##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File Number 1-3473
 PET DRX CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware
    
    56-2517815(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)215 Centerview Drive, Suite 360Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 369-1914
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $.0001 per share
    
    Nasdaq Capital MarketWarrants, exercisable for Common Stock at an
exercise price of $6.00 per share
    
    Nasdaq Capital MarketUnits, each consisting of one share of Common Stock and one Warrant
    
    Nasdaq Capital Market
  None
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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##### 



INDEX
 TO FORM 10-K
 PagePART IItem 1. BusinessItem 1A. Risk Factors
    
    
    8Item 1B. Unresolved Staff Comments
    
    
    18Item 2. Properties
    
    
    18Item 3. Legal Proceedings
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18PART IIItem 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    19Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 8. Financial Statements and Supplementary Data
    
    
    39Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    73Item 9A. Controls and Procedures
    
    
    73Item 9B. Other Information
    
    
    74PART IIIItem 10. Directors, Executive Officers, and Corporate Governance
    
    
    74Item 11. Executive Compensation
    
    
    75Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    75Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    75Item 14. Principal Accountant Fees and Services
    
    
    75PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    75EX-10.21EX-10.22EX-10.28EX-21.1EX-31.1EX-31.2EX-32.1EX-32.2
  ii




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PART I
 
 Item 1. BUSINESS
 Company Overview
      Operating Segment
  Company History




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Business Strategy
  o
    
    recruit and retain top veterinary professionals;o
    
    provide high quality veterinary care to our customers;o
    
    pursue acquisitions of additional veterinary hospitals, with a focus
on continuing to develop hub and spoke networks that will improve
customer service;o
    
    increase veterinary hospital visits through advertising, market
positioning, consumer education, wellness programs and branding;o
    
    increase veterinary hospital margins through same-store revenue growth
and cost savings realized through consolidated purchasing arrangements
for high volume items such as food and medical supplies and generally
lower costs through economies of scale;o
    
    increase veterinary hospital productivity through professional
development and training, integration of performance data collection
systems, application of productivity standards to previously
under-managed operations and removal of administrative burdens from
veterinary professionals; ando
    
    capture valuation arbitrage differentials between individual practice
value and larger consolidated enterprise value.
 2




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##### Table of Contents



Our Veterinary Hospitals
  Medical Advisory Board
  Customers
  Industry and Competition
 The Industry
     o
    
    an increased emphasis on pet health and wellness;o
    
    continued technological and medical developments which are migrating
from human healthcare to veterinary medicine, driving new and
previously unconsidered diagnostic tests, procedures and treatments;
ando
    
    favorable demographic trends supporting a growing pet population.
 ®
 3




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o
    
    the purchasing, marketing and administrative cost advantages that can
be realized by large, multiple location, multi-doctor veterinary
providers;o
    
    the cost of financing equipment purchases and upgrading technology
necessary for a successful practice and the associated ability of a
large provider to obtain the necessary financing on more competitive
terms;o
    
    the desire of veterinarians to minimize the percentage of their time
spent dealing with administrative functions and to focus instead on
practicing veterinary medicine;o
    
    the desire of some owners of animal hospitals to obtain liquidity by
selling all or a portion of their investment in the animal hospital
(which we believe will increase as more owners of animal hospitals
approach retirement); ando
    
    the appeal to many veterinarians of the benefits and flexible work
schedule that is not typically available to a sole practitioner or
single-site provider.
  o
    
    Extensive veterinarian training requirements represent significant
competitive barriers to entry. Although the number of pets and pet
services is growing rapidly, the number of veterinarians and available
hospitals is limited, with the potential for increasing the number of
veterinarians constrained by the extensive training requirements for
veterinarians.o
    
    Highly fragmented industry service sector. Although the pet care
market is large and growing, no single entity accounts for more than
5% of the hospital industry. The market consists mainly of independent
private practices consisting of sole practitioners or small groups of
veterinarians. Most practices do not offer a broad range of products
and services. Many veterinarians spend a significant portion of their
time handling the administrative burden of running a small business,
versus seeing customers. The Company believes that these small animal
hospitals tend to be profitable in spite of the inefficiencies
associated with a small operating scale and limited marketing clout
and that these factors make veterinary hospitals an attractive
consolidation opportunity.o
    
    Attractive industry payor and pricing characteristics. The animal
health care services industry does not experience the problems of
extended payment collection cycles or pricing pressures from
third-party payors faced by human health care providers. Fees for
animal hospital services are due, and typically paid for, at the time
of the service via cash or credit card. Pet care services are
predominantly provided on a cash-pay basis. Thus, (unlike human
healthcare) there are (i) few accounts receivable to finance, (ii) no
government payors, and (iii) no managed care contracting. Also,
because of expanding options for care services coupled with the
growing awareness of pet health and wellness and pet owner sentiments
to their pets, veterinarians typically enjoy the ability to pass
through pricing increases to their customers.o
    
    Opportunity to increase hospital productivity through an integrated
management information system. By deploying integrated management
information systems that monitor each veterinarian and hospital on
products and services delivered, productivity and prices, veterinary
hospitals are able to identify opportunities and areas for growth and
to monitor veterinarians and target individuals who may benefit from
additional training in specific treatment disciplines.
 4




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o
    
    Limited medical malpractice liabilities. Unlike human healthcare,
veterinarians have limited corresponding medical malpractice
liabilities.o
    
    Veterinary cares recession resistant revenue characteristics.
Although the practice of veterinary medicine is subject to seasonal
fluctuations based on weather and holiday seasons, the Company
believes that veterinary care revenues have historically been
recession resistant and veterinary hospitals have one of the lowest
failure rates of any business.
 Competition
  Companion Animals
   Acquisition Program
  Government Regulation
  Employees
  5




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Seasonality
  Executive Officers of Pet DRx
 
 Name
    
    Age
    
    PositionGene E. Burleson
    
    
    68
    
    
    Chairman of the Board and Chief Executive OfficerHarry L. Zimmerman
    
    
    53
    
    
    Executive Vice President and Chief Financial OfficerGeorge A. Villasana
    
    
    41
    
    
    Executive Vice President, General Counsel and Secretary
 GENE E. BURLESON
 HARRY L. ZIMMERMAN
 6




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GEORGE A. VILLASANA
 Availability of Our Reports Filed with the Securities and Exchange Commission
   7




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Item 1A. RISK FACTORS
  Risks Related to the Companys Business
 The Company has a limited operating history, has a history of losses and may incur losses in the
foreseeable future.
  o
    
    changes in the Companys pricing policies or those of its competitors;o
    
    the hiring and retention of key personnel;o
    
    fluctuation in costs related to acquisitions of businesses;o
    
    wage and cost pressures;o
    
    availability of facilities that are suitable for acquisition;o
    
    viability of the hub and spoke model;o
    
    hiring and retention of veterinarians;o
    
    increased competition and pricing pressure;o
    
    seasonal and general economic factors, including a recession or economic slowdown; ando
    
    level of personal discretionary spending.
 8




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The Company has substantial indebtedness which requires a significant amount of cash to service.
The Company may not be able to generate or raise sufficient cash to meet its debt service
obligations, and these obligations will reduce the amount of cash available to operate and expand
its business.
 Risk
Factors The Company may not be able to pay its obligations with respect to its 12% Senior Notes
upon maturity, prepayment or redemption
  The Company may not be able to pay its obligations with respect to its 12% Senior Notes upon
maturity, prepayment or redemption.
  The Companys debt instruments may adversely affect its ability to run its business.
  o
    
    limit its ability to borrow additional funds or to obtain other
financing in the future for working capital, capital expenditures,
acquisitions, investments and general corporate purposes;o
    
    limit its ability to dispose of its assets, create liens on its assets or to extend credit;o
    
    make the Company more vulnerable to economic downturns and reduce its
flexibility in responding to changing business and economic
conditions;
 9




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o
    
    limit its flexibility in planning for, or reacting to, changes in its business or industry;o
    
    place it at a competitive disadvantage to its competitors with less debt; ando
    
    restrict its ability to pay dividends, repurchase or redeem its
capital stock or debt, or merge or consolidate with another entity.
  The issuance of the 12% Senior Notes and related warrants will result in a significant charge to
earnings and impact net earnings (loss) going forward.
  Galen and Camden, participants in the Companys offering of its 12% Senior Notes, may have the
ability to significantly influence the business and affairs of the Company.
  The Company may be unable to effectively execute its growth strategy which could cause its margins
and profitability to decline. Even if the Company is able to effectively execute its growth
strategy, the growth of the business may put a strain on the business, and the Company may not
achieve desired economies of scale.
   10




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The Companys failure to satisfy covenants in its debt instruments will cause a default under those
instruments.
  Incurring substantial amounts of debt could adversely affect the Companys financial condition.
 Leverage.
 Risk of Rising Interest Rates.
 Limitations on Debt.
 The Companys business strategy includes growth through acquisitions, which involve special risks
that could increase expenses, and divert the time and attention of management. Difficulties
integrating new acquisitions may impose substantial costs and disrupt the Companys business, which
could adversely affect the Companys financial condition, results of operations, cash flows and
prospects.
 
 o
    
    diversion of managements attention from the Companys existing business;o
    
    integration of acquired veterinary hospitals and employees into the
Companys existing business, including coordination of geographically
dispersed operations, which can take longer and be more complex than
initially expected;o
    
    dependence on retention, hiring and training of key personnel, including specialists;
 11




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o
    
    loss or termination of employees, including costs associated with the
termination of those employees;o
    
    dilution of then-current stockholders percentage ownership;o
    
    dilution of earnings if synergies with the acquired veterinary hospitals are not achieved;o
    
    inability to generate sufficient revenue and profitability to offset acquisition or investment costs;o
    
    assumption of liabilities of the acquired businesses, including costly
litigation related to alleged liabilities of the acquired businesses;
ando
    
    risk of impairment charges related to potential write-down of acquired assets in future acquisitions.
   The termination or failure to renew a lease or sublease for a veterinary hospital facility would
require the Company to relocate its hospital to a different facility and make substantial capital
expenditures, which could disrupt the Companys business and adversely impact the Companys results
of operations, cash flows and financial condition.
  We have recently been served with a lawsuit stemming from the acquisition of a veterinary hospital,
which could have a material adverse effect on our business, financial condition, results of
operations, cash flows and prospects.
  12




