in net policies in the U.K.While the number of U.K. in-force policies grew by 2% sequential-ly over the course of the fourth quarter, the average net declined by 3% when compared to the number in-force for the same period in the prior year accounting for approximately $139,000 of compara-

tive decline in commission and fee revenue for the quarter.

(2) Participation in underwriting results.Participation in underwriting results had a net positive impact on the year-on-year quarterly comparative of $300,000.

(3) Tax expense/recovery.For the quarter, comparative net income after taxes was im-pacted by tax differences of $253,000 being the net of current year tax expense of $117,000 and the prior year’s tax recovery of ($136,000).

NON-INSURANCe SegmeNT

OverviewThe Company’s non-insurance segment focuses on generating revenues from North American pet owners who have acquired their pets through adoption, and corporate entities and charitable foundations wishing to participate directly or indirectly with the adopter or during the pet adoption process.

Non-insurance operations consist of:(i) the development and distribution of PetPoint, the Compa-

ny’s animal shelter management software and the mainte-nance of its associated database;

(ii) the distribution of RFID microchip technology and the main-tenance of its associated pet registry and recovery database;

(iii) the development and operation of its online pet adoption and community portal Petango.com, including the retail/wholesale pet medications and supplies e-commerce plat-form, ThePetangoStore.com.

PetPoint and the PetPoint DatabasePetPoint, coupled with the network of animal welfare organisa-tions running PetPoint, is the cornerstone of the Company’s non-insurance business and its most significant source of new in-surance policy sales in North America. PetPoint, the PetPoint da-tabase, and the shelter distribution network are discussed in detail under the heading Core Competencies.

The Company’s objective is to continue to build out both the breadth (though increasing the number of animal welfare organ-isations licensing its software) and the depth (through increased products and services offered to animal welfare organisations in-cluding PetPoint Enterprise) of PetPoint and the network of ani-mal welfare organisations running its software.

24PetWatchTm & Pet Protect RFID microchip Technology and DatabaseThe Company has become the largest provider of companion ani-mal RFID microchip technology operating in the U.S., the U.K. and Canada. Based on its own performance and the disclosure of some competitors, Pethealth estimates better than one in three microchipped companion animals in the U.S. and Canada now carry the 24PetWatch microchip. Pethealth also began selling mi-crochips in the U.K. in 2009 and estimates it now has a 6% mar-ket share. In Canada and the U.S., microchips are sold under the 24PetWatch brand and in the U.K. under the Pet Protect brand.

Microchips used for the Company’s 24PetWatch and Pet Protect mi-crochip program are supplied under a Purchase and Supply Agree-ment with Allflex USA Inc. The agreement currently runs through to December 31, 2013 and provides Pethealth with limited exclusiv-ity over certain technologies and in certain jurisdictions.

The Company’s objective is to continue to expand its market for RFID microchips through an expansion of its network of animal welfare organisations and veterinary clinics that micro-chip, and through an expansion of the dogs and cats suitable for microchipping. The Company plans to achieve the former through the continued growth in the use of its electronic plat-forms, such as PetPoint, and the latter through the marketing of new technologies. As previously announced, the Company be-gan distributing and promoting the MiniChipTM manufactured by Allflex and available to the Company on an exclusive basis in North America. The MiniChip is approximately one third the size of its rice grain sized standard chip and primarily marketed to smaller animals often previously perceived as too small for the standard chip.



The 24PetWatch database plays a key role in the Company’s busi-ness-to-consumer product and service offerings in both its insur-ance and non-insurance operations alike. The 24PetWatch data-base is discussed in detail under the heading Core Competencies.

Petango.com Integrated with PetPoint and 24PetWatch, online pet portal Petan-go.com represents the most comprehensive marketing platform to the shelter demographic in the industry. Visitors to Petango.com can search through interactive profiles of adoptable pets, share pet information as well as purchase pet supplies and pet pharmacy products via ThePetangoStore.com.

The Company’s Petango brand operates in two areas:

(i) Adoptable search, whereby potential pet owners can access all pets available for adoption from the Company’s net-work of animal welfare organisations running its PetPoint platform. Petango.com is the only adoptable search site featuring exclusively live, real-time available animal infor-mation. Additionally, the Company uses its Petango.com platform to power adoptable search on over 702 websites of animal welfare organisations using PetPoint. The Com-pany intends to grow the Petango.com adoptable search

content through the continued expansion of its shelter net-work and grow its audience through both the promotion of the site by members of its shelter network and through a search engine optimisation program. The Company pro-motes its own business-to-consumer products and services on Petango.com and expects to further monetise the plat-form through (i) the sale of advertising space to interested third parties and (ii) through powering adoptable search on interested third parties’ websites.

(ii) Pet pharmacy and specialty retail, whereby ThePetangoStore.com offers pet owners and principally adopters of pets the ability to buy pet medications online at prices better than through traditional channels. A key advantage of ThePetan-goStore.com is that as “cause giving” online becomes more entrenched in consumer purchasing habits, ThePetangoStore.com offers adopters the ability to donate directly to the ani-mal welfare organisation of their choice via purchases made on the site. The Company’s involvement in online pet medi-cation is not only to drive additional revenue for the Com-pany’s existing platform, but it is the Company’s aim to also enhance the profitability of its insurance operations to hold down the cost of claims related to pet medications made by the Company’s insured customer base.

Non-Insurance Segment ResultsyeAR ended quARteR ended

($’000s) dec . 31, 2011 dec . 31, 2010 Change dec . 31, 2011 dec . 31, 2010 Change

Operatingrevenue 10,926 8,778 24% 2,879 2,185 32%

Costofsales 5,518 4,630 19% 1,430 1,149 24%

Operatingexpenses 5,931 6,612 (10)% 1,443 1,594 (9)%

Amortisationanddepreciation 1,108 844 31% 292 226 29%

Operatinglossbeforetax (1,631) (3,308) 51% (286) (784) 64%

Incometax 53 - 100% 53 - 100%

Operatingloss (1,684) (3,308) 49% (339) (784) 57%

eBitdA (523) (2,464) 79% 6 (558) -



Additional Operating measuresyeAR ended

($’000sexceptPetPointlicensedshelters) dec . 31, 2011 dec . 31, 2010 Change

PetPointlicensedshelters 1,773 1,569 13%

IntakesthroughPetPoint 2,251 2,029 11%

AdoptionsthroughPetPoint 891 785 13%

AnimaltransfersthroughPetPont 300 267 13%

Microchipssold 1,323 1,243 6%

24PetWatchdatabasesubscriptions 5,262 4,139 27%

Databasesalesrevenue 1,978 1,163 70%

Petangouniquevisitors 9,200 8,872 4%

Petangopageviews 93,000 93,671 (1)%

Full Year 2011Revenue from non-insurance operations totalled $10.9 million for the year ended December 31, 2011, up 24% over the same period in the prior year. For the year, the 4% appreciation of the Canadian dollar re-duced the non-insurance revenue by $404,000. Adjusted for this impact of foreign exchange on the Company’s non-insurance results, revenue would have increased by 29% over the same period in the prior year.

The EBITDA loss from non-insurance operations declined to $523,000 for the year ended December 31, 2011, from EBITDA losses of $2,464,000 in the prior year, a 79% improvement. The net operating loss on the Company’s non-insurance operations after taxes fell 49% to $1,684,000 over the same period in the prior year.

The non-insurance results consist of aggregate growth in the following:

PetPointTm

PetPoint had been licensed by 1,773 animal welfare organisations by December 31, 2011, an increase of 13% from those licensed at December 31, 2010. For the year ended December 31, 2011, 2,250,873 intakes (animals entering the welfare organisations) and 890,565 adoptions, respectively, were completed through PetPoint, an increase in intakes of 11% and adoptions of 13% for the year.

24PetWatchTm & Pet Protect RFID microchip and Database managementFor the year ended December 31, 2011, the Company sold, in aggre-gate, 1,323,235 RFID microchips in the U.S., Canada and the U.K., a 6% increase in unit sales from the same period in 2010. Revenue from microchip sales for the year ended December 31, 2011 increased 10% to $7.71 million from the same period in the prior year. As a percent-

age of total non-insurance revenue over the year, microchip revenue fell to 71% from 80% in 2010, indicating the Company’s growing di-versity in revenue generation through its non-insurance platform.

Total individual pet and pet owner registrations in the 24PetWatch database surpassed 5.26 million by December 31, 2011, represent-ing an increase of over 1.12 million registered cats and dogs, or 27%, compared to those registered at the end of Q4 2010.

The sale of ancillary products and services to the 24PetWatch data-base of pet owners accounted for $1,978,000 in revenue for the year ended December 31, 2011, a 70% increase from the same period in the prior year. Inbound calls to the Company’s non-insurance call centre totalled 237,557 for the year ended December 31, 2011, rep-resenting a 14% increase over the same period last year. The conver-sion rate on those calls into sales reached 32%, up 6% from the same period in the prior year.

Petango.com Petango.com attracted more than 9.2 million unique visitors and generated over 93 million page views during 2011.

Sales via ThePetangoStore.com totalled $879,000 for the year ended December 31, 2011, a 166% increase from sales recorded in the same period in the prior year. Approximately 69% of sales recorded were for pet medications.

Fourth QuarterRevenue from non-insurance operations totalled $2.88 million for the quarter ended December 31, 2011, up 32%, compared to 24% for the year as a whole, over the same period in the prior year.



EBITDA from non-insurance operations was $6,000 for the quar-ter ended December 31, 2011, compared to an EBITDA loss of $558,000 in the prior year. The net operating loss on the Com-pany’s non-insurance operations after taxes fell 57% to $339,000 over the same period in the prior year.

The non-insurance results consist of aggregate growth in the following:

PetPointTm

For the quarter, 532,423 intakes and 247,149 adoptions were completed through PetPoint, an increase in intakes of 10% and adoptions of 18%.

24PetWatchTm & Pet Protect RFID microchip and Database management For the quarter ended December 31, 2011, the Company sold, in aggregate, 328,183 RFID microchips in the U.S., Canada and the

U.K., a 12% increase in unit sales from the same period in 2010. Revenue from microchip sales for the quarter ended December 31, 2011 increased 19% to $1.96 million from the same period in the prior year.

The sale of ancillary products and services to the 24PetWatch database of pet owners, such as pet tags and change of address fees but excluding core insurance products and sales through ThePetangoStore.com, accounted for $531,000 in revenue during 2011, a 52% increase over Q4 2010.

Petango.comFor the quarter, Petango.com attracted more than 2.37 million unique visitors and generated over 24 million page views.

Sales via ThePetangoStore.com totalled $258,000 for the quarter, a 158% increase from sales recorded in Q4, 2010.

LIQUIDITY AND CAPITAL ReSOURCeS

The Company anticipates that, based on its profitability and fore-casted cash requirements, there are sufficient cash resources to fund the Company’s current operations.

The Company has a capital management process in place to measure and monitor its available capital and assess its adequacy. The Com-pany’s objective when managing capital is to safeguard the Com-pany’s ability to continue as a going concern, so that it can continue to provide returns and benefits for its shareholders. The Company

considers loans and borrowings and shareholders’ equity, includ-ing convertible preferred shares net of its deficit, to form its capital base. The Company would consider increasing its capital base to take advantage of growth opportunities by issuing more shares or increasing its debt portfolio. Alternatively, the Company can reduce its capital by returning it to shareholders in the form of dividends.

The Company had the following financial commitments at December 31, 2011:

($’000s)December31,2011

Lessthan 1year

Between 1and2years

Between 2and5years

Over5years Total

Tradeandotherpayables 4,082 - - - 4,082

Duetoinsurancecarriers 4,872 - - - 4,872

Borrowings(excl.financeleaseobligations) - - - - -

Financeleaseobligations 124 62 - - 186

Operatingleaseobligations (includingpremisesleases)(1)

871 1,580 1,934 490 4,875

9,949 1,642 1,934 490 14,015

December31,2010



Borrowings(excl.financeleaseobligations) 1,637 - - - 1,637

Financeleaseobligations 158 131 11 - 300

Operatingleaseobligations (includingpremisesleases)

874 1,617 2,210 928 5,629

9,955 1,748 2,221 928 14,852

(1) Ofthetotaloperatingleases,$4.8millionrelatesspecificallytotheCompany’slong-termleasesofofficespace.



In addition to the above contractual obligations, the Company pays an annual dividend to the holders of its Series 1 cumulative 6% convertible preferred shares, currently $585,000 in aggregate, each January. This annual dividend payment was made on January 27, 2011 to holders of record on January 20, 2011.

On February 9, 2006, the Company entered into an agreement with Praetorian Financial Group Inc. whereby Praetorian agreed to become one of the Company’s underwriters for the Company’s

pet insurance programs in the U.S. Under the terms of the agree-ment, the Company participates in a portion of the underwriting results for the policies placed with Praetorian and QBE (Europe). As part of its agreement, the Company is to post security in fa-vour of Praetorian of an amount up to 2.5% of the core insurance premiums earned by Praetorian in the form of a letter of credit or other agreed upon form. As of the date of this MD&A, this portion of the agreement had not yet been formalised between the parties.

FOReIgN exChANge

The Company’s U.S. and U.K. subsidiaries have U.S. and U.K. functional currencies while the Company’s presentation cur-rency is Canadian dollars, as defined under IFRS. As such, other than foreign currency transactions between its Cana-dian and foreign subsidiaries, the Company’s exposure to cur-rency fluctuations is limited to the Company’s net investment in its foreign subsidiaries.

Foreign Currency TransactionsTransactions in foreign currencies are translated to the re-spective functional currencies of the Company’s entities at exchange rates at the dates of the transactions. Monetary as-sets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the pe-riod, and the amortised cost in foreign currency translated at the exchange rate at the end of the period.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a for-eign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transac-tion. Foreign currency differences arising on retranslation are recognised in profit or loss.

Foreign OperationsThe assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition,

are translated to Canadian dollars at exchange rates at the re-porting date. The income and expenses of foreign operations are translated to Canadian dollars at the average monthly ex-change rates.

Since January 1, 2010, the Company’s date of transition to IFRS, foreign currency differences are recognised and presented in other comprehensive income and in the foreign currency trans-lation reserve (translation reverse) in equity. When a foreign op-eration is disposed of such that control or significant influence is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the profit or loss on disposal.

When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses aris-ing from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and presented in the translation reserve in equity.

Foreign currency translations can have a significant impact on reported consolidated results during periods of fluctuating exchange rates.

The Company does not employ a foreign currency derivative hedging program.

At December 31, 2011, the Company had the following finan-cial assets and liabilities, denominated in U.S. dollars and U.K. pound sterling excluding inter-company balances, which are eliminated on consolidation:



(’000s) usd gpB

Cashandcashequivalents $3,229 £ 442

Tradeandotherreceivables 1,010 41

Tradepayablesandaccruedliabilities (1,769) (247)

Borrowings - -

NetFinancialAssetExposure $2,470 £ 236

SensitivityAs the Company reports its consolidated results in Canadian dollars, changes in the relative value of the Canadian dol-lar against the U.S. dollar impact revenues and net income positively in periods when the Canadian dollar falls in value relative to the U.S. dollar, and negatively when the Canadian dollar strengthens.

