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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.
highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 mAnAgement teAm . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 pResidents messAge . . . . . . . . . . . . . . . . . . . . . . . . . . 11 CFos messAge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 mAnAgement disCussion & AnAlysis . . . . . . . . . . . . 21 FinAnCiAls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 diReCtoRs, oFFiCeRs And shAReholdeRs . . . . . . . . . 82
$33.2 million
34% to $5.09 million
C o n s o l i d At e d A d j u s t e d e B i t d A
C o n s o l i d At e d R e v e n u e s o F
1,323,235
2 4 p e t WAt C h d AtA B A s e R e g i s t R At i o n s
890,000 Adoptions
of 11% and 13% respectively
oRgAnizAtions, 13% from 2010
6 pethealth 2011 annual report
2011 highlights
ConsolidAted Revenues vs . exChAnge RAtes 40 35 30 millions 25 20 15 10 5 0 2008 2009 2010 2011 1 .20 1 .10 CAd vs . u .s . & gBp 2009 1 .00 0 .90 0 .80 0 .70 0 .60 0 .50 0 .40
AFteR tAx net inCome 5 4 3 2 1 0 2008 2009 2010 2011 6 5 4 millions millions 3 2 1 0 2008
Adjusted eBitdA
2010
2011
mAnAgement teAm
Management Team
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In addition to these top line numbers, some additional achievements of note include:
1. Year-on-year revenue growth of 24% in our noninsurance business. Largely fuelled by database growth,
changes to our client fees, and the good performance of the 24PetWatch call centre, our non-insurance business experienced solid growth over the year and positive EBITDA in Q4. The positive trending leads us to believe non-insurance revenues 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 years growth in the database was driven by organic
growth in organisations using our PetPoint data management software. 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 declining euthanasia, this activity indicates and contributes to a more
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We noW Believe With ConFidenCe We ARe the WoRlds lARgest pRovideR oF miCRoChip teChnology to CompAnion AnimAls .
dynamic marketplace for adoptable pets. As demand for adoptable pets continues to rise, opportunities and demand for our insurance programs and other products and services also increase. 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 expansion which increased each quarter is also expected to continue. We now believe with confidence we are the worlds 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 highlight 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 business model to leverage new customer acquisition through PetPoint, as well as increased focus on business-to-business sales to shelters to satisfy 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 discretionary purchases including possibly pet insurance. United Kingdom Our 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 underwriting 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.
4. Full repayment of debt incurred through the acquisition 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 PetPoint 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 Review
United States We 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 adjusting 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 program 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. generated increasing momentum through the year. The acquisition of
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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. Canada Our 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.
Looking 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 better 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 technologies enter the marketplace. As the worlds largest provider of microchip technology for companion animal use, the opportu-
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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 .
nity to retail new products at higher margins with the same downstream opportunities as our current business is exciting. We are very proud of our success in this area and our partnership 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 animal 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 welfare and specifically our own data. We think there will be growing pressure on companies to work more closely with the animal welfare 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 shipping 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 online business both on a business-to-consumer and businessto-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 arbitrage online model to an online distribution model.
We continue to be on the lookout for strategic opportunities, including 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 environment characterised by unfavourable foreign exchange rates and the slow growth of returning consumer confidence, we are pleased with the Companys 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 Barbara 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.
mARk WARRen
President & Chief Executive Officer
April 3, 2012
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onsolidated revenues grew year over year by 3% with accelerated growth in the fourth quarter of 12%, representing 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 business, when normalized for the impacts of foreign exchange and changes to our ShelterCare program, remained flat. The strong growth in noninsurance 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 addition to the year-on-year 24% revenue growth, operating costs decreased by 4%, largely due to reduced marketing expenditures with pay-perclick advertising campaigns scaled back during 2011 as organic traffic and revenues driven by our shelter partners continued to build.
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In 2011, we generated consolidated operating cash flows of $5.1 million while investing $2.8 million on the purchase and development 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 application 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 contribute to earnings in 2012, further improving free cash flow.
participating in our 24PetWatch microchip program and promoting our ShelterCare insurance program. During 2011 we began the development 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 double digit growth in 2011 with a 19% increase to $7.71 million resulting 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 technology 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 standard 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 injection 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 database. For 2011, we generated $1.9 million in revenue from such sales consisting primarily of change of address fees, pet tags and EmergencyCare insurance coverage, a 70% growth over revenue generated in 2010. For 2012, the 24PetWatch membership subscription program was expanded 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 .
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 unrestricted $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 commission and fee growth in our business in the United States and Canada 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 adjustments to our underwriting guidelines which ultimately reduced our in-force policy count and revenues in the U.K. Satisfied with our adjusted 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 underwriting profit sharing compared to a $233,000 return of commission 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
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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 themselves to enhance returns, by acquisition or otherwise, shareholders can expect management to pursue them. Our 2011 audited financial statements represent our first yearend reported under International Financial Reporting Standards (IFRS). There was no impact from the transition on our operations 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 Galoska, Director of Finance, and Suryakant Bheem, Corporate Controller, 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 tennison
Chief Financial Officer
April 3, 2012
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M a n a g e M e n t d i s c u s s i o n & a n a ly s i s
The following Management Discussion and Analysis (MD&A) provides additional analysis of the operations and financial position 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 statements, including the accompanying notes, managements report and the auditors report available on SEDAR at www.sedar.com and on the Companys 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 Companys future outlook and anticipated events or results and may include statements regarding the Companys 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, anticipate, 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 Companys financial condition, material changes in the Companys financial condition, and its results of operations including liquidity and capital resources for the year ended and quarter ended December 31, 2011 compared with the year ended and quarter ended December 31, 2010. Readers are cautioned that this information 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 Companys markets, the Companys 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 Companys ability to maintain good relations with its employees, changes in the law or regulations regarding the environment or other environmental liabilities, the Companys ability to integrate acquisitions and the Companys ability to protect its intellectual property. For more exhaustive information on these risks and uncertainties the reader should refer to the Companys filings with the securities regulatory authorities, including the Companys most recently filed Annual Information Form, which is available on SEDAR at www.sedar.com and on the Companys website at www.pethealthinc.com. Forward-looking information contained in this commentary is based on the Companys current estimates, expectations and projections, which it believes are reasonable as of the current date. Readers should not place undue importance on forwardlooking 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 Financial Reporting Standards (IFRS). The following disclosure, as well as the associated consolidated financial statements, have been prepared in accordance with IFRS. Pethealths effective transition date is January 1, 2010, and the 2010 IFRS comparative 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 Pethealths transition from Canadian Generally Accepted Accounting 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 Companys audited consolidated financial statements for the year ended and quarter ended December 31, 2011. All financial information is presented in Canadian dollars unless 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 contained in this MD&A is expressly qualified in its entirety by this cautionary statement.