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Loss of key personnel could adversely affect our business.
  Due to the fixed cost nature of the Companys business, fluctuations in the Companys revenue could
adversely affect its operating income.
  Demand for certain products and services may decline, which could have a material adverse effect on
the Companys financial condition, results of operations, cash flows and prospects.
  An economic downturn could materially adversely affect the Companys business and recessionary
economic conditions may reduce demand for our services.
   Goodwill and other intangible assets comprise a significant portion of our total assets. We must
test our intangible assets for impairment at least annually, which may result in a material,
non-cash write down of goodwill and could have a material adverse impact on our results of
operations and stockholders equity.
 13




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.
  Shortages of skilled veterinarians may cause the Company to experience hiring difficulties which
could result in a disruption of its business.
  Currently existing or newly enacted laws and regulations could restrict the Companys business or
result in significant costs and expenses. Any failure to comply with these laws and regulations
could have a material adverse effect on the Companys financial condition, results of operations,
cash flows and prospects.
   The possible wide spread implementation of pet insurance could adversely affect the Companys
business, operating results and prospects.
  14




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A decrease in the frequency of animal vaccinations could adversely affect the Companys business,
operating results and prospects.
  The Company faces increasing competition, including from better-established companies that have
significantly greater resources, which places pressure on its pricing and which could prevent the
Company from increasing revenue or maintaining profitability.
  o
    
    greater name recognition and larger marketing budgets and resources;o
    
    established marketing relationships and access to larger customer bases; ando
    
    substantially greater financial, technical and other resources.
  The Company is subject to local market risks as a result of the geographic concentration of its
operations.
  Risks Related to the Companys Common Stock
 We may not be able to maintain compliance with NASDAQs continued listing requirements.
  15




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The Companys stock may be a penny stock. Trading of the Companys stock may be restricted by the
SECs penny stock regulations and FINRAs sales practice requirements, which may limit a
stockholders ability to buy and sell our stock.
   The market prices of the Companys securities are likely to be highly volatile and subject to wide
fluctuations.
  16




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o
    
    announcements of new products or services by its competitors;o
    
    demand for its services;o
    
    changes in the pricing policies of its competitors; ando
    
    changes in government regulations.
 The amount of stock held by executive officers, directors and other affiliates may limit your
ability to influence the outcome of director elections and other matters requiring stockholder
approval.
   If the Companys existing stockholders exercise their registration rights, it may have an adverse
effect on the market price of the Companys Common Stock.
  The exercise of the Companys outstanding warrants and/or conversion of the Companys outstanding
convertible securities will result in a dilution of the Companys current stockholders voting
power and an increase in the number of shares eligible for future resale in the public market which
may negatively impact the market price of the Companys shares.
   17




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##### Table of Contents



Item 1B. Unresolved Staff Comments
  
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
   
 Item 4. Submission of Matters to a Vote of Security Holders.
  1.
    
    The election of eight directors, each for a term expiring at the next
Annual Meeting or until their successors are duly elected and
qualified.2.
    
    The ratification of the selection of SingerLewak  LLP as our independent registered public accounting firm
for 2008.
  18




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##### Table of Contents



Name
    
    Votes For
    
    WithheldRi Gene Burleson
    
    
    16,885,908
    
    
    
    2,987,906Gary A. Brukardt
    
    
    16,888,238
    
    
    
    2,985,576Steven T. Johnson
    
    
    16,888,238
    
    
    
    2,985,576Richard Johnston
    
    
    19,231,191
    
    
    
    642,623Joel Kanter
    
    
    15,606,656
    
    
    
    4,267,158Richard O. Martin
    
    
    17,428,515
    
    
    
    2,445,299J. David Reed
    
    
    19,214,615
    
    
    
    659,199Zubeen Shroff
    
    
    17,148,753
    
    
    
    2,725,061
  For
    
    Against
    
    Abstain19,331,802
    
    542,012
    
    0
 
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
   Common Stock
    
    Warrants
    
    Units2008
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    LowFourth Quarter
    
    $
    3.01
    
    
    $
    0.08
    
    
    $
    0.25
    
    
    $
    0.01
    
    
    $
    4.00
    
    
    $
    0.16Third Quarter
    
    $
    4.23
    
    
    $
    1.00
    
    
    $
    0.54
    
    
    $
    0.16
    
    
    $
    4.40
    
    
    $
    2.00Second Quarter
    
    $
    4.78
    
    
    $
    3.30
    
    
    $
    0.65
    
    
    $
    0.36
    
    
    $
    4.85
    
    
    $
    4.30First Quarter
    
    $
    7.85
    
    
    $
    3.74
    
    
    $
    1.12
    
    
    $
    0.40
    
    
    $
    8.20
    
    
    $
    4.05
 Common Stock
    
    Warrants
    
    Units2007
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    LowFourth Quarter
    
    $
    8.04
    
    
    $
    7.55
    
    
    $
    1.23
    
    
    $
    0.55
    
    
    $
    9.24
    
    
    $
    8.20Third Quarter
    
    $
    7.81
    
    
    $
    7.65
    
    
    $
    1.04
    
    
    $
    0.87
    
    
    $
    8.80
    
    
    $
    8.50Second Quarter
    
    $
    7.82
    
    
    $
    7.61
    
    
    $
    1.17
    
    
    $
    0.93
    
    
    $
    8.80
    
    
    $
    8.45First Quarter
    
    $
    7.69
    
    
    $
    7.46
    
    
    $
    1.05
    
    
    $
    0.79
    
    
    $
    8.65
    
    
    $
    8.30
 19




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Stockholders
  Dividends
  Item 5, Part II
 EQUITY COMPENSATION PLANS
  (A)
    
    (B)
    
    (C)Number of Securities to
    
    Weighted-Average
    
    Number of Securities Remainingbe Issued Upon
    
    Exercise Price of
    
    Available for Future IssuanceExercise
    
    Outstanding
    
    Underof Outstanding
    
    Options,
    
    Equity Compensation PlansOptions,
    
    Warrants and
    
    (Excluding Securities Reflected inPlan Category
    
    Warrants and Rights
    
    Rights
    
    Column A)Equity Compensation Plans
Approved by Security
Holders
    
    
    3,052,808
    (1)
    
    $
    4.90
    (1)
    
    
    1,752,367Equity Compensation Plans
Not Approved by Security
Holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,052,808
    
    
    $
    4.90
    
    
    
    1,752,367
 
 (1)
    
    Includes options to purchase an aggregate of 1,377,774 shares, at a
weighted-average exercise price of $5.31, granted under the XLNT Veterinary
Care, Inc. 2004 Stock Option Plan (the Plan) which was assumed by the Company
in connection with the Merger. 20




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
 Merger with Pet DRx Veterinary Group, Inc.
   General
    21




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Business Strategy
  o
    
    recruit and retain top veterinary professionals;o
    
    provide high quality veterinary care to our customers;o
    
    pursue acquisitions of additional veterinary hospitals, with a focus
on continuing to develop hub and spoke networks that will improve
customer service;o
    
    increase veterinary hospital visits through advertising, market
positioning, consumer education, wellness programs and branding;o
    
    increase veterinary hospital margins through same-store revenue growth
and cost savings realized through consolidated purchasing arrangements
for high volume items such as food and medical supplies and generally
lower costs through economies of scale;o
    
    increase veterinary hospital productivity through professional
development and training, integration of performance data collection
systems, application of productivity standards to previously
under-managed operations and removal of administrative burdens from
veterinary professionals; ando
    
    capture valuation arbitrage differentials between individual practice
value and larger consolidated enterprise value.
 Seasonality
  Overview of Our Financial Results
 (Results discussed relate to continuing operations unless stated otherwise)
   22




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23




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Results of Our Operations
 Fiscal year 2008 compared to fiscal year 2007
 (in millions, except percentages)
 Revenue
 Continuing Operations:
 For The Years EndedDecember 31,%2008
    
    2007
    
    ChangeRevenue
    
    $
    68.3
    
    
    $
    60.3
    
    
    
    13.3
    %
  Comparative Analysis%2008
    
    
    2007
    
    
    ChangeSame-store revenue (1)
    
    $
    37.5
    
    
    $
    37.5
    
    
    
    (0.2
    )%Net acquired revenue (2)
    
    
    30.8
    
    
    
    22.8
    
    
    
    35.5
    %Total
    
    $
    68.3
    
    
    $
    60.3
    
    
    
    13.3
    %
 
 (1)
    
    Same-store revenue was calculated using animal hospital operating results for the animal
hospitals that we owned as of January 1, 2007.(2)
    
    Net acquired revenue represents the revenue from those five animal hospitals acquired after
January 1, 2007 (not including South Bay). Fluctuations in net acquired revenue occurred due
to the volume, size and timing of acquisitions.  24




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Discontinued Operations:
 For The Years EndedDecember 31,%2008
    
    2007
    
    ChangeRevenue
    
    $
    1.3
    
    
    $
    2.2
    
    
    
    (42.0)
    %
  Direct Costs
 Continuing Operations:
 For The Years EndedDecember 31,%2008
    
    2007
    
    ChangeTotal direct costs
    
    $
    64.5
    
    
    $
    56.5
    
    
    
    14.3
    %Gross Margin as a
percentage of total
net revenue from
continuing
operations
    
    
    5.5
    %
    
    
    6.4
    %
   25




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Discontinued Operations:
 For The Years EndedDecember 31,%2008
    
    2007
    
    ChangeTotal direct costs
    
    $
    1.9
    
    
    $
    2.6
    
    
    
    (29.2)
    %Gross Margin as a
percentage of net
revenue from
discontinued
operations
    
    
    (43.4
    )%
    
    
    (17.7)
    %
  Selling, General and Administrative
 For The Years EndedDecember 31,%2008
    
    2007
    
    ChangeSelling, general and administrative
    
    $
    19.0
    
    
    $
    12.7
    
    
    
    50.1
    %As a percentage of total net
revenue from continuing operations
    
    
    27.9
    %
    
    
    21.0
    %
   26




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Interest income
 For The Years EndedDecember 31,%2008
    
    2007
    
    ChangeInterest income
    
    $
    0.3
    
    
    $
    0.1
    
    
    
    192
    %As a
percentage of total net revenues from continuing operations
    
    
    0.5
    %
    
    
    0.2
    %
  Interest Expense
 For The Years EndedDecember 31,%2008
    
    2007
    
    ChangeInterest expense
    
    $
    4.6
    
    
    $
    3.8
    
    
    
    18.4
    %As a percentage of total net revenues from
continuing operations
    
    
    6.7
    %
    
    
    6.4
    %
  Fiscal year 2007 compared to fiscal year 2006
 (in millions, except for percentages)
 Revenue
 Continuing Operations:
 For The Years EndedDecember 31,%2007
    
    2006
    
    ChangeRevenue
    
    $
    60.3
    
    
    $
    17.4
    
    
    