As of December 31, 2011, a 10% appreciation or depreciation in the Canadian dollar at the consolidated balance sheet date would have resulted in a decrease or increase in consolidated net income of approximately $246,000 (2010 – $20,000) as it relates to the above listed financial assets and liabilities.

For the year and quarter ended December 31, 2011, the 4% ap-preciation and 1% depreciation in the Canadian dollar against the U.S. dollar compared to Q4 2010 did have a significant im-pact on year-over-year comparative revenue and earnings. On a foreign exchange adjusted pro-forma basis, the change in the Canadian dollar decreased the consolidated revenue for the year by $921,000 and increased the consolidated revenue for the quar-ter ended by $64,000.

Further, the change in the Canadian dollar decreased the consoli-dated pre-tax net income for the year by $575,000 and increased the consolidated earnings for the quarter by $17,000.

OUTSTANDINg ShARe DATA

The table below contains a summary of the outstanding shares for each class of equity at December 31, 2011. The total number of outstanding and issuable shares is also presented assuming full conversion of outstanding options and shares reserved for future option grants.

($’000sexceptpershareamounts)

OutstandingsharesCommonshares

Series1Convertible Preferenceshares(non-voting)(1)

Totalshares

Commonequity

Outstandingshares 32,513 4,875 37,388 (2)

Optionsoutstanding(3)andissuable 2,260 - 2,260

34,773 4,875 39,648

(1) OnJanuary21,2004,Pethealthcompletedaprivateplacementfinancingof5,000,000Series16%convertiblepreferredsharesoftheCompany(“preferred

shares”)atapriceof$2.00perpreferredshareforaggregategrossproceedstotheCompanyof$10millionandthenetproceedswere$9.34millionafter

deductingagentandissuancecosts.Eachpreferredshareisentitledtocumulativedividendsatthefixedrateof6%payableannuallyontheanniversary

date.EachpreferredshareisconvertibleintoonecommonshareinthecapitaloftheCompanyatanytimeattheoptionoftheholder.TheCompanymay,

atitsoption,redeemtheconvertiblepreferencesharesbyproviding60days'writtennoticetotheholdersatapriceof$2.15pershare.(2) Forthepurposesofcalculatingdilutedearningspershare,theweightedaveragenumberofshareswas37,556,209fortheyearendedDecember31,2011.(3) Assumingfullconversionandignoringexerciseprices.



ReLATeD-PARTY TRANSACTIONS

On August 1, 2002, the Board of Directors authorised the Com-pany to lend to the President and Chief Executive Officer the amount of $500,000 for the exclusive purpose of purchasing shares of the Company. The loan amount was advanced by the Company and evidenced by a promissory note and a securities pledge agreement in favour of the Company for 833,333 com-mon shares in the capital of the Company. The promissory note bears interest at the lesser of the prevailing prime rate and 7% per annum with a maturity date extended to January 15, 2015. Immediately following the advance of the loan, the President and Chief Executive Officer purchased 416,666 units of the Company at a purchase price of $1.20 per unit, each such unit consisting of a common share and a common share purchase warrant, which warrant entitled the holder thereof to acquire one common share at an exercise price of $1.00 per common share up to and including December 19, 2002.

On December 19, 2002, the Board of Directors further authorised the Company to loan to the President and Chief Executive Offi-

cer an additional amount of $530,000 for the exclusive purpose of exercising the previously issued warrants to purchase 530,303 common shares in the capital of the Company. The loan amount was advanced by the Company and evidenced by a promissory note and a securities pledge agreement in favour of the Com-pany for 530,303 common shares in the capital of the Company. Pursuant to this securities pledge agreement, all of the common shares in the capital of the Company pledged by the borrower to the Company secure all of the obligations of the borrower of such loan amounts. The promissory note bears interest at the lesser of the prevailing prime rate and 7% per annum with a maturity date extended to January 15, 2015. Immediately following the advance of the loan by the Company, the President and Chief Executive Of-ficer exercised the warrants and purchased an additional 530,303 common shares in the capital of the Company at an exercise price of $1.00 per warrant.

As at December 31, 2011, accrued interest receivable was $489,000 (2010 – $444,000).

CRITICAL ACCOUNTINg eSTImATeS

The preparation of consolidated financial statements that conform with IFRS requires the Company to make estimates and assump-tions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and ex-penses during the reporting period. The Company bases its esti-mates on historical experience, current trends and other assump-tions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. In the Company’s judgment, the accounting policies and estimates detailed in Notes 2 and 3 of the Notes to the consolidated financial statements for the year ended December 31, 2011 do not require it to make as-sumptions about matters that are highly uncertain and accordingly none of the estimates is considered a “critical accounting estimate” as defined in Form 51-102F1 published by the Ontario Securities Commission, except as noted below:

valuation of goodwill and Other IntangiblesThe Company tests goodwill for impairment at least annually and more regularly if there are indications that goodwill might be im-paired. An impairment loss is recognized if the carrying value of a CGU exceeds its recoverable amount.

The recoverable amount of a CGU is determined from greater of fair value and “value in use” calculations based on the net present value of discounted cash flow. In assessing value in use, the estimated fu-ture cash flows are derived from the most recent financial budget and three–year forecasts and an assumed growth rate. A terminal value is calculated by discounting using an appropriate discount rate. Impair-ment losses are recognized in the income statement as an expense.

Management determined budgeted operating profit based on past performance and its expectations of market development. The weighted average growth rates used are consistent with the forecasts included in industry reports. The discount rate is pre-tax and reflects specific risks related to the operating segment.

Goodwill was tested for impairment at September 30, 2011 and no impairment was detected.

Other intangible assets with an indefinite life are not subject to amor-tization; rather, they should be assessed annually for impairment. As at December 31, 2011, the Company does not have any indefinite life intangibles. Finite life intangible assets that are subject to amortiza-tion, after initial recognition, are amortized over their estimated useful



lives. The Company makes an annual assessment, or more frequently if events or changes in circumstances warrant, of the carrying value of these finite life intangible assets, their useful life, their residual value and the method on which amortization is being recorded and makes adjustments as required. The Company assesses its intangible assets annually for impairment. When events or changes in circumstances indicate that the carrying value may not be recoverable and the carry-ing value is higher than the sum of undiscounted cash flows expected from the asset’s use and eventual disposition, the asset is written down to its fair value. This accounting policy impacts both of the Company’s business segments. See Notes 3.4, 11 and 12 to the 2011 consolidated financial statements for additional disclosures regarding goodwill and other intangibles.

Income Tax, Deferred Tax and the Utilization of Tax LossesDeferred tax assets and liabilities require management’s judge-

ment in determining the amount to be recognized. In particular, judgement is used when assessing the extent to which deferred tax assets should be recognized with consideration to the timing and level of future taxable income. The Company assesses its deferred income tax asset on a quarterly basis.

The actual income tax for the year is determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, estimates are used in determining the tax liability for tax to be paid on past profits that are recognized in the financial statements. The Company considers estimates, as-sumptions and judgements to be reasonable but this can involve complex issues, which may take a number of years to resolve. The final determination of prior year tax liabilities could be different from the estimates reflected in the financial statements.

NON IFRS ACCOUNTINg meASUReS

The Company believes the presentation of EBITDA is a useful means of providing investors with additional information in review-ing and analysing the Company’s operating results. EBITDA are considered to be non-IFRS earnings measures and do not have any

standardised meaning prescribed by IFRS. It is, therefore, unlikely to be comparable to similar measures presented by other issuers.

The following table reconciles Net Income and EBITDA:

yeAR ended quARteR ended

($’000s) dec . 31, 2011 dec . 31, 2010 dec . 31, 2011 dec . 31, 2010

NetIncomeaftertax 2,827 2,423 906 748

Amortisation 1,873 1,682 479 419

Netfinancecosts (41) 105 (11) 12

Incometaxexpense/(recovery) 432 (420) 117 (136)

eBitdA(1) 5,091 3,790 1,491 1,043

(1) EBITDA,anon-IFRSmeasure,isoperatingincomeplusamortization,interestandtaxes.

SIgNIFICANT ACCOUNTINg ChANgeS ON TRANSITION TO IFRS

1. Functional CurrencyManagement is required to make an assessment of each of its sub-sidiaries to determine each subsidiary’s functional currency. In cases where the subsidiary’s functional currency is the same as its parent company’s, the parent company’s exposure to foreign exchange move-ments is on a transactional basis, the same as it would be had the par-ent company completed the transactions directly itself. As a result, any gain or loss arising from currency movements is recorded in the Con-solidated income statement. Where the functional currency of the

subsidiary is different from the parent company, the parent company’s exposure to foreign exchange movements is limited to the parent’s net investment in the subsidiary. As a result, any gains or losses arising from foreign exchange movements is recorded in the Consolidated statement of comprehensive income under the heading foreign cur-rency translation differences for foreign operations. Under the latter scenario, a gain or loss is recorded in the Consolidated income state-ment only when realized upon the disposal of all or part of the subsid-iary or the discontinuing of the subsidiary’s operations.



Canadian GAAP – In assessing the functional currency of a subsidiary, Canadian GAAP requires management to review certain economic facts and circumstances including whether or not the reporting en-terprise’s cash flows are insulated from direct affects by the day-to-day operations of the subsidiary; whether sales prices for the foreign op-eration are determined by local competition or international pricing; whether the sales market for the foreign operation’s products are pri-marily outside the reporting enterprise’s country or within it; whether labour, materials and other costs of the foreign operation’s products are primarily local costs or whether they depend on products and services obtained from the country of the reporting enterprise; whether the day-to-day activities of the foreign operation are financed primarily from its own operations and local borrowings or primarily by the reporting enterprise or borrowings from the country of the reporting enterprise,

and the extent of the interrelationship of the day-to-day activities of the foreign operation and the reporting enterprise.

IFRS – In assessing the functional currency of a subsidiary, similar facts and circumstances are reviewed by management. However, unlike Canadian GAAP, IFRS divides facts and circumstances into primary indicators and secondary indicators with heavier empha-sis given to those categorised as primary. Under IFRS, the primary indicators are (1) the currency that dominates the determination of sales prices and (2) the currency that most influences operating costs. All other facts and circumstances are considered secondary.

Management’s assessment of the functional currency of each of its subsidiaries at January 1, 2010 is as follows:

FunCtionAl CuRRenCy

Domicile Canadian gAAp iFRs

PTZInsuranceBrokersLtd. Canada Canadian Canadian

PethealthServicesInc. Canada Canadian Canadian

PTZInsuranceAgencyLtd. u .s . Canadian u .s .

PethealthServices(USA)Inc. u .s . Canadian u .s .

PetProtectLimited u .k . u .k . u .k .

PethealthServices(UK)Ltd. u .k . u .k . u .k .

The Company applied the one-time exemption to set the foreign currency cumulative translation adjustment (“CTA”) to zero as of January 1, 2010. As a result, all other adjustments relate to the impact of the change in functional currency of the Company’s U.S. subsidiaries after January 1, 2010.

2. Share Based CompensationThe Company has applied IFRS 1 exemption and applied IFRS 2:

(a) to equity instruments that were granted after November 7, 2002 that vest after the date of transition – January 1, 2010;

(b) to liabilities arising from cash-settled, share-based payment transactions that will be settled after the date of transition. The effects of the application of IFRS 2 are as follows:

Recognition of expenseCanadian GAAP – For grants of share-based awards with graded vesting, the total fair value of the award is recognized on a straight-line basis over the employment period necessary to vest the award.

IFRS – Each tranche in an award with graded vesting is considered a separate grant with a different vesting date and fair value. Each grant is accounted for on that basis. As a result, the Company adjusted its expense for share-based awards to reflect this difference in recognition.

ForfeituresCanadian GAAP – Forfeitures of awards are recognized as they occur.

IFRS – An estimate is required of the number of awards expected to vest, which is revised if subsequent information indicates that the actual forfeitures are likely to differ from the estimate. As a result, the Company adjusted its expense to reflect this difference.

3. Segregated Cash and Due to Insurance CarriersThe Company maintains trust bank accounts on behalf of its carri-ers, which are used to fund insurance claims when settled.

Canadian GAAP – The cash held in trust on behalf of a third-party carrier and the corresponding liability were presented on a net basis.



IFRS – Amounts received on behalf of third parties should be ac-counted for as a payable in the statement of financial position until settled and should not gross up revenue and expenses. Similarly, amounts prepaid to third parties on behalf of customers should be recognized as a receivable until recovered and also should not gross up revenues and expenses.

Under IFRS, the Company has recorded cash held on behalf of its carriers as “Segregated cash” and the liability to its carriers as “Due to insurance carrier” on a gross basis.

The change in presentation is a reclassification on the statement of financial position and has no revenue or expense impact.

RISKS AND UNCeRTAINTIeS

Management of the Company has identified risks associated with execution of the Company’s business plan, including its stage of development. The Company intends to continue to modify and/or expand its business and business plan, which will continue to place heavy demands on the Company’s man-agement, operating systems, internal controls and financial and physical resources.

economies and market ConditionsThe Company faces challenging macro economic and market condi-tions in Canada, the U.S. and the U.K.. The deterioration of the U.S. residential mortgage market that began in 2007 precipitated a global credit crisis, prompting unprecedented responses from governments and central banks. Such an environment could cause the Company to make unplanned modifications to its products and services and could potentially have a material adverse effect on the Company’s business, operations, future prospects and financial results.

Foreign exchangeThe Company currently transacts sales in U.S. and Canadian dol-lars as well as British pounds sterling. In North America, the ma-jority of operating costs are incurred in Canadian dollars while revenues are generated in both U.S. and Canadian dollars. In the U.K., operating costs are incurred in both British pounds ster-ling and Canadian dollars while revenues are generated in British pounds sterling. In North America and the U.K., the Company is exposed to foreign exchange fluctuations. From time to time the cost effectiveness of any currency hedging strategy is examined relative to the identified risk.

Competitive LandscapeThe pet insurance market in North America and the U.K. is competi-tive. The Company may not be aware of other companies’ plans or ex-isting property and casualty insurance carriers’ plans to enter the mar-ket. Changes in the competitive landscape in the markets in which the Company operates could have a material adverse effect on the Com-pany’s business, operations, future prospects and financial results.

RegulationThe business of insurance is subject to substantial government regulation and supervision in North America and the U.K., in-cluding, in the U.S., a state-by-state approval requirement for all policy form and rate modifications. Changes in the current regula-tory and supervisory framework could include increased govern-mental involvement and unanticipated expenses in the insurance industry, or could otherwise change the business and economic environment in which insurance industry participants operate. Such changes could cause the Company to make unplanned modi-fications to its products and services and could potentially have a material adverse effect on the Company’s business, operations, future prospects and financial results.

Insurance UnderwriterThe Company does not underwrite the risk associated with the pet insurance policies it places with pet owners in Canada and has limited participation in the United States and the U.K.. In Canada, the underlying risk is borne by Lombard; in the U.S. and the U.K., by QBE. There are no assurances that Lombard or QBE will con-tinue to underwrite the risk associated with the Company’s pet insurance policies or that a suitable replacement could be secured on a timely basis. The loss of Lombard or QBE could have a mate-rial adverse effect on the Company’s business, operations, future prospects and financial results.