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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, Canada 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 reducing, 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. Pethealths common shares trade on the TSX under the symbol PTZ. The Company has recently begun development of an additional feebased 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 business-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 animal welfare organisations running PetPoint, all of which is stored on the Companys servers. Data includes, but is not limited to, intake data (animals entering animal welfare organisations), 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 facilitates timely and personalised marketing messages to pet adopters from the point of adoption and through the pets lifecycle, allowing the Company to inform adopters about both its own and third parties available products and services and influence when and where they purchase them; b. Individual animal profiles and pictures: PetPoint data facilitates Petango.com, the Companys portal for next generation 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 expects to generate media and advertising revenues as its audience continues to build; c. Aggregate shelter data: PetPoints significant data capture facilitates the publication of the only comprehensive national, state and community information related to animal 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
Core Competencies
Software: Launched in 2005, PetPoint was the first software-asa-service (SaaS) management application for animal welfare organisations 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 organisations (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 Companys 24PetWatch microchip program and actively promote its shelter-branded ShelterCare insurance program to their adopters.
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M a n a g e M e n t d i s c u s s i o n & a n a ly s i s
microchip products and is the Companys primary businessto-consumer lead source for the marketing of its business-toconsumer products. The primary source for new registrations is from adoptions occurring at those animal welfare organisations 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 competitive 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 national 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 microchip program into the adoption process whereby registration occurs at point of adoption. Distribution: In addition to more traditional methods of distribution, 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 development 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.
OveRALL PeRFORmANCe
yeAR ended ($000s except per share amounts) Revenue eBitdA(2) Net income before taxes Basic effective tax rate Net income after taxes Basic earnings per share Fully diluted earnings per share
(1)
quARteR ended Change 3% 34% 63% 17% dec . 31, 2011 8,758 1,491 1,023 11% 906 0.03 0.02 dec . 31, 2010 7,817 1,043 612 (22%) 748 0 .02 0 .02 Change 12% 43% 67% 21% -
dec . 31, 2011 33,204 5,091 3,259 13% 2,827 0.07 0.06
dec . 31, 2010 32,208 3,790 2,003 (21%) 2,423 0 .06 0 .05
Linda K. Lord, Walter Ingwersen, Janet L. Gray, and David J. Wintz. "Characterization of Animals with Microchips Entering Animal Shelters." Journal of the American Veterinary Medical Association 235.2 (2009): 16067. Print. See Non-IFRS Measures page 36.
(2)
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M a n a g e M e n t d i s c u s s i o n & a n a ly s i s
pre-tax operating loss in the non-insurance business due primarily 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 Quarter
Consolidated 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 segment operating revenue grew by 4% to $5.9 million as the Company 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 resons outlined above.
($000s except per share amounts) Total assets Total cash and cash equivalents Loans and borrowings (including current portion) Loans and borrowings (excluding current portion) Cash dividends declared per Series 1 Convertible Preferred Shares (annual dividend-payable in January)
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M a n a g e M e n t d i s c u s s i o n & a n a ly s i s
retiring the term debt associated with the Companys 2008 acquisition 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 substantially by mid-year, the Company remains cautious as it relates to consumer discretionary spending for the latter half of the year. Canada Conditions in Canada remain relatively stable although pet owners would appear to be continuing to extend the periods between visits to veterinary clinics except for needed treatments and surgeries. The Ontario Veterinary Medical Association has recommended 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 marketplace 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 veterinary inflation persists.
Seasonal Trends:
Seasonality is best illustrated in the non-insurance business revenues 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.
($000s except per share amounts) insurance revenues non-insurance revenues Other income Total revenue Net income before taxes eBitdA Earnings (loss) per share Earnings (loss) per share on a fully diluted basis
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M a n a g e M e n t d i s c u s s i o n & a n a ly s i s
INSURANCe SegmeNT
Overview
Insurance operations currently consist of the distribution and administration of the 24PetWatch, PetCare, ShelterCare, Pet Protect, Petpals Direct, and other co-branded, white-labelled or private-labelled pet insurance programs including Best Friends Animal Society, the Ontario SPCA, Union Privilege, the Pennsylvania SPCA, and the Wisconsin Humane Society. The Companys insurance policies are designed to cover unexpected 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 welfare organisations, direct-to-consumer advertising, co-branded and white-labelled programs, the Companys own advertising platform, 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 exclusive relationships with selected veterinary clinics and hospitals as well as through the Companys 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 conditions in the U.K., and in particular the current condition of the U.K. financial services industry, should lead to future acquisition opportunities. ment, marketing and sales, claims adjudication, medical underwriting and premium collection including the management of Praetorians premium trust account. The Company currently operates its United Kingdom pet insurance 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 underwritten 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 percentage of premiums earned by the carrier) for its core program in aggregate 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%. Pethealths participation 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 underwriting results for policies placed in Canada.
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$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 comparative 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 began investing in U.K. new policy acquisition, which saw a 8% sequential 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 underwritten 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.
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(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 expense of $432,000 and the prior years tax recovery of ($420,000).
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 impacted by tax differences of $253,000 being the net of current year tax expense of $117,000 and the prior years tax recovery of ($136,000).
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% sequentially 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-
NON-INSURANCe SegmeNT
Overview
The Companys 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 Companys animal shelter management software and the maintenance of its associated database; (ii) the distribution of RFID microchip technology and the maintenance 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 platform, ThePetangoStore.com.
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The 24PetWatch database plays a key role in the Companys business-to-consumer product and service offerings in both its insurance and non-insurance operations alike. The 24PetWatch database is discussed in detail under the heading Core Competencies.