    246
    %
 27




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##### Table of Contents



Comparative Analysis%2007
    
    
    2006
    
    
    ChangeSame-store revenue (1)
    
    $
    12.1
    
    
    $
    11.3
    
    
    
    7
    %Net acquired revenue (2)
    
    
    48.2
    
    
    
    6.1
    
    
    
    690
    %Total
    
    $
    60.3
    
    
    $
    17.4
    
    
    
    246
    %
 
 (1)
    
    Same-store revenue were calculated using animal hospital operating results for the six animal
hospitals that we owned for the full 12 months from the beginning of each applicable period.(2)
    
    Net acquired revenue represents the revenue from those nineteen animal hospitals acquired on
or after January 1, 2006. Fluctuations in net acquired revenue occurred due to the volume,
size and timing of acquisitions.  Discontinued Operations:
 For The Years EndedDecember 31,%2007
    
    2006
    
    ChangeRevenue
    
    $
    2.2
    
    
    $
    
    
    
    
    
    %
  Direct Costs
 Continuing Operations:
 28




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For The Years EndedDecember 31,%2007
    
    2006
    
    ChangeTotal direct costs
    
    $
    56.5
    
    
    $
    15.5
    
    
    
    264
    %Gross Margin as a
percentage of total
net revenue from
continuing operations
    
    
    6.4
    %
    
    
    11.1
    %
  Discontinued Operations:
 For The Years EndedDecember 31,%2007
    
    2006
    
    ChangeTotal direct costs
    
    $
    2.6
    
    
    $
    
    
    
    
    
    %Gross Margin as a
percentage of net revenue
from discontinued
operations
    
    
    (17.7)
    %
    
    
    
    %
  Selling, General and Administrative
 For The Years EndedDecember 31,%2007
    
    2006
    
    ChangeSelling, general and administrative
    
    $
    12.7
    
    
    $
    3.4
    
    
    
    278
    %As a percentage of total net
revenue from continuing operations
    
    
    21.0
    %
    
    
    18.9
    %
 29




---



##### Table of Contents



Interest income
 For The Years EndedDecember 31,%2007
    
    2006
    
    ChangeInterest income
    
    $
    0.1
    
    
    $
    0.5
    
    
    
    (77.6
    )%As a percentage of total net revenues from
continuing operations
    
    
    0.2
    %
    
    
    3.0
    %
  Interest Expense
 30




---



##### Table of Contents



For The Years EndedDecember 31,%2007
    
    2006
    
    ChangeInterest expense
    
    $
    3.8
    
    
    $
    1.0
    
    
    
    304
    %As a percentage of total net revenues from
continuing operations
    
    
    6.4
    %
    
    
    5.4
    %
  Liquidity and Financial Condition
 (Results discussed relate to continuing operations unless stated otherwise)
 Summary
  
    
    $10.0 million of the net proceeds were immediately used to fund the working capital
deficit of PVGI at the date of Merger;
    
    In June 2008, the Company used $16.2 million to prepay its outstanding mezzanine
debt balance with Fifth Street and related fees;
    
    In July 2008, the Company used $3.0 million for the acquisition of Valley Animal; and
    
    $2.2 million for purchases of property and equipment during the year.
  Cash Flows from Operating Activities
    31




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##### Table of Contents



Cash Flows from Investing Activities
     Cash Flows from Financing Activities
     32




---



##### Table of Contents



Cash Flows from Discontinued Operations
  Secured Financing
      Off-Balance Sheet Arrangements
 33




---



##### Table of Contents



Debt Covenants
 Huntington
Loan
   12% senior notes
 The Companys debt instruments
may adversely affect its ability to run its business
  The Company may not be able to pay its obligations with respect to its 12% Senior Notes upon
maturity, prepayment or redemption
 Quarterly Results
  2008 Quarter Ended
    
    2007 Quarter EndedDec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31Revenue
    
    $
    16,102
    
    
    $
    17,299
    
    
    $
    17,498
    
    
    $
    17,396
    
    
    $
    15,874
    
    
    $
    17,134
    
    
    $
    16,956
    
    
    $
    10,323Hospital Contribution
Margin
    
    
    (417
    )
    
    
    971
    
    
    
    1,403
    
    
    
    1,817
    
    
    
    887
    
    
    
    1,789
    
    
    
    844
    
    
    
    316Operating loss from
continuing operations
    
    
    (8,011
    )
    
    
    (2,718
    )
    
    
    (2,559
    )
    
    
    (1,974
    )
    
    
    (2,503
    )
    
    
    (1,930
    )
    
    
    (2,120
    )
    
    
    (2,291
    )Operating loss from
discontinued
operations
    
    
    (202
    )
    
    
    (156
    )
    
    
    (129
    )
    
    
    (86
    )
    
    
    (3,767
    )
    
    
    (319
    )
    
    
    (42
    )
    
    
    63Net loss
    
    
    (8,584
    )
    
    
    (3,172
    )
    
    
    (5,237
    )
    
    
    (3,028
    )
    
    
    (7,266
    )
    
    
    (3,364
    )
    
    
    (3,267
    )
    
    
    (2,534
    )Basic and diluted
loss per common share
from continuing
operations
    
    $
    (0.34
    )
    
    $
    (0.11
    )
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.67
    )
    
    $
    (0.45
    )
    
    $
    (0.50
    )
    
    $
    (0.61
    )Basic and diluted
loss per common share
from discontinued
operations
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.00
    )
    
    $
    (1.00
    )
    
    $
    (0.08
    )
    
    $
    (0.01
    )
    
    $
    0.02Net loss per share
    
    $
    (0.37
    )
    
    $
    (0.13
    )
    
    $
    (0.22
    )
    
    $
    (0.13
    )
    
    $
    (1.93
    )
    
    $
    (0.79
    )
    
    $
    (0.77
    )
    
    $
    (0.68
    )
 34




---



##### Table of Contents



Critical Accounting Policies and Estimates
  w
    
    valuation of goodwill and other intangible assets;w
    
    accounting for stock options; andw
    
accounting for income taxes.
 Valuation of Goodwill and other Intangible Assets
 Goodwill
   Other Intangible Assets
   35




---



##### Table of Contents



Impairment of Goodwill and Other Intangible Assets
   Accounting for Stock Options
   Accounting for Income Taxes
  36




---



##### Table of Contents



Recent Accounting Policies
 Adoption of New Accounting Pronouncements
  Effective
Date of FASB Statement No. 157
  Recently Issued Accounting Pronouncements
   37




---



##### Table of Contents



38




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
   Report of Independent Registered Public Accounting Firm.
    
    
    40Consolidated Balance Sheets as of December 31, 2008 and 2007.
    
    
    41Consolidated Statements of Operations for the years ended December 31, 2008, 2007, and 2006.
    
    
    43Consolidated Statements of Stockholders Equity for the years ended December 31, 2008,
2007, and 2006.
    
    
    44Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006.
    
    
    45Notes to Consolidated Financial Statements.
    
    
    48
 39




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##### Table of Contents



40




---



##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except par value and number of shares)
 December 31, 2008
    
    

December 31, 
2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,723
    
    
    $
    1,993Trade accounts receivable, net
    
    
    369
    
    
    
    167Inventory
    
    
    1,154
    
    
    
    1,196Prepaid expenses and other
    
    
    1,719
    
    
    
    894Assets held for sale
    
    
    900
    
    
    
    Due from related parties
    
    
    32
    
    
    
    238Assets of discontinued operations
    
    
    1
    
    
    
    178Total Current assets
    
    
    5,898
    
    
    
    4,666Property and Equipment, net
    
    
    7,422
    
    
    
    7,829Other assets:Goodwill
    
    
    49,373
    
    
    
    49,190Other intangible assets, net
    
    
    6,704
    
    
    
    7,145Restricted cash
    
    
    500
    
    
    
    75Other
    
    
    447
    
    
    
    937Total assets
    
    $
    70,344
    
    
    $
    69,842LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Current portion of long-term obligations, net of debt discount
    
    $
    3,718
    
    
    $
    1,533Accounts payable
    
    
    2,394
    
    
    
    6,011Accrued payroll and other expenses
    
    
    6,551
    
    
    
    5,485Accrued income taxes
    
    
    
    
    
    
    189Due to a related party
    
    
    96
    
    
    
    356Obligations under capital leases, current portion
    
    
    312
    
    
    
    508Liabilities of discontinued operations
    
    
    55
    
    
    
    574Total Current liabilities
    
    
    13,126
    
    
    
    14,656Long-term liabilities:Convertible debt, net of debt discount
    
    
    4,949
    
    
    
    11,361Term notes, less current portion
    
    
    3,687
    
    
    
    21,532Obligations under capital leases, less current portion
    
    
    361
    
    
    
    531Deferred rent
    
    
    355
    
    
    
    97Other
    
    
    83
    
    
    
    145Total long term liabilities
    
    
    9,435
    
    
    
    33,666Total liabilities
    
    
    22,561
    
    
    
    48,322Stockholders equity:Preferred stock, par value $0.0001, 10,000,000 shares authorized
Series A: 0 and 7,652,175 shares outstanding as of December 31,
2008 and 2007, respectively
    
    
    
    
    
    
    1
 41




---



##### Table of Contents



December
    
    
    December31, 
2008
    
    

31, 
2007Common stock, par value $0.0001, 90,000,000 shares authorized,
23,660,460 and 4,247,632 shares outstanding as of December 31,
2008 and 2007, respectively, net of treasury shares of
$1,361,574 and 0 shares at December 31, 2008 and 2007,
respectively
    
    
    2
    
    
    
    1Additional paid-in-capital
    
    
    87,686
    
    
    
    41,402Accumulated deficit
    
    
    (39,905
    )
    
    
    (19,884
    )Total stockholders equity
    
    
    47,783
    
    
    
    21,520Total liabilities and stockholders equity
    
    $
    70,344
    
    
    $
    69,842
 See Notes to Consolidated Financial Statements
 42




---



##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 Year ended December 31,2008
    
    
    2007
    
    
    2006Revenue
    
    $
    68,295
    
    
    $
    60,287
    
    
    $
    17,442Direct costs
    
    
    64,521
    
    
    
    56,452
    
    
    
    15,510Hospital contribution
    
    
    3,774
    
    
    
    3,835
    
    
    
    1,932Selling,
general and administrative expense before impairment charges
    
    
    13,965
    
    
    
    12,680
    
    
    
    3,352Impairment of goodwill and intangibles
    
    
    4,580
    
    
    
    
    
    
    
    Impairment of Assets Held for Sale
    
    
    491
    
    
    
    
    
    
    