InventoryAs a component of the Company’s existing companion animal pet registry and recovery database service, the Company dis-tributes microchip technology. Microchip technology is pur-chased from third-party suppliers and resold to members of the veterinary and the animal welfare communities. As such, revenues are dependent on such suppliers’ ability to supply sufficient quantities of products on a timely basis to meet ex-pected customer demands. The Company relies on the veteri-nary and shelter communities to resell the products and ser-vices to their customers. The consumer demand required for



the successful execution of this component of the Company’s business plan may not necessarily develop as expected through these distribution channels. These microchip technologies are subject to certain patents not owned by the Company or the Company’s provider, which may restrict the Company’s ability to carry out its existing distribution strategies for such mi-crochip technology and/or may result in unanticipated costs that could have a potentially material adverse effect on the Company’s financial resources. There is no assurance that the Company’s existing provider will be able to adapt to changing technologies or successfully develop products and/or licence technology not otherwise subject to third-party intellectual property rights.

Sales through ThePetangoStore.com are fulfilled by third-party distributors and, as such, the Company is dependent on their ability to supply sufficient quantities of products on a timely basis to meet expected customer demands. A significant portion of the Company’s store sales are medications that are supplied by a single distributor and, historically, substantially all of the major pharmaceutical manufacturers have declined to sell prescription and non-prescription pet medications directly to non-veterinary suppliers such as the Company’s supplier, making it necessary for them to establish second-ary sources of supply. If the supplier is unable to continue to purchase from their secondary suppliers, then the Company’s ability to sell prescription and non-prescription medications could be interrupted. The sale and delivery of prescription medications is generally subject to certain pharmacy laws and licensing. There is no assurance that the Company’s pharmacy supplier will be able to maintain/obtain licences or adapt to changing laws and regulations nor is there assurance that the Company could source an alternate supplier in a timely man-ner should its current supplier suffer an interruption in their business. In addition, there is generally resistance from some veterinarians to authorise prescriptions to external suppliers and an increase in this resistance could adversely affect the Company’s prescription medication sales. The occurrence of one or more of these store-related risks could adversely affect the successful execution of this component of the Company’s business strategy.

TechnologyThe market for computer software is highly competitive and rapid technological innovation and change may make the Com-pany’s software products obsolete. The Company has developed its PetPoint, Petango.com and ThePetangoStore.com products

using third-party operating systems. There can be no assurance that these suppliers will not make changes to these operating systems, requiring substantial changes to the Company’s soft-ware products. There can also be no assurance that additional competitors will not enter the marketplace in North America and offer the same or similar software products as currently offered by the Company. There is no assurance that the Com-pany will be able to continue to develop and market its software products or that it will be able to continue to offer such prod-ucts in a cost-effective manner.

The Company relies significantly on its database to run its day-to-day operations and to provide a base for future revenue streams. The database contains individuals’ private information. The Company is subject to privacy legislation in both the U.S. and Canada. This legislation restricts the use of personal infor-mation as prescribed by applicable laws, which could materially adversely affect the way the Company conducts its existing and future business.

Legal mattersFrom time to time in connection with its operations, the Company is named as a defendant in actions for damages and costs allegedly sustained by the plaintiffs. Management evaluates the risks associ-ated with each claim on a claim-by-claim basis.

CreditThe Company extends credit to veterinary clinics and animal welfare organisations, which arise primarily from the sale of RFID microchips to individual consumers and to individu-als insured in connection with its individual insurance policy portfolio. No individual customer makes up more than 5% of the outstanding trade receivable balance. The Company re-views individual credit balances for veterinary clinics and animal welfare organisations and sets reserves where appropri-ate. The Company manages this portfolio of credits through a policy that restricts further shipments to any organisation more than 90 days past due. The Company manages its individual insured credit portfolio utilizing an extensive communications program and sets reserves based on a pooled basis.



CONTROLS AND PROCeDUReS

As required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators, the Company’s Chief Execu-tive Officer and Chief Financial Officer have made certain certi-fications related to the information in the Company’s annual and interim filings (as defined in Multilateral Instrument 52-109) with the provincial securities legislation.

evaluation of Disclosure Controls and ProceduresDisclosure controls and procedures are designed to provide rea-sonable assurance that all relevant information is gathered and reported to senior management, including the Company’s Chief Executive Officer and Chief Financial Officer, on a timely ba-sis so that appropriate decisions can be made regarding public disclosure. As at the end of the period covered by this MD&A, management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evalu-ated the effectiveness of the Company’s disclosure controls and procedures as required by Canadian securities laws. Based on that evaluation, the Chief Executive Officer and the Chief Fi-nancial Officer have concluded that, as of the end of the period covered by this MD&A, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s annual filings and in-terim filings (as such terms are defined under Multilateral In-strument 52-109 − Certification of Disclosure in Issuers’ Annual and Interim Filings) and other reports filed or submitted under Canadian securities laws is recorded, processed, summarised and reported within the time periods specified by those laws and that material information is accumulated and communicated to management of the Company, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Multilateral Instrument 52-109. Internal control over financial reporting means a process designed by or under the supervi-sion of the Chief Executive Officer and Chief Financial Officer, and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reli-ability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and

fairly reflect the transactions and dispositions of the assets of the Company; (2) are designed to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accor-dance with authorisations of management and directors of the Company; and (3) are designed to provide reasonable assurance regarding prevention or timely detection of unauthorised acqui-sition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

All internal control systems have inherent limitations and there-fore the Company’s internal control over financial reporting can only provide reasonable assurance and may not prevent or detect misstatements due to error or fraud.

The Company’s management, including the Chief Executive Offi-cer and Chief Financial Officer, conducted an evaluation of the ef-fectiveness of the Company’s internal control over financial report-ing as of December 31, 2011 using the Committee of Sponsoring Organisations of the Treadway Commission (COSO) framework. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s internal control over financial reporting was operating effectively as of December 31, 2011.



Financials

IndependentAuditor'sReport . . . . . . . . . . . . . . . . . . . . . . . . . . 44

ConsolidAted FinAnCiAl stAtements

Financialposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Incomestatements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Comprehensiveincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Cashflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Changesinequity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

notes to the ConsolidAted FininACiAl stAtements

1.Natureofoperationsandgeneralinformation . . . . . . . . . . 49

2.Statementofcompliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

3.Summaryofsignificantaccountingpolicies . . . . . . . . . . . . 50

4.Cashandcashequivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 57

5.Segregatedcashandduetoinsurancecarriers . . . . . . . . 57

6.Tradeandotherreceivables . . . . . . . . . . . . . . . . . . . . . . . . . 58

7.Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

8.Notesreceivableandrelatedpartytransactions . . . . . . . . 59

9.Propertyandequipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

10.Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

11.Intangibleassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

12.Tradeandotherpayables . . . . . . . . . . . . . . . . . . . . . . . . . . 63

13.Incometaxesrelatingtocontinuingoperations . . . . . . . . 63

14.Loansandborrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

15.Sharecapital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

16.Expensesbynature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

17.Financeincomeandcosts . . . . . . . . . . . . . . . . . . . . . . . . . 70

18.Earningspershare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

19.Businessandgeographicalsegments . . . . . . . . . . . . . . . . 71

20.Financialriskmanagement . . . . . . . . . . . . . . . . . . . . . . . . . 73

21.Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

22.TransitiontoIFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75


Consolidated F inanCial statements

INDePeNDeNT AUDITORS’ RePORT

To the Shareholders of Pethealth Inc.

We have audited the accompanying consolidated financial statements of Pethealth Inc., which comprise the consolidated statements of financial position as at December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated statements of income, comprehen-sive income, changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Inter-national Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accor-dance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial state-ments. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consoli-dated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by manage-ment, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Pethealth Inc. as at December 31, 2011, December 31, 2010 and January 1, 2010, and its consolidated financial performance and its consolidated cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards.

Chartered Accountants, Licensed Public Accountantsmarch 7, 2012Toronto, Ontario



PeTheALTh INC. – CONSOLIDATeD STATemeNTS OF FINANCIAL POSITION

($’000s) Notes dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

assets

Cashandcashequivalents 4 5,828 5,082 7,310

Segregatedcash 5 4,872 4,193 3,489

Tradeandotherreceivables 6 1,336 985 2,245

Inventory 7 196 154 522

Prepaidandothercurrentassets 903 766 714

total current assets 13,135 11,180 14,280

Notesreceivable 8 1,520 1,475 1,437

Propertyandequipment 9 946 1,039 1,074

Goodwill 10 3,649 3,584 3,905

Intangibleassets 11 8,527 7,417 6,079

Deferredincometaxes 13 - 209 -

total non-current assets 14,642 13,724 12,495

total assets 27,777 24,904 26,775

liabilities

Tradeandotherpayables 12 4,082 3,093 3,744

Incometaxespayable - - 482

Duetoinsurancecarriers 5 4,872 4,193 3,489

unearned revenue 322 193 218

Loansandborrowings 14 124 1,769 2,681

total current liabilities 9,400 9,248 10,614

Loansandborrowings 14 62 142 1,908

Deferredincometaxes 13 194 - -

total non-current liabilities 256 142 1,908

total liabilities 9,656 9,390 12,522

shareholders’ equity

Sharecapital 15 14,497 14,497 14,450

Contributedsurplus 1,936 1,719 1,610

Accumulatedothercomprehensiveincome (535) (708) -

Retainedearnings(deficit) 2,223 6 (1,807)

total shareholders’ equity attributable to equity holders of the company 18,121 15,514 14,253

total liabilities and shareholders’ equity 27,777 24,904 26,775

(Notesonpages49to80areanintegralpartoftheseconsolidatedfinancialstatements.)

On behalf of the Board:

David Atkins, FCA, Director Richard Renaud, FCA, Director



PeTheALTh INC. – CONSOLIDATeD INCOme STATemeNTS

($’000s,exceptforEPS) yeAR ended

Notes dec . 31, 2011 dec . 31, 2010

revenue

Insurancecommissionsandfees 22,263 23,430

Microchiptechnologyandnon-insurancerevenue 10,911 8,778

Otherincome 30 -

Revenue 33,204 32,208

Costofgoodssold 5,518 4,630

Sellingandmarketing 10,800 12,413

Administrative 13,508 13,087

Foreigncurrencytranslationloss(gain) 160 (30)

Expenses 16 29,986 30,100

Resultsfromoperatingactivities 3,218 2,108

Finance revenue 69 54

Financecosts (28) (159)

Netfinancerevenue(costs) 17 41 (105)

Profit before income tax 3,259 2,003

Incometaxexpense(recovery) 13 432 (420)

Profit for the period 2,827 2,423

earnings per share 18

Basicearningspershare 0 .07 0 .06

Dilutedearningspershare 0 .06 0 .05

PeTheALTh INC. – CONSOLIDATeD STATemeNT OF COmPReheNSIve INCOme

($’000s,exceptforEPS) yeAR ended

dec . 31, 2011 dec . 31, 2010

Profitfortheperiod 2,827 2,423

Othercomprehensiveincome(loss),netofincometaxes:

Foreigncurrencytranslationgain(loss)fromforeignoperations 173 (708)

Total comprehensive income for the period, net of income taxes 3,000 1,715

(Notesonpages49to80areanintegralpartoftheseconsolidatedfinancialstatements)



PeTheALTh INC. – CONSOLIDATeD STATemeNTS OF CASh FLOWS

($’000s) yeAR ended

Notes dec . 31, 2011 dec . 31, 2010

Cash flows from operating activities

Profitfortheperiod 2,827 2,423

Adjustmentsfor:

Depreciation 9 231 259

Amortisationofintangibleassets 11 1,642 1,423

Netfinancecosts 17 (41) 105

Deferredincometaxes 13 .1 403 (209)

Foreignexchangemovements (37) (113)

Share-basedpaymenttransactions 217 109

5,242 3,997

Changesin:

Tradeandotherreceivables (280) 1,178

Inventories (39) 364

Prepaidandothercurrentassets (122) (72)

Tradeandotherpayables 767 (75)

Incometaxespayable/(recoverable) - (213)

unearned revenue 120 (22)

Cash flows from operating activities 5,688 5,157

Interestpaid 17 (28) (159)

Incometaxrecovered 189 -

Incometaxpaid (52) (466)

net cash from operating activities 5,797 4,532

Cash flows from investing activities

Purchaseofintangibleassets (2,722) (2,881)

Purchaseofpropertyandequipment (79) (158)

Interestreceived 17 24 16

net cash from investing activities (2,777) (3,023)

Cash flows from financing activities

Issuanceofcommonshares,onexerciseofoptions - 51

Additionalshareissuecost - (4)

Repaymentofloansandborrowings (1,746) (2,678)

Dividendandtaxonpreferredsharespaid (610) (610)

Net cash from financing activities (2,356) (3,241)

Netincrease(decrease)incashandcashequivalents 664 (1,732)

Unrestrictedcashandcashequivalentsatbeginningofyear 5,082 7,310

Effectofexchangeratefluctuationsoncashheld 82 (496)

Unrestricted cash and cash equivalents at end of year 4 5,828 5,082

Memonote:($’000s) yeAR ended

dec . 31, 2011 dec . 31, 2010

Segregatedcashatbeginningofyear 4,193 3,489

Changeduringtheperiod 679 704

segregated cash at end of year 4,872 4,193



PeTheALTh INC. – CONSOLIDATeD STATemeNT OF ChANgeS IN eQUITY

($’000s)

year ended dec . 31, 2011Share

capitalContributed

surplusTranslation

reserve

Retainedearnings(deficit)

Totalequity

Balance at Jan. 1, 2011 14,497 1,719 (708) 6 15,514

total comprehensive income for the year

Profitfortheyear - - - 2,827 2,827

Othercomprehensiveincome:

Foreigncurrencytranslationdifferences - - 173 - 173

Totalothercomprehensiveincome - - 173 - 173

Totalcomprehensiveincomefortheyear - - 173 2,827 3,000

Transactionswithownersofthecompany, recordeddirectlyinequity

Dividendspaidtoequityholders(includingtaxof$25)

- - - (610) (610)

Share-basedpaymenttransactions - 217 - - 217

TotaltransactionswithownersoftheCompany - 217 - (610) (393)

Balance at dec. 31, 2011 14,497 1,936 (535) 2,223 18,121

year ended dec . 31, 2011

Balance at Jan. 1, 2010 14,450 1,610 - (1,807) 14,253

total comprehensive income for the year

Profitfortheperiod - - - 2,423 2,423

Othercomprehensiveincome:

Foreigncurrencytranslationdifferences - - (708) - (708)

Totalothercomprehensiveincome - - (708) - (708)

Totalcomprehensiveincomefortheyear - - (708) 2,423 1,715

Transactionswithownersofthecompany,recordeddirectlyinequity

Issuanceofcommonshares - - - - -

Dividendspaidtoequityholders(includingtaxof$25)

- - - (610) (610)

Share-basedpaymenttransactions - 109 - - 109

Shareoptionsexercised 47 - - - 47

TotaltransactionswithownersoftheCompany 47 109 - (610) (454)

Balance at dec. 31, 2010 14,497 1,719 (708) 6 15,514


notes to the Consolidated F inanCial statementsYear ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)

1. NATURe OF OPeRATIONS AND geNeRAL INFORmATION

The consolidated financial statements of the Company for the twelve months ended December 31, 2011 include the accounts of the Com-pany and its subsidiaries (together referred to as the “Company”).