Petango.com
Integrated with PetPoint and 24PetWatch, online pet portal Petango.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 Companys Petango brand operates in two areas: (i) Adoptable search, whereby potential pet owners can access all pets available for adoption from the Companys network of animal welfare organisations running its PetPoint platform. Petango.com is the only adoptable search site featuring exclusively live, real-time available animal information. Additionally, the Company uses its Petango.com platform to power adoptable search on over 702 websites of animal welfare organisations using PetPoint. The Company intends to grow the Petango.com adoptable search
content through the continued expansion of its shelter network 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 promotes its own business-to-consumer products and services on Petango.com and expects to further monetise the platform 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 ThePetangoStore.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 animal welfare organisation of their choice via purchases made on the site. The Companys involvement in online pet medication is not only to drive additional revenue for the Companys existing platform, but it is the Companys aim to also enhance the profitability of its insurance operations to hold down the cost of claims related to pet medications made by the Companys insured customer base.
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age of total non-insurance revenue over the year, microchip revenue fell to 71% from 80% in 2010, indicating the Companys growing diversity 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, representing 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 database 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 Companys non-insurance call centre totalled 237,557 for the year ended December 31, 2011, representing a 14% increase over the same period last year. The conversion 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 Quarter
Revenue 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.
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EBITDA from non-insurance operations was $6,000 for the quarter ended December 31, 2011, compared to an EBITDA loss of $558,000 in the prior year. The net operating loss on the Companys 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.com For 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.
considers loans and borrowings and shareholders equity, including 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:
Between 1 and 2 years 62 1,580 1,642 131 1,617 1,748 Between 2 and 5 years 1,934 1,934 11 2,210 2,221 Over 5 years 490 490 928 928 Total 4,082 4,872 186 4,875 14,015 3,093 4,193 1,637 300 5,629 14,852
Of the total operating leases, $4.8 million relates specifically to the Companys long-term leases of office space.
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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 Companys underwriters for the Companys
pet insurance programs in the U.S. Under the terms of the agreement, 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 favour 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 Companys U.S. and U.K. subsidiaries have U.S. and U.K. functional currencies while the Companys presentation currency is Canadian dollars, as defined under IFRS. As such, other than foreign currency transactions between its Canadian and foreign subsidiaries, the Companys exposure to currency fluctuations is limited to the Companys net investment in its foreign subsidiaries. are translated to Canadian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Canadian dollars at the average monthly exchange rates. Since January 1, 2010, the Companys date of transition to IFRS, foreign currency differences are recognised and presented in other comprehensive income and in the foreign currency translation reserve (translation reverse) 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 payable to a foreign operation is neither planned nor likely in the foreseeable 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. 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 financial assets and liabilities, denominated in U.S. dollars and U.K. pound sterling excluding inter-company balances, which are eliminated on consolidation:
Foreign Operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition,
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(000s) Cash and cash equivalents Trade and other receivables Trade payables and accrued liabilities Borrowings Net Financial Asset Exposure
Sensitivity
As the Company reports its consolidated results in Canadian dollars, changes in the relative value of the Canadian dollar 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% appreciation and 1% depreciation in the Canadian dollar against the U.S. dollar compared to Q4 2010 did have a significant impact 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 quarter ended by $64,000. Further, the change in the Canadian dollar decreased the consolidated pre-tax net income for the year by $575,000 and increased the consolidated earnings for the quarter by $17,000.
Outstanding shares Common equity Outstanding shares Options outstanding(3) and issuable
4,875 4,875
(2)
(1)
On January 21, 2004, Pethealth completed a private placement financing of 5,000,000 Series 1 6% convertible preferred shares of the Company (preferred shares) at a price of $2.00 per preferred share for aggregate gross proceeds to the Company of $10 million and the net proceeds were $9.34 million after deducting agent and issuance costs. Each preferred share is entitled to cumulative dividends at the fixed rate of 6% payable annually on the anniversary date. Each preferred share is convertible into one 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.
(2) (3)
For the purposes of calculating diluted earnings per share, the weighted average number of shares was 37,556,209 for the year ended December 31, 2011. Assuming full conversion and ignoring exercise prices.
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ReLATeD-PARTY TRANSACTIONS
On August 1, 2002, the Board of Directors authorised the Company 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 common 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 December19, 2002. On December 19, 2002, the Board of Directors further authorised the Company to loan to the President and Chief Executive Officer 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 Company 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 Officer 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).
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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 carrying value is higher than the sum of undiscounted cash flows expected from the assets use and eventual disposition, the asset is written down to its fair value. This accounting policy impacts both of the Companys business segments. See Notes 3.4, 11 and 12 to the 2011 consolidated financial statements for additional disclosures regarding goodwill and other intangibles.
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, assumptions 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.
quARteR ended dec . 31, 2011 906 479 (11) 117 1,491 dec . 31, 2010 748 419 12 (136) 1,043
EBITDA, a non-IFRS measure, is operating income plus amortization, interest and taxes.
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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 enterprises cash flows are insulated from direct affects by the day-to-day operations of the subsidiary; whether sales prices for the foreign operation are determined by local competition or international pricing; whether the sales market for the foreign operations products are primarily outside the reporting enterprises country or within it; whether labour, materials and other costs of the foreign operations products are primarily local costs or whether they depend on products and services obtained from the country of the reporting enterprise; whether the dayto-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 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 currency that most influences operating costs. All other facts and circumstances are considered secondary. Managements assessment of the functional currency of each of its subsidiaries at January 1, 2010 is as follows:
FunCtionAl CuRRenCy Domicile Canadian gAAp Canadian Canadian Canadian Canadian u .k . u .k . iFRs Canadian Canadian u .s . u .s . u .k . u .k .
PTZ Insurance Brokers Ltd. Pethealth Services Inc. PTZ Insurance Agency Ltd. Pethealth Services (USA) Inc. Pet Protect Limited Pethealth Services (UK) Ltd.
Canada Canada u .s . u .s . 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 Companys U.S. subsidiaries after January 1, 2010.
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. Forfeitures Canadian 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.