    Selling, general and administrative expenses
    
    
    19,036
    
    
    
    12,680
    
    
    
    3,352Loss from operations
    
    
    (15,262
    )
    
    
    (8,845
    )
    
    
    (1,420
    )Other income (expense):Interest income
    
    
    344
    
    
    
    118
    
    
    
    527Interest expense
    
    
    (4,551
    )
    
    
    (3,843
    )
    
    
    (950
    )Gain on sale of building
    
    
    
    
    
    
    249
    
    
    
    Loss before provision (benefit) for income taxes
    
    
    (19,469
    )
    
    
    (12,321
    )
    
    
    (1,843
    )Provision (benefit) for income taxes
    
    
    (21
    )
    
    
    44
    
    
    
    25Loss from continuing operations
    
    
    (19,448
    )
    
    
    (12,365
    )
    
    
    (1,868
    )Loss from discontinued operations, net of tax
    
    
    (565
    )
    
    
    (4,066
    )
    
    
    Loss on disposition of discontinued operations, net of tax
    
    
    (8
    )
    
    
    
    
    
    
    Loss from discontinued operations, net of tax
    
    
    (573
    )
    
    
    (4,066
    )
    
    
    Net loss
    
    $
    (20,021
    )
    
    $
    (16,431
    )
    
    $
    (1,868
    )Basic and diluted loss per common shareLoss from continuing operations
    
    $
    (0.83
    )
    
    $
    (3.00
    )
    
    $
    (0.53
    )Loss from discontinued operations
    
    $
    (0.02
    )
    
    $
    (0.98
    )
    
    
    Net loss per share
    
    $
    (0.85
    )
    
    $
    (3.98
    )
    
    $
    (0.53
    )Shares used for computing basic and diluted loss per share
    
    
    23,433
    
    
    
    4,124
    
    
    
    3,501
 See Notes to Consolidated Financial Statements
 43




---



##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 STATEMENT OF STOCKHOLDERS EQUITY
 (In thousands except number of shares)
 PreferredPreferred Stock A
    
    Stock B
    
    Common StockAdditionalPaid-in-
    
    AccumulatedShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    capital
    
    Deficit
    
    TotalBalance as of December 31, 2005
    
    
    1,662,404
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    3,308,361
    
    
    
    
    
    
    
    7,278
    
    
    
    (1,585
    )
    
    
    5,693Sale of Preferred A for cash, net
    
    
    6,060,703
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,443
    
    
    
    
    
    
    
    16,443Repurchase of preferred stock
    
    
    (70,932
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (221
    )
    
    
    
    
    
    
    (221
    )Repurchase of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (514
    )
    
    
    
    
    
    
    (514
    )Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,093
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    72Cashless exercise of non-employee options for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,657
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of non-employee options for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,008
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    92Warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,510
    
    
    
    
    
    
    
    1,510Stock option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,745
    
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    51Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    36Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,868
    )
    
    
    (1,868
    )Balance as of December 31, 2006
    
    
    7,652,175
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    3,560,864
    
    
    
    
    
    
    
    24,747
    
    
    
    (3,453
    )
    
    
    21,295Sale of Preferred B for cash, net
    
    
    
    
    
    
    
    
    
    
    25,391
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,644
    
    
    
    
    
    
    
    13,644Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,819
    )
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    1,270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued upon debt conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    691,587
    
    
    $
    1
    
    
    
    1,495
    
    
    
    
    
    
    
    1,496Warrants issued as debt discount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,371
    
    
    
    
    
    
    
    1,371Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    170Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,431
    )
    
    
    (16,431
    )Balance as of December 31, 2007
    
    
    7,652,175
    
    
    $
    1
    
    
    
    26,661
    
    
    $
    
    
    
    
    4,247,632
    
    
    $
    1
    
    
    $
    41,402
    
    
    $
    (19,884
    )
    
    $
    21,520Net proceeds from IPO received as a result of merger
with XLNT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,355
    
    
    
    
    
    
    
    36,355Conversion of Preferred A and B stock to common stock
    
    
    (7,652,175
    )
    
    $
    (1
    )
    
    
    (26,661
    )
    
    
    
    
    
    
    10,318,275
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    Pet DRx shares assumed in Merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,750,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,806
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stock issued upon debt conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,327,024
    
    
    
    
    
    
    
    8,305
    
    
    
    
    
    
    
    8,305Inducement shares issued in Merger with XLNT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,297
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,624
    
    
    
    
    
    
    
    1,624Shares retained in Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,361,574
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,021
    )
    
    
    (20,021
    )Balance as of December 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,660,460
    
    
    $
    2
    
    
    $
    87,686
    
    
    $
    (39,905
    )
    
    $
    47,783
 See Notes to Consolidated Financial Statements
 44




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##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Year ended December 31,
 2008
    
    
    2007
    
    
    2006Cash flows (used in) provided by operating activities:Net loss
    
    $
    (20,021
    )
    
    $
    (16,431
    )
    
    $
    (1,868
    )Loss from discontinued operations, net of tax (includes impairment
of goodwill and
intangibles of $3,670 in 2007)
    
    
    573
    
    
    
    4,066
    
    
    
    Loss from continuing operations
    
    
    (19,448
    )
    
    
    (12,365
    )
    
    
    (1,868
    )Adjustments to reconcile net loss from continuing operations to net
cash used in operating activities, net effect of acquisitions:Depreciation and amortization
    
    
    2,456
    
    
    
    1,733
    
    
    
    469Amortization of debt discount
    
    
    1,903
    
    
    
    627
    
    
    
    88Impairment of fixed assets
    
    
    219
    
    
    
    
    
    
    
    Impairment of Assets Held for Sale
    
    
    491
    
    
    
    
    
    
    
    Impairment of goodwill and intangibles
    
    
    4,580
    
    
    
    
    
    
    
    Amortization of debt amendment costs
    
    
    182
    
    
    
    
    
    
    
    Share-based compensation
    
    
    1,624
    
    
    
    415
    
    
    
    36Gain on sale of building
    
    
    
    
    
    
    (249
    )
    
    
    Deferred rent
    
    
    212
    
    
    
    (113
    )
    
    
    (2
    )Other
    
    
    85
    
    
    
    (601
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (203
    )
    
    
    268
    
    
    
    65Inventory
    
    
    212
    
    
    
    397
    
    
    
    (133
    )Prepaid expenses and other
    
    
    (369
    )
    
    
    (786
    )
    
    
    (302
    )Accounts payable
    
    
    (4,734
    )
    
    
    5,176
    
    
    
    199Accrued payroll and other expenses
    
    
    1,231
    
    
    
    3,147
    
    
    
    635Income taxes
    
    
    (168
    )
    
    
    (328
    )
    
    
    (114
    )Other
    
    
    (18
    )
    
    
    123
    
    
    
    Net cash used in continuing operations
    
    
    (11,745
    )
    
    
    (2,556
    )
    
    
    (927
    )Net cash provided by discontinued operations
    
    
    26
    
    
    
    55
    
    
    
    Net cash used in operating activities
    
    
    (11,719
    )
    
    
    (2,501
    )
    
    
    (927
    )Cash flows used in investing activities:Property and equipment additions
    
    
    (2,128
    )
    
    
    (5,004
    )
    
    
    (1,656
    )Business acquisitions, net of cash received (including $2,450 for
the acquisition of South Bay in 2007)
    
    
    (3,003
    )
    
    
    (16,832
    )
    
    
    (13,255
    )Proceeds from sale of building
    
    
    
    
    
    
    1,244
    
    
    
    Payments
made related to prior year acquisitions
    
    
    (356
    )
    
    
    (3,940
    )
    
    
    Net cash used in continuing operations
    
    
    (5,487
    )
    
    
    (24,532
    )
    
    
    (14,911
    )
 45




---



##### Table of Contents



Year ended December 31,
 2008
    
    
    2007
    
    
    2006Net cash used in discontinued operations
    
    
    (26
    )
    
    
    (32
    )
    
    
    Net cash used in investing activities
    
    
    (5,513
    )
    
    
    (24,564
    )
    
    
    (14,911
    )Cash flow (used in) provided by financing activities:Proceeds from issuance of common stock, net
    
    
    
    
    
    
    
    
    
    
    123Proceeds from Series A preferred stock, net of expenses
paid in cash
    
    
    
    
    
    
    
    
    
    
    17,302Proceeds (payments) from term loan with
preferred stock warrants
    
    
    
    
    
    
    14,935
    
    
    
    (735
    )Proceeds from Series B preferred stock, net of expenses
paid in cash
    
    
    
    
    
    
    13,641
    
    
    
    Repurchases of preferred stock and common stock warrants
    
    
    
    
    
    
    (25
    )
    
    
    Net proceeds from IPO received as a result of merger
with XLNT
    
    
    36,355
    
    
    
    
    
    
    
    Deferral of debt waiver fees
    
    
    (182
    )
    
    
    
    
    
    
    Deferred financing costs
    
    
    (132
    )
    
    
    
    
    
    
    Payments on notes payable
    
    
    (18,151
    )
    
    
    (3,063
    )
    
    
    (701
    )Payments on capital lease obligations
    
    
    (503
    )
    
    
    (374
    )
    
    
    (64
    )Payments make as collateral on accounts
    
    
    (425
    )
    
    
    
    
    
    
    Net cash provided by continuing operations
    
    
    16,962
    
    
    
    25,114
    
    
    
    15,925Net cash used in discontinued operations
    
    
    (12
    )
    
    
    (11
    )
    
    
    Net cash provided by financing activities
    
    
    16,950
    
    
    
    25,103
    
    
    
    15,925Increase (decrease) in cash and cash equivalents
    
    
    (282
    )
    
    
    (1,963
    )
    
    
    87Consolidated cash and cash equivalents at beginning of period
    
    
    2,005
    
    
    
    3,968
    
    
    
    3,881Consolidated cash and cash equivalents at end of period
    
    $
    1,723
    
    
    $
    2,005
    
    
    $
    3,968Cash and cash equivalents of continuing operations
    
    $
    1,723
    
    
    $
    1,993
    
    
    $
    3,968Cash and cash equivalents of discontinued operations
    
    $
    
    
    
    $
    12
    
    
    $
    Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    18
    
    
    $
    97
    
    
    $
    76Interest
    
    $
    3,533
    
    
    $
    2,510
    
    
    $
    872Schedule of non-cash investing and financing activities:Detail of acquisitions:Fair value of assets acquired
    
    $
    5,728
    
    
    $
    30,659
    
    
    $
    25,444Cash paid for acquisitions and related direct costs
    
    
    (3,003
    )
    
    
    (14,382
    )
    