The Company, domiciled in Canada with its head office at 710 Dorval Drive, Oakville, Ontario is a leading provider of com-panion animal services and the second largest provider of medi-cal insurance for dogs and cats to pet owners in North America, operating in Canada, the United States and the United Kingdom. The Company offers a unique range of products and services for veterinarians, animal welfare organizations, and pet owners.

In addition, the Company is the leading provider of management software to North American animal welfare organizations through its cloud-based application PetPoint. As a cloud-based application, PetPoint provides exclusive data management and reporting capa-bilities to licensed organisations while at the same time significantly

reducing, if not eliminating, their IT-related infrastructural costs.

The Company is also the leading provider of pet recovery database management services to the North American companion animal industry under the brand 24PetWatch. Early in 2010, the Compa-ny introduced its pet recovery database services in the U.K. market under its Pet Protect brand.

Petango.com, launched in 2009, is the only adoptable pet search site that exclusively publishes pets available for adoption with a real-time live feed powered by PetPoint. The Petango brand has evolved from an adoptable search portal to an online destination for pet lovers to learn about pets, search for pets, engage with other pet lovers as well as pur-chase pet supplies and medications through ThePetangoStore.com.

These consolidated financial statements were approved by the Board of Directors on March 7, 2012.

2. STATemeNT OF COmPLIANCe

(a) Statement of ComplianceThese consolidated financial statements were prepared in accor-dance with International Financial Reporting Standards (“IFRSs”), as issued by the International Accounting Standards Board (“IASB”).

These are the Company’s first annual financial statements pre-pared in accordance with IFRS and IFRS I First Time Adoption of International Financial Reporting Standards has been applied.

An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided in Note 22. This note includes reconciliations of equity, profit and total comprehensive income for the comparative year, December 31, 2010 and of equity at the date of transition January 1, 2010, reported un-der Canadian GAAP (“previous GAAP”) to those reported under IFRS.

(b) Basis of measurementThe consolidated financial statements have been prepared on the historical cost basis except for liabilities for cash-settled share-based payment arrangements, which are measured at fair value.

(c) Functional CurrencyThese consolidated financial statements are presented in Ca-nadian dollars, which is the Company’s functional currency. All financial information presented has been rounded to the

nearest thousand except Earnings per Share (“EPS”) and as otherwise noted.

(d) Use of estimates and JudgementsThe preparation of the consolidated financial statements in con-formity with IFRS requires management to make judgements, es-timates and assumptions that affect the application of accounting policies and the reported amount of assets, liabilities, income and expenses. Actual results may differ materially from these estimates.

In preparing these consolidated financial statements, the significant judgements made by management in applying the Company’s account-ing policies and the key sources of estimation uncertainty are as follows:

(i) JudgementThe key judgement made in applying accounting policies that has the most significant effect on the amounts recognised in these con-solidated financial statements is as follows:

Non-Monetary Commission RevenueCertain commission revenue is related to pet insurance policies sold to arm’s-length animal welfare organisations in exchange for certain distribution and advertising services. This non-monetary commis-sion revenue and the related marketing expenses are recorded on a gross basis. In determining whether to present these transactions



on a gross or net basis, management considered whether or not the exchange of products and services was similar in nature and con-cluded that the sale of pet insurance policies and the provision of distribution and advertising services was dissimilar.

(ii) Use of estimatesInformation about the assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next twelve months are as follows:

Valuation of Goodwill Goodwill is assessed for impairment at the Cash Generating Unit (“CGU”) level on an annual basis and more frequently if there are po-tential indicators of impairment. An impairment loss is recognised if the carrying value of a CGU exceeds its recoverable amount.

The recoverable amount of a CGU is determined from the greater of fair value or “value in use” calculations based on the net present value of dis-counted cash flow. Key assumptions used in the calculation of recover-able amounts are future revenues, discount rates, terminal value growth

rates and corporate overhead costs. See Note 10 for details in respect of the calculation of the recoverable amount of Pet Protect Limited CGU.

Income Tax, Deferred Tax and the Utilisation of Tax LossesDeferred tax assets and liabilities require management’s judge-ment in determining the amount to be recognised. In particular, judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration to the timing and level of future taxable income. The Company assesses its deferred income tax asset on a quarterly basis.

The actual income tax for the year is determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, estimates are used in determining the tax liability for tax to be paid on past profits which are recognised in the financial statements. The Company considers estimates, as-sumptions and judgements to be reasonable but this can involve complex issues, which may take a number of years to resolve. The final determination of prior year tax liabilities could be different from the estimates reflected in the financial statements.

3. SUmmARY OF SIgNIFICANT ACCOUNTINg POLICIeS

The accounting policies set out below have been applied consis-tently to all the periods presented in these consolidated financial statements and in preparing the opening IFRS statement of finan-cial position at January 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated.

3.1 Basis of ConsolidationThe consolidated financial statements comprise the financial state-ments of Pethealth Inc. and its subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting periods, using consistent accounting policies. Subsidiaries are all entities over which the Company has the power to control the financial and operating poli-cies, generally accompanying a shareholding of more than one half the voting rights. Subsidiaries are fully consolidated from the date on which control is obtained by the Company and will continue to be consolidat-ed until control ceases. All of Pethealth’s subsidiaries are wholly owned.

3.1.1 Business Combinations Acquisitions prior to January 1, 2010

As part of its transition to IFRS, the Company elected not to re-state those business combinations that occurred prior to January 1, 2010. In respect of acquisitions prior to January 1, 2010, goodwill

represents the amount recognised under the Company’s previous accounting framework, Canadian GAAP.

3.1.2 Transactions eliminated on ConsolidationInter-company transactions, balances and unrealised gains or loss-es on intra-group transactions are eliminated upon consolidation.

3.2 Segmented ReportingAn operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company’s other components. All operating segments’ operating results are reviewed regularly by the Company’s management to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available.

Segment results that are reported to the Company’s management include items that are directly attributable to a segment as well as those that can be allocated on a reasonable basis.

Segment capital expenditures are the total cost incurred during the period to acquire property and equipment, and intangible assets other than goodwill.



3.3 Foreign Currency 3.3.1 Foreign Currency TransactionsTransactions in foreign currencies are translated to the respective functional currency of Company entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denomi-nated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the be-ginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period.

Non-monetary assets and liabilities denominated in foreign cur-rencies that are measured at fair value are retranslated to the func-tional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured at historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on translation are recognised in the consolidated income statement.

3.3.2 Foreign OperationsThe assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Ca-nadian dollars at exchange rates at the dates of the transactions.

Since January 1, 2010, the Company’s date of transition to IFRS, for-eign currency differences are recognised and presented in other com-prehensive income and in the foreign currency translation reserve (translation reserve) in equity. When a foreign operation is disposed of such that control or significant influence is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the profit or loss on disposal.

When the settlement of a monetary item receivable from or pay-able to a foreign operation is neither planned nor likely in the fore-seeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and presented in the translation reserve in equity.

3.4 Intangible assets(a) goodwillGoodwill relates to acquisitions prior to January 1, 2010 and is in-cluded on the basis of deemed cost, which represents the amount

recorded under previous Canadian GAAP. Goodwill is measured at cost less impairment losses.

(b) Other Intangible AssetsIntangible assets that are acquired by the Company and have finite lives are measured at cost less accumulated impairment loss and are amortised over their estimated useful lives and are tested for impair-ment whenever changing circumstances indicate that impairment may have occurred. Amortisation is calculated from the date avail-able for use on a straight-line basis, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset based on the following estimated useful lives:

Contractual customer relationships 4 yearsTrademarks 3 to 10 yearsDeveloped software 2 to 5 yearsComputer software 3 to 5 yearsLicensing and registrations 10 yearsPatents 5 yearsOthers 3 to 5 years

Amortisation methods, useful lives and residual values are reviewed annually and adjusted if appropriate.

(i) Contractual customer relationships acquired in a business com-bination are recognised at the fair value at the acquisition date. These contractual customer relations have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the customer relationships.

(ii) Trademarks, licenses and patentsSeparately acquired trademarks, licenses and patents are recorded initially at historical cost. Trademarks and licenses acquired in a business combination are recognised at the fair value at the ac-quisition date. The trademarks, licenses and patents have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over their estimated useful life.

(iii) Computer and internally developed softwareAcquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software.

Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that



are directly attributable to the design and testing of identifiable unique software products controlled by the Company are recog-nised as intangible assets when the following criteria are met:

• Itistechnicallyfeasibletocompletethesoftwareproductsothat it will be available for use or sale;

• Managementintendstocompletethesoftwareproductanduse or sell it;

• Thereisanabilitytouseorsellthesoftwareproduct;• Itcanbedemonstratedhowthesoftwareproductwillgener-

ate future probable future economic benefits;• Adequate technical,financial andother resources to com-

plete the development and to use or sell it, are available;• Theexpendituresattributabletothesoftwareproductdur-

ing its development can be reliably measured.

Costs that are capitalised as part of the software include cost of materials, direct labour and overhead costs that are directly attrib-utable to preparing the asset for its intended use.

Capitalised development software is measured at cost less accu-mulated amortisation and accumulated impairment losses.

Amortisation of developed software begins when the asset is available for use and capable of operating in the manner intended by management.

Borrowing costs that are not directly attributable to the acquisition, con-struction or production of a qualifying asset are recognised in profit or loss using the effective interest method. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use. The Company capitalises borrowing costs incurred on or after Janu-ary 1, 2010 for certain of its internally generated intangible assets.

Other development expenditures that do not meet the above criteria are recognised as an expense when incurred.

The Company does not have any indefinite-life intangible assets.

3.5 Property and equipmentRecognition and measurementItems of property and equipment are measured at cost less accu-mulated depreciation and accumulated impairment losses.

Costs include expenditures that are directly attributable to the ac-quisition of the asset including any borrowing costs on qualifying assets for which the commencement date for capitalisation is on or after January 1, 2010.

Gains or losses on the disposal of an item of property and equip-ment are determined by comparing the proceeds from disposal with the carrying amount of the property and equipment, and are recognised net within the statement of income.

Subsequent CostsThe cost of replacing a component of an item of property and equip-ment is recognised in the carrying amount of the item if it is prob-able that the future economic benefits embodied within the compo-nent will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced component is derecognised. The costs of day-to-day servicing of property and equipment are recognised in the consolidated income statement as incurred.

DepreciationDepreciation is based on the cost of an asset less its residual value. Depreciation is recognised in the consolidated income statement over the estimated useful life of each item of property and equipment as set out below. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term.

Method RateFurniture and fixtures Declining balance 20%Computer hardware Declining balance 30%Office equipment Declining balance 30%Leasehold improvements Declining balance 30%

The residual values, useful lives and depreciation methods of items of property and equipment are reviewed, and adjusted if appropri-ate, at each annual reporting date.

3.6 Financial InstrumentsThe Company has financial assets and liabilities consisting of cash and cash equivalents, segregated cash, trade and other re-ceivables, notes receivable, trade and other payables, due to insurance carriers and loans and borrowings. The Company classifies its non-derivative financial assets as loans and receiv-ables. Loans and receivables are non-derivative financial assets or liabilities with fixed or determinable payments that are not quoted in an active market. They are included in current assets or liabilities, except for settlements due greater than 12 months after the consolidated balance sheet date, which are classified as non-current assets or liabilities. The Company’s financial assets and liabilities are recorded at their cost, or amortised cost when interest bearing, which approximates their fair value.



Non-derivative Financial AssetsThe Company initially recognises loans and receivables and de-posits on the date that they are originated. All other financial assets are recognised initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.

The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Com-pany is recognised as a separate asset or liability.

Financial assets and liabilities are offset and the net amount pre-sented in a statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a new basis or to realise the asset and settle the liability simultaneously.

Cash and Cash equivalentsCash and cash equivalents comprise cash balances with original maturities of three months or less.

Loans and ReceivablesLoans and receivables comprise trade and other receivables, and notes receivables, which are financial assets with fixed or deter-minable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attrib-utable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses.

Non-derivative Financial LiabilitiesThe Company initially recognises debt securities issued on the date that they are originated. All other financial liabilities are rec-ognised initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Com-pany derecognises a financial liability when its contractual obliga-tions are discharged or cancelled or expire.

The Company classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value plus any directly attribut-able transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method.

Other financial liabilities comprise loans and borrowings, trade and other payables, and due to insurance carriers.

Trade and Other PayablesTrade and other payables are obligations to pay for goods and services that have been acquired in the normal course of business from suppliers. Other payables are classified as current liabilities if payment is due within one year or less.

Loans and BorrowingsBorrowings are recognised initially at fair value, net of transaction costs incurred, and are subsequently amortised to their maturity using the effective interest rate method.

3.7 InventoriesInventories are measured at the lower of cost, including direct ex-penditures plus other attributable costs incurred in bringing in-ventories to their current location and condition, and net realisable value. Cost is determined using the first-in, first-out (FIFO) meth-od. Net realisable value is the estimated selling price in the normal course of business, less the estimated costs of selling expenses.

3.8 Impairment Non-derivative Financial AssetsA financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Company on terms that the Company would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers in the Company and economic conditions that correlate with defaults.

Loans and ReceivablesThe Company considers evidence of impairment for loans and receivables at both a specific asset and collective level. All indi-vidually significant loans and receivables are assessed for specific impairment. All individually significant loans and receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and receivables that are not individually significant are col-



lectively assessed for impairment by grouping together receivables with similar risk characteristics.

In assessing collective impairment, the Company uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judge-ment as to whether current economic and credit conditions aresuch that the actual losses are likely to be greater or less than sug-gested by historical trends.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate.

Losses are recognised in profit or loss and reflected in an allow-ance account against loans and receivables. When a subsequent event (e.g., repayment by a debtor) causes the amount of impair-ment loss to decrease, the decrease in impairment loss is reversed through the consolidated income statement.

Non-financial AssetsThe carrying amounts of the Company’s non-financial assets other than inventories and deferred tax assets, being property and equip-ment and intangible assets, are reviewed at each annual reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have an indefi-nite useful life, the recoverable amount is estimated each period at the same time. An impairment loss is recognised if the carrying amount of an asset or its related cash generating unit (“CGU”) ex-ceeds its estimated recoverable amount.

Goodwill is allocated to CGUs for the purposes of impairment testing. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assess-ing value in use, the estimated future cash flows after allocating corporate assets are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is

performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination.

Impairment losses are recognised in the consolidated income state-ment. Impairment losses recognised in respect of CGUs are allocat-ed first to reduce the carrying amount of any goodwill allocated to the CGU (group of GCUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis.