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IFRS Amounts received on behalf of third parties should be accounted for as a payable in the statement of financial position until settled and should not grossup 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.
Regulation
The business of insurance is subject to substantial government regulation and supervision in North America and the U.K., including, in the U.S., a state-by-state approval requirement for all policy form and rate modifications. Changes in the current regulatory and supervisory framework could include increased governmental 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 modifications to its products and services and could potentially have a material adverse effect on the Companys business, operations, future prospects and financial results.
Insurance Underwriter
The 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 continue to underwrite the risk associated with the Companys pet insurance policies or that a suitable replacement could be secured on a timely basis. The loss of Lombard or QBE could have a material adverse effect on the Companys business, operations, future prospects and financial results.
Foreign exchange
The Company currently transacts sales in U.S. and Canadian dollars as well as British pounds sterling. In North America, the majority 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 sterling 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.
Inventory
As a component of the Companys existing companion animal pet registry and recovery database service, the Company distributes microchip technology. Microchip technology is purchased 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 expected customer demands. The Company relies on the veterinary and shelter communities to resell the products and services to their customers. The consumer demand required for
Competitive Landscape
The pet insurance market in North America and the U.K. is competitive. The Company may not be aware of other companies plans or existing property and casualty insurance carriers plans to enter the market. Changes in the competitive landscape in the markets in which the Company operates could have a material adverse effect on the Companys business, operations, future prospects and financial results.
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the successful execution of this component of the Companys 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 Companys provider, which may restrict the Companys ability to carry out its existing distribution strategies for such microchip technology and/or may result in unanticipated costs that could have a potentially material adverse effect on the Companys financial resources. There is no assurance that the Companys 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 thirdparty 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 Companys 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 Companys supplier, making it necessary for them to establish secondary sources of supply. If the supplier is unable to continue to purchase from their secondary suppliers, then the Companys 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 Companys 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 manner 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 Companys 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 Companys business strategy.
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 Companys software 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 Company will be able to continue to develop and market its software products or that it will be able to continue to offer such products in a cost-effective manner. The Company relies significantly on its database to run its dayto-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 information as prescribed by applicable laws, which could materially adversely affect the way the Company conducts its existing and future business.
Legal matters
From 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 associated with each claim on a claim-by-claim basis.
Credit
The Company extends credit to veterinary clinics and animal welfare organisations, which arise primarily from the sale of RFID microchips to individual consumers and to individuals 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 reviews individual credit balances for veterinary clinics and animal welfare organisations and sets reserves where appropriate. 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.
Technology
The market for computer software is highly competitive and rapid technological innovation and change may make the Companys software products obsolete. The Company has developed its PetPoint, Petango.com and ThePetangoStore.com products
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M a n a g e M e n t d i s c u s s i o n & a n a ly s i s
Financials
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . 44 ConsolidAted FinAnCiAl stAtements Financial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Income statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Changes in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 notes to the ConsolidAted FininACiAl stAtements 1. Nature of operations and general information . . . . . . . . . . 49 2. Statement of compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3. Summary of significant accounting policies . . . . . . . . . . . . 50 4. Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . 57 5. Segregated cash and due to insurance carriers . . . . . . . . 57 6. Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . 58 7. Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 8. Notes receivable and related party transactions . . . . . . . . 59 9. Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 10. Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 11. Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 12. Trade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . 63 13. Income taxes relating to continuing operations . . . . . . . . 63 14. Loans and borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 15. Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 16. Expenses by nature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 17. Finance income and costs . . . . . . . . . . . . . . . . . . . . . . . . . 70 18. Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 19. Business and geographical segments . . . . . . . . . . . . . . . . 71 20. Financial risk management . . . . . . . . . . . . . . . . . . . . . . . . . 73 21. Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 22. Transition to IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
43
C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
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, comprehensive 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. Managements Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International 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 Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance 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 statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entitys 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 entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, 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. Opinion In 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.
44
C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Notes 4 5 6 7
dec . 31, 2010 5,082 4,193 985 154 766 11,180 1,475 1,039 3,584 7,417 209 13,724 24,904 3,093 4,193 193 1,769 9,248 142 142 9,390 14,497 1,719 (708) 6 15,514 24,904
jan . 1, 2010 7,310 3,489 2,245 522 714 14,280 1,437 1,074 3,905 6,079 12,495 26,775 3,744 482 3,489 218 2,681 10,614 1,908 1,908 12,522 14,450 1,610 (1,807) 14,253 26,775
8 9 10 11 13
12 5 14 14 13
15
45
C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
yeAR ended dec . 31, 2011 2,827 173 3,000 dec . 31, 2010 2,423 (708) 1,715
46
C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Memo note: ($000s) Segregated cash at beginning of year Change during the period segregated cash at end of year
yeAR ended dec . 31, 2011 4,193 679 4,872 dec . 31, 2010 3,489 704 4,193
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C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
year ended dec . 31, 2011 Balance at Jan. 1, 2011 total comprehensive income for the year Profit for the year Other comprehensive income: Foreign currency translation differences Total other comprehensive income Total comprehensive income for the year Transactions with owners of the company, recorded directly in equity Dividends paid to equity holders (including tax of $25) Share-based payment transactions Total transactions with owners of the Company Balance at dec. 31, 2011
14,497
(535)
year ended dec . 31, 2011 Balance at Jan. 1, 2010 total comprehensive income for the year Profit for the period Other comprehensive income: Foreign currency translation differences Total other comprehensive income Total comprehensive income for the year Transactions with owners of the company, recorded directly in equity Issuance of common shares Dividends paid to equity holders (including tax of $25) Share-based payment transactions Share options exercised Total transactions with owners of the Company Balance at dec. 31, 2010 47 47 14,497 109 109 1,719 (708) (610) (610) 6 (610) 109 47 (454) 15,514 (708) (708) (708) 2,423 (708) (708) 1,715 2,423 2,423 14,450 1,610 (1,807) 14,253
48
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
49
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
on a gross or net basis, management considered whether or not the exchange of products and services was similar in nature and concluded that the sale of pet insurance policies and the provision of distribution and advertising services was dissimilar. (ii) Use of estimates Information 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 potential 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 discounted cash flow. Key assumptions used in the calculation of recoverable 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 Losses Deferred tax assets and liabilities require managements judgement 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, assumptions 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.