    
    (13,255
    )Cash paid for acquisition of discontinued operations
    
    
    
    
    
    
    (2,450
    )
    
    
    Obligations to sellers of acquired hospitals, notes
payable and assumed liabilities
    
    $
    2,725
    
    
    $
    13,827
    
    
    $
    12,189Building acquired:Purchase price
    
    $
    
    
    
    $
    930
    
    
    $
    
 46




---



##### Table of Contents



Year ended December 31,
 2008
    
    
    2007
    
    
    2006Cash paid
    
    
    
    
    
    
    (430
    )
    
    
    Mortgage held by seller
    
    $
    
    
    
    $
    500
    
    
    $
    Deferred costs and accrued liabilities associated with merger of
XLNT recorded to additional paid-in-capital on January 4, 2008
(Date of Merger)
    
    $
    700
    
    
    $
    
    
    
    $
    Retirement of debt to offset related party receivable
    
    $
    16
    
    
    $
    
    
    
    $
    Conversion of Series A and Series B preferred stock to common stock
    
    $
    1
    
    
    $
    
    
    
    $
    Common stock warrants issued as payment of offering costs
    
    $
    
    
    
    $
    
    
    
    $
    1,510Common stock issued upon conversion of debt
    
    $
    8,305
    
    
    $
    1,495
    
    
    $
    Offering costs to be paid in common stock warrants
    
    $
    
    
    
    $
    
    
    
    $
    859
 See Notes to Consolidated Financial Statements
 47




---



##### Table of Contents



PET DRx CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2008
 1. The Company
    2. Summary of Significant Accounting Policies
 a. Basis of Presentation
   b. Cash and Cash Equivalents
  c. Revenue Recognition
  o
    
    persuasive evidence of a sales arrangement exists;o
    
    delivery of goods has occurred or services have been rendered;o
    
    the sales price or fee is fixed or determinable; and,
 48




---



##### Table of Contents



o
    
    collectability is reasonably assured.
   d. Inventory
  e. Property and Equipment
   Buildings
    
    30 yearsLeasehold improvements
    
    Lesser of lease term or asset lifeFurniture and equipment
    
    5 to 7 yearsComputer equipment
    
    3 to 7 yearsEquipment held under capital leases
    
    Lesser of lease term or 5 to 10 years
 f. Income Taxes
   g. Deferred Financing Costs
  h. Convertible Debt
  49




---



##### Table of Contents



i. Derivative Financial Instruments
   j. Business Segments
  k. Share-Based Compensation
   50




---



##### Table of Contents



l. Reclassifications and Quarterly Restatement
  3. Use of estimates
   Accounts Receivable Allowances
 Impairment of Long-Lived Assets and Intangibles Subject to Amortization
 51




---



##### Table of Contents



Goodwill and Indefinite-Lived Intangible Assets
   Accrued
Expenses
 4. New Accounting Pronouncements
 Adoption of New Accounting Pronouncements
  Effective
Date of FASB Statement No. 157
  52




---



##### Table of Contents



Recently Issued Accounting Pronouncements
     53




---



##### Table of Contents



5. Merger with Pet DRx Veterinary Group, Inc.
    
 
 
 
 54




---



##### Table of Contents




 
 
 
 
 6. Acquisitions
     ConsiderationAcquisition Date
    

(in thousands)Valley Animal Medical Center
    
    July 1, 2008
    
    $
    4,9502007 acquisitions
    
    Various, 2007
    
    
    28,249
  2008
    
    
    2007Consideration:Cash, net of cash acquired
    
    $
    2,900
    
    
    $
    16,532Obligations to sellers
    
    
    
    
    
    
    580Notes payable
    
    
    
    
    
    
    4,355
 55




---



##### Table of Contents



2008
    
    
    2007Convertible notes (1)
    
    
    1,947
    
    
    
    6,440Direct costs
    
    
    103
    
    
    
    342Total
    
    $
    4,950
    
    
    $
    28,249Purchase Price Allocation (2):Tangible assets:Accounts receivable
    
    $
    
    
    
    $
    308Inventories
    
    
    116
    
    
    
    674Prepaid and other current assets
    
    
    156
    
    
    
    448Property and equipment
    
    
    285
    
    
    
    1,523Other long-term assets
    
    
    107
    
    
    
    129Liabilities:Accounts payable
    
    
    (78
    )
    
    
    (527
    )Accrued expenses
    
    
    (397
    )
    
    
    (896
    )Accrued and deferred taxes
    
    
    
    
    
    
    (162
    )Current portion of capitalized leases
    
    
    (30
    )
    
    
    (253
    )Current portion of long-term debt
    
    
    
    
    
    
    (7
    )Long-term debt
    
    
    
    
    
    
    (29
    )Long-term capitalized leases
    
    
    (71
    )
    
    
    (536
    )Deferred rent
    
    
    (46
    )
    
    
    Identifiable intangible assets:Client lists (3)
    
    
    890
    
    
    
    3,186Covenants not-to-compete (3)
    
    
    390
    
    
    
    110Goodwill
    
    
    3,628
    
    
    
    24,281Total
    
    $
    4,950
    
    
    $
    28,249
 
 (1)
    
    The convertible notes related to the Valley Animal acquisition can be
converted to 327,510 shares of Pet DRx stock. The convertible notes
related to the acquisitions in 2007 were convertible into 856,071
shares of Pet DRx common stock. On January 4, 2008 (Date of Merger),
a portion of the 2007 convertible notes was converted to 619,454 of
Pet DRx common stock.(2)
    
    The Company is in the process of finalizing its valuation on Valley
Animal. This valuation is expected to be completed in the second
quarter of 2009. The completion of this valuation may result in
adjustments to the goodwill and other intangibles, as disclosed.(3)
    
    The covenants not-to-compete for Valley Animal, as well as the
acquisitions made in 2007, have 3.0 year weighted-average useful
lives. The client lists for Valley Animal and the acquisitions made
in 2007 have 11.5 and 9.5 year weighted-average useful lives,
respectively. Pro Forma Information
  56




---



##### Table of Contents



Revenues
    
    $
    70,534Loss from continuing operations
    
    
    (14,912
    )Other income
    
    
    345Interest expense
    
    
    (4,620
    )Loss before income taxes
    
    
    (19,186
    )Benefit from income taxes
    
    
    22Net loss from continuing operations
    
    
    (19,165
    )Loss from discontinued operations
    
    
    (573
    )Net loss
    
    
    (19,738
    )Basic and Diluted loss per share from continuing operations
    
    $
    (0.82
    )Basic and Diluted loss per share from discontinued operations
    
    $
    (0.02
    )Net loss per share
    
    $
    (0.84
    )Shares used for computing basic and diluted loss per share
    
    
    23,433
 7. Goodwill and Other Intangible Assets
  Balance as of December 31, 2007
    
    $
    49,190Goodwill acquired from hospital acquisition
    
    
    3,628Payments made related to prior year acquisitions
    
    
    550Impairment of goodwill
    
    
    (3,995
    )Balance as of December 31, 2008
    
    $
    49,373
  As of December 31, 2008
    
    
    As of December 31, 2007Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCovenants not-to-compete
    
    $
    713
    
    
    $
    (300
    )
    
    $
    413
    
    
    $
    335
    
    
    $
    (144
    )
    
    $
    191Non-contractual customer
relationships
    
    
    8,886
    
    
    
    (2,009
    )
    
    
    6,877
    
    
    
    8,813
    
    
    
    (1,082
    )
    
    
    7,731Impairment of assets
    
    
    (797
    )
    
    
    211
    
    
    
    (586
    )
    
    
    (850
    )
    
    
    73
    
    
    
    (777
    )Total
    
    $
    8,802
    
    
    $
    (2,098
    )
    
    $
    6,704
    
    
    $
    8,298
    
    
    $
    (1,153
    )
    
    $
    7,145
    57




---



##### Table of Contents



2009
    
    $
    1,0422010
    
    
    9852011
    
    
    8922012
    
    
    7892013
    
    
    716Thereafter
    
    
    2,280Total
    
    $
    6,704
 8. Property and Equipment
  2008
    
    
    2007Buildings
    
    $
    2,787
    
    
    $
    4,177Leasehold improvements
    
    
    935
    
    
    
    518Equipment
    
    
    3,318
    
    
    
    2,435Furniture and equipment
    
    
    606
    
    
    
    447Computer equipment & software
    
    
    2,307
    
    
    
    1,569Construction-in-progress
    
    
    62
    
    
    
    Total property and equipment
    
    
    10,015
    
    
    
    9,146Less-accumulated depreciation and amortization
    
    
    (2,593
    )
    
    
    (1,317
    )Total property and equipment, net
    
    $
    7,422
    
    
    $
    7,829
    9. Assets Held for Sale
  58




---



##### Table of Contents



10. Employee Benefit Plans
   11. Long-Term Obligations
  2008
    
    
    2007Convertible notes
    
    Convertible notes payable, maturing from  2010 to 2012, secured by assets and stock  of certain subsidiaries, various interest  rates ranging from 6.0% to 12.0% (net of debt discount  of 18)
    
    $
    5,049
    
    
    $
    11,292Promissory notes
    
    Notes payable, maturing from 2009 to  2012, secured by assets and stock of  certain subsidiaries, various interest rates  ranging from 6.5% to 15.0%
    
    
    6,686
    
    
    
    22,900Earn-out notes
    
    Notes payable, various maturities through  2010, interest rates ranging from none  to 8.0%
    
    
    619
    
    
    
    234Total debt obligations
    
    
    12,354
    
    
    
    34,426Less-current portion, net of debt discount
    
    
    (3,718
    )
    
    
    (1,533
    )Long-term portion
    
    $
    8,636
    
    
    $
    32,893
  2009
    
    $
    3,7182010
    
    
    5,7502011
    
    
    2,620
 59




---



##### Table of Contents



2012
    
    
    2682013
    
    
    16Total
    
    $
    12,372
 Convertible Notes
     Promissory Notes
    Fifth Street loans
  60




---



##### Table of Contents



Amendments to Credit Agreements for $12.0 million and $4.0 million term loans with Fifth Street
  Retirement of term loans with Fifth Street
   Retirement of partial term loan to satisfy related party receivable
  Earn-out Notes
  Debt Covenants
  Compensating Balance Arrangements
  61




---



##### Table of Contents



12. Stockholders Equity
 Pre-merger stock issuances
 (All share and warrant amounts stated are before conversion to Pet DRx stock using the Merger
Conversion Ratio)
 Preferred Stock
    Common Stock
   Preferred Stock Warrants
     62