The determination of gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are as-sessed at each annual reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the ex-tent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

3.9 ProvisionsA provision is recognised if, as a result of a past event, the Com-pany has a present legal or constructive obligation that can be es-timated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost.

3.10 Revenue recognitionRevenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the normal course of the Company’s activities. Revenue is shown net of sales taxes.

The Company recognises revenue when persuasive evidence ex-ists that the significant risks and rewards of ownership have been transferred and when the amount of revenue can be reliably mea-sured and when specific criteria have been met as described below.

Insurance Segment RevenueCommission revenue relates to the sale and/or renewal of pet in-surance policies in which the Company acts as agent in the trans-



action rather than principal. The Company is licensed as an insur-ance agent/broker in the jurisdictions in which it operates. Other than a limited participation in the underwriting results for core policies sold in the U.S. and the U.K., the underwriting risk associ-ated with the pet insurance policies sold is borne entirely by the Company’s licensed insurance carriers.

Revenue from commissions is derived from the sale of insurance policies which premiums are billed principally on a monthly basis. Base commissions are recognised as revenue on the effective dates of the related monthly insurance premiums, except for annually billed policies which are recognised, net of mid-term cancellation reserves, as revenue on the policies’ effective, renewal or anniver-sary dates. Commission adjustments, related to the Company’s limited participation in underwriting results, are made quarterly.

The Company earns commission revenue through the sale of cer-tain pet insurance policies to arm’s-length animal welfare organ-isations which in turn charge the Company a related fee for access to their distribution network, as well as advertising to pet owners adopting pets from their organisation. Revenue and expenses are recorded based on the fair value of the services provided by the Company for similar cash transactions.

Non-Insurance Segment RevenuesRevenue, net of returns, from the sale of microchips and micro-chip readers is recorded when the goods are shipped.

Revenue from the retail sale of products from the Company’s e-commerce site is recognised when the goods are shipped. A provi-sion is made for returns based on historical trends.

Administration fees are non-refundable and are recorded as reve-nue over the period in which administration services are provided. Unearned administration fees are deferred and recognised as rev-enue as administrative services are provided.

Database and data revenue is recognised either over the period in which the service is provided or, where long-term contracts re-quire the performance of more than one service, proportionately by reference to the performance of each service to the extent each has stand-alone value.

3.11 LeasesLeases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under the operating leases are charged to

the consolidated income statement on a straight-line basis over the period of the lease.

The Company leases certain property and equipment. Leases of prop-erty and equipment where the Company has substantially all the risks and rewards are classified as finance leases. Finance leases are capi-talised at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease pay-ments. Subsequent to the initial recognition, the asset is accounted for in accordance with the accounting policy applicable to the asset.

Lease payments made under finance leases are apportioned be-tween the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

3.12 Income TaxIncome tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in profit or loss except to the ex-tent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the period, using tax rates enacted or substan-tively enacted at the reporting date, and any adjustment to tax pay-able in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends.

Deferred tax is recognised in respect of temporary differences be-tween the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for:

• Temporarydifferencesontheinitialrecognitionofassetsorliabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

• Temporarydifferencesrelatedtoinvestmentsinsubsidiariesto the extent that it is probable that they will not reverse in the foreseeable future; and

• Taxabletemporarydifferencesarisingontheinitialrecogni-tion of goodwill.

Deferred tax is measured at the tax rates that are expected to be ap-plied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.Deferred tax assets and liabilities are offset if there is a legally en-



forceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that fu-ture taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is not probable that the related tax benefit will be realised.

3.13 Share CapitalCommon shares are classified as equity. Incremental costs directly attributable to the issue of common shares or options are shown as a deduction from equity, net of taxes.

Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any dividends are discretionary. Dividends theron are recognised as distributions within equity upon approval by the Company’s Board.

3.14 employee CostsDefined Contribution PlansA defined contribution plan is a post-employment benefit plan un-der which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in the periods during which services are rendered by employees.

Short-term employee BenefitsShort-term employee benefit obligations are measured on an undis-counted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus plans if the Company has a present legal or construc-tive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

Stock OptionsThe Company operates an equity settled, share based stock option plan for employees and directors. Under the equity settled share plan, the Company receives services from employees as consideration for share options of the Company. The fair value of the employee services re-ceived in exchange for the grant of options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of options granted as calculated using the

Black-Scholes option pricing model and an estimate of forfeiture rates prior to vesting. The Black-Scholes model requires judgements to be made regarding expected volatility, dividend yield, risk free rates of re-turn and expected option lives. Forfeiture rates are based on past ex-perience and are adjusted if subsequent information indicates that the actual forfeitures are likely to differ from the estimate.

Share Unit Plan for DirectorsThe Company operates a share unit plan for directors. The fair value of this plan is calculated on each statement of financial posi-tion date and the appreciation or depreciation in value is recorded as compensation expense with the counterpart in trade and other payables on the consolidated statement of financial position.

3.15 Finance Income and Finance CostsInterest income consists of interest earned from short-term invest-ments, consisting of guaranteed investment certificates and notes receivable and is recognised in finance income. Interest income is recognised as it accrues in the consolidated income statement, us-ing the effective interest method.

Finance costs comprise interest expense on borrowings and impair-ment losses recognised on financial assets (other than trade receivables).

3.16 earnings per ShareThe Company presents basic and diluted earnings per share data for its common shares. Basic earnings per share is calculated by divid-ing the profit or loss attributable to the common shareholders of the Company by the weighted average number of common shares out-standing during the period, adjusted for own shares held. Diluted earnings per share is determined by adjusting the profit or loss at-tributable to common shareholders and the weighted average num-ber of common shares outstanding, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprise convertible preference shares, share options granted to employees and deferred share units granted to certain Company directors.

3.17 Future Accounting and Reporting Changes(i) IFRS 9–Financial InstrumentsIFRS 9 Financial Instruments was issued in November 2009 and modifies previous standard IAS 39 “Financial Instruments: Recog-nition and Measurement”.

The new standard requires financial instruments to be measured at either fair value or amortized cost. Under the new standard, the existing categories for AFS, held to maturity, and loans and receiv-ables will be eliminated.



A fair value option (fair value through income, same as held-for-trading (HFT) would continue to be available on the condition that accounting mismatches are reduced. The new standard requires that a) embedded derivatives be as-sessed for classification together with their financial asset host and b) a single impairment method be used for financial assets.

IFRS 9 is effective for annual periods beginning on or after Janu-ary 1, 2015. The Company is currently assessing the full impact of IFRS 9 on its consolidated financial statements.

(ii) IFRS 13–New Standard on Fair value measurement In May 2011, the IASB published IFRS 13, Fair Value Measurement. IFRS 13 replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guid-ance. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction be-tween market participants at the measurement date, i.e., an exit price.

The standard also establishes a framework for measuring fair val-ue and requires the fair value hierarchy, which was introduced by IFRS 7, Financial Instruments: Disclosures, to be applied to all fair

value measurements, including non-financial assets and liabilities that are measured at or based on fair value in the statement of fi-nancial position as well as non-recurring fair value measurements such as assets held for sale. IFRS 13 expands disclosure require-ments for fair value measurements to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements.

IFRS 13 is applicable prospectively for annual periods beginning on or after January 1, 2013. Earlier application is permitted with disclosure of that fact. The Company is in the process of assessing the full impact of IFRS 13 on its consolidated financial statements.

(iii) IAS 17–LeasesThe IASB issued an exposure draft for a new standard on lease account-ing for lessees and lessors that would replace IAS 17, Leases, and related interpretations. The new accounting model requires both lessees and lessors to record the assets and liabilities on the balance sheet at the pres-ent value of the lease payments arising from all lease contracts. The new classification would be the right-of-use model, replacing the operating and finance lease accounting models that currently exist. The final lease standard is expected to be released in 2012 at which time the Company will assess the full impact on the consolidated financial statements.

4. CASh AND CASh eQUIvALeNTS

Cash and cash equivalents comprise cash, guaranteed investment certificates and short-term bank deposits with an original maturity of three months or less and are held in the following currencies (those held in currencies other than Canadian dollars have been converted at the ex-change rate at the statement of financial position date):

dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

u .s . dollars 3,285 2,199 (96)

Poundssterling 698 480 759

Canadian dollars 1,845 2,403 6,647

5,828 5,082 7,310

The credit risk on cash and cash equivalents is limited because the counterparties are banks with high credit-ratings assigned by interna-tional credit-rating agencies. The carrying amount of these assets approximates their fair value.

5. SegRegATeD CASh AND DUe TO INSURANCe CARRIeRS

Under the terms of the MGA Agreements with its insurance carriers, the Company collects premiums and pays claims on behalf of their respective insurance carriers. These funds, net of the Company’s commissions, are held in trust for the benefit of the insurance carriers and cannot be used or applied for other purposes.

These funds are shown on the Company’s consolidated statement of financial position as segregated cash with a corresponding li-ability under due to insurance carriers.



6. TRADe AND OTheR ReCeIvABLeS

dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

Tradereceivables 1,092 1,094 833

Less:amountsprovidedfordoubtfulaccounts 68 148 87

1,024 946 746

Profitsharing

Commissionreceivable 123 - 682

Othercarrierreceivables - - 761

Otherreceivables 189 39 56

1,336 985 2,245

Trade receivables are non-interest bearing. The carrying value of trade and other receivables approximates their fair value.Trade receivables are provided for based on estimated recoverable amounts, determined by reference to past default experience.

Aging of trade receivables is as follows:

dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

Current 720 606 450

1–60dayspastdue 191 284 295

60–90dayspastdue 39 51 33

Greaterthan90dayspastdue 142 153 55

1,092 1,094 833

Movement in allowance for doubtful accounts

dec . 31, 2011 dec . 31, 2010

BalanceatJan.1 148 87

Impairmentlossesrecognised - 61

Reversalofallowance (50) -

Amountswrittenoffasuncollectable (30) -

BalanceatDec.31,2011andDec.31,2010 68 148

In determining the recoverability of a trade receivable, the Company considers any change to the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The Company has no significant exposure to credit risk, with exposure spread over a large number of customers.



Trade and other receivables are held in the following currencies as at December 31, 2011 and December 31, 2010 with those balances held in currencies other than Canadian dollars converted at the exchange rate at the balance sheet date:

u .s . dollars

pounds sterling

Canadian dollars Consolidated

Duewithintwelvemonths 870 98 112 1,080

Dueaftertwelvemonths 12 - - 12

AsatDec.31,2011 882 98 112 1,092

Duewithintwelvemonths 897 96 101 1,094

Dueaftertwelvemonths - - - -

AsatDec.312010 897 96 101 1,094

7. INveNTORY

dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

Microchips 54 111 522

PetangoStoreproducts 142 43 -

196 154 522

8. NOTeS ReCeIvABLe AND ReLATeD-PARTY TRANSACTIONS

On August 1, 2002, the Board of Directors authorised the Company to loan to the President and Chief Executive Officer the amount of $500 for the exclusive purpose of purchasing units of the Company. The loan amount was advanced by the Company and evidenced by a promissory note and a securities pledge agreement in favour of the Company for 833 Common Shares. As of August 1, 2002, these pledged shares represented a market value in excess of the loan amount of $500. The promissory note bears interest at the lesser of the prevailing Prime Rate (as hereinaf-ter defined) and 7% per annum with a maturity date extended to January 15, 2015. Immediately following the advance of the loan, the President and Chief Executive Officer purchased 417 units of the Company at a purchase price of $1.20 per unit, each such unit consisting of a common share and a common share purchase warrant, which warrant entitled the holder thereof to acquire one common share at an exercise price of $1.00 per common share up to and including December 19, 2002. On December 19, 2002, the Board of Directors further authorised the Company to loan to the President and Chief Executive Officer an ad-ditional amount of $530 for the exclusive purpose of exercising the pre-viously issued warrants to purchase 530 Common Shares in the capital of the Company. The loan amount was advanced by the Company and evidenced by a promissory note and a securities pledge agreement in favour of the Company for 530 Common Shares in the capital of the

Company. As of December 19, 2002, these additional pledged shares represented a market value in excess of the loan amount of $530. Pursu-ant to this securities pledge agreement, all of the Common Shares in the capital of the Company pledged by the borrower to the Company to secure the obligations of the borrower for such loan amounts. The promissory note bears interest at the lesser of the prevailing Prime Rate and 7% per annum with a maturity date extended to January 15, 2015. Immediately following the advance of the loan by the Company, the President and Chief Executive Officer exercised the warrants and pur-chased an additional 530 Common Shares in the capital of the Com-pany at an exercise price of $1.00 per warrant.

For purposes of the promissory notes, “Prime Rate” means the per annum rate of interest from time to time quoted, published and com-monly known as the “prime rate” of the Canadian Imperial Bank of Commerce which it establishes at its main office in Toronto, Ontario as the reference rate of interest in order to determine interest rates for loans in Canadian dollars to its Canadian borrowers, adjusted auto-matically with each quoted or published change in such rate, all with-out the necessity of any notice to the borrower or any other person.

At December 31, 2011, the note receivable balance was $1,520 (December 31, 2010 - $1,475, January 1, 2010 - $1,437).



Directors and Key management CompensationThe remuneration of the directors and members of the operating executive, who are the key management personnel of the Company, is set out below in aggregate for each of the noted categories.

yeAR ended

dec . 31, 2011 dec . 31, 2010

Employeecompensationandshort-termbenefits 750 974

Share-basedpayments 116 578

866 1,552

9. PROPeRTY AND eQUIPmeNT

Furnitureandfixtures

Computerhardware

Office equipment

Leasehold improvements Total

at Jan. 1, 2010

Cost 262 1,108 976 246 2,592

Accumulateddepreciation 180 515 662 161 1,518

net book value 82 593 314 85 1,074

year ended dec. 31, 2010

Openingnetbookamount 82 593 314 85 1,074

Foreignexchangedifferences (2) (8) (8) (2) (20)

Additions 22 153 53 16 244

Depreciationcharge (18) (129) (87) (25) (259)

closing net book value 84 609 272 74 1,039

at dec. 31, 2010

Cost 281 1,253 1,003 259 2,796


net book value 84 609 272 74 1,039


Openingnetbookamount 84 609 272 74 1,039

Foreignexchangedifferences - 1 - - 1

Additions 15 116 6 - 137

Depreciationcharge (16) (125) (71) (19) (231)

closing net book value 83 601 207 55 946

at dec. 31, 2011

Cost 297 1,371 1,011 260 2,939


net book value 83 601 207 55 946

Included in property and equipment are assets with a net book value of $325 held under finance leases (2010–$499).



10. gOODWILL

dec . 31, 2011 dec . 31, 2010

Balanceatbeginningofperiod 3,584 3,905

Foreignexchangedifferences 65 (321)

Closingbalance 3,649 3,584

Goodwill acquired in business combinations is allocated to the cash generating units ("CGUs") that are expected to benefit from that business combination. The Company has defined its CGUs, for the purpose of Goodwill impairment testing, as the Pet Protect insurance operation and the Canadian insurance operation including an appropriate allocation of corporate costs.

Impairment Testing for goodwillThe Company tests goodwill for impairment at least annually and more regularly if there are indications that goodwill might be impaired. An impairment loss is recognised if the carrying value of a CGU exceeds its recoverable amount.