50
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
recorded under previous Canadian GAAP. Goodwill is measured at cost less impairment losses. (b) Other Intangible Assets Intangible 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 impairment whenever changing circumstances indicate that impairment may have occurred. Amortisation is calculated from the date available 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 Trademarks Developed software Computer software Licensing and registrations Patents Others 4 years 3 to 10 years 2 to 5 years 3 to 5 years 10 years 5 years 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 combination 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 patents Separately 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 acquisition 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 software Acquired 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
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n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
are directly attributable to the design and testing of identifiable unique software products controlled by the Company are recognised as intangible assets when the following criteria are met: It is technically feasible to complete the software product so that it will be available for use or sale; Management intends to complete the software product and use or sell it; There is an ability to use or sell the software product; It can be demonstrated how the software product will generate future probable future economic benefits; Adequate technical, financial and other resources to complete the development and to use or sell it, are available; The expenditures attributable to the software product during 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 attributable to preparing the asset for its intended use. Capitalised development software is measured at cost less accumulated 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, construction 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 January 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.
Gains or losses on the disposal of an item of property and equipment 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 Costs The cost of replacing a component of an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the component 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. Depreciation Depreciation 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 Furniture and fixtures Computer hardware Office equipment Leasehold improvements Declining balance Declining balance Declining balance Declining balance Rate 20% 30% 30% 30%
The residual values, useful lives and depreciation methods of items of property and equipment are reviewed, and adjusted if appropriate, at each annual reporting date.
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Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Non-derivative Financial Assets The Company initially recognises loans and receivables and deposits 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 Company is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented 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 equivalents Cash and cash equivalents comprise cash balances with original maturities of three months or less. Loans and Receivables Loans and receivables comprise trade and other receivables, and notes receivables, which are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable 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 Liabilities The Company initially recognises debt securities issued on the date that they are originated. All other financial liabilities 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 liability when its contractual obligations 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 attributable 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 Payables Trade 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 Borrowings Borrowings 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 Inventories
Inventories are measured at the lower of cost, including direct expenditures plus other attributable costs incurred in bringing inventories to their current location and condition, and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. 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 Assets A 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 Receivables The Company considers evidence of impairment for loans and receivables at both a specific asset and collective level. All individually 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-
53
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
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 managements judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested 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 assets original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and receivables. When a subsequent event (e.g., repayment by a debtor) causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the consolidated income statement. Non-financial Assets The carrying amounts of the Companys non-financial assets other than inventories and deferred tax assets, being property and equipment 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 assets recoverable amount is estimated. For goodwill and intangible assets that have an indefinite 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) exceeds 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 assessing value in use, the estimated future cash flows after allocating corporate assets are discounted to their present value using a pretax 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 statement. Impairment losses recognised in respect of CGUs are allocated 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 assessed 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 extent that the assets 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 Provisions
A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated 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 pretax 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.
54
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
action rather than principal. The Company is licensed as an insurance 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 associated with the pet insurance policies sold is borne entirely by the Companys 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 anniversary dates. Commission adjustments, related to the Companys limited participation in underwriting results, are made quarterly. The Company earns commission revenue through the sale of certain pet insurance policies to arms-length animal welfare organisations 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 Revenues Revenue, net of returns, from the sale of microchips and microchip readers is recorded when the goods are shipped. Revenue from the retail sale of products from the Companys ecommerce site is recognised when the goods are shipped. A provision is made for returns based on historical trends. Administration fees are non-refundable and are recorded as revenue over the period in which administration services are provided. Unearned administration fees are deferred and recognised as revenue 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 require the performance of more than one service, proportionately by reference to the performance of each service to the extent each has stand-alone value.
the consolidated income statement on a straight-line basis over the period of the lease. The Company leases certain property and equipment. Leases of property and equipment where the Company has substantially all the risks and rewards are classified as finance leases. Finance leases are capitalised at the leases commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. 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 between 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.
3.11 Leases
Leases 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
55
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
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 future 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.
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 return and expected option lives. Forfeiture rates are based on past experience and are adjusted if subsequent information indicates that the actual forfeitures are likely to differ from the estimate. Share Unit Plan for Directors The Company operates a share unit plan for directors. The fair value of this plan is calculated on each statement of financial position 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.
56
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
A fair value option (fair value through income, same as held-fortrading (HFT) would continue to be available on the condition that accounting mismatches are reduced. The new standard requires that a) embedded derivatives be assessed 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 January 1, 2015. The Company is currently assessing the full impact of IFRS 9 on its consolidated financial statements. (ii) IFRS 13New 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 guidance. 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 between market participants at the measurement date, i.e., an exit price. The standard also establishes a framework for measuring fair value 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 financial position as well as non-recurring fair value measurements such as assets held for sale. IFRS 13 expands disclosure requirements 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 17Leases The IASB issued an exposure draft for a new standard on lease accounting 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 present 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.
The credit risk on cash and cash equivalents is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The carrying amount of these assets approximates their fair value.
57
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
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 Current 160 days past due 6090 days past due Greater than 90 days past due 720 191 39 142 1,092 dec . 31, 2010 606 284 51 153 1,094 jan . 1, 2010 450 295 33 55 833
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.
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Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
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 Due within twelve months Due after twelve months As at Dec. 31, 2011 Due within twelve months Due after twelve months As at Dec. 31 2010 870 12 882 897 897 pounds sterling 98 98 96 96 Canadian dollars 112 112 101 101
7. INveNTORY
dec . 31, 2011 Microchips Petango Store products 54 142 196 dec . 31, 2010 111 43 154 jan . 1, 2010 522 522
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n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
Directors and Key management Compensation The 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 Employee compensation and short-term benefits Share-based payments 750 116 866 dec . 31, 2010 974 578 1,552
Total
Included in property and equipment are assets with a net book value of $325 held under finance leases (2010$499).
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Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
10. gOODWILL
dec . 31, 2011 Balance at beginning of period Foreign exchange differences Closing balance 3,584 65 3,649 dec . 31, 2010 3,905 (321) 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 goodwill The 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 budget 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.