---



##### Table of Contents



Common Stock Warrants
    Merger with PVGI
 (All share and warrant amounts stated are after conversion to Pet DRx stock using the Merger
Conversion Ratio, except where noted)
      Number ofCommon
    
    
    WeightedStock
    
    
    AverageWarrants
    
    
    PriceOutstanding, December 31, 2005
    
    
    483,027
    
    
    $
    1.18Granted
    
    
    740,160
    
    
    
    3.11Exercised
    
    
    (141,093
    )
    
    
    0.52Cancelled
    
    
    (173,475
    )
    
    
    0.22Outstanding, December 31, 2006
    
    
    908,619
    
    
    $
    3.04Granted
    
    
    62,065
    
    
    
    6.16Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    
 63




---



##### Table of Contents



Number ofCommon
    
    
    WeightedStock
    
    
    AverageWarrants
    
    
    PriceOutstanding, December 31, 2007
    
    
    970,684
    
    
    $
    3.24Pet DRx warrants assumed in Merger
    
    
    7,645,833
    
    
    
    6.00Granted
    
    
    
    
    
    
    Series B Preferred Stock warrants converted to
common stock warrants
    
    
    69,621
    
    
    
    0.00Exercised
    
    
    (57,825
    )
    
    
    0.00Cancelled
    
    
    
    
    
    
    Outstanding and Exercisable, December 31, 2008
    
    
    8,628,313
    
    
    $
    5.68
  RemainingContractualExercise
    
    Warrants
    
    LifePrice
    
    Outstanding
    
    (years)$0.00
    
    
    11,796
    
    
    
    8.38$2.72
    
    
    168,459
    
    
    
    6.83$3.11
    
    
    740,160
    
    
    
    7.08$6.00
    
    
    7,645,833
    
    
    
    1.25$6.16
    
    
    62,065
    
    
    
    8.758,628,313
 Dividends
  13. Calculation of Loss Per Common Share
   For the year ended December31,2008
    
    2007
    
    2006Convertible debenture notes, if converted to common stock
    
    
    731
    
    
    
    1,736
    
    
    
    1,557Warrants for common stock
    
    
    8,628
    
    
    
    971
    
    
    
    908Warrants for preferred stock, if exercised and converted
to common stock
    
    
    
    
    
    
    69
    
    
    Preferred shares, if converted to common stock
    
    
    
    
    
    
    7,679
    
    
    
    7,652Options for common stock
    
    
    3,053
    
    
    
    1,618
    
    
    
    213Total
    
    
    12,412
    
    
    
    12,073
    
    
    
    10,330
 64




---



##### Table of Contents



2008
    
    
    2007
    
    
    2006Loss from continuing operations
    
    $
    (19,448
    )
    
    $
    (12,365
    )
    
    $
    (1,868
    )Loss from discontinued operations
    
    $
    (573
    )
    
    $
    (4,066
    )
    
    $
    Net loss
    
    $
    (20,021
    )
    
    $
    (16,431
    )
    
    $
    (1,868
    )Weighted average common shares outstanding:Basic
    
    
    23,433
    
    
    
    4,124
    
    
    
    3,501Effect of dilutive common stock equivalents
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    23,433
    
    
    
    4,124
    
    
    
    3,501Basic and diluted loss per common shareLoss from continuing operations
    
    $
    (0.83
    )
    
    $
    (3.00
    )
    
    $
    (0.53
    )Loss from discontinued operations
    
    $
    (0.02
    )
    
    $
    (0.98
    )
    
    $
    Basic and diluted net loss per common share
    
    $
    (0.85
    )
    
    $
    (3.98
    )
    
    $
    (0.53
    )
 14. Share-Based Compensation
     65




---



##### Table of Contents



Year Ended
    
    
    Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2006Direct costs
    
    $
    97
    
    
    $
    
    
    
    $
    1Selling, general and
administrative and
marketing
    
    
    1,527
    
    
    
    170
    
    
    
    35Totals
    
    $
    1,624
    
    
    $
    170
    
    
    $
    36
 Stock Option Activity
  WeightedStock
    
    
    
    
    
    
    
    
    
    AverageOptions
    
    
    
    
    
    Weighted
    
    RemainingAvailable
    
    Stock
    
    Average
    
    Contractual
    
    Aggregatefor
    
    Options
    
    Exercise
    
    Life
    
    IntrinsicGrant
    
    Outstanding
    
    Price
    
    (years)
    
    ValueBalance as of
December 31, 2006
    
    
    (15
    )
    
    
    212
    
    
    $
    5.03
    
    
    
    8.21
    
    
    $
    26Authorized
    
    
    1,908
    
    
    
    
    
    
    
    Granted
    
    
    (1,505
    )
    
    
    1,505
    
    
    
    5.47Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    99
    
    
    
    (99
    )
    
    
    5.78Balance as of
December 31, 2007
    
    
    487
    
    
    
    1,618
    
    
    $
    5.39
    
    
    
    9.35
    
    
    $
    3Authorized under the
Pet DRx 2007
Stock Incentive Plan
    
    
    2,700
    
    
    
    
    
    
    
    Granted
    
    
    (1,765
    )
    
    
    1,765
    
    
    
    4.65Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or canceled
    
    
    330
    
    
    
    (330
    )
    
    
    6.03Balance as of
December 31, 2008
    
    
    1,752
    
    
    
    3,053
    
    
    $
    4.90
    
    
    
    8.72
    
    
    $
    Expected to vest at
December 31, 2008
    
    
    
    
    
    
    2,762
    
    
    $
    4.95
    
    
    
    8.69
    
    
    $
    Exercisable at
December 31, 2008
    
    
    
    
    
    
    854
    
    
    $
    4.59
    
    
    
    8.42
    
    
    $
    
 66




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##### Table of Contents



WeightedAverage
    
    Weighted
    
    Number
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Exercisable
    
    AverageRange of
    
    Outstanding
    
    Contractual
    
    Exercise
    
    As of
    
    ExerciseExercise Prices
    
    As of 12/31/08
    
    Life (years)
    
    Price
    
    12/31/08
    
    Price$
    1.00
    
    
    $5.71
    
    
    1,092
    
    
    
    8.92
    
    
    $
    2.23
    
    
    
    384
    
    
    $
    2.49$
    6.16
    
    
    $6.50
    
    
    1,537
    
    
    
    8.50
    
    
    $
    6.30
    
    
    
    442
    
    
    $
    6.28$
    6.70
    
    
    $6.70
    
    
    424
    
    
    
    9.03
    
    
    $
    6.70
    
    
    
    27
    
    
    $
    6.70$
    1.00
    
    
    $6.70
    
    
    3,053
    
    
    
    8.72
    
    
    $
    4.90
    
    
    
    854
    
    
    $
    4.59
  Calculation of Fair Value
   2008
    
    2007
    
    2006Expected volatility of peer group (1)
    
    
    35.5%-66.0
    %
    
    
    34.6%-68.0
    %
    
    
    34.6%-68.05Weighted- average volatility (1)
    
    
    44.5
    %
    
    
    46.0
    %
    
    
    46.0
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected term  employees (2)
    
    4.6 years
    
    6.1 years
    
    6.1 yearsExpected term  nonemployees (2)
    
    
    N/A
    
    
    10.0 years
    
    10.0 yearsRisk-free rate  employees (3)
    
    
    1.4%-3.3
    %
    
    
    4.4%-4.8
    %
    
    
    4.4%-4.8
    %Risk-free rate  nonemployees
    
    
    N/A
    
    
    
    4.5%-5.2
    %
    
    
    4.5%-5.2
    %
 
 (1)
    
    We estimate the volatility of our common stock on the valuation date
based on historical volatility of the common stock of a peer group of
public companies as the Company has limited stock price history and it 67




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would not be practical to use internal volatility.(2)
    
    The expected term represents the period of time that we expect the
options to be outstanding. We estimate the expected term for
employees based on the simplified method permitted under SAB No.
110. The expected term presented for nonemployees is based upon
option expiration date at the date of grant.(3)
    
    The risk-free interest rate is based on the implied yield in effect on
U.S. Treasury zero-coupon issues with equivalent remaining terms.  15. Income Taxes
  Year ended December 31,2008
    
    
    2007
    
    
    2006Provision for income taxes:Current:Federal
    
    $
    1
    
    
    
    
    
    
    
    (37
    )State
    
    
    (23
    )
    
    
    44
    
    
    
    46(22
    )
    
    
    44
    
    
    
    9Deferred:Federal
    
    
    (5,140
    )
    
    
    (4,341
    )
    
    
    (665
    )State
    
    
    (1,310
    )
    
    
    (1,294
    )
    
    
    (193
    )Valuation allowance
    
    
    6,450
    
    
    
    5,635
    
    
    
    874
    
    
    
    
    
    
    
    16$
    (22
    )
    
    $
    44
    
    
    $
    25
  2008
    
    
    2007Current deferred income tax assets:Accounts receivable
    
    $
    111
    
    
    $
    192State taxes
    
    
    10
    
    
    
    15Other liabilities and reserves
    
    
    409
    
    
    
    373530
    
    
    
    580Non-current deferred income tax assets (liabilities)Stock based compensation
    
    
    863
    
    
    
    201Deferred rent
    
    
    145Property and equipment
    
    
    120
    
    
    
    (163
    )Intangible assets
    
    
    916
    
    
    
    520Contributions
    
    
    3
    
    
    
    2
 68




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##### Table of Contents



2008
    
    
    2007Net operating loss carry forwards
    
    
    11,557
    
    
    
    6,54113,604
    
    
    
    7,101Total deferred tax assets (liabilities)
    
    
    14,134
    
    
    
    7,681Valuation allowance
    
    
    (14,134
    )
    
    
    (7,681
    )Net deferred tax assets (liabilities)
    
    $
    
    
    
    $
    
    Year ended December 31,2008
    
    
    2007
    
    
    2006Federal income tax at statutory rate
    
    
    (35.0
    %)
    
    
    (35.0
    %)
    
    
    (35.0
    %)State taxes, net of federal benefit
    
    
    (4.8
    %)
    
    
    (5.0
    %)
    
    
    (4.8
    %)Goodwill impairment
    
    
    7.0
    %
    
    
    6.2
    %
    
    
    Other
    
    
    0.5
    %
    
    
    (.3
    %)
    
    
    2.8
    %Valuation allowance
    
    
    32.4
    %
    
    
    34.4
    %
    
    
    38.4
    %0.1
    %
    
    
    0.3
    %
    
    
    1.4
    %
 16. Related party transactions
  Leases
  Consulting Services
  69




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##### Table of Contents



17. Discontinued Operations
    (Dollars in thousands)
    
    2008
    
    2007
    
    2006Revenues
    
    $
    1,301
    
    
    $
    2,241
    
    
    $
    Operating loss
    
    
    (566
    )
    