The recoverable amount of a CGU is determined from the greater of fair value and “value in use” calculations based on the net present value of discounted cash flow. In assessing value in use, the estimated future cash flows are derived from the most recent financial bud-get and three-year forecasts and an assumed growth rate. A terminal value is calculated by discounting using an appropriate discount rate. Impairment losses are recognized in the income statement as an expense.

Management determined budgeted operating profit based on past performance and its expectations of market development. The weighted average growth rates used are consistent with the forecasts included in industry reports. The discount rate is pre-tax and reflects specific risks related to the operating segment.

Goodwill was tested for impairment at September 30, 2011 and there was no impairment.



11. INTANgIBLe ASSeTS

Customerrelationships Patents

licensing and

registrationsComputersoftware

Internallydeveloped

software Trademarks Other Total

at Jan. 1, 2010

Cost 1,609 20 68 1,036 5,803 647 254 9,437

Accumulatedamortisation 517 16 10 783 1,750 194 88 3,358

Netbookvalue 1,092 4 58 253 4,053 453 166 6,079


Openingnetbookamount 1,092 4 58 253 4,053 453 166 6,079

Foreignexchangedifferences (80) - (5) (1) (17) (32) (12) (147)

Additions–internallygenerated - - - - 2,443 - - 2,443

Additions–acquired - - - 59 389 17 - 465

Amortisationcharge (398) (4) (6) (76) (793) (87) (59) (1,423)

closing net book value 614 - 47 235 6,075 351 95 7,417

at dec. 31, 2010

Cost 1,475 20 62 1,092 8,615 626 233 12,123

Accumulatedamortisation 861 20 15 857 2,540 275 138 4,706

net book value 614 - 47 235 6,075 351 95 7,417


Openingnetbookamount 614 - 47 235 6,075 351 95 7,417

Foreignexchangedifferences 14 - 2 2 5 6 1 30

Additions–internallygenerated - - - - 2,562 - - 2,562

Additions–acquired - - - 58 87 15 - 160

Amortisationcharge (397) - (7) (69) (1,057) (65) (47) (1,642)

closing net book value 231 - 42 226 7,672 307 49 8,527

at dec. 31, 2011

Cost 1,502 20 63 1,152 11,276 649 236 14,898

Accumulatedamortisation 1,271 20 21 926 3,604 342 187 6,371

net book value 231 - 42 226 7,672 307 49 8,527

Additions of internally generated software include $9 (2010–$0) of interest capitalised at a borrowing rate of 8.5%.

Included in intangible assets are assets with a net book value of $44 held under finance leases (2010–$133).



12. TRADe AND OTheR PAYABLeS

dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

Tradepayables 2,350 1,551 2,134

Accruedprofessionalfees 409 375 269

Provisionforswingcommissionpayable 122 226 -

Accruedvacationpay 168 168 178

Accruedsalespartnersfees 134 164 145

DeferredShareUnitsliability 125 107 100

Taxesandothergovernmentremittances 367 93 256

PetPointcommitmentdeposits 186 124 93

Otherliabilities 221 285 569

4,082 3,093 3,744

Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. For most suppliers no interest is charged but for certain overdue balances, interest is charged at various rates.

Trade and other payables are held in the following currencies (those held in currencies other than Canadian dollars have been converted at the exchange rate at the balance sheet date):

u .s . dollars

pounds sterling

Canadian dollars Consolidated

Duewithintwelvemonths 1,799 442 1,841 4,082

AsatDec.31,2011,duewithintwelvemonths 1,799 442 1,841 4,082

Duewithintwelvemonths 1,338 332 1,423 3,093

AsatDec.31,2010,duewithintwelvemonths 1,338 332 1,423 3,093

The carrying value of trade and other payables are carried at amortised cost, which approximates their fair value.

13. INCOme TAxeS ReLATINg TO CONTINUINg OPeRATIONS

13.1 Income Tax Recognised in Profit or Loss 2011 2010

Current tax

Currenttaxexpenseinrespectofthecurrentyear - 72

Adjustmentsrecognisedinthecurrentyearinrelationtothecurrenttaxofprioryears 29 (283)

29 (211)

Deferred tax

Deferredtaxexpenserecognisedinthecurrentyear 403 (209)

403 (209)

Totalincometaxexpenserecognisedinthecurrentyearrelatingtocontinuingoperations 432 (420)



The income tax expense for the year can be reconciled to the accounting profit as follows:

dec . 31, 2011 dec . 31, 2010

Profitbeforetaxfromcontinuingoperations 3,259 2,003

Incometaxexpensecalculatedat28.25%(2010–31%) 921 621

Effectofincomethatisexemptfromtaxation - 221

Effectofexpensesthatarenotdeductibleindeterminingtaxableprofit 106 (27)

Effectofunusedtaxlossesandtaxoffsetsnotrecognisedasdeferredtaxassets 31 -

Effectofpreviouslyunrecognisedandunusedtaxlossesanddeductibletemporarydifferencesnowrecognisedasdeferredtaxassets (951) (867)

Effectofdifferenttaxratesofsubsidiariesoperatinginotherjurisdictions 234 65

Effectondeferredtaxbalancesduetothechangeinincometaxrates (54) (127)

DifferencebetweenIFRSandU.K.orCanadianGAAP 116 (21)

Other - (2)

403 (137)

Adjustmentsrecognisedinthecurrentyearinrelationtothecurrenttaxofprioryears 29 (283)

Incometaxexpenserecognisedinprofitorloss(relatingtocontinuingoperations) 432 (420)

The tax rate used for the 2011 and 2010 reconciliations above is the corporate tax rate of 28.25% (2010 – 31%) payable by corporate enti-ties in Canada on taxable profits under tax law in that jurisdiction.

13.2 Current Tax Assets and Liabilitiesdec . 31, 2011 dec . 31, 2010 jan . 1, 2010

Current tax assets

Incometaxesrecoverable 44 213 -

Current tax liabilities

Incometaxespayable - - 482

13.3 Deferred Tax BalancesThe following is the analysis of deferred tax assets/(liabilities) presented in the consolidated statement of financial position:

dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

Deferredtaxassets 570 217 -

Deferredtaxliabilities (764) (8) -

(194) 209 -



2011Openingbalance

Recognised inprofitorloss

Closing balance

Deferred tax (liabilities)/assets in relation to:

Propertyandequipment 48 (806) (758)

Intangibleassets (7) 2 (6)

provisions 5 (5) -

Other (1) - -

45 (809) (764)

Taxlosses 164 406 570

164 406 570

209 (403) (194)

2010Openingbalance

Recognised inprofitorloss

Closing balance

Deferred tax (liabilities)/assets in relation to:

Propertyandequipment - 48 48

Intangibleassets - (7) (7)

provisions - 5 5

Other - (1) (1)

- 45 45

Taxlosses - 164 164

- 164 164

- 209 209

13.4 Unrecognised Deductible Temporary Differences, Unused Tax Losses and Unused Tax CreditsyeAR ended

dec . 31, 2011 dec . 31, 2010

Deductibletemporarydifferences,unusedtaxlossesandunusedtaxcreditsforwhich nodeferredtaxassetshavebeenrecognisedareattributabletothefollowing:

taxlosses(revenueinnature) 13,106 14,346

taxlosses(capitalinnature) 162 180

unamortisedshareissuecosts 265 396

non-deductiblereserves 165 1,291

13,698 16,213



14. LOANS AND BORROWINgS

dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

non-current

loans (a) - - 1,694

Financeleaseliabilities(b) 62 142 214

62 142 1,908

current

loans (a) - 1,611 2,469

Financeleaseliabilities(b) 124 158 212

124 1,769 2,681

Totalloansandborrowings 186 1,911 4,589

(a) LoansOn July 25, 2008, in order to finance the Pet Protect acquisition, the Company entered into a three-year loan agreement denominated in U.S. dollars for $7,098 with a recognised financial institution at a fixed interest rate of 4.52%. The security for the loan, provided by the Company, was the policy renewals on its U.S. book of business which is underwritten by Praetorian, the Company’s U.S. insurance car-rier. The terms of the loan restricted the Company from paying dividends other than to holders of the Company’s Series I 6% convertible preferred shares. Payments occurred evenly over the course of the loan and commenced September 1, 2008. At December 31, 2011, the loan had a balance of U.S. dollars nil (December 31, 2010 - U.S. $1,605 or $1,597 in Canadian dollars, January 1, 2010 – U.S. $3,810 or $3,988 in Canadian dollars).

The Company entered into an agreement with Microsoft Canada Inc. to finance the acquisition of system and applications software and related support services that were delivered in February 2008. The principal amount financed was $450 at an effective interest rate of 8.5% and was repayable in 36 monthly instalments of $14 commencing February 1, 2008. At December 31, 2011, the loan had a balance outstanding of nil (December 31, 2010 - $14, January 1, 2010 - $176).

(b) Finance LeasesLease liabilities are effectively secured as the rights to the leased assets revert to the lessor in the event of default.

dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

Grossfinanceleaseliabilities

Paymentsduenolaterthan1year 133 173 239

Paymentsduelaterthan1yearbutnolaterthan5years 65 151 237

Paymentsduelaterthan5years - - -

198 324 476

Lessfuturefinancechargesonfinanceleases (12) (24) (50)

Present value of finance lease liabilities 186 300 426



The present value of finance lease liabilities is as follows:

due dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

Nolaterthan1year 124 158 212

Laterthan1yearbutnolaterthan5years 62 142 214

Laterthan5years - - -

186 300 426

During the twelve months ended December 31, 2011, $25 was expensed relating to the Company’s operating leases (2010: $30).

15. ShARe CAPITAL

dec . 31, 2011 dec . 31, 2010 jan . 1, 2010

Authorised:

Unlimitedpreferredshares

Unlimitedcommonshares

issued:

4,875preferredshares(December31,2010–4,875) 9,339 9,339 9,339

32,513commonshares(December31,2010–32,513) 5,158 5,158 5,111

14,497 14,497 14,450

On January 21, 2004, the Company completed a private placement financing of 5,000 Series I 6% convertible preferred shares of the Com-pany (“preferred shares”) at a price of $2.00 per preferred share for aggregate gross proceeds to the Company of $10,000 and the net proceeds were $9,339 after deducting agent and issue costs. Each preferred share is entitled to cumulative dividends at a fixed rate of 6% payable annu-ally on the anniversary date. Each preferred share is convertible into 1 common share in the capital of the Company at any time at the option of the holder. The Company may, at its option, redeem the convertible preference shares by providing 60 days written notice to the holders at a price of $2.15 per share.

Subsequent to year-end, on January 27, 2012, the Company declared and paid a dividend of $585 at $0.12 per share on 4,875 preferred shares outstanding at December 31, 2011, which has not been accrued at December 31, 2011.

Share-based Paymentsequity-settled, Share-based PaymentsCommon share options are granted to directors and selected employees of the Company. In accordance with the plan, the exercise price of the granted options is equal to the market price of the shares on the date of grant. Options granted under the plan typically vest annually over a three- to five-year period and are non-transferable. The common shares issuable upon exercise of any option that is cancelled or terminated prior to its exercise will become available again for grant under the plan. Options granted under the plan may be exercised during a period not exceeding 10 years from the date of grant, subject to earlier termination if the option holder ceases to be an employee, officer or director of the Company.



Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:

yeAR ended deC . 31 2011 2010

Numberofoptions

Weightedaverage exerciseprice

Numberofoptions

Weightedaverage exerciseprice

OptionsoutstandingasatJan.1 2,668 $1.60 3,511 $1.95

Granted 137 1 .30 936 1 .30

Forfeited (160) 1 .43 (235) 1 .79

Exercised - - (38) 1 .37

Expired (385) 2 .48 (1,506) 2 .20

OptionsoutstandingasatDec.31 2,260 $1.45 2,668 $1.60

Of the 2,260 outstanding options (December 31, 2010–2,668 options), 1,240 options (December 31, 2010–1,475 options) were exercis-able. During the year ended December 31, 2011, no options were exercised (twelve months ended December 31, 2010–38).

During the year ended December 31, 2011, 137 options were granted compared to 936 options in the same period in the previous year.

The weighted average fair value of options granted during the year ended December 31, 2011 determined using the Black-Scholes valua-tion model was $0.62 (December 31, 2010–$0.62) per option. The significant inputs into the model were weighted average share price of $1.30 (December 31, 2010–$1.30) at the grant date, volatility of 60% (December 31, 2010–60%), dividend yield of Nil, an expected option life of 4.15 years (December 31, 2010–4.5 years), and an annual risk free interest rate of 3.0% (December 31, 2010–3.0%). The volatility was determined using market inputs at the time of the options being granted.

Deferred Share-based PaymentsUnder the share unit plan for directors, directors may elect to receive either cash or deferred share units (“DSU”) for their compensation. Following cessation of the function of director of the Company, a director can elect to receive a cash payment or common shares equal to the market value of the accumulated deferred share units. When a director elects to participate in this plan, the Company credits the full account of the director for the number of units equal to their deferred compensation divided by the fair value of the common shares at the date of grant to the cash option.

As the director has the option of settling in cash or common shares, the Company’s DSUs are a compound financial instrument with a debt compo-nent, being the cash settlement option, and an equity component, being the equity settled option. In calculating the split between the debt and equity components, the Company first determines the fair value of the cash option and then secondly determines the fair value of the cash and equity option taken together and the difference between the two options is the fair value of the equity option. Under the terms of the Company’s DSU plan, the debt liability at inception is equal to the combined fair value of the cash and equity option taken together and as such no value is assigned to the equity option.

The variation in the fair value at each reporting period is recorded as a compensation expense with the counterpart in trade and other payables in the consolidated statement of financial position.

yeAR ended

dec . 31, 2011 dec . 31, 2010

Numberofunits:

Balance,beginningofperiod 81 50

Directors’compensation 46 34

Exercised/encashed - (3)

Balance,endofperiod 127 81



The expense recorded in the consolidated income statement relating to equity and deferred share-based payments for the year ended December 31, 2011 was $176 (December 31, 2010 – $59). During the year no amount was paid under the plan (2010 - nil).

The total number of common shares reserved under the Company’s share based compensation plans is 4,547. The share unit plan for directors shall not exceed 1,000 of the total number of common shares reserved.