61
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
Customer relationships at Jan. 1, 2010 Cost Accumulated amortisation Net book value year ended dec. 31, 2010 Opening net book amount Foreign exchange differences Additions internally generated Additions acquired Amortisation charge closing net book value at dec. 31, 2010 Cost Accumulated amortisation net book value year ended dec. 31, 2011 Opening net book amount Foreign exchange differences Additions internally generated Additions acquired Amortisation charge closing net book value at dec. 31, 2011 Cost Accumulated amortisation net book value 1,502 1,271 231 614 14 (397) 231 1,475 861 614 1,092 (80) (398) 614 1,609 517 1,092
Patents 20 16 4 4 (4) 20 20 20 20 -
Computer software 1,036 783 253 253 (1) 59 (76) 235 1,092 857 235 235 2 58 (69) 226 1,152 926 226
Other 254 88 166 166 (12) (59) 95 233 138 95 95 1 (47) 49 236 187 49
Total 9,437 3,358 6,079 6,079 (147) 2,443 465 (1,423) 7,417 12,123 4,706 7,417 7,417 30 2,562 160 (1,642) 8,527 14,898 6,371 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).
62
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
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 Due within twelve months As at Dec. 31, 2011, due within twelve months Due within twelve months As at Dec. 31, 2010, due within twelve months 1,799 1,799 1,338 1,338 pounds sterling 442 442 332 332 Canadian dollars 1,841 1,841 1,423 1,423
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 Current tax Current tax expense in respect of the current year Adjustments recognised in the current year in relation to the current tax of prior years Deferred tax Deferred tax expense recognised in the current year Total income tax expense recognised in the current year relating to continuing operations 403 403 432 (209) (209) (420) 29 29 72 (283) (211) 2010
63
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
The income tax expense for the year can be reconciled to the accounting profit as follows:
dec . 31, 2011 Profit before tax from continuing operations Income tax expense calculated at 28.25% (201031%) Effect of income that is exempt from taxation Effect of expenses that are not deductible in determining taxable profit Effect of unused tax losses and tax offsets not recognised as deferred tax assets Effect of previously unrecognised and unused tax losses and deductible temporary differences now recognised as deferred tax assets Effect of different tax rates of subsidiaries operating in other jurisdictions Effect on deferred tax balances due to the change in income tax rates Difference between IFRS and U.K. or Canadian GAAP Other Adjustments recognised in the current year in relation to the current tax of prior years Income tax expense recognised in profit or loss (relating to continuing operations) 3,259 921 106 31 (951) 234 (54) 116 403 29 432 dec . 31, 2010 2,003 621 221 (27) (867) 65 (127) (21) (2) (137) (283) (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 entities in Canada on taxable profits under tax law in that jurisdiction.
64
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
2011 Deferred tax (liabilities)/assets in relation to: Property and equipment Intangible assets provisions Other Tax losses
Opening balance
Closing balance
2010 Deferred tax (liabilities)/assets in relation to: Property and equipment Intangible assets provisions Other Tax losses
Opening balance
Closing balance
13.4 Unrecognised Deductible Temporary Differences, Unused Tax Losses and Unused Tax Credits
yeAR ended dec . 31, 2011 Deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax assets have been recognised are attributable to the following: tax losses (revenue in nature) tax losses (capital in nature) unamortised share issue costs non-deductible reserves 13,106 162 265 165 13,698 14,346 180 396 1,291 16,213 dec . 31, 2010
65
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
(a) Loans On 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 Companys U.S. insurance carrier. The terms of the loan restricted the Company from paying dividends other than to holders of the Companys SeriesI 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 Leases Lease liabilities are effectively secured as the rights to the leased assets revert to the lessor in the event of default.
dec . 31, 2011 Gross finance lease liabilities Payments due no later than 1 year Payments due later than 1 year but no later than 5 years Payments due later than 5 years Less future finance charges on finance leases Present value of finance lease liabilities 133 65 198 (12) 186 173 151 324 (24) 300 239 237 476 (50) 426 dec . 31, 2010 jan . 1, 2010
66
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
During the twelve months ended December 31, 2011, $25 was expensed relating to the Companys operating leases (2010: $30).
On January 21, 2004, the Company completed a private placement financing of 5,000 Series I 6% convertible preferred shares of the Company (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 annually 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 Payments
equity-settled, Share-based Payments Common 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.
67
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
yeAR ended deC . 31 Number of options Options outstanding as at Jan. 1 Granted Forfeited Exercised Expired Options outstanding as at Dec. 31 2,668 137 (160) (385) 2,260 2011 Weighted average exercise price $1.60 1 .30 1 .43 2 .48 $1.45 Number of options 3,511 936 (235) (38) (1,506) 2,668 2010 Weighted average exercise price $1.95 1 .30 1 .79 1 .37 2 .20 $1.60
Of the 2,260 outstanding options (December 31, 20102,668 options), 1,240 options (December 31, 20101,475 options) were exercisable. During the year ended December 31, 2011, no options were exercised (twelve months ended December 31, 201038). 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 valuation 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, 201060%), dividend yield of Nil, an expected option life of 4.15 years (December 31, 20104.5 years), and an annual risk free interest rate of 3.0% (December 31, 20103.0%). The volatility was determined using market inputs at the time of the options being granted.
68
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
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 Companys 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.
69
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
(b) Diluted Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding to assume conversion 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 Companys 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.