    
    (396
    )
    
    
    Impairment of goodwill and intangibles
    
    
    
    
    
    
    (3,670
    )
    
    
    Net loss
    
    
    (573
    )
    
    
    (4,066
    )
    
    
    
 18. Commitments and Contingencies
 Leases
   Operating
    
    
    Capital2009
    
    $
    3,653
    
    
    $
    3432010
    
    
    3,523
    
    
    
    2472011
    
    
    3,292
    
    
    
    1162012
    
    
    3,221
    
    
    
    92013
    
    
    2,985
    
    
    
    9Thereafter
    
    
    17,615
    
    
    
    Total minimum future payments
    
    $
    34,289
    
    
    
    724Less imputed interest
    
    
    
    
    
    
    (51
    )Less current portion
    
    
    
    
    
    
    (312
    )Long-term capital lease obligations
    
    
    
    
    
    $
    361
 70




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##### Table of Contents



2008
    
    
    2007Equipment
    
    $
    2,306
    
    
    $
    2,151Accumulated amortization
    
    
    (1,684
    )
    
    
    (1,067
    )Net book value
    
    $
    622
    
    
    $
    1,084
 Litigation Matters
   19. Subsequent Events
 New
Financing
      71




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##### Table of Contents



Amendment
to Huntington Promissory Note
   Legal proceedings
  20. Quarterly Financial Information
   72




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##### Table of Contents



As Reported

    As Restated(dollars in thousands)
    
    3/31/2008
    
    6/30/2008
    
    9/30/2008
    
    3/31/2008
    
    6/30/2008
    
    9/30/2008Balance Sheet:Current portion of long-term obligations, net of debt
discounts
    
    
    1,663
    
    
    
    2,320
    
    
    
    2,254
    
    
    
    5,394
    
    
    
    5,924
    
    
    
    5,723Total long-term debt, net of debt discounts
    
    
    24,358
    
    
    
    8,798
    
    
    
    10,208
    
    
    
    20,627
    
    
    
    5,194
    
    
    
    6,739Total debt
    
    
    26,021
    
    
    
    11,118
    
    
    
    12,462
    
    
    
    26,021
    
    
    
    11,118
    
    
    
    12,462
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A(T). Controls and Procedures.
 (a) Evaluation of Disclosure Controls and Procedures
  (b) Managements Annual Report on Internal Control over Financial Reporting
 73




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##### Table of Contents



(c) Changes in Internal Control over Financial Reporting
  
 Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
 74




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##### Table of Contents



Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accountant Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 (a)(1) Consolidated Financial Statements.
 (a)(2) Financial Statement Schedules.
 (a)(3) Exhibits.
 (b) Exhibits.
 (c) Financial Statement Schedules.
 75




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##### Table of Contents



SIGNATURES
  PET DRX CORPORATIONDate: March 31, 2009
    By:
    /s/ Gene E. BurlesonGene E. BurlesonChairman of the Board and
Chief Executive Officer  Name
    
    Position
    
    Date/s/ Gene E. BurlesonGene E. Burleson
    
    Chairman
of the
Board and Chief
Executive Officer
    
    March 31, 2009/s/ Harry L. ZimmermanHarry L. Zimmerman
    
    Executive
Vice
President and Chief
Financial Officer
    
    March 31, 2009/s/ Kyle MorseKyle Morse
    
    Vice
President,
Corporate
Controller and
Chief Accounting
Officer
    
    March 31, 2009/s/ Gary A. BrukardtGary A. Brukardt
    
    Director
    
    March 31, 2009/s/ Richard JohnstonRichard Johnston
    
    Director
    
    March 31, 2009/s/ Joel KanterJoel Kanter
    
    Director
    
    March 31, 2009/s/ Richard O. MartinRichard O. Martin
    
    Director
    
    March 31, 2009/s/ J. David ReedJ. David Reed
    
    Director
    
    March 31, 2009/s/ Zubeen ShroffZubeen Shroff
    
    Director
    
    March 31, 2009
 76




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNo.
    
    Description2.1
    
    Second Amended and Restated Agreement and Plan of Merger dated October
23, 2007 by and among Echo Healthcare Acquisition Corp. (the
Company), Pet DRx Acquisition Company and XLNT Veterinary Care, Inc.
(Incorporated by reference to Exhibit 2.1 of the Companys
Registration Statement on Form S-4, as amended, filed on November 8,
2007.)3.1
    
    Second Amended and Restated Certificate of Incorporation of Pet DRx
Corporation. (Incorporated by reference to Exhibit 3.1 of the
Companys Current Report on Form 8-K filed on January 10, 2008.)3.2
    
    Amended and Restated By-laws of Pet DRx Corporation. (Incorporated
by reference to Exhibit 3.2 of the Companys Current Report on Form
8-K filed on January 10, 2008.)4.1
    
    Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 of the Companys Current Report on Form 8-K filed on
January 10, 2008.)4.2
    
    Specimen Unit Certificate. (Incorporated by reference to Exhibit 4.2
of the Companys Current Report on Form 8-K filed on January 10,
2008.)4.3
    
    Specimen Warrant Certificate. (Incorporated by reference to Exhibit
4.3 of the Companys Current Report on Form 8-K filed on January 10,
2008.)4.4
    
    Form of Warrant Agent Agreement by and between Corporate Stock
Transfer, Inc. and the Company. (Incorporated by reference to Exhibit
4.4 of the Companys Registration Statement on Form S-1, as amended,
filed on February 2, 2006.)4.5
    
    Warrant Clarification Agreement by and between Company and Corporate
Stock Transfer, Inc. (Incorporated by reference to Exhibit 10.2 of
the Companys Current Report on Form 10-Q filed on March 20, 2007.)10.1
    
    Form of Stock Escrow Agreement by and among the Company, Corporate
Stock Transfer, Inc. and the Existing Stockholders. (Incorporated by
reference to Exhibit 10.2 of the Companys Registration Statement on
Form S-1, as amended, filed on February 2, 2006.)10.2
    
    Form of Registration Rights Agreement by and among the Company and
the Existing Stockholders. (Incorporated by reference to Exhibit 10.3
of the Companys Registration Statement on Form S-1, as amended,
filed on February 2, 2006.)10.3
    
    Letter Agreement by and among the Company, Morgan Joseph & Co. Inc.
and Eugene A. Bauer. (Incorporated by reference to Exhibit 10.6 of
the Companys Registration Statement on Form S-1, as amended, filed
on March 8, 2006.)10.4
    
    Letter Agreement by and among the Company, Morgan Joseph & Co. Inc.
and Gary A. Brukardt. (Incorporated by reference to Exhibit 10.7 of
the Companys Registration Statement on Form S-1, as amended, filed
on March 8, 2006.)10.5
    
    Letter Agreement by and among the Company, Morgan Joseph & Co. Inc.
and Gene E. Burleson. (Incorporated by reference to Exhibit 10.8 of
the Companys Registration Statement on Form S-1, as amended, filed
on March 8, 2006.)
 77




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##### Table of Contents



ExhibitNo.
    
    Description10.6
    
    Letter Agreement by and among the Company, Morgan Joseph & Co. Inc.
and Alastair Clemow. (Incorporated by reference to Exhibit 10.9 of
the Companys Registration Statement on Form S-1, as amended, filed
on March 8, 2006.)10.7
    
    Letter Agreement by and among the Company, Morgan Joseph & Co. Inc.
and Joel Kanter. (Incorporated by reference to Exhibit 10.10 of the
Companys Registration Statement on Form S-1, as amended, filed on
March 8, 2006.)10.8
    
    Letter Agreement by and among the Company, Morgan Joseph & Co. Inc.
and Richard Martin. (Incorporated by reference to Exhibit 10.11 of
the Companys Registration Statement on Form S-1, as amended, filed
on March 8, 2006.)10.9
    
    Letter Agreement by and among the Company, Morgan Joseph & Co. Inc.
and Kevin Pendergest. (Incorporated by reference to Exhibit 10.12 of
the Companys Registration Statement on Form S-1, as amended, filed
on March 8, 2006.)10.10
    
    Letter Agreement by and among the Company, Morgan Joseph & Co. Inc.
and Windy City, Inc. (Incorporated by reference to Exhibit 10.13 of
the Companys Registration Statement on Form S-1, as amended, filed
on March 8, 2006.)10.11
    
    Letter Agreement by and among the Company, Morgan Joseph & Co. Inc.
and Chicago Investments, Inc. (Incorporated by reference to Exhibit
10.14 of the Companys Registration Statement on Form S-1, as
amended, filed on March 8, 2006.)10.12
    
    Form of Unit Option Purchase Agreement by and among the Company,
Morgan Joseph & Co. and Roth Capital Partners, LLC. (Incorporated by
reference to Exhibit 10.26 of the Companys Registration Statement
on Form S-1, as amended, filed on February 2, 2006.)10.13
    
    Founding Director Warrant Purchase Agreement by and among the
Company and Certain Directors of the Company. (Incorporated by
reference to Exhibit 10.2 of the Companys Current Report on Form
8-K filed on March 24, 2006.)10.14
    
    Second Amendment to Subordinated Revolving Line of Credit
Agreement dated November 2, 2007 by and among Echo Healthcare
Acquisition Corp., Richard Martin, Gene Burleson and Chicago
Investments, Inc. (Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K filed on November 6, 2007.)10.15
    
    Executive Employment Agreement by and between XLNT Veterinary Care,
Inc. and Robert Wallace. (Incorporated by reference to Exhibit
10.16 of the Companys Current Report on Form 8-K filed on January
10, 2008.)10.16
    
    Executive Employment Agreement by and between XLNT Veterinary Care,
Inc. and Steven Johnson (Incorporated by reference to Exhibit 10.30
of the Companys Registration Statement on Form S-4, as amended,
filed on November 11, 2007.)10.17
    
    Executive Employment Agreement by and between XLNT Veterinary Care,
Inc. and Gregory Eisenhauer (Incorporated by reference to Exhibit
10.31 of the Companys Registration Statement on Form S-4, as
amended, filed on November 11, 2007.)10.18
    
    Executive Employment Agreement by and between XLNT Veterinary Care,
Inc. and George Villasana (Incorporated by reference to Exhibit
10.32 of the Companys Registration Statement on Form S-4, as
amended, filed on November 11, 2007.)10.19
    
    Amendment to Executive Employment Agreement dated August 14, 2008 between
Gregory J. Eisenhauer and the Company. (Incorporated by reference to Exhibit
10.1 of the Companys Current Report on Form 10-Q filed on November 14, 2008.)
 78




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##### Table of Contents



ExhibitNo.
    