16. exPeNSeS BY NATURe

yeAR ended

dec . 31, 2011 dec . 31, 2010

Employeebenefitexpenses 10,835 9,943

Depreciationandamortisation 1,873 1,682

Advertisingcosts 4,901 7,310

Costofgoodssold 5,518 4,630

Informationtechnology 683 634

Communications 1,576 1,567

travel 367 338

Bankcharges 1,099 1,024

Professionalandlegalfees 627 636

Rent 916 846

Baddebts 652 763

Foreignexchange(gain)/loss 160 (30)

Other 779 757

29,986 30,100

16.1 employee benefit expensesyeAR ended

dec . 31, 2011 dec . 31, 2010

Wages and salaries 8,818 8,176

Share-basedpaymentcharges 176 59

Socialsecuritycosts 841 810

Bonuses 258 217

Definedcontributionpensionplanpayments 36 42

Other–car,insurancepremiumpayments,medicalinsurancepayments 706 639

10,835 9,943



17. FINANCe INCOme AND COSTS

The components of finance costs, net, include interest (expense) income and other finance costs as follows:

yeAR ended

dec . 31, 2011 dec . 31, 2010

Interestincome–externalsources 24 16

Interestincome–relatedpartytransactions 45 38

Interestexpenseonlong-termborrowings (28) (159)

Netinterest(expense)income 41 (105)

18. eARNINgS PeR ShARe

(a) BasicBasic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of common shares.

yeAR ended

dec . 31, 2011 dec . 31, 2010

ProfitattributabletoequityholdersoftheCompany 2,827 2,423

Aftertaxeffectofdividendsdeclaredonpreferenceshares (610) (610)

ProfitattributabletocommonequityholdersoftheCompany 2,217 1,813

Weightedaveragenumberofcommonshares 32,513 32,497

Earningspercommonshare

Basic 0 .07 0 .06

(b) DilutedDiluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding to assume conver-sion of all dilutive potential common shares. The Company has three categories of dilutive potential common shares: convertible preference shares, share options and deferred share units. The convertible preference shares are assumed to have been converted into common shares. For the share options, a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to the outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options and the difference is diluted number of shares. For deferred share units, it is assumed that the balance will be settled in common shares.



yeAR ended

dec . 31, 2011 dec . 31, 2010

ProfitattributabletoequityholdersoftheCompany 2,827 2,423

Aftertaxeffectofdividendsdeclaredonpreferenceshares (610) (610)

ProfitattributabletocommonequityholdersoftheCompany 2,217 1,813

Weightedaveragenumberofcommonshares 32,513 32,497

Adjustments

assumedconversionofconvertiblepreferenceshares 4,875 4,875

shareoptionsvestedand“inthemoney” 41 387

assumedsettlementofdeferredshareunitsincommonshares 127 81

Weightedaveragenumberofcommonsharesfordilutedearningspershare 37,556 37,840

Earningspercommonshare

Diluted 0 .06 0 .05

19. BUSINeSS AND geOgRAPhICAL SegmeNTS

Business SegmentsFor management purposes, the Company is organised into two main operating segments – insurance and non-insurance. The insurance operations consist of the distribution and administration of the PetCare, Pet Protect, Petpals, ShelterCare, QuickCare, Cherryblue and other co-branded, white labelled or private labelled pet insurance programs. The non-insurance operations are made up of its 24PetWatch and Pet Protect pet registry and recovery service, the distribution of RFID microchip technology, the development and distribution of PetPoint, its animal shelter management software program and Petango.com, its online pet portal, which includes its on-line adoptable search engine, ThePetangoStore.com and social networking.

For segment reporting, certain costs are allocated to the reporting segments based on the resource usage of the two operating segments.

yeAR ended deC . 31, 2011 insurance non-insuranceCashandnotes

receivable Consolidated

revenue

Externalsales 22,263 10,911 33,174

Other 15 15 30

Totalrevenue 22,278 10,926 33,204

Profit(loss)beforeincometax 4,890 (1,631) 3,259

Profit(loss)fortheperiod 4,511 (1,684) 2,827

Otherinformation:

Finance revenue 69 - 69

Financecosts (28) - (28)

Amortisation 765 1,108 1,873

Incometax 379 53 432

Capitalassetadditionsanddisposal 69 68 137

Intangibleassetadditions 60 2,662 2,722

Consolidatedcapitalandintangibleadditions 129 2,730 2,859

SegmentassetsasatDec.31,2011 7,369 8,188 12,220 27,777



yeAR ended deC . 31, 2010 insurance non-insuranceCashand

notesreceivable Consolidated

revenue

Externalsales 23,430 8,778 32,208

Totalrevenue 23,430 8,778 32,208

Profit(loss)beforeincometax 5,311 (3,308) 2,003

Profit(loss)fortheperiod 5,731 (3,308) 2,423

Otherinformation:

Finance revenue 54 - 54

Financecosts (159) - (159)

Amortisation 838 844 1,682

Incometax (420) - (420)

Capitalassetadditions 216 28 244

Intangibleassetadditions 66 2,842 2,908

Consolidatedcapitalandintangibleadditions 282 2,870 3,152

SegmentassetsasatDec.31,2010 6,477 7,677 10,750 24,904

SegmentassetsasatJan.1,2010 8,589 5,950 12,236 26,775

geographic SegmentsThe Company’s operations are located in Canada, the U.S. and the U.K. Both the insurance and the non-insurance segments are located in each country. The following table provides an analysis of the Company’s revenue geographically for each of the periods.

yeAR ended

dec . 31, 2011 dec . 31, 2010

UnitedStates 22,521 21,669

UnitedKingdom 4,520 4,565

Canada 6,163 5,974

33,204 32,208

The following is an analysis of the carrying amount of segment assets, analysed by the geographic area in which the assets are located:

dec . 31, 2011 UnitedStates UnitedKingdom Canada Consolidated

Goodwill - 3,609 40 3,649

Intangibleassets 329 617 7,581 8,527

Propertyandequipment 50 37 859 946

dec . 31, 2010 UnitedStates UnitedKingdom Canada Consolidated

Goodwill - 3,544 40 3,584


Propertyandequipment 51 47 941 1,039

jan . 1, 2010 UnitedStates UnitedKingdom Canada Consolidated

Goodwill - 3,865 40 3,905


Propertyandequipment 54 52 968 1,074

No individual customer constitutes greater than 10% of the Company’s revenues. The Company’s results are not significantly impacted by seasonality.



20. FINANCIAL RISK mANAgemeNT

20.1 Financial Risk FactorsThe Company has financial assets and liabilities consisting of cash and cash equivalents, segregated cash, trade and other receivables, notes re-ceivable, trade and other payables, due to insurance carriers and loans and borrowings. Loans and receivables are non-derivative financial assets or liabilities with fixed or determinable payments that are not quoted in an active market. They are included in current assets or liabilities, except for settlements due greater than 12 months after the consolidated balance sheet date, which are classified as non-current assets or liabilities. The Company’s financial assets and liabilities are recorded at their cost, or am-ortised cost when interest bearing, which approximates their fair value.

The Company’s financial assets and liabilities are exposed to cer-tain financial risk factors including market risk (foreign exchange risk), credit risk and liquidity risk.

(i) market Risk Foreign exchange riskForeign exchange risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

The Company’s consolidated statement of financial position is expressed in Canadian dollars but a portion of its business is conducted in U.S dollars and British pounds sterling. Changes in the exchange rates for such currencies into Canadian dollars can increase or decrease revenues, operating profit, earnings and the carrying values of assets and liabilities.

The Company’s U.S. and U.K. subsidiaries have local functional cur-rencies, that is, U.S. dollars and British pounds sterling respectively.

As such, the Company’s exposure to currency fluctuations is limited to its net investment in the subsidiary. Foreign exchange translation gains and losses are calculated using the current method, that is, the rates in effect at each consolidated statement of financial position date. The foreign exchange translation gains or losses resulting from holding the net investment between the statement of financial posi-tion dates are recorded on the consolidated statement of financial position as other comprehensive income and are not reflected in the consolidated income statement until such time that the net invest-ment is removed from the consolidated statement of financial posi-tion either through a sale or an impairment in value.

On July 25, 2008, the Company borrowed U.S. $7,098 (CDN $7,256) to finance the acquisition of Pet Protect (Note 14). The U.S. dollar denominated loan is a foreign currency transaction, which does not form part of the foreign operation. As a result, the foreign exchange translation gains and losses, which resulted from the relative change in the value of the exchange rate between the Ca-nadian and U.S. dollar on the consolidated statements of financial position date as compared to the exchange rate at the beginning of the period, are recorded on the consolidated income statement.

The Company does not employ a foreign currency derivative hedging program and, therefore, foreign currency translations can have a significant impact on reported consolidated results during periods of fluctuating exchange rates.

At December 31, 2011, the Company had the following financial assets and liabilities, denominated in U.S. dollars and U.K. pound sterling excluding inter-company balances, which are eliminated on consolidation:

dec . 31, 2011 u .s . £

Cashandcashequivalents 3,229 442

Tradeandotherreceivables 1,010 41


Borrowings - -

Netfinancialassetexposure 2,470 236

dec . 31, 2010 u .s . £

Cashandcashequivalents 2,211 309

Tradeandotherreceivables 826 34


Borrowings (1,605) -

Netfinancialassetexposure 87 129



As of December 31, 2011, a 10% appreciation or depreciation in the Canadian dollar at the consolidated statement of financial position date would have resulted in a decrease or increase in consolidated net income of approximately $246 (period ended December 31, 2010–$20) as it relates to the above listed financial assets and liabilities.

The Company is not exposed to price risk being the change in price of securities, and its exposure to changes in interest rates is not material.

(ii) Credit RiskCredit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge its obligation. Total credit risk is $2.8 million (2010– $2.46 million), which includes trade and other receivables and notes receivable.

(a) Trade receivablesThe Company’s trade receivables consist of credit extended to veterinary clinics and animal welfare organisations, which arise primarily in connec-tion with the sale of RFID microchips, and credit extended to individuals insured in connection with its individual insurance policy portfolio.

As at December 31, 2011 and 2010, no individual veterinary clinic, animal welfare organisation or individual insured accounted for greater than 10% of the Company’s trade receivables.

The Company reviews individual credit balances for veterinary

clinics and animal welfare organisations and sets reserves on a collective basis. The Company manages this portfolio of credits through a policy that restricts sales and shipments to any organ-isation that becomes more than 90 days past due.

The Company manages its individual insured credit portfolio utilising an extensive communications program and sets reserves on a pooled basis.

(b) Note receivableThe note is with a related party, the Company’s President and Chief Executive Officer. Management reviews the Company’s collateral in place related to this note at each statement of financial position date to assess any value impairment. The Company maintains collateral, the fair value of which exceeds the fair value of the note receivable as described in Note 8.

(iii) Liquidity RiskLiquidity risk is the risk that the Company will encounter dif-ficulty in meeting its obligations associated with financial liabili-ties. The Company monitors its cash flows on a continuous basis utilising financial projections to ensure that it can meet its fi-nancial obligations as they become due. Management expects to meet the below obligation through operating cash flows.

The Company had the following financial commitments at December 31, 2011 and at December 31, 2010.

dec . 31, 2011Lessthan

1yearBetween1and2years

Between2and5years

over 5years Total



Borrowings(excl.financeleaseobligations) - - - - -

Financeleaseobligations 124 62 - - 186

Operatingleaseobligations(includingpremisesleases) 871 1,580 1,934 490 4,875

9,949 1,642 1,934 490 14,015

dec . 31, 2010



Borrowings(excl.financeleaseobligations) 1,637 - - - 1,637

Financeleaseobligations 158 131 11 - 300

Operatingleaseobligations(includingpremisesleases) 874 1,617 2,210 928 5,629

9,955 1,748 2,221 928 14,852

20.2 Capital DisclosuresThe Company has a capital management process in place to measure and monitor its available capital and assess its adequacy. The Com-

pany’s objective when managing capital is to safeguard the Com-pany’s ability to continue as a going concern, so that it can continue to provide returns and benefits for its shareholders. The Company



considers loans and borrowings and shareholders’ equity, includ-ing convertible preferred shares net of its deficit, to form its capital base. The Company would consider increasing its capital base to

take advantage of growth opportunities by issuing more shares or increasing its debt portfolio. Alternatively, the Company can reduce its capital by returning it to shareholders in the form of dividends.

21. CONTINgeNCIeS

From time to time in connection with its operations, the Company is named as a defendant in actions for damages and costs alleg-edly sustained by the plaintiffs. While it is not possible to estimate the outcome of various proceedings at this time, such actions have

generally been resolved with minimal damages or expense in ex-cess of amounts provided and the Company does not believe that it will incur any significant additional loss or expense in connec-tion with such actions.

22. TRANSITION TO IFRS

The accounting policies set out in Note 3 have been applied in preparing the financial statements for the year ended December 31, 2011 and the year ended December 31, 2010 and in the preparation of an opening IFRS statement of financial position at January 1, 2010 (the “Transition Date”).

IFRS 1 requires first-time adopters to retrospectively apply all effec-tive IFRS standards as of the transition date, which for the Company is January 1, 2010. However, it also provides for certain optional exemptions and certain mandatory exceptions for first-time IFRS adopters. IFRS 1 also requires, on first time adoption, for the Com-pany to make an explicit and unreserved statement of compliance.

In preparing its opening IFRS statement of financial position, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP (its pre-vious GAAP). An explanation of how the transition from previ-ous GAAP to IFRS has affected the Company’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.

IFRS exemption Options1. Business combinations – IFRS 1 provides the option to ap-

ply IFRS 3, Business Combinations, retrospectively or pro-spectively from the Transition Date. The retrospective basis would require restatement of all business combinations that occurred prior to the Transition Date. The Company elected not to retroactively apply IFRS 3 to business combinations that occurred prior to the Transition Date and such business com-binations have not been restated. Any goodwill arising on such business combinations before the Transition Date has not been adjusted from the carrying value previously determined under Canadian GAAP as a result of applying this exemption.

2. Currency translation differences – Retrospective application of IFRS would require the Company to determine cumula-tive currency translation differences in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates, from the date a subsidiary was formed or acquired. IFRS 1 permits cumulative translation gains and losses to be reset to zero at the Transition Date. The Company has elected to reset all cu-mulative translation gains and losses to nil and recognised all cumulative translation gains and losses, in opening retained earnings at the Transition Date.

3. Share-based payments – IFRS 2, Share-Based Payments, encourages application of its provisions to equity instru-ments granted on or before November 7, 2002, but permits the application only to equity instruments granted after November 7, 2002 that had not vested by the Transition Date. The Company elected to apply the exemption provid-ed under IFRS 1 and applied IFRS 2 for all equity instru-ments granted after November 7, 2002 that had not vested by the Transition Date.

4. Borrowing costs – IAS 23, Borrowing Costs, requires an en-tity to capitalise the borrowing costs related to all qualifying assets for which the commencement date for capitalisation is the later of January 1, 2009 and the Transition Date or an earlier date chosen by the Company. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The Company elected to apply IAS-23 as of the Transition Date and as such, all borrowing costs related to qualifying assets where the com-mencement date for capitalisation was prior to January 1, 2010 have been expensed.



IFRS mandatory exemptions 1. Estimates – Hindsight is not used to create or revise estimates. The estimates previously made by the Company under Canadian GAAP were not revised for application of IFRS.