70
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
yeAR ended dec . 31, 2011 Profit attributable to equity holders of the Company After tax effect of dividends declared on preference shares Profit attributable to common equity holders of the Company Weighted average number of common shares Adjustments assumed conversion of convertible preference shares share options vested and in the money assumed settlement of deferred share units in common shares Weighted average number of common shares for diluted earnings per share Earnings per common share Diluted 0 .06 0 .05 4,875 41 127 37,556 4,875 387 81 37,840 2,827 (610) 2,217 32,513 dec . 31, 2010 2,423 (610) 1,813 32,497
yeAR ended deC . 31, 2011 revenue External sales Other Total revenue Profit (loss) before income tax Profit (loss) for the period Other information: Finance revenue Finance costs Amortisation Income tax Capital asset additions and disposal Intangible asset additions Consolidated capital and intangible additions Segment assets as at Dec. 31, 2011
71
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
yeAR ended deC . 31, 2010 revenue External sales Total revenue Profit (loss) before income tax Profit (loss) for the period Other information: Finance revenue Finance costs Amortisation Income tax Capital asset additions Intangible asset additions Consolidated capital and intangible additions Segment assets as at Dec. 31, 2010 Segment assets as at Jan. 1, 2010
geographic Segments
The Companys 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 Companys revenue geographically for each of the periods.
yeAR ended dec . 31, 2011 United States United Kingdom Canada 22,521 4,520 6,163 33,204 dec . 31, 2010 21,669 4,565 5,974 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 Goodwill Intangible assets Property and equipment dec . 31, 2010 Goodwill Intangible assets Property and equipment jan . 1, 2010 Goodwill Intangible assets Property and equipment United States 329 50 United States 306 51 United States 209 54 United Kingdom 3,609 617 37 United Kingdom 3,544 1,090 47 United Kingdom 3,865 1,730 52 Canada 40 7,581 859 Canada 40 6,021 941 Canada 40 4,140 968 Consolidated 3,649 8,527 946 Consolidated 3,584 7,417 1,039 Consolidated 3,905 6,079 1,074
No individual customer constitutes greater than 10% of the Companys revenues. The Companys results are not significantly impacted by seasonality.
72
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
As such, the Companys 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 position 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 investment is removed from the consolidated statement of financial position 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 Canadian 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:
u .s . 3,229 1,010 (1,769) 2,470 u .s . 2,211 826 (1,345) (1,605) 87 442 41 (247) 236 309 34 (214) 129
73
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
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 Risk Credit 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 receivables The Companys trade receivables consist of credit extended to veterinary clinics and animal welfare organisations, which arise primarily in connection 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 Companys 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 organisation 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 receivable The note is with a related party, the Companys President and Chief Executive Officer. Management reviews the Companys 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 Risk Liquidity risk is the risk that the Company will encounter difficulty in meeting its obligations associated with financial liabilities. The Company monitors its cash flows on a continuous basis utilising financial projections to ensure that it can meet its financial 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.
Between 1 and 2 years 62 1,580 1,642 131 1,617 1,748 Between 2 and 5 years 1,934 1,934 11 2,210 2,221 over 5 years 490 490 928 928
dec . 31, 2011 Trade and other payables Due to insurance carriers Borrowings (excl. finance lease obligations) Finance lease obligations Operating lease obligations (including premises leases) dec . 31, 2010 Trade and other payables Due to insurance carriers Borrowings (excl. finance lease obligations) Finance lease obligations Operating lease obligations (including premises leases)
Less than 1 year 4,082 4,872 124 871 9,949 3,093 4,193 1,637 158 874 9,955
Total 4,082 4,872 186 4,875 14,015 3,093 4,193 1,637 300 5,629 14,852
panys objective when managing capital is to safeguard the Companys ability to continue as a going concern, so that it can continue to provide returns and benefits for its shareholders. The Company
74
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
considers loans and borrowings and shareholders equity, including 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 allegedly 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 excess of amounts provided and the Company does not believe that it will incur any significant additional loss or expense in connection with such actions.
75
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
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 IFRS IFRS 1 requires an entity to reconcile equity, comprehensive income and cash flows for prior periods. The following represents the reconciliations from Canadian GAAP to IFRS for the respective periods noted for equity, earnings and comprehensive income:
dec . 31, 2010 15,546 (32) (1) 15,514 jan . 1, 2010 14,244 9 14,253 yeAR ended
Reconciliation of equity as at Shareholders equity under Canadian GAAP Property and equipment and intangible assets Other shareholders equity under ifrs
Reconciliation of profit for the year Net earnings under Canadian GAAP Foreign currency translation adjustments Share based compensation Net profit under IFRS
(1)
Impact of foreign exchange on property and equipment and intangible assets as a result of change in the functional currency of the U.S. subsidiaries.
yeAR ended Reconciliation of comprehensive income for the year Comprehensive income under Canadian GAAP Differences in net earnings Foreign currency translation adjustments Comprehensive income under IFRS dec . 31, 2010 1,747 68 (100) 1,715
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 subsidiarys 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 enterprises cash flows are insulated from any direct effects of the day-to-day operations of the subsidiary; whether sales prices for the foreign operation are determined by local competition or international pricing; whether the sales market for the foreign operations products are primarily outside the reporting enterprises country or within it; whether labour, materials and other costs of the foreign operations products are primarily local costs or whether they depend on products and services obtained from the country of the reporting enterprise; whether the dayto-day activities of the foreign operation are financed primarily from its own operations and local borrowings or primarily by the reporting
76
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
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 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 currency that most influences operating costs. All other facts and circumstances are considered secondary. Managements assessment of the functional currency of each of its subsidiaries at January 1, 2010 is as follows:
FunCtionAl CuRRenCy Domicile Canadian gAAp Canadian Canadian Canadian Canadian u .k . u .k . iFRs Canadian Canadian u .s . u .s . u .k . u .k .
PTZ Insurance Brokers Ltd. Pethealth Services Inc. PTZ Insurance Agency Ltd. Pethealth Services (USA) Inc. Pet Protect Limited Pethealth Services (UK) Ltd.
Canada Canada u .s . u .s . u .k . u .k .
As stated in the section IFRS exemption options, 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 Companys U.S. subsidiaries after January 1, 2010. 3. Share-based Compensation The 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 expense Canadian GAAP For grants of share-based awards with graded vesting, the total fair value of the award is recognised on a straightline 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. Forfeitures Canadian 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 gross The Company maintains trust bank accounts on behalf of its carriers, which are used to fund insurance claims when settled. Canadian GAAP The cash held in trust on behalf of a thirdparty carrier and the corresponding liability were presented on a net basis. IFRS - Amounts received on behalf of third parties should be accounted for as a payable in the statement of financial position until settled and should not grossup 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.