    Description10.20
    
    Separation Agreement dated September 25, 2008 between Robert Wallace and the
Company. (Incorporated by reference to Exhibit 10.2 of the Companys Current
Report on Form 10-Q filed on November 14, 2008.)10.21*
    
    Executive Employment Agreement by and between Gene E. Burleson and the Company.10.22*
    
    Executive Employment Agreement by and between Harry L. Zimmerman and the Company.10.23
    
    Separation Agreement effective December 31, 2008 between Steven T. Johnson and
the Company. (Incorporated by reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K filed on January 2, 2009.)10.24
    
    XLNT Veterinary Care, Inc. 2004 Stock Option Plan, as amended. (Incorporated by
reference to Exhibit 10.23 of the Companys Current Report on Form 8-K filed on
January 10, 2008.)10.25
    
    Form of XLNT Veterinary Care, Inc. Non-Qualified Stock Option Agreement by and
between XLNT Veterinary Care, Inc. and Certain Employees of XLNT Veterinary
Care. Inc. (Incorporated by reference to Exhibit 10.24 of the Companys Current
Report on Form 8-K filed on January 10, 2008.)10.26
    
    Form of XLNT Veterinary Care, Inc. Non-incentive Stock Option Agreement by and
between XLNT Veterinary Care, Inc. and Certain Executives of XLNT Veterinary
Care, Inc. (Incorporated by reference to Exhibit 10.25 of the Companys Current
Report on Form 8-K filed on January 10, 2008.)10.27
    
    2007 Pet DRx Corporation Stock Incentive Plan (Incorporated by
reference to Exhibit 10.28 of the Companys Registration Statement
on Form S-4, as amended, filed on November 11, 2007.)10.28*
    
    Form of Stock Option Agreement for stock options granted to
Employees under the 2007 Pet DRx Corporation Stock Incentive Plan.10.29
    
    Form of Stock Option Agreement for stock options granted to
Non-Employee Directors under the 2007 Pet DRx Corporation Stock
Incentive Plan. (Incorporated by reference to Exhibit 10.13 of the
Companys Current Report on Form 10-Q filed on May 14, 2008.)10.30
    
    Pet DRx Corporation 2008 Employee Bonus Plan. (Incorporated by
reference to Exhibit 10.11 of the Companys Current Report on Form
10-Q filed on May 14, 2008.)10.31
    
    Pet DRx Corporation 2008 Non-Employee Director Compensation
Program. (Incorporated by reference to Exhibit 10.12 of the
Companys Current Report on Form 10-Q filed on May 14, 2008.)10.32
    
    Pet DRx Corporation 2009 Employee Bonus Plan. (Incorporated by
reference to Item 5.02 of the Companys Current Report on Form 8-K
filed on March 23, 2009.)10.33
    
    Pet DRx Corporation 2009 Non-Employee Director Compensation
Program. (Incorporated by reference to Item 5.02 of the Companys
Current Report on Form 8-K filed on March 23, 2009.)10.34
    
    Board Voting Agreement dated as of January 4, 2008 by and among the
Company and Certain Stockholders named on the signature pages
thereof. (Incorporated by reference to Exhibit 10.20 of the
Companys Current Report on Form 8-K filed on January 10, 2008.)10.35
    
    Form of Indemnification Agreement for Executive Officers and
Directors by and between XLNT Veterinary Care, Inc. and Certain
Executive Officers and Directors of XLNT Veterinary Care,
Inc. (Incorporated by reference to Exhibit 10.22 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.36
    
    Form of Stock Purchase Warrant Issued by XLNT Veterinary Care, Inc.
to Certain Lenders. (Incorporated by reference to Exhibit 10.26 of
the Companys Current Report on Form 8-K filed on January 10,
2008.)
 79




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##### Table of Contents



ExhibitNo.
    
    Description10.37
    
    Form of Convertible Promissory Note Issued to Sellers of Veterinary
Clinics Acquired by XLNT Veterinary Care, Inc. (Incorporated by
reference to Exhibit 10.27 of the Companys Current Report on Form
8-K filed on January 10, 2008.)10.38
    
    Form of Warrant to Purchase Common Stock of XLNT Veterinary Care,
Inc. (Incorporated by reference to Exhibit 10.28 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.39
    
    Warrant to Purchase Common Stock of XLNT Veterinary care, Inc. for
Galen Partners IV, L.P. dated September 26, 2007. (Incorporated by
reference to Exhibit 10.29 of the Companys Current Report on Form
8-K filed on January 10, 2008.)10.40
    
    Promissory Note between XLNT Veterinary Care, Inc. and Huntington
Capital, L.P. in the amount of $1,400,000 dated November 2,
2005. (Incorporated by reference to Exhibit 10.30 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.41
    
    Promissory Note between XLNT Veterinary care, Inc. and St. Cloud in
the amount of $1,600,000 dated November 4, 2005. (Incorporated by
reference to Exhibit 10.31 of the Companys Current Report on Form
8-K filed on January 10, 2008.)10.42
    
    Credit Agreement by and between XLNT Veterinary Care, Inc. and Fifth
Street Mezzanine Partners II, L.P. dated March 29,
2007. (Incorporated by reference to Exhibit 10.32 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.43
    
    Security Agreement by and between XLNT Veterinary Care, Inc. and
Fifth Street Mezzanine Partners II, L.P. dated March 29,
2007. (Incorporated by reference to Exhibit 10.33 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.44
    
    Environmental Compliance Agreement by and between XLNT Veterinary
care, Inc. and Fifth Street Mezzanine Partners II, L.P. dated June
2007. (Incorporated by reference to Exhibit 10.34 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.45
    
    Right of First Offer and Last Look Agreement by and between XLNT
Veterinary Care, Inc. and Fifth Street Mezzanine Partners II, L.P.
dated June 29, 200. (Incorporated by reference to Exhibit 10.35 of
the Companys Current Report on Form 8-K filed on January 10, 2008.)10.46
    
    First Amendment to Credit Agreement by and between XLNT Veterinary
Care, Inc. and Fifth Street Mezzanine Partners II, L.P. dated
November 27, 2007. (Incorporated by reference to Exhibit 10.36 of
the Companys Current Report on Form 8-K filed on January 10, 2008.)10.47
    
    Co-Sale Agreement by and among the Company and the Certain
Stockholders named on signature pages thereof dated September 11,
2006. (Incorporated by reference to Exhibit 10.38 of the Companys
Current Report on Form 8-K filed on January 10, 2008.)10.48
    
    Form of Lock-Up Agreement entered into by and between the Company
and the Companys Founding Stockholders. (Incorporated by reference
to Exhibit 10.39 of the Companys Current Report on Form 8-K filed
on January 10, 2008.)10.49
    
    Form of Lock-Up Agreement entered into by and between the Company
and Certain of XLNTs Significant Stockholders. (Incorporated by
reference to Exhibit 10.40 of the Companys Current Report on Form
8-K filed on January 10, 2008.)10.50
    
    Escrow Agreement dated as of February 12, 2008 by and among the
Company, the stockholder representatives acting on behalf of the
former stockholders of XLNT Veterinary Care, Inc., and JP Morgan
Chase Bank, National Association, as Escrow Agent. (Incorporated by
reference to Exhibit 10.1 of the Companys Current Report on Form
8-K filed on February 12, 2008.)
 80




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##### Table of Contents



ExhibitNo.
    
    Description10.51
    
    Amended and Restated Registration Rights Agreement dated as of
February 12, 2008 by and among the Company, the founders of the
Company, as listed on the signature pages thereof, and former
affiliates of XLNT Veterinary Care, Inc., as listed on the signature
pages thereof. (Incorporated by reference to Exhibit 10.2 of the
Companys Current Report on Form 8-K filed on February 12, 2008.)10.52
    
    First Amendment to Credit Agreement and Loan Documents dated as of
February 19, 2008 by and among Fifth Street Mezzanine Partners II,
L.P., as Lender, XLNT Veterinary Care, Inc., as Lead Borrower,
certain subsidiaries of XLNT Veterinary Care, Inc. named therein,
as Non-Lead Borrowers, and Bay Area Veterinary Specialist, Inc.
and Bradshaw Veterinary Clinic, Inc., as New
Borrowers. (Incorporated by reference to Exhibit 10.1 of the
Companys Current Report on Form 8-K filed on February 25, 2008.)10.53
    
    Second Amendment to Credit Agreement and Loan Documents dated as
of February 19, 2008 by and among Fifth Street Mezzanine Partners
II, L.P., as Lender, and XLNT Veterinary Care, Inc., as
Borrower. (Incorporated by reference to Exhibit 10.2 of the
Companys Current Report on Form 8-K filed on February 25, 2008.)10.54
    
    Guaranty made as of February 19, 2008 by and among Fifth Street
Mezzanine Partners II, L.P., as Lender, and the Company, as
Guarantor. (Incorporated by reference to Exhibit 10.3 of the
Companys Current Report on Form 8-K filed on February 25, 2008.)10.55
    
    Security Agreement dated February 19, 2008 by and among Fifth
Street Mezzanine Partners II, L.P., as Secured Party, and the
Company, Bay Area Veterinary Specialist, Inc., and Bradshaw
Veterinary Clinic, Inc., as Debtors. (Incorporated by reference
to Exhibit 10.4 of the Companys Current Report on Form 8-K filed
on February 25, 2008.)10.56
    
    Form of 12% Senior Convertible Note. (Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on
January 27, 2009.)10.57
    
    Form of Warrant to Purchase Shares of Common Stock. (Incorporated
by reference to Exhibit 10.2 of the Companys Current Report on
Form 8-K filed on January 27, 2009.)10.58
    
    Registration Rights Agreement. (Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on
February 10, 2009.)14.1
    
    Code of Business Conduct and Ethics. (Incorporated by reference to
Exhibit 5.1 of the Companys Current Report on Form 8-K filed
February 12, 2008.)16.1
    
    Letter from Eisner LLP to the Securities and Exchange Commission
dated January 7, 2008. (Incorporated by reference to Exhibit 16.1
of the Companys Current Report on Form 8-K filed on January 10,
2008.)21.1*
    
    List of Subsidiaries31.1 *
    
    Section 302 Certification from Gene E. Burleson31.2 *
    
    Section 302 Certification from Harry L. Zimmerman32.1 **
    
    Section 906 Certification from Gene E. Burleson32.2 **
    
    Section 906 Certification from Harry L. Zimmerman
 81