Reconciliations of Canadian gAAP to IFRSIFRS 1 requires an entity to reconcile equity, comprehensive in-come and cash flows for prior periods. The following represents the reconciliations from Canadian GAAP to IFRS for the respec-tive periods noted for equity, earnings and comprehensive income:

Reconciliationofequityasat dec . 31, 2010 jan . 1, 2010

Shareholders’equityunderCanadianGAAP 15,546 14,244

Propertyandequipmentandintangibleassets (32)(1) -

Other - 9

shareholders’ equity under ifrs 15,514 14,253

yeAR ended

Reconciliationofprofitfortheyear dec . 31, 2010

NetearningsunderCanadianGAAP 2,355

Foreigncurrencytranslationadjustments 61

Sharebasedcompensation 7

Net profit under IFRS 2,423

(1) ImpactofforeignexchangeonpropertyandequipmentandintangibleassetsasaresultofchangeinthefunctionalcurrencyoftheU.S.subsidiaries.

yeAR ended

Reconciliationofcomprehensiveincomefortheyear dec . 31, 2010

ComprehensiveincomeunderCanadianGAAP 1,747

Differencesinnetearnings 68

Foreigncurrencytranslationadjustments (100)

ComprehensiveincomeunderIFRS 1,715

Changes in accounting policies1. Foreign currency translation adjustment As stated in the section “IFRS exemption options” the Company applied the one-time exemption to set the foreign currency cumu-lative translation adjustment (“CTA”) to zero as at January 1, 2010. The cumulative translation adjustment balance as of January 1, 2010 of $1 was recognised as an adjustment to retained earnings. The application of the exemption had no impact on net equity.

2. Functional CurrencyManagement is required to make an assessment of each of its subsidiar-ies to determine each subsidiary’s functional currency. In cases where the subsidiary’s functional currency is the same as its parent company’s, the parent company’s exposure to foreign exchange movements is on a transactional basis, the same as it would be had the parent company completed the transactions directly itself. As a result, any gain or loss arising from currency movements is recorded in the income statement. Where the functional currency of the subsidiary is different from the parent company, the parent company’s exposure to foreign exchange movements is limited to the parent’s net investment in the subsidiary.

As a result, any gains or losses arising from foreign exchange movements are recorded in the Consolidated Statement of Comprehensive Income under the heading foreign exchange differences on translating foreign operations. Under the latter scenario, a gain or loss is recorded in the statement of income only when realised upon the disposal of all or part of the subsidiary or the discontinuing of the subsidiary’s operations.

Canadian GAAP – In assessing the functional currency of a subsidiary, Canadian GAAP requires management to review certain economic facts and circumstances including whether or not the reporting enter-prises cash flows are insulated from any direct effects of the day-to-day operations of the subsidiary; whether sales prices for the foreign op-eration are determined by local competition or international pricing; whether the sales market for the foreign operation’s products are pri-marily outside the reporting enterprises’ country or within it; whether labour, materials and other costs of the foreign operation’s products are primarily local costs or whether they depend on products and services obtained from the country of the reporting enterprise; whether the day-to-day activities of the foreign operation are financed primarily from its own operations and local borrowings or primarily by the reporting



enterprise or borrowings from the country of the reporting enterprise, and the extent of the interrelationship of the day-to-day activities of the foreign operation and the reporting enterprise.

IFRS – In assessing the functional currency of a subsidiary, similar facts and circumstances are reviewed by management. However, unlike Canadian GAAP, IFRS divides facts and cir-cumstances into primary indicators and secondary indicators

with heavier emphasis given to those categorised as primary. Under IFRS, the primary indicators are (1) the currency that dominates the determination of sales prices and (2) the cur-rency that most influences operating costs. All other facts and circumstances are considered secondary.

Management’s assessment of the functional currency of each of its subsidiaries at January 1, 2010 is as follows:

FunCtionAl CuRRenCy

Domicile Canadian gAAp iFRs

PTZInsuranceBrokersLtd. Canada Canadian Canadian

PethealthServicesInc. Canada Canadian Canadian

PTZInsuranceAgencyLtd. u .s . Canadian u .s .

PethealthServices(USA)Inc. u .s . Canadian u .s .

PetProtectLimited u .k . u .k . u .k .

PethealthServices(UK)Ltd. u .k . u .k . u .k .

As stated in the section “IFRS exemption options”, the Company ap-plied the one-time exemption to set the foreign currency cumulative translation adjustment (“CTA”) to zero as of January 1, 2010. As a result, all other adjustments relate to the impact of the change in functional currency of the Company’s U.S. subsidiaries after January 1, 2010.

3. Share-based CompensationThe Company has applied the IFRS 1 exemption and applied IFRS 2:(a) To equity instruments that were granted after November 7,

2002 that vest after the Transition Date;(b) To liabilities arising from cash-settled share-based payment

transactions that will be settled after the Transition Date.

The effects of the application of IFRS 2 are as follows:Recognition of expenseCanadian GAAP – For grants of share-based awards with graded vesting, the total fair value of the award is recognised on a straight-line basis over the employment period necessary to vest the award.

IFRS – Each tranche in an award with graded vesting is considered a separate grant with a different vesting date and fair value. Each grant is accounted for on that basis. As a result, the Company adjusted its ex-pense for share-based awards to reflect this difference in recognition.

ForfeituresCanadian GAAP – Forfeitures of awards are recognised as they occur.

IFRS – An estimate is required of the number of awards expected to vest, which is revised if subsequent information indicates that the actual forfeitures are likely to differ from the estimate. As a result, the Company adjusted its expense to reflect this difference.

4. Carrier Cash and Liabilities Presented grossThe Company maintains trust bank accounts on behalf of its carri-ers, which are used to fund insurance claims when settled.

Canadian GAAP – The cash held in trust on behalf of a third-party carrier and the corresponding liability were presented on a net basis.

IFRS - Amounts received on behalf of third parties should be ac-counted for as a payable in the statement of financial position until settled and should not gross up revenue and expenses. Similarly, amounts prepaid to third parties on behalf of customers should be recognised as a receivable until recovered and also should not gross up revenues and expenses.

Under IFRS, the Company has recorded cash held on behalf of its carriers as “segregated cash” and the liability to its carriers as “Due to insurance carrier” on a gross basis.

The change in presentation is a reclassification on the statement of financial position and has no revenue or expense impact.



Reconciliation of Consolidated Statement of Financial Position as of January 1, 2010

CanadianGAAPaccounts

CanadianGAAPbalance

iFRs adjustments

iFRsreclassification

iFRsbalance IFRSaccounts

assets assets

Cashandcashequivalents 7,310 - - 7,310 Cashandcashequivalents

- - 3,489 - 3,489 Segregatedcash

Accountsreceivable 2,245 - - 2,245 Tradeandotherreceivables

Inventory 522 - - 522 Inventory

Prepaidexpenses 714 - - 714 Prepaidandothercurrentassets

total current assets 10,791 3,489 - 14,280 total current assets

Notesreceivable 1,437 - - 1,437 Notesreceivable

Capitalassets 1,074 - - 1,074 Propertyandequipment

Goodwill 3,905 - - 3,905 Goodwill

Intangibleassets 6,079 - - 6,079 Intangibleandotherassets

total non-current assets 12,495 - - 12,495 total non-current assets

total assets 23,286 3,489 - 26,775 total assets

current liabilities liabilities

Accountspayableandaccruedliabilities 4,226 (482) - 3,744 Tradeandotherpayables

- - 482 - 482 Incometaxespayable

- - 3,489 - 3,489 Duetoinsurancecarriers

Deferredrevenue 227 (9) - 218 unearned revenue

Currentportionofobligationsundercapitalleases

212 - (212) -

Currentportionoflong-termdebt 2,469 - 212 2,681 Loansandborrowings

current liabilities 7,134 3,480 - 10,614 total current liabilities

Obligationsundercapitalleases 214 - (214) -

Long-termdebt 1,694 - 214 1,908 Loansandborrowings

total non-current liabilities 1,908 - - 1,908 total non-current liabilities

total liabilities 9,042 3,480 - 12,522 total liabilities

shareholders’ equity equity

Capitalstock 14,450 - - 14,450 Sharecapital

Contributedsurplus 1,533 77 - 1,610 Contributedsurplus

Accumulatedothercomprehensiveloss (1,253) 1,253 - - Accumulatedother comprehensiveloss

Deficit (486) (1,321) - (1,807) Retainedearnings(deficit)

total shareholders’ equity 14,244 9 - 14,253 total equity attributable to equity holders of the company

total liabilities and shareholders’ equity

23,286 3,489 - 26,775 total liabilities and equity



Reconciliation of Consolidated Income Statement for the year ended December 31, 2010


CanadianGAAPbalance

iFRs adjustments



revenue revenue

Insurancecommissionsandfees 23,430 - - 23,430 Insurancecommissionsandfees

Microchiptechnologyand non-insurance revenue

8,778 - - 8,778 Microchiptechnologyand non-insurance revenue

Interestandotherincome 57 - (57) -

32,265 - (57) 32,208

Expenses

Employment 9,884 - (9,884) -

Marketing 7,309 - 5,104 12,413 Sellingandmarketing

Selling,generalandadministrative 6,599 - 6,488 13,087 Administrative

CostofSales 4,630 - - 4,630 Costofgoodssold

Amortisationofcapital& intangibleassets

1,683 - (1,683) -

Stockoptionandequity-basedcompensation 68 (7) (61) -

Interestonlong-termdebt 126 - (126) -

Foreignexchange(gain)/loss 31 (61) - (30) Foreignexchange(gain)/loss

Expenses 30,330 (68) (162) 30,100

Netincomebeforeincometaxes 1,935 68 105 2,108 Resultsfromoperatingactivities

- - (105) (105) Netfinancerevenue/(costs)

Netincomebeforeincometaxes 1,935 68 - 2,003 Profitbeforeincometax

Incometaxexpense/(recovery) (420) - - (420) Incometaxexpense

net income 2,355 68 - 2,423 Profit for the period

Dividendsdeclaredonpreferredsharesincludingdividendtax

610 - - 610 Includedinconsolidatedstate-mentforchangesinequity

Earningspershare Earningspershare

Basic 0 .05 0 .01 - 0 .06 Basicearningspershare

Diluted 0 .05 0 .00 - 0 .05 Dilutedearningspershare

Reconciliation of Consolidated Statement of Comprehensive Income for the year ended December 31, 2010


CanadianGAAPbalance

iFRs adjustments



net income 2,355 68 - 2,423 Profit for the period

Othercomprehensiveincome(loss):

foreign currency translation adjustments

(608) (100) - (708) foreign currency translation differences for foreign operations

TotalComprehensiveincome(loss) 1,747 (32) - 1,715 TotalComprehensiveincome(loss)



Reconciliation of Consolidated Statement of Financial Position as of December 31, 2010


CanadianGAAPbalance

iFRs adjustments


iFRsbalance

iFRs accounts

assets assets

Cashandcashequivalents 5,082 - - 5,082 Cashandcashequivalents

- - 4,193 - 4,193 Segregatedcash

Accountsreceivable 985 - - 985 Tradeandotherreceivables

Inventory 154 - - 154 Inventory

Deferredincometax 168 - (168) -

Prepaidexpenses 766 - - 766 Prepaidandothercurrentassets

total current assets 7,155 4,193 (168) 11,180 total current assets

Notesreceivable 1,475 - - 1,475 Notesreceivable

Capitalassets 1,054 (15) - 1,039 Propertyandequipment

Goodwill 3,584 - - 3,584 Goodwill

Intangibleassets 7,434 (17) - 7,417 Intangibleandotherassets

Deferredincometax 41 - 168 209

total non-current assets 13,588 (32) 168 13,724 total non-current assets

total assets 20,743 4,161 - 24,904 total assets

current liabilities liabilities

Accountspayableandaccruedliabilities 3,093 - - 3,093 Tradeandotherpayables

- - - - - Incometaxespayable

- - 4,193 - 4,193 Duetoinsurancecarrier

Deferredrevenue 193 - - 193 unearned revenue

Currentportionofobligationsundercapitalleases

158 - (158) -

Currentportionoflong-termdebt 1,611 - 158 1,769 Loansandborrowings

current liabilities 5,055 4,193 - 9,248 total current liabilities

Obligationsundercapitalleases 142 - - 142 Loansandborrowings

Long-termdebt - - - -

total non-current liabilities 142 - - 142 total non-current liabilities

total liabilities 5,197 4,193 - 9,390 total liabilities

shareholders’ equity equity

Capitalstock 14,497 - - 14,497 Sharecapital

Contributedsurplus 1,651 68 - 1,719 Contributedsurplus

Accumulatedother comprehensiveloss

(1,861) 1,153 - (708) Accumulatedother comprehensiveloss

Deficit 1,259 (1,253) - 6 Retainedearnings(deficit)

total shareholders’ equity 15,546 (32) - 15,514 total equity attributable to equity holders of the company

total liabilities and shareholders’ equity

20,743 4,161 - 24,904 total liabilities and equity


diReCtoRs, oFFiCeRs And shAReholdeR inFoRmAtion

BOARD OF DIReCTORSRichard J. Renaud, FCA 1 – ChairmanChairman and Mana ging PartnerWynnchurch Capital Ltd.Montreal, Quebec

David Atkins, FCA 1, 3, 4

ChairmanNightingale Informatix CorporationToronto, Ontario

W. Brian edwards 2, 4

Chairman

Miranda Technologies Inc.St. Lambert, Quebec

harold P. (Sonny) gordon, QC 1, 2

ChairmanDundee CorporationSunny Isles, Florida

Pierre Raymond 2, 3, 4

ChairmanStikeman Elliott LLP Barristers and SolicitorsMontreal, Quebec

e. mark WarrenPresident & Chief Executive OfficerPethealth Inc.Rockwood, Ontario

martha Wilder 2, 3, 4

PresidentThe Wilder Group Inc.Toronto, Ontario

exeCUTIve OFFICeRSe. mark WarrenPresident & Chief Executive OfficerPethealth Inc.Rockwood, Ontario

glen TennisonChief Financial OfficerPethealth Inc.Oakville, Ontario

ShARehOLDeR INFORmATIONInvestor Relationsglen TennisonChief Financial OfficerTel: (905) 842-2615Fax: (905) [email protected]

Transfer Agent and RegistrarComputershare Investor Services100 University Avenue, 9th FloorToronto, Ontario, M5J 2Y1Tel: (416) 263-9200

Stock ListingToronto Stock Exchange(Symbol: PTZ)

AuditorKPmg LLPBay Adelaide Centre333 Bay Street, Suite 4600Toronto, Ontario, M5H 2S5Tel: (416) 228-7000

Legal CounselStikeman elliott LLP Barristers and Solicitors199 Bay Street, Suite 5300Commerce Court WestToronto, Ontario, M5L 1B9Tel: (416) 869-5500

Annual meetingmonday, may 14th - 2.30 p.m.Stikeman elliott,Commerce Court West,199 Bay Street, Suite 5300Toronto, Ontario,M5L 1B9

COmmON ShARe DIvIDeND POLICYPethealth Inc. has not paid any dividends on its outstanding common shares, its policy being to apply its earnings toward its continued expansion. The future payment of dividends will depend on the financing require-ments, the financial condition of the Company and other factors, which the Board of Directors, in its sole discretion, may consider appropriate.

1 Member of the Audit Committee2 Member of the Compensation and Human Resource Committee3 Member of the Special Purpose Risk Committee4 Member of the Corporate Governance/Nominating Committee

710DORVALDRIVE,SUITE400OAKVILLE, ONTARIOL6K3V7CANADA• 905.842.2615 • WWW.PE THEALTH INC .COM

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