77
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
Canadian GAAP accounts assets Cash and cash equivalents Accounts receivable Inventory Prepaid expenses total current assets Notes receivable Capital assets Goodwill Intangible assets total non-current assets total assets current liabilities Accounts payable and accrued liabilities Deferred revenue Current portion of obligations under capital leases Current portion of long-term debt current liabilities Obligations under capital leases Long-term debt total non-current liabilities total liabilities shareholders equity Capital stock Contributed surplus Accumulated other comprehensive loss Deficit total shareholders equity total liabilities and shareholders equity
Canadian GAAP balance 7,310 2,245 522 714 10,791 1,437 1,074 3,905 6,079 12,495 23,286 4,226 227 212 2,469 7,134 214 1,694 1,908 9,042 14,450 1,533 (1,253) (486) 14,244 23,286
iFRs adjustments 3,489 3,489 3,489 (482) 482 3,489 (9) 3,480 3,480 77 1,253 (1,321) 9 3,489
iFRs balance 7,310 3,489 2,245 522 714 14,280 1,437 1,074 3,905 6,079 12,495 26,775 3,744 482 3,489 218 2,681 10,614 1,908 1,908 12,522 14,450 1,610 (1,807) 14,253 26,775
IFRS accounts assets Cash and cash equivalents Segregated cash Trade and other receivables Inventory Prepaid and other current assets total current assets Notes receivable Property and equipment Goodwill Intangible and other assets total non-current assets total assets liabilities Trade and other payables Income taxes payable Due to insurance carriers unearned revenue
Loans and borrowings total current liabilities Loans and borrowings total non-current liabilities total liabilities equity Share capital Contributed surplus Accumulated other comprehensive loss Retained earnings (deficit) total equity attributable to equity holders of the company total liabilities and equity
78
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Reconciliation of Consolidated Income Statement for the year ended December 31, 2010
Canadian GAAP accounts revenue Insurance commissions and fees Microchip technology and non-insurance revenue Interest and other income Expenses Employment Marketing Selling, general and administrative Cost of Sales Amortisation of capital & intangible assets Stock option and equity-based compensation Interest on long-term debt Foreign exchange (gain)/loss Expenses Net income before income taxes Net income before income taxes Income tax expense/(recovery) net income Dividends declared on preferred shares including dividend tax Earnings per share Basic Diluted
Canadian GAAP balance 23,430 8,778 57 32,265 9,884 7,309 6,599 4,630 1,683
iFRs adjustments -
IFRS accounts revenue Insurance commissions and fees Microchip technology and non-insurance revenue
(30) 30,100 2,108 (105) 2,003 (420) 2,423 610 Results from operating activities Net finance revenue/(costs) Profit before income tax Income tax expense Profit for the period Included in consolidated statement for changes in equity Earnings per share Basic earnings per share Diluted earnings per share Foreign exchange (gain)/loss
0 .05 0 .05
0 .01 0 .00
0 .06 0 .05
Reconciliation of Consolidated Statement of Comprehensive Income for the year ended December 31, 2010
Canadian GAAP accounts net income Other comprehensive income (loss): foreign currency translation adjustments Total Comprehensive income (loss)
iFRs adjustments 68
iFRs reclassification -
(608) 1,747
(100) (32)
(708) 1,715
foreign currency translation differences for foreign operations Total Comprehensive income (loss)
79
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
Canadian GAAP accounts assets Cash and cash equivalents Accounts receivable Inventory Deferred income tax Prepaid expenses total current assets Notes receivable Capital assets Goodwill Intangible assets Deferred income tax total non-current assets total assets current liabilities Accounts payable and accrued liabilities Deferred revenue Current portion of obligations under capital leases Current portion of long-term debt current liabilities Obligations under capital leases Long-term debt total non-current liabilities total liabilities shareholders equity Capital stock Contributed surplus Accumulated other comprehensive loss Deficit total shareholders equity total liabilities and shareholders equity
Canadian GAAP balance 5,082 985 154 168 766 7,155 1,475 1,054 3,584 7,434 41 13,588 20,743
iFRs iFRs balance accounts assets 5,082 Cash and cash equivalents 4,193 Segregated cash 985 Trade and other receivables 154 Inventory 766 Prepaid and other current assets 11,180 total current assets 1,475 Notes receivable 1,039 Property and equipment 3,584 Goodwill 7,417 Intangible and other assets 209 13,724 total non-current assets 24,904 total assets liabilities
3,093 193 158 1,611 5,055 142 142 5,197 14,497 1,651 (1,861) 1,259 15,546 20,743
(158) 158 -
3,093 Trade and other payables - Income taxes payable 4,193 Due to insurance carrier 193 unearned revenue 1,769 Loans and borrowings 9,248 total current liabilities 142 Loans and borrowings 142 total non-current liabilities 9,390 total liabilities equity 14,497 Share capital 1,719 Contributed surplus (708) Accumulated other comprehensive loss 6 Retained earnings (deficit) 15,514 total equity attributable to equity holders of the company 24,904 total liabilities and equity
80
d i R e C t o R s , o F F i C e R s A n d s h A R e h o l d e R i n F o R m At i o n
Chairman and Mana ging Partner Wynnchurch Capital Ltd. Montreal, Quebec
ShARehOLDeR INFORmATION
Investor Relations
glen Tennison
Chief Financial Officer Tel: (905) 842-2615 Fax: (905) 842-3522 glen.tennison@pethealthinc.com www.pethealthinc.com Transfer Agent and Registrar
W. Brian edwards 2, 4
Chairman Miranda Technologies Inc. St. Lambert, Quebec
KPmg LLP
Pierre Raymond 2, 3, 4
Bay Adelaide Centre 333 Bay Street, Suite 4600 Toronto, Ontario, M5H 2S5 Tel: (416) 228-7000 Legal Counsel
e. mark Warren
martha Wilder 2, 3, 4
glen Tennison
Pethealth 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 requirements, 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 Committee 2 Member of the Compensation and Human Resource Committee 3 Member of the Special Purpose Risk Committee 4 Member of the Corporate Governance/Nominating Committee
82
Year ended dec. 31, 2011 and dec. 31, 2010 (presented in thousands, except for ePs and as otherwise indicated)
n o t e s t o t h e C o n s o l i d at e d F i n a n C i a l s tat e m e n t s